Bolivia - Gas and Oil Engineering Project

Docwnent of The World Bank FOR OFFICIAL USE ONLY Report No. 8127 . PROJECT COMPLETION REPORT BOLIVIA GAS AND OIL ENGINEERING PROJECT CREDIT S-25-BO OCTOBER 17, 1989 Infrastructure and Energy Division Department III Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TR WORLD SAlK MI O1MCIAL US ONLY Wa0weitoe. O.C. M3063 October 17. 1989 MEDNRANDUM TO THE mXCUTIVE DIRECTORS AND THE PRESIDENT SUBJECTs Project Completion Report on Bolivia Gas and Oil Engineering Project (Credit S-25-BO) Attached, for information, is a copy of a report entitled -Project Completion Report on Bolivia - Gas and Oil Engineering Project (Credit S-25- BO), prepared by the Latin America and the Caribbean Regional Office. No audit of this project has been made by the Operatior-s Evaluation Department at this time. Attachment Thmduuasouiahuke s _ dbbudsRm and mybe byd" tnee uodbathe p I muu1 of b* ftWdulls. In sme.s my ne eshwiwlu be dbdlmsd *Mmin WadiSa uldw  FOR OMCIAL USE ONLY PROJECT COMPLETION REPORT BOLIVIA GAS AND OIL ENGINEERING PROJECT CREDIT S-25-BO TABLE OF CONTENTS Page No. Preface .............. (i) Basic Data Sheet ................ (ii-iii) Highlights .............. (iv) CHAPTER I: BACKGROUND .. 1 CHAPTER II: PROJECT PREPARATION AND APPRAISAL . . 3 CHAPTER III: PROJECT IMPLEMENTATION ............................... 7 CHAPTER IV: FINANCIAL PERFORMANCE .. 9 CHAPTER V: PROJECT COST AND DISBURSEMENTS .. 9 CHAPTER VI: INSTITUTIONAL PERFORMANCE .. 9 CHAPTER VII: ECONOMIC PERFORMANCE . . . 10 CHAPTER VIII: BANK PERFORMANCE . . . 10 CHAPTER VIII: CONCLUSIONS AND RECOMMENDATIONS ..................... . 10 TABLES 1. Cumulative Disbursement Schedule 2. Appraisal Drilling Results 3. Gas Reserves Quantification 4. Appraisal and Actual Cost by Source of Financing ANNEXES Annex 1.1: Bank Lending to the Energy Sector Annex 2.1: Project Definition Annex 2.2: Major Covenants of the Project and Credit Agreements Annex 3.1: Actual and Forecast Completion Date Map IBRD #14429R4 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  (i) PROJECT COMPLETION REPORT BOLIVIA GAS AND OIL ENGINEERING PROJECT CREDIT S-25-BO PREFACE This is the Project Completion Report for the Gas and Oil Engineering Project which the International Develorment Association (IDA) supported with Credit S-25-BO (1980s US$16 million). The borrower was the Republic of Bolivia; the executing agency was the national oil and gas energy company, Yacimientos Petroliforos Fiscales Bolivianos (YPFB). This completion report was prepared by the Bank's Latin America and the Caribbean Regional Office and is based on information obtained from the minutes of the Board meeting, the LAC Information Center, appraisal and supervision reports for the Credit, and a Project Completion Report prepared by the Borrower, YPFB. This PCR was read by the Operations Evaluation Department (OED). The draft PCR was sent to the Borrower and Cofinanciers on. July 28, 1989, for comments by September 8, 1989, but none were received.  (ii) PROJECT COMPLETION REPORT BOLIVIA GAS AND OIL ENGINEERING PROJECT CREDIT S-25-BO BASIC DATA SHEET Appraisal Actual Total Project Cost (US$ million equivalent) (excl. finance charges) Appraisal drilling 32.6 42.9 Seismic surveys & certification of reserves 5.4 6.0 Secondary recovery 3.3 0.4 Project preparation facility 0.5 4.3 41.8 53.6 Cost Overrun (or Underrun) (Z) 28.2 Credit Amount (US$ million equivalent) Disbursed 16.0 Cancelled - Outstanding Completion dates Appraisal drilling 12/81 12/83 Seismic surveys & certification of reserves 12/81 06/84 Secondary recovery 12/81 12/83 Project preparation facility --- 05/82 Return on investment (2) Not applicable CUMULATIVE DISBURSEMENTS (US$ millions) FY 80 PY 81 FY 82 FY 83 FY 84 FY 85 Appraisal 4.0 13.0 16.0 0.0 0.0 0.0 Actual 0.0 7.0 13.0 14.7 15.8 16.0 Actual as 2 of Appraisal 0 54 81 91.6 - - Original Item Plan Revisions Actual First Mention in Files --- --- 01/13/78 Negotiations 12/17-20/79 Board Approval 02/26/80 Loan Agreement Date 06/18/80 Effectiveness Date 05/00/80 11118/80 12/12/80 Closing Date 06/30/83 12/31/84 Last Disbursement Date 02/14/85 Borrower Government Government Beneficiary/Executing Agency YPFB YPFB Fiscal Year of Borrower Calendar YeZr Follow-on Project Vuelta Grande Gas Recycling Project (Credit 1719-BO)  ( iii) OTHER PROJECT DATA MISSION DATA No. of Month/ No. of No. of Staff Date of Type of Mission Year Weeks Staff Weeks Report Reconnaisance I 01-2/78 2 1 2 03/14/78 Reconnaisance II 10/78 2 1 2 10/30/78 Preparation I 12/78 2 1 2 01/08/79 Preparation II 01/79 0.5 2 1 02/15/79 Appraisal 03/79 1 3 3 03/27/79 Post-Aprraisal I 05/79 0.5 1 0.5 06/13/79 Post-Appraisal II 07-8/79 1.5 1 1.5 08/27/79 Post-Appraisal III 11/79 1 2 2 11/14/79; 02/06/80 Supervision I 03/80 2 3 6 04/18/80 Supervision II 10/80 2.5 4 10 10131180 SuperviLion III 07/81 1 1 1 07122/81 Supervision IV 11/81 1.5 3 4.5 12/31/81 Supervision V 02/82 2 2 4 03/11/82 Supervision VI 06/82 1 4 4 06/22/82 Supervision VII 08/82 0.5 1 0.5 09/17/82 Supervision VIII 10/82 1 3 3 10/29/82 Supervision IX 12/82 2 1 2 01/13/83 Supervision X 01-02/83 4 3 12 02/04/83; 02/14/83 Supervision XI 12/83 2.5 2 5 12/12/83 Supervision XII 03/85 2.5 4 10 06/25/85 Total 62 Staff Input (staff-weeks) FYs 78 79 80 81 82 83 84 85 Total Ident/prep 4.0 1.0 - - - - - - 5.0 Appraisal - 3.0 - - - - - - 3.0 Post-Appraisal - 4.0 - - - - - - 4.0 & Negotiations Supervision _ - 16.0 5.5 13.5 17.0 - 13P.0 64.0 4.0 8.0 16.0 5.5 13.5 17.0 - 12.0 76.0  (iv) FROJECT COMPLETION REPORT BOLIVIA GAS AND OIL ENGINEERING ?ROJECT (CREDIT NO. S-25-BO) HIGHLIGHTS The fundamental objective of the Gas and Oil Engineering project was to prove the existence of sufficient additional reserves of natural gas for Bolivia to undertake a proiect of gas exports to Brazil, and help reverse the decline in production in the main oil field in the country by means of secondary recovery. Both objectives were successfully attained, despite several obstacles encountered. Brazil did not implement the gas sales agreement of 1978 (for reasons unrelated to this project), but the information on reserves provided by the project remains valid, and has been used in 1988/89 as a basis for further negotiations with Brazil. Implementation of the project suffered general delays due basically to managerial and financial difficulties, cumbersome procurement procedures, to frequent changes in the Central Government and in the executing agency, financial constraints resulting from the economic crisis the country suffered during project execution, and finally the unexpectedly long rainy seasons that postponed the seismic survey acquisition and the appraisal drilling program in the Boomerang Hills area. For these reasons the Closing Date was postponed twice. All project components were implemented satisfactorily and without cost overruns, and the credit was fully disbursed. One of the main objectives of the project was established by the appraisal drilling operations which proved the existence of incremental gas reserves in excess of 1.6 TCF in the Boomerang and Chaco areas. The information obtained in the seismic survey was a key input to the success of the appraisal drilling. Secondary recovery by water injection in the Monteagudo field, Bolivia's main oil field, has been in operation since April 1984. It is significantly helping to reverse the decline in the production of the field which means additional oil reserves and a reduced need for oil imports. As a result of the successful appraisal drilling program, the Bank prepared a second petroleum project (Vuelta Grande Recycling Project), which enables the recovery of condensates and LPG by recycling the field gas, thus improving declining liquid hydrocarbon production in-Bolivia.  BOLIVIA GAS AND OIL ENGINEERING PROJECT CREDIT S-25-BO I. BACKGROUND INTRODUCTION 1.1 This report is about the gas and oil engineering project supported by Credit S-25-BO (US$16.0 million; 1980), as provided by the International Development Association (IDA) to the Government of Bolivia, which relent the proceeds of the credit to the national oil and gas company, Yacimientos Petroliferos Fiscales Bolivianos (YPFB;. This chapter covers Bank lending to the energy sector, and the organization of the energy sector and of YPFB. BANK/IDA LENDING TO ThE ENERGY SECTOR 1.2 Since 1964, the World Bank and IDA have provided the energy sector in Bolivia with financing amounting to about US$121.0 million: six credits and one loan for electric power, totalling US$66.7 million; and one loan and two credits for gas and oil, totalling US$54.3 million (Annex 1.1). Credit S-25-BO was the first credit to benefit the gas and oil sector. RESOURCES AND ORGANIZATION OF THE ENERGY SECTOR 1.3 Relative to its needs, Bolivia has a large energy resource base. Proven natural gas reserves in 1983 were equivalent to 40 years of production at current levels, about 4.1 trillion cubic feet. There is abundant hydroelectric potential (18,000 MV), of which only 287 MW has been developed. Proven reserves of liquid hydrocarbons amount to about 154 million barrels, the equivalent of about 17 years of present production. There are considerable reserves of firewood, though undeveloped, but no significant coal deposits. Bolivia is a net energy exporter; but its largest energy resource -- natural gas -- faces limited domestic and foreign demand. In 1984, 822 of the net output of natural gas was exported to Argentina. 1.4 The Ministry of Energy and Hydrocarbons (MEH) is responsible for the energy sectcr and supervises YPFB, private operators, and the electric- power utilities. MEH is responsible for energy planning. Electricity tariffs and petroleum product prices are decided by MEH, normally after consultations in Cabinet. YPFB 1.5 An autonomous state company, YPFB is responsible for hydrocarbon exploration, production, transportation, pipeline construction and operation, refining and distribution, as well as imports and exports of oil and gas products. The Santa Cruz Division operates the fields of Colpa, Caranda, and Rio Grande. A subsidiary, Yacibol Bogoc Transportacoes (YABOG)  - 2- operates the Santa Cruz-Argentina pipeline, which the Bank helped to finanice (Annex 1.1). Assisted by an assistant general manager and various department heads, a general manager implements policy as establ.ished by the Board, all but one of whose members are appointed by the President of the Republic. Identification of new gas markets, development of recently discovered condensate fields and enhanced oil recovery have been top priorities of YPFB and the Government. In 1986, the staff of YPFB numbered 7,640. The Government is reorganizing YPFB to improve efficiency, reduce its role in the sector, encourage private capital, and increase petroleum production and tax revenues. II. PROJECT PREPARATION AND APPRAISAL 2.1 This chapter discusses the background and some of the problems encountered in preparing the project; origin, rationale, preparation and appraisal of the project; and negotiations and other steps leading to effectiveness of the credit. BACKGROUND 2.2 In December 1977, an energy sector mission noted that there had been a decline in oil production in Bolivia during the years since 1974 and that exploratory drilling had yielded sigiificant deposits of natural gas but very little condensate. (During the 19?0s, YPFB had carried out exploration drilling by using its own drilling crews, drilling craws operating under contract with YPFB, and private, foreign oil companies operating under "production sharing" contracts. The bulk of the risk investment for exploration had been supplied by the foreign companies). This represeuted an opportunity for the World Bank to provide financing and to play a useful part in sector development. Subsequently, this engineering project evolved from the efforts of GOB, YPFB, and the Bank to reverse the decline in oil production and to justify the future export to Brazil of natural gas. ORIGIN, RATIONALE, PREPARATION, AND APPRAISA'. 'F THE PROJECT 2.3 In 1978, GOB initiated discussions with the Bank Group on possible financing for a project to increase oil or gas production. A reconnaissance mission (January/February, 1988) determined that because oil production was declining, Bolivia faced the prospect of needing to purchase imported oil, with financial strain on its foreign exchange reserves, unless it discovered additional domestic sources. Domestic petroleum price levels were less than half the international price level, causing YPFB to incur losses on sales of refined products in the domestic market. Because of this, YPFB lacked sufficient internally generated financial resources to carry out an appropriate level of exploratory drilling. The mission also found that YPFB did not-share the interest of GOB in obtaining Bank/IDA financing to prepare a secondary recovery project, but was Inte'e'sted in obtaining such financing for oil exploration or for a natural gas pipeline from Santa Cruz to La Paz.  - 3 - 2.4 IDA subsequently reviewed the investment program of YPFB and informed the Government that financial assistance could be provided for seismic studies, geophysical studies, secondary recovery projects, and gas pipelines. IDA staff expected that the Kiroposed engineering project would accelerate preparation of a number of high-return projects for finat.cing during FY80-FY82 and would strengthen the dialogue between GOB, YPFB. and the Association on sectoral and institutional issues. 2.5 In October 1978, the Association sent a second mission to review the oil and gas sector investment and work programs to determine in what areas and projects it could be of assistance. The mission endorsed developing the export potential of the gas fields in the Boo'merang Hills (north of Santa Cruz), and gave high priority to increasing oil production in the Monteagudo field, the only one supplying heavy crude, by means of water flooding. With respect to developing the gas fields, the obvious next steps were to carry out seismic work to identify the most promising parts of the fields and then to drill appraisal wells to prove the size of the fields. It was hoped that Tesoro and Occidental, two major international oil companies, would undertake a complementary exploratory program in the fields at La Vertiente and Porvenir. The information developed from this discovery activity would determine whether there was sufficient gas to meet existing commitments to Argentina, expected domestic demand, and possible future sales to Brazil. 2.6 It was the opinion of the mission that enhanced oil recovery and increasing sales of gas (esljcially to Brazil) offered promising sources and savings of foreign exchange; and that IDA should finance an engineering project, consisting of yarious studies and a pilot project for secondary oil recovery. Further justifying the interest of IDA in this project was the signing (on 10125/78) of a letter of intent by the respective Ministers of Energy of Bolivia and Brazil with respect to a buy-sell contract for natural gas. The letter covered sales of 400 MHCFD, provided that adequate reserves could be proven and that pricing, on the basis of liquid fuels that the gas would replace, could be agreed. 2.7 The mission identified the following elements which, after further refinement, constituted the engineering project: (a) a pre-feasibility study to verify market prospects and optimum design alternatives for a natural gas pipeline from Santa Cruz to La Paz; (b) studies to determine the optimum technology and engineering design for a pilot, secondary recovery (water injection) project to increase oil production at the Monteagudo fields: (c) seismic surveys (1.600 line kilometers) and data interpretation to identify the more promising sites in the Boomerang Hills for appraisal drilling, plus the reinterpretation of a previous survey in the Chaco area; (d) a program of appraisal drilling in the Boomerang Hills (12 wells) and the Chaco area (2 wells) to prove.sufficient natural gas reserves to justify construction of a natural gas pipeline from Santa Cruz to the Brazilian border.  2.8 Later, a separate study of the market for domestic gas use was added to the definition of the project. As finally defined, the project was expected to cost US$41.8 million, including a foreign cost of US$27.5 million. IDA would supply a credit of US$16.0 million to help cover the foreign cost; IDB would supply a loan for the same amount, US$16.0 million, (US$11.5 million to cover foreign costs and US$4.5 million for local costs); and YPFB would cover the remaining loral costs, US$9.8 million. The following table shows the expected components, costs, and sources of financing for the project: Local Cost Foreign Cost Total YPFB IDB IDA IDB - ----- (USS million)---------- Appraisal drilling 6.5 4.5 10.1 11.5 32.6 Seismic surveys 2.1 - 3.3 - 5.4 Secondary recovery 1.2 - 2.1 - 3.3 Project preparation facility - - 0.5 - 0.5 Total 9.8 4.5 16.0 11.5 41.8 2.9 Having confirmed that the low level of domestic petroleum prices and the financial problems of YPFB were major issues, the October, 1978 mission recommended that IDA: (i) seek the Government of Bolivia's commitment to a program of future price increases approaching the international level for petroleum products over an agreed time period; (ii) make Board presentation conditional on implementation of price increases consistent with this commitment; and (iii) devise with YPFB and GOB during appraisal a priority investment program and a program of financial rehabilitation (price increases, tax reductions, debt rescheduling, and access to foreign exchange for debt-servicing purposes). 2.10 In December 1978 and January 1979, two preparation missions visited Bolivia. In addition to investigating further the ju3tification for the various project elements, the mission recommended an advance ("Project Preparation Facility") for financing a pre-feasibility study for the Bolivia-Brazil gas pipeline, a study of the domestic gas market, and an updating of natural gas reserves. Prior to departure of the second mission, IDB and IDA began to coordinate their efforts with respect to the project. 2.11 IiDA appraised the project in March 1979. Subsequently, three post- appraisal missions visited Bolivia. These missions were required to complete the definition of the project and to deal with various unforeseen disbursement, financial, technical and procurement problems. It was expected that disbursements of the IDA credit would finance 1002 of the foreign expenditures for the seismic surveys, well services (other than well logging) for the appraisal drilling, imported goods for the appraisal drilling and the secondary oil recovery components, and consultant serrices. Theyawould also finance 90? of locally procured imported goods neecled for appraisal drilling, well services and the secondary oil recovery components. The IDB loan would finance 100? of drilling and well logging .  services. In addition, IDB would disburse about US$700,000 for purchases of local materials related to drilling services. 2.12 After appraisal, it became apparent that the recommendations for improving the financial condition of YPFB, plus any related financial covenants, constituted a sensitive political issue in Bolivia, which could be better addressed in connection with the larger "follow-on" project that was then envisaged, rather than this engineering project. The Bank recommended that the best way for YPFB to improve its financial situation would be to install compressors to increase gas sales to Argentina. The materialization of such additional sales, plus the implementation (11/79) of significant price increases for petroleum products, satisfied the Association that sufficient counterpart financing would be available for the project. 2.13 Both before and after appraisal, the Association spent considerable time monitoring negotiations between: (i) YPFB and Tesoro and Occidental in connection with "production-sharing, contracts and exploration activities- and (ii) Bolivia and Brazil in connection with natural gas sales. In regard to the former, the Bank took the attitude that agreement between YPFB and the oil companies should not be a condition for disbursement, as the companies were reluctant to start their own exploration programs unless Bolivia and Brazil had signed a contract specifying the sales price. In November 1979, IDA expressed itself satisfied with the progress on negotiations with the international private oil companies -- that is, the Government of Bolivia had made a reasonable offer to one of the companies to participate in the export sale to Brazil and a reasonable offer to the second company was pending. Faced with the unwillingness of the Brazilians to commit themselves beyond what had been expressed in the exchange of ministerial letters, the Association took a flexible attitude and decided to proceed to negotiations. 2.14 A parallel issue was the question of whether Bolivia was creditworthy for a loan, or would qualify for an IDA credit. Since the Government's sovereign guarantee was not considered acceptable, the Bank Group sought to secure repayment of the proposed loan, with the proceeds of Bolivian gas sales to Argentina. These proceeds were being deposited in a trust account established in connection with the Bolivia-Argentina gas pipeline, which the Bank had helped to finance (Loan 635-BO) and payments were being made from the trust account to the creditors who had helped finance the pipeline. However the Bank Group failed to persuade the other creditors to agree to an amendment of a lenders' trust agreement, so decided that a credit was the more appropriate lending instrument. NEGOTIATIONS, BOARD PRESENTATION, SIGNING, AND EFFECTIVENESS 2.15 The project was processed as an engineering credit (hence the "SI in the credit number). That is, it would be refinanced by a follow-on project --which never in fact materialized. Accordingly, no separate staff appraisal report was written. No major problems delayed negotiations (12/17-20/79) or Board approval (02/26/80). The proceeds of the IDA credit would be relent by GOB to YPFB for a term of 10 years including 3 years of grace with a rate of interest of 8.252 per annum. The credit would be refinanced if, based on the results of this project, a Bank loan were made  for a gas export project or for a subsequent phase or phases of the Monteagudo secondary oil recovery component. 2.16 The IDB made its intended parallel loan of US$16 million with a term of 40 years, including 10 years of grace, at a rate of interest of 12 per annum. The Government of Bolivia agreed to relend the proceeds of this loan to YPFB on the same terms. 2.17 Signing of the IDA credit agreement was delayed four months (to 06/18/80) because of slow action on the part of the Bolivian Congress in approving the credit. Effectiveness was then held up due to a cross- effectiveness condition with the IDB loan, and delay by the Government in meeting IDB's effectiveness conditions. In order not to delay implementation of the project, IDA agreed to convert the meeting of IDB's conditions for effectiveness into a dated covenant of the IDA credit agreement. On this basis, the credit became effective on December 11, 1980. III. IMPLEMENTATION PROJECT PREPARATION FACILITY 3.1 Two of the three components to be financed under the PPF were successfully completed in good time; the third was carried out late. Firstly, the preliminary feasibility report on the Bolivia-Brazil gas line was completed by a US consultant in February 1980. Secondly, the reprocessing and reinterpretation of the.250 line-km of seismic data of an area nortt. of the city of Santa Cruz was completed by a US firm. The third component, the domestic gas market study, was delayed because of disagreements with the Mexican consultant selected, on specifics of the contract. SEISMIC SURVEYING 3.2 Part of the results of the seismic survey were needed for locating the wells to be drilled under the gas appraisal drilling component. IDA approved advance contracting of about US$5.8 m_llion (US$3.3 million under the credit) for these services in late 1979. It also approved retroactive financing of US$ 0.3 million for work which was expected to be done prior to credit approval. The Controller General of Bolivia rejected the tenders unQpened because the credit had not yet been approved by Congress. In the meantime, in order not to delay the start of the drilling operations, YPFB used their own seismic consultants, crew and equipment, to start a 1,100 line-km survey in the Boomerang area where the first well was to be sited. Heavy rains at the end of 1981 curtailed work and only 487 line-km could be completed by the end of May 1982. To complete the 1100-1600 line-km of seismic survey intended in the Boomerang Hills, tenders were then requested from the only two companies which accepted the invitation to bid. A US consultant was subsequently awarded the termination of the field work and an Argentinian firm processed the seismic data. 3.3 As the seismic data became available, it was interpreted by the American consultant. The information indicated the existence of several large structures in the Boomerang Hills area. The information was used in  deciding locations of wells in the Boomerang Hills field which led to the success but drilling operations there. APPRAISAL DRILLING 3.4 IDB's US$16 million cofinancing all went into appraisal drilling. The drilling of 14 wells was expected to prove the existence of up to a total of 2.0 trillion cubic feet (TCF) of recoverable reserves from the Boomerang area fields, where 12 wells were to be drilled, and from Vuelta Grande (Chaco), where two wells were to be drilled. 3.5 Heavier than usuai rains in 1981 and 1982 caused serious damage to roads and bridges in the Boomerang Hills area and delayed this component for two years. IDA had some misgivings over the way the contracting of the drilling services was handled (elimination of certain companies at the pre-qualification stage for apparently trivial reasons). Although financed by IDB, these contracts were basic to the services and materials which were to be financed by IDA. Contracts were eventually signed with a local firm for the drilling of eight wells and an Argentinian firm for the other four. Contracts for well services suffered delays during approval by the Controller General's Office, where administrative procedures were cumbersome, inefficient and costly. 3.6 Only eleven of the twelve wells initially scheduled in the Boomerang area were actually drilled, as a result of a YPFB decision to drill only one of the two wells planned in the Palometas Noroeste area, as it would provide sufficient information to confirm gas reserves in the area. The results of the eleven wells drilled are presented in Table 1. Gas was discovered in three wells, oil in two; gas reserves were confirmed in three wells, with oil discovery in one of them, and four wells were abandoned as dry holes. The appraisal drilling was useful in a further sense, since the results identified the point of contact in the field between gas and water. This and prior seismic information indicated the dimension of the gas field and provided guidance for future drilling of the gas-bearing reservoir. 3.7 Retroactive financing of US$0.4 million was approved for well services for the two Vuelta Grande wells, drilled by YPFB during the dry season before moving their rig from the Chaco area. The two wells planned were plugged and abandoned as dry holes. GAS RESERVES QUANTIFICATION AND CERTIFICATION 3.8 The gas reserve quantification component was initially limited to five fields. The certification of reserves was required by Brazil for signing the gas sale agreement on the gas pipeline. The drilling showed that the quantities to be verified had been overestimated. At the request of the Government of Bolivia this component was therefore -extended to cover all of YPFB's gas fields, which were divided into three groups for bidding purposes. After extremely slow international bidding procedures and internal differences within YPFB about contract awarding, the works were finally awarded to three different US firms. Results from this study are presented in Table 2.  -8- MONTEAGUDO SECONDARY RECOVERY 3.9 The major equipment and material for the Monteagudo secondary recovery component and civil construction for water supply and water injection were procured and constructed satisfactorily, although Bolivia's deteriorating economic situation caused delays during 1982-83. In particular, these affected YPFB's procuring of its share of secondary minor equipment and material. However, the facility started operations in April 1984. IV. FINANCIAL PERFORMANCE 4.1 YPFB's financial condition, which was robust at the beginning of project implementation, became precarious from 1982 on as a consequence of foreign exchange restrictions. Domestic petroleum product prices decreased alarmingly in dollar terms as the exchange rate slid from US$1 = 25 Bolivian pesos to US$1 - 500 Bolivian pesos in 1983 and US$1 = 9,000 in 1984. The situation was further exacerbated by the failure of Argentina to pay for gas deliireries from April 1982 on. However, YPFB managed to provide about 41Z of the funds required for the project, as had been agreed at appraisal. V. PROJECT COST AND DISBURSEMENT 5.1 The physical components of the project were all completed more or less as planned with only a moderate cost overrun. Actual total project cost was US$53.6 million as compared to the planned US$41.8 million, or 28.22 above the appraisal estimate. The differences between actual and planned costs -ere due mainly to material cost increases and the inclusion of certain materials not considered at appraisal. A comparison between actual and planned costs is presented in Table 3. 5.2 The last disbursement was made in April 1985, three years later than foreseen at appraisal. Table 4 compares appraisal and actual timing of disbursements. VI. INSTITUTIONAL PERFORHANCE 6., YPFB was severely affected by the lack of foreign exchange resulting from delays in payment by Argentina for gas imported from Bolivia and by exchange control restrictions, which made payment of technical services and urgent imports difficult. 6.2 During the first years of project implementation, YPFB's showed its ability for timely decisions and technical expertise, taking over seismic survey operations with its own manpower when the contracting of expert firms was delayed by the central government. 6.3 YPFB's technical ability to handle the project load was weakened by the dismissal for political reasons of senior officials and their resignation because of the erosion of their salaries. In the later years of project implementation relations between labor and management were poor  - 9 - and disturbances occurred, affecting YPFB's operations to the extent that some of its divisions were shut down by strikers. One of the most worrisome aspects of these disturbances was that YPFB's staff had already been affected by the departure of more than a dozen top technicians and the company appeared drifting out of control and losing its ability to handle the extra work that the Bank's project was bringing. 6.4 The Borrower's performance with respect to the obligations set forth in the loan agreement was satisfactory, although provision of Financial Statements, Progress Reports, and Project Completion Report suffered substantial delays. Annex 2.2 summarizes the major covenants of the credit agreement. VII. ECONOMIC PERFORMANCE 7.1 The main economic benefit arising from this credit is the improved knowledge of oil and natural gas reserves. The minimum reserves required by Brazil were proven and gas exports to Argentina are now the most important source of foreign exchange for Bolivia. Benefits have also accrued from the oil recovery in Monteagudo, where the decline in the production of the field was reversed and the need for imports reduced. The information obtained in this project was instrumental to be preparation of the Brazil-Bolivia gas pipeline. Unfortunately the sales agreement could not be implemented by Brazil as planned, for reasons unrelated to this project. However, the information is still valid and has been used in 1988/89 as a basis for further negotiations with Brazil. 7.2 Because this was an engineering project, no economic rate of return was calculated at appraisal nor ex-post for this report. VIII. BANK PERFORMANCE 8.1 IDA contributed significantly during project identification and preparation by helping the borrower clarify its priorities based on a positive assessment of the natural gas potential in Bolivia. The project was timely and well selected, since it represented a high priority for the country, i. e. development of a high-potential source of foreign exchange. However, the Association's failure to require that seismic operations necessary for the drilling component be completed before loan negotiations contributed to the cost and time overruns. 8.2 IDA provided adequate supervision during implementation with an average of three missions per year. In 1982, when the project experienced significant problems, five supervision missions visited Bolivia. The Association displayed understanding and flexibility in agreeing to changes in project scope and time extensions required to meet problems and delays. IX. CONCLUSIONS AND RECOMMENDATIONS 9.1 The project was successful in attaining its intended objectives of proving the existence of sufficient additional reserves of natural gas for Bolivia to pursue negotiations with Brazil for gas exports to that country,  - 10 - by significantly increasing the knowledge of its oil and gas reserves. The information obtained in the seismic survey was a key input to the appraisal drilling program, which proved incremental gas reserves in excess of 1.6 TCF in the Boomerang and Chaco areas. 9.2 The construction of secondary recovery facilities by water injection proved to be a significant contribution to the reversal of the decline in production and recovery of additional oil reserves. The certification and quantification of gas reserves confirmed and specified the reserves available for export agreements with Brazil and potentially to other countries. 9.3 These achievements were all the more commendable in that Bolivia's political and economic situation deteriorated dramatically during the implementation period. The deterioration of YPFB's financial situation can be traced directly to the country's economic collapse and to confusion in the central government as to its priorities. The resulting loss of senior staff triggered some delays, due to internal differences among the senior staff remaining over how the project should be implemented, but most of the delays recorded were caused by the Government's slow procurement procedure. 9.4 The project did not include a specific institution-building effort. The need for such an effort became more apparent as implementation proceeded and staff were lost. Remedial action had to await the stabilization of the macro-economic situation in 1986-7 and the start of new IDA operations: the Vuelta Grande project and the two Reconstruction Import Credits. YPFB has revised its bidding and contract award procedures, and since April 1988 the Government has required that all public-sector contracts over 100,000 Bolivianos (about US$ 41,000) are handled by foreign procurement agencies. In principle this should speed up implementation and help keep costs within budget. A start has been made on improving conditions of professional employment, though progress in raising salaries has been constrained by the continuing tight economic situation and the need for consistency across public-sector agencies. These initiatives deserve IDA's continued support. 9.5 Much of the justification for the project rested on the assumption that Bolivia would soon start selling gas to Brazil, for which the confirmation of gas reserves was a necessary condition. That Bolivia and Brazil did not succeed in putting into effect a mutually beneficial contract is regrettable, but can not be blamed on the engineering project. Rather, it may be concluded that, despite a deteriorating econonmic environment during implementation, the project made a significant immediate contribution to the supply of oil and gas for domestic consumption and an important potential contribution to Bolivia's earnin' of foreign exchange.  - 11 - TABLE 1 BOLIVIA GAS AND OIL ENGINEERING PROJECT CREDIT S-25-BO APPRAISAL DRILLING RESULTS LOCATION RESULTS 1. Humberto Suarez Roca Dry hole 2. Humberto Suarez Roca oil discovered 3. La Negra Gas discovered 4. El Pulpito Gas discovered and gas reserves copfirmed 5. El Pulpito Gas discovered 6. Junin Dry hole 7. Enconada Dry hole 8. Enconada Dry hole 9. Palometas NW Gas reserves confirmed 10. Yapacani Gas reserves confirmed and oil discovered 11. Yapacani Gas discovered 12. Vuelta Grande Dry hole 13. Vuelta Grande Dry hole  - 12 TABLE 2 BOLIVIA GAS AND OIL ENGINEERING PROJECT CREDIT S-25-BO GAS RESERVES QUANTIFICATION PROVED RESERVES GAS CONDENSATES OIL FIELD (Ft3 x 109) (MHBL) (MML) GROUP I Yapacani 341.30 2,549.60 Enconada 28.50 258.10 Palometas N.V. 79.60 199.00 - Santa Rosa W. 39.83 109.91 933.60 GROUP II Rio Grande 952.253 22,671.00 Colpa 312.937 1,862.10 Caranda 63.629 470,00 GROUP III Vuelta Grande 669.992 15,971.00 San Roque 71.672 1,42i.00 Naranjillos 135.521 896,00 TOTAL RESERVES 2,695.234 46,411,71 933.60  BOLIVIA GAS AND OIL ENGINEERING PROJECT CREDIT S-26-BO APPRAISAL AND ACTUAL COST BY SOURCE OF FINANCING Actual InB MDA YPFB TOTAL as X of Appralsal Actual Appraisal Actual Apprisal Actual Appraisal Actual Appraisal Seismic Survey - - 8.8 8.1 2.1 2.9 S.4 8.0 111 Apprasal Drilling 16.0 16.0 10.1 9.2 6.5 17.7 3 82.6 42.9 182 Gas Reserves Quantification - - 0.6 0.4 - - 0.5 0.4 80 and Certification Monteagudo Secondary Recovery - - 2.1 2.4 1.2 1.9 a.8 4.8 18o TOTAL 16.0 16.0 16.0 16.1 9.8 22.6 41.8 68.6 128 -u =3 _ =_ _ _ 5=n _a = y/ Inw luda USJS 64 million Financial and Adoistnative expenses.  - 14 _ TABLE 4 BOLIVIA GAS AND OIL ENGINEERING PROJECT CREDIT S-25-BO CUMULATIVE DISBURSEMENTS APPRAISAL SCHEDULE AND ACTUAL (US$ 000) Appraisal Actual as 2 Estimate Actual of Appraisal 1980 4,000 0.0 1981 13,000 7,021 54.0 1982 16,000 12,978 81.0 1983 14,660 91.6 1984 15,806 1985 16,000  - 15 - ANNEX 1 BOLIVIA GAS AND OIL ENGINEERING PROJECT CREDIT S-25-Bo Bank Lendina to the Energy Sector 1. Except as otherwise indicated, all of the loans or credits below are fully disbursed and the associated projects completed. Effec- Loan/ tive- Credit ness Closing Number Amount Date Date Project Name (in USS millions) A. Electric Power Sector 1/ 1. Credit 61-BO 10.0 08-25-64 10-31-70 ENDE Power 2. Credit 62-BO 5.0 08-25-64 12-31-67 BRC Power 3. Credit 148-B0 7.4 10-14-69 06-30-75 Second ENDE Power 4. Credit 433-BO .6.0 12-11-73 12-03-77 Third ENDE Power S. Loan 1238-BO 25.0 08-23-76 08-01-80 Fourth ENDE Power 6. Credit 1703-BO 2/ 6.5 10-14-86 06-30-89 Reconstruction Import Credit 7. Credit 1818-BO 3/ 6.8 01-28-88 12-31-88 Power Rehabilitation Sub-Total 66.7 B. Oil & Gas Sector 1. Loan 635-D0 23.3 02-11-71 12-31-72 Gas Pipeline 2. Credit S-25-BO 4/ 16.0 11-12-80 12-31-84 Gas & Oil Engineering 3. Credit 1719-BO 15.0 11-12-86 06-30-89 Vuelta Grande Gas Recycling Sub-Total 54.3 1/ Except for Credit 62-BO, all of the above helped to support the generation and transmission system of the national clectric power company, Empresa Nacional de Electricidad (ENDE). Credit 62-BO helped to support the Bolivian Power Company. 21 Credit 1703-BO amounts to US$55.0 million, of which US$6.5 million has been allocated to help finance a gas turbine to be installed near the city of Santa Cruz, Bolivia. No problems are anticipated in connection with the implementation of this sub-project. 3/ No problems are anticipated in connection with the implementation of this project. 4/ Date of last disbursements 02/14/85.  - 16 - ANNEX 2.1 BOLIVIA GAS AND OIL ENGINEERING PROJECT CREDIT S-25-BO Project Definition 1. Set forth below is the project ae defined in the Credit Agreement: Part A: Seismic Surveying. Detailed seismic surveys of gas fields of the Boomerang Hills, processing and interpretation of data. Part B: Appraisal Drilling and Delineation of Gas Reserves. Drilling of wells in Boomerang Hills and Chaco, provision of well services, acquisition of equipment, and monitoring. Part C: Certification of Gas Reserves. Certificaticn of gas reserves resulting from appraisal drilling in Boomerang Hills and Chaco. Part D: Monteagudo Secondary Recovery Project. Converting about five to seven existing wells into water injection wells, working over some eight producing wells to be affected by the injection of water, and drilling about fifteen water-supply wells; acquisition and installation of water supply pipe and related equipment; monitoring operation of facilities. Part E: Additional Studies. A study of thv domestic gas market and a pre-feasibility study on a gas export projecs.  - 17 - ANNEX 2.2 Page I of 1 BOLIVIA GAS AND OIL ENGINEERING PROJECT CREDIT S-25-BO Maior Covenants of the ProJect and Credit Agreements Apart from the customary covenants covering good professional practices, Yacimientos Petroliferos Fiscales Bolivianof (YPFB), the national gas and oil company, agreed to: (i) carry out the project with due diligence, give the project priority over other investments in respect of the allocation of funds available from its natural gas sales abroad, and maintain the project unit with competent management and staff until completion of the project (Section 2.01a & b); (ii) employ competent consultant staff in the execution of various studies, cooperate with the consultants, and consult with IDA on the findings of such consultants (Section 2.02a-d); (iii) procure goods and services (other than consultant iervices) through international competitive bidding (Section 2.03); (iv) carry out the project in conformity with appropriate pollution control and ecological standards (Section 3.03); (v) annually furnish IDA with audited financial statements concerning operations within four months after the end of the subject year (Section 4.02); (vi) review with IDA the economic, financial, and technical justification of the investment program and corresponding financing plan not later than 120 days before the initial implementation of such investment program (Section 4.03).  ANEX 3 Page 1 of 4 BOLIVIA GAS QD OIL E!NERNRINO PROJECT CREDIT S-25-60 Actual and Forecast Completion Dates Th- following comprs actual and forocast completion dates on a component-by-component basis. Project Forecast Actual Componont/Description Tasks Completion Date Compltlon Date PART A: SEISMIC SURVEYS a. 500 line-km seimic survoy to 1. 467 line-ke was completed January 1981 be completed by YPFS's covering parts of Boomrng equipment and seismic team. Hill area. b. 1,100/1 600 line-km selmic 1. YPFB prequalified the - September 1980 survey in the o00merang Hill* seismic companies. covering the areas in Santa 2. IDA approved the October 1980 Rosa, Palometo, Yapacani and prqualitfication of the Enconada. This project seismic companies. component also Includes 3. Evaluation of bids Lky YPF. - February 1981 processing and lnterprotation 4. IDA approval for *warding - March 1981 of the above seimic work contract. plus the seismic data S. YPFB aworded the seismic - May lS81 gathered In previous survey survey contract. of 250 line-km. 6. Selmic survey completed. - October 1982 7. Seismic processing - March 1988 completed. 8. Seismic interpretation Doember, 1981 June 1988 comploted.  ANNEX 3 Pro]oct Forecast Actual Cjmponent/De cciPti.m Tasks Complet70n Dte Completion Dat. PART B: APPRAISAL DRILSR AM DELINEATI01 OF GAS RESERVES a. Drtiltng of 12 w*lle, 6 In 1. YPPB prequalified the - ard Quarter 1980 Snta Roe, 2 in Pe I _t 2 drilling contractors. In Ynapacni, 2 In EnconaJb In 2. IDB approved the - 3rd Quarter 1980 the Boomerang Hils to prove prquSallficatlon of the a" reserves for ntul Pas drillng contractors. export project to Brazil. S. Evaluation of Bid offers - NoveWmbr 1980 by YFB. 4. DO approved award of - Dec_r 1980 drilliog contracts. 6. VPFB warded drilling - January 1961 contract. 6. Mobilization of drilling - Until oen! of rigs. AprIl 1961 7. Spdding of first well. - July 24, 18I1 6. Drilling completed. December 1to1 February 10 b. Procurement of matrials 1. Eveluation of bid offers November 1660 needed to drill above wells. for meteriols to be procurd. 2. IDA approval for some of Doce_mr 1960 the materlal procurement. 8. YPFB purchas orders for January 1901 IDA a proved mterials. 4. mator a delivery of IDA April 1091 approved procuremnt. 6. 8id evaluation of may 1661 remindr mterials O. IDA approval for material may 1901 procurement.  ANNEX 3 Page 8 of 4 Project Forcsat Actual Co porientjMcriptlion T kc Completion Date Completion Date c. Contracting of enginering 1. Pr.qualifcation of Decomker 1980 services needed fsr drilling, engineering companies by completion, nd approlsing YPFB. the 12 wells. 2. IDA approval of Deember 1960 pre a lification. 8. YPFB's *valuation of bid February 1981 offers for engineering servlcp 4. IDA =elCval for awarding March 1981 enineering service contract. S. YPFB awardmd contract. March 1981 S. Completion of contract for June 1983 eineering service (drilling & completion). PART C: CERTIFICATION OF GAS RESERVES 1. Award ot contract for July 1983 consulting service on Group I wells. 2. Award of contract for February 1984 consulting services on Group I1 wells. 8. Completion of Study April 1964 Group I and II well. 4. Completion of Study June 1964 Group iI wells.  ANNEX 8 Page 4.o 4 Projoet Forweast Actual C_prPti6n Tooke Completion Date Comletion Date MONTEAOO SECONDARY RECOVERY . IOaterials sa euipment, 1. Excluding very few minor December 1988 needed to implment watr Itemt , *11 mterial and Injection nto the Ingre Nd equipment were insta led. Paral-iri oll-Ieering 2. Completed. D cember 1981 let Quortor 1984 formatlon to roer t .tional poduction (8,900,000 *1). PROJECT PREPARATION FACILXY a. Prefeasibility study of the Study comleted. Now. February 1980 Bolivia/Brazil Ps pipeline. b. Reprocessing ot 2C0 line-km Reproceslng comploted. None Novembr 1980 simic date. c. D*omtic S0 mrket stuy. Study completed. 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