Turkey - Petroleum Exploration Project

Document of The World Bank FOR OFICIAL USE ONLY leport No. 7941 PROJECT COMPLETION REPORT TURKEY PETROLEUM EXPLORATION PROJECT (LOAN 1916-TU) JUNE 30, 1989 Energy Operations Division Country Department I Europe, Middle East and North Africa 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.  PRINCIPAL ABBREVIATIONS AND ACRONYMS USED BOTAS Fetroleum Pipeline Corporation BPD Barrels Per Day DIT-AS Tan1ar and Marine Operations Corporation EIE Energy Conservation Agency GDPA General Directorate of Petroleum Administration GOT Government of Turkey IPRAGAS LPG Distribution Corporation MMCFD Million Standard Cubic Feet Per Day POAS Petroleum Marketing Corporation TPAO Turkish Petroleum Corporation TUPRAS Turkish Petroleum Refineries Corporation COUNTRY EXCHANGE RATE Name of Currency Turkish Lira (1L) Appraisal Year Average USS1.00 = 76.04 TL Intervening Year Average US$1.00 = 343.73 TL Completioni Year Average (1987) US$1.00 = 853.00 Tl, FISCAL YEAR OF BORROWER January 1 to December 31  FM OmICIAL uu ONLY TO* WOl SANK Waihonton. DC 20413 Ole of DloVCGUhi opsudmu E,.hauamn June 30, 1989 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND TRE PRESIDENT SUBJECT: Project Completion Repor Turkey Petroleum Exploration Project (Loan 1916-TU) Attached, for information, is a copy of a report entitled "Project Completion Report on Turkey Petroleum Exploration Project (Loan 1916-TU)" prepared by the Europe, Middle East and North Africa Regional Office. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment This document has v restricted distribution and macy be used by recipients only in the performance ot(their olcitl dutics.Its contents maynot otherwisebe disclosedwithout WorldB&nkt utE.orizstion.  71 (JWUClLS USgE ONLY TURKEY PETROLEUM RXPLORATION PROJECT (LOAN 1916-TU) PROJECT COMPLETION REPORT TABLE OF CONTENTS Preface ........................ .. ................. J Basic Data Sheet ....... I .................................... i Highlights ............................................. iv I. INTRODUCTION . II. PROJECT PREPARATION AND APPRAISAL ................. Project Origin ........................... ......... Appraisal, Negotiations and Effectiveness ......... Project Objectives ........................... Project Description . Changes in Prcoject Scope. ....... ,.. Major Covenant s ................,...... 4 III. PROJECT IMPLEMENTATION ..................... ....... J Initial Delay, .................. ..... Project Ma-.agement ...... ........ .. ....... Project Execution .................................. Project Cost ............................... . Procur e:ent .8 Disbursements. 9 Achievement of Project Objectives ........ . ........ 5 IV. INSTITUTIONAL PERFORMANCE .......................... 10 A. TPAO ....................... 10 B. GDPA ....... . . . . .... 11 C. EIE ............. .... 12 Performance of Consultants .;.. ...1 Financial Performance ......................... 12 Sustainability of TPAO . . ........................... 14 V. BAN-K'S PRFORMANCE. 14 VI. CONCLUSIONS .16 Lessons to be Learned ...... ........... ---. 17 This document has a restricted distribution and may be used by recipients only in the performance of their officiL,l duties. Its conents may not otherwise be disclosed without World Bank authori7ation.  TABLE OF CONTENTS (cont'd.) Page No. ANNEXES 1. Extent of Compliance with Covenants .............. . 18 2. Project Coso.................... 22 3. Schedule of Disbursements......... 23 4. Well Testing Rsult ... ...... 24 5. New Field Discovscois ............. ..... 26 6. Summary Balance Sheets of TPAO (as of December 31, 1984, 1985 and 1986. 27 7. Suimmary Sources and Applications of Funds of TPAO for 1984-1986 .........28 8. Summary of TPAO Subsidiaries .29 9. Borrower and GOT Coments .30 MAP IBRD 15046R  TURKEY P1'TROLEUM EXPLORATION PROJECT (LOAA1 1916-TU) PROJECT COMPLETION REPORT PREFACE This project, supported by Loan 1916-TU for llS$25 million, consisted of: (a) geological studies of southeastern Turkey; (b) technical assistance to, and trainirg of, the staff of the Ministry of Energy and the Turkish Petroleum Corporation (TPAO); (c) seismic surveys by two seismic crews each. for two years; (d) drilling of fourteen wells based on the studies and, seismic surveys, four appraisal wel'.s in the Thrace basin in southwestern TurKey and ten exploration wells in southeastern Turkey; and (e) a program of energy audits in the power and selected industrial subsectors with a view to improving the efficiency of energy use and promoting energy co:jservation. The loan was closed on December 31, 1935, after an extension of the Clcsing Date by one year from the original date of December 31, 1984. The total disbursements were JS$24.867 million, leaving US$133,000 undisburs3ed, which was cancelled on May 12, 1986. The loan was the first bank loan for the Turkish p,troleum subsector and amongst the Bank's earliest involvements with the petroleumn subsector anywhere. It contributed to the strengthening of TPAO's capabilities, particularly in the areas of exploration geophysics and geology. It also influenced the modification of conditions under which foreign companies took concessions in Turkey, whicA resulted in a new wave of exploration in the country by the international oil companies. This Project Completion Report (PCR) was prepared by the Energy Division of the Europe, Middle East and North Arrica Regional Office based on the Bank's appraisal report, supervision reports and other documents in the Bank's files and on the findings of a pro4ect completion mission which visited Turkey in January-February 1967. This PCR was read by the Operations Fvaluation Department (OED). The draft PCR was sent to the Borrower (TE'AO) and GOT for comments and they are attached to the report (Annex 9).  - ii - PETROLVJM CXPLORATION PROJECT (LOAN 1916fTU) PROJECT COMPL1ETION REPORT ASIC DATA SHIET KEY PROJECT DATA Aporais I ltee Expectation Actuial Totil Project Cost (US$ flillion( 45 64.5 Overrun 1) - 30.0 Loan Agount (UC Million) 25 25.0 Dsburse 25 24.87 Cancelled - 0.13 Date Ptysical CoaDonents Clopletec 06164 12/85 (Althouqh the Pnerov audit cosponent was coopleted by sid-1984j Proportion Co8eleted By Above DAte (1! 60 100 Fropotjor Df Tite Overrun lX) - JvJ Ecnotsic Rate of Return 04. Nct Applcable Not Acplicable F:naicial Rate ot Returt (I) Not Applicatle Not Applicable inst;tutional Perforear:e Satisfactorv Satisfactory lusulative Esti'pted and Actual Disbursenents (USS sillion Ff3. FY8. FY83 FY84 FYS9 Ft68 FY67 Appraisal 4 17 24 25 - !II Ac'ual 0.OO 0.6i 2-21 10.13 13.34 24.79 24.87 (11i Actual as % of Apnr 'sal OQO. 4.06 9.63 401.2 53.6 91 99.48 (i0v Actual as ' of Net Loan Amount (V00 2.77 9.29 40.73 : 164 qq.66 100I 00 PROJECT DATES ODlginal Actual Date Date First Wentior in Files 02180 0211( 6overnoent s Appl:caticr Oo/S'J Reqc:liti3ps 0s'8 Eoard Approval 11/16/90 1V16ISO Loar Aqreeeent Date 11/24/90 1iV24(10 Effe:tveress Date 03/24/81 06ktie: :2osinq Date 12/31'84 1231 8P  - lii - STAFF INPUT FY80 FY81 FY82 FY83 FY84 FY85 FY86 FY87 FY88 Total Preappraisal 19.0 19.0 Appraisal 0.7 5.3 6.0 Negotiation 17.1 17.1 Supervision 0.3 0.3 13.5 20.9 7.2 9.0 2.1 53.4 Total 0.7 41.7 0.3 13.5 20.9 7.2 9.0 2.1 95.5 Zonth No. of Staff Date of Year Persons Weeks Weeks Report Identification / Preparation !!/79 4 1.0 4.0 12/15179 Appraisa1 02/680 7 3.0 21 0 10/17/80 Supervision I 01!81 3 1.7 5.1 02/04/81 Supervision 11 U1. I i 2.0 6.0 02116/82 Superv:s"on !i 04i6. 3 1.0 3.0 05/27/82 Sueervisior I V 098, 2 1.0 2.0 12/70/82 Supervision V 028 E 4 2.q 11.6 08/23/83 Supervisior v O5 8' 4 0.2 0.8 01/30/84 Supervision YII iO:84 3 0.4 1.2 12/1/384 Supervisior V1i7 fc.85 4 M.I 2.0 0,/20/85 Su;ervis5rn 1% 11/85 , 1.4 rE 12/16/8! Snervision X 0218 2 1.4 2.2 04i25/86 o*Dl etionr .-!'r 2 PA 2 . n 4;P1/i Tota' Supervision 4',3 OTHER PROJECT DATA : E- - _Ee r ' oP- an  - iv - TURKEY PETROLEUM EXPLORATION PROJECT (LOAN 1916-TU) PROJECT CO4PLETIOR REPORT HIGHLIGHTS (1) The purpose of the project was to: (i) strengthen TPAO's exploration activities :hrough the introduction of modern geological studies and geophysical data acquisition, processing and interpretation techniques; (ii) promote additional exploration activities by helping the General Directorate of Petroleum Affairs (GDPA) to attract foreign oil compani2s to Turkey; and (iii) improve energy efficiency usage in industry through technical assistance for an energy audit program. (ii) The project was a qualified success. It succeeded in adding to TPAO's established recoverable reserves about 14 million barrels of oil but the exploration bffort has not been a commercial success mainly because of the steep drop in the price of crude oil. No major discoveries were made in southeastern Turkey, the original project area, as the exploration effort under the project led to the finding of only three small fields. TPAO's technical skills have been significantly upgraded through the training of many of its engineers and technicians, especially in the areas of geophysics and geology. Organizationally, TPAO has been strengthened by the separation of oil importing and refinery activities from those of domestic exploration. The other two institutions involved in the project, namely 'JDPA and the General Directorate of Electric Power Resources, Survey and Development Administration (EIE), have also been strengthened. The energy audit component was successfully carried out and improvements in the efficiency of energy usage in selected industries are under way. (iii) Except for increasing the number of wells to be drilled fr-m "four to six" to fourteen, the project was implemented as envisaged at appraisal. The actual project cost was about 30% more than what was estimated at appraisal mainly because of an increase in local cost associated with the extension of the exploration area and local inflation which exceeded the appraisal projections. The project was also completed a year late because of delays in procurement and in the appointment of consultants. The project was almost fully disbursed by the extended closing date of December 31, 1985 and undisbursed funds of US$133,000 were cancelled on May 12, 1986. (iv) A parttcularly disappointing outcome of the project was that the expected reefal development of the carbonate reservoirs with prolific oil accumulations was not found. Also, the economic gains of the small discoveries made did not materialize as expected because of the steep drop in the price of crude oil.  TUMMY PETROLEUM EXPLORATION PROJECT (LOAN 1916-TU) PROJECT COMPLETION REPORT I. INTRODUCTION 1.01 Although Turkey wan producing approximately 3 million tons of crude oil per year, the rapid industrial expansion of the economy since the mid-1970s resulted in an increased dependence on imported oil and petroleum products, which in 1979 amounted to 17 million tons. Very few discoveries were made during this period and overall production slowly declined. While petroleum imports of $1.4 billion in 1978 absorbed 60% of merchandise export earnings, they were about $2.4 billion 'n 1979, consuming all of the merchandise earnings. Turkey tried to reduce the growth of oil consumption by replacing oil with lignite and hydropower for electric generation, and with coal for process heat in industries, but with the increase in envir,nmental pollution, thn opportunities for substitution of energy sources could not be fully utilized. 1.02 To increase indigenous oil production, the Government of Turkey (GOT) encouraged oil exploration in the sedimentary basins which cover a large portion of the Turkish land area, and instituted several institutional changes to finance the expansion of Turkish oil exploration. It is in this setting that the Petroleum Exploration Project was conceived. The Project waa the Bank's first involvewent in the exploration for hydrocarbons in Turkey. II. PROJECT PREPARATION AND APPRAISAL Proiect Oriain 2.01 Recognizing the heavy burden of cil imports on the Turkish balance of payments, GOT's energy policy focused on the development of indigenous energy resources suich as coal, lignite and hydropower, and on the search for new hydrocarbon resources. Exploration for oil was being carried out by TPAO and also to a small ectent by foreign oil companies. In November 1978, an engineering loan of US$2.5 million was given b; the Bank to help TPAO evaluate a'ternative enhanced oil recovery techniques that would help increase Turkey's oil production in the medium-term. While implemeiiting this loan, the subject project was proposed by GOT and TPAO to the Bank. It was thereafter prepared by TPAO. ADDraisal, Negotiations and Effectiveness 2.02 The project was appraised in February 1980, and negotiations were held in September 1980. During .he negotiations, no substantive changes were made except for the following: (a) the loan amount was raised from US$19.5 million to US$25 million in view of the increase in the fnreign exchange ccsts;  - 2 - (b) the loan terms were changed to standard terms, namely, for seventeen years including four years of grace; (c) GOT presented, and the Bank accepted, a plan for eliminating the foreign exchange losses of TPAO ov its outstanding foreign debt associated with the imports of crude and petroleum products. TPAO also concluded satisfactory arrangements with the Turkish Elect,lcity Authority (TEK) for obtaining timely electricity supply at Dodan gas field. These had been proposed as loan effectiveness conditions and were deleted since they were no longer necessary; and (d) TPAO made satisfactory arrangements for design of the gas oiReline by its conisultants, instead of by its subsidiary as earlier indicated, and it also furnished logging and coring data for three wells from the Thrace gas field. These had been earlier proposed by the Bank as disbursement conditions and were now accepted as fulfilled. 2.03 The loan was signed on llovember 24, 1980, and was made effective on June 16, 1981, about three months later than estimated at appraisal, to allow GOT and TPAO sufficient time to complete action on two matters, without which they would have been in technical default. These were: (a) GOT' obligation to carry out a plan of action acceptable to the Bank co offset or eliminate the foreign exchange losses occurring after January 1, 1981, on account of its foreign debts incurred in connection with the imported petroleum and petroleum products; and .b) GOT's agreement to transfer from TPAO to a subsidiary by January 1, 1981 all responsibility with regard to import-related activities and to formulate a time-bound plan to transfer TPAO's residual responsibilities in respect of refining imported oil by December 31, 1981. Prolect Objectives 2.04 The project had four major objectives: (i) to increase Turkey's petroleum production potential through the introduction of modern geological and geophysical studies, reflection seismic surveys, data processing and interpretation; (ii) to implement a limited exploration drilling program to help determine whether the prospects developed by the studies and surveys can lead to nLew oil discoveries; (4ii) to promote additional exploration activities by helping GDPA to attract foreign oil companies to Turkey; and  -3- (Iv) to identify the prospects of, and method. for, proviling energy conservation programs by encouraging efficient energy usage in industry through technical assistance for an energy audit program. Proiect DescriDtion 2.05 The project consisted of the following components: (a) Geolouical Studies and TechnicalX si4tance. Geological support would comprise new regional basin studies, and integration of their results with the existing geological, geophysical, and well data into an overall geological picture of the southeastern part of Turkey. Studies of the geology of adjacent countries, Syria, Iraq and Iran, would be carried out and incorporated into the regional studies, as well as laboratory studies in the fields of sedimentology, petrography and stratigraphy. The results would be used to locate the areas in which reefal development in the carbonate sectior, which is the main reservoir in this area, was most likely and which should subsequently be suiveyed by reflection seismic methods; (b) Seismic Surveys. This component of the project would involve reflection seismic surveys, data processing and interpretation in an attempt to detect possible stratigraphic reef traps, and deep oil bearing structures. The seismic surveys were to be concentrated in the southeastern part of the country where prospects for the discovery of good oil reservoirs were considered to be the best. The surveys were also to include the topographically difficult Hakkari area where there had been no seismic surveys. The locations for seismic surveys were to be determined on the basis of stratigraphic and geological studies . Seismic surveys were also to cover the areas adjacent to the Raman and Garzan fields in an attempt to better delineate these fields. Reprocessing and reinterpretatior of some of the existing seismic data were also ircluded. The appraisal estimate was based on shooting approximately 2200 km of seismic lines over the life of the project; (c) Exploratory Drilling. Subject to the satisfactory outcome of geophysical and geological studies in locating potential hydrocarbon bearing prospects, this component would finance the drilling of four to six medium-depth wells, about 3,000 meters deep, in southeastern Turkey. The funds were to ensure that TPAO would have sufficient drilling materials to follow-up on its seismic program. However, the selection of locations to be chosen was to comply with internationally acceptable star.iards and TPAO was required to submit a complete technical justification, acceptable to the Bank, for its choice of well locations prior to drilling; (d) Promoting Foreian Interest in ExDloration. This component was to provide financing for professional services to increase GDPA's capabilities in carrying out the following activities: (a) collating, evaluating and packaging available drilling and geological data on open concessions to make them easily available to interested foreign oil companies; (b) advertising Turkey's petroleum potential by establishing and maintaining contacts with the international oil industry; and (c) providing the expert legal and technical advice needed to negotiate, and enter into, exploration and production contracts; and  *- 4 - (e) Industrial Energy Efficiency Audits. This component was dasigned to identify the potential for energy savings in major energy consuming industries and to evaluate ways in which GOT could encourage energy savings activities. Basically, the program was to encompass consulting services which would concentrate prtmarily on thermal power plants and gl8ss and textile plants in both public and private sectors. Chanies in Proiect ScoDe 2.06 The project originally included drilling of four to six exploration wells in the southeastern part of Turkey. However, initial exploration work financed under the project turned out to be more difficult than expected due to the rugged terrain in that part of Turkey and interpretation of seismic studies became difficult. The initial seismic studies did not locate suitable drilling locations in this area, and it was decided to defer drilling under the Bank project while further seismic work was carried out. In April 1983, GOT proposed, and the Bank agreed, to expand the proje't area to include the Thrace basin in northwestern Turkey which was thought to have greater potential for investments in hydrocarbon exploration. Four shallow appraisal wells in the Thrace area were thus financed out of this loan. Also, to permit achieving higher quality seismic data processing needed for the Thrace program, a sum of US$1.5 million was allocated out of the unallocated amount, for the purchase of computers to establish TPAO's own seismic processing center. It was also decided that in Hakkari in the thrust belt, one of the originally identified areas, very deep wells were required to investigate poor structural indications and the Bank decided not to support the well drilled by TPAO, which proved unsuccessful. 2.07 Meanwhile, TPAO also identified a series of prospective features in another area of southeastern Turkey in the zone of Cretaceous imbricate structures which have proved oil-bearing. Based on the new seismic results, TPAO developed a ten-well drilling program for this area to be financed under the loan. The Bank supported the expanded drilling program with a foreign cost of US$9 million equivalent. These ten wells together with the four already drilled in Thrace raised the total number of wells under the project from "four to six" to fourteen. 2.08 To permit completion of the above additional drilling, the Closing Date of the loan was extended from December 31, 1984 to December 31, 1985. Maior Covenants 2.09 Annex 1 sets forth the major covenants )i the Loan and Project Agreements. Compliance by both GOT and TPAO with these covenants, though occasionally late, was generally satisfactory. Three covenants need special mention. 2.10 One covenant concerned exchange of views with the Bank on how to retain qualified technical personnel which was a problem at appraisal and during the initial phases of project implementation. This has been complied with by TPAO and, at the present time, the morale of TPAO staff is  satisfactory. TPAO revised the salary structure, introduced incentives and provided training facilities for the technical staff, which resulted in motPiating the technical staff to remain with the organization. This has been helped to some extent by the general depression in the world oil industry as well as by t%e improvement of economic conditions in Turkey. 2.11 Another covenant required TPAO to establish and maintain separate financial statements to reflect activities with regard to imported oil and those related to domestic exploration and production. TPAO has complied with this covenant since January 1984, following the enactment of the law restructuring TPAO in May 1983. 2.12 A third covenant concerned audit by independent groups acceptable to the Bank and submission of the audited statements. Here, the Bank and TPAO accepted the government auditors as an independent group. There were delays, however, in auditing the accounts within six months, as required under the loan covenants. The 1981 accounts were received about a year late, but the delays were largely overcome in the succeeding years. III. PROJECT IMPLEMENTATION Initial Delays 3.01 The project was delayed initially by about three months due to the delay in loan effectiveness (para 2.03). The project was further delayed by serious management and staffing problems within TPAO in the latter part of 1981 which resulted In the resignation of many professionals and frequent changes in TPAO's technical management. This endangered the timely implementation of the basin studies which, in turn, delayed the implementation of the seismic program. 3.02 Similarly, the recruitment of consultants to assist in training TPAO's staff, and to participate in the various geological and geophysical studies was also delayed by approximately nine months due to lengthy negotiations. Delays were also experienced in discussions with the Ministry of Energy concerning the utilization of funds provided in the loa.k for strengtlhening of GDPA and the training of its perscnnel. 3.03 The only progress made in 1981 was in defining the scope of the energy audit studies, which were started in the spring of 1982. In 1982, a new general manager of TPAO was appointed and the pace of project implementation began to accelerate. Prolect Management 3.04 The day-to-day management of the project was entrusted to TPAO's Exploration Department. However, conditions ior the disbursement of funds were agreed between the Bark and TPAO at appraisal to ensure close cooperation in the selection of areas for exploration. TPAO was required to se2k the Bank's concurrence for justification of expenditures to finance drilling in specific locations and to consult w'th the Bank on the overall exploration strategy. A committee was set up in Ankara composed of exploration staff and selected Bank consultants in order to establish priorities for seismic studies and selection of drilling locations.  -6- Prglect Execution 3.05. The implementation of the various project components in described in the following paragraphs: a. Studies 3.06 The basis for the commencement of the geological studies as vell as the initial sa*isic program was a report prepared by the Bank consultants during appraisa]. This indicated that the highest priority should be accorded to the Hazro-Ravan area in southeastern Turkey, adjacent to the site of existing oil production where hitherto undiscovered carbonate reef reservoirs could possibly have developed. However, geological, geophysical and basinal studies subsequently carried out by the consultants and TPAO indicated that contrary to expectations, the postulated structural and stratigraphic traps were not found in that area. The failure to find guod prospects in the prime target area led TPAO to switch its activities to the Mardin Limestone group in the overthrust st-uctures of the imbricate zone. b. Seismic Proaram 3.07 The priorities of the seismic program were subject to change, based on the results of seismic and drilling programs carried out by TPAO. The actual seismic coverage under the project (4,309 km.) vis-a-vis the original estimate (2,200 km.) is given below: Original Actual Change (km) (km) (km) Dincer-Camurlu 400 630 (+) 230 Hakkari 570 639 (+) 69 Raman Hazro 800 1,862 (+)1,062 Cezre Silopi 450 - (-) 450 Thrace - 655 (+) 655 Other Areas in SE Turkey - 523 L+) 523 2,220 4,309 (+)2,089 Because of the failure of seismic studies to locate suitable drilling locations in the original target area in southeastern Turkey, a decision was taken by the Bank and TPAO to initiate seismic work in the Thrace basin (para 2.06). This required two seismic crews which were procured under LIB procedures and were financed from the lcan proceeds (paras. 2.06 & 2.07). Some 655 km of seismic was accordingly shot in the Thrace basin under the project (para 3.07). Another 1,862 km was shot in the Hazro area which contained Paleozoic clastic and Mesozoic carbonate prospects, but an intended 500 km of seismic was dropped on account of the absence of source rocks and the general difficulty of the terrain. The third location selected for the seismic program was the Hakkari area, again characterized by difficult terrain. Here, six to seven structures were lointly identified by TPAO and  -7- Amoco after 950 km ot seismic lines tiere acquired, of which 800 km8 was financed by the Bank loan. About 523 km of seismic was shot in areas of southeastern Turkey, not originally targeted, by the time the project was completed in 1985. c. KiDloratorv and ADoraisal Drilling 3.08 The seismic work in the Thrace basin (par& 3.07) was to be followed by the drilling of a suitable number of strategically placed key exploration wells to test the potential hydrocarbon-bearing structures in the area. Four shallow appraisal wells were accordingly drilled in the Umurca gas field in Thrace and financed from the subject loan. The drilling of these wells helped delineate the Umurca gas field and expedited the Thrace Gas Exploration Project (Loan 2327-TU of June 1983). 3.09 By early 1984, new seismic structures were identified in the original project area where ten wells were drilled compared to the appraisal estimate of 4-6 wells. The remaining funds under the subject loan were used to refurbish equipment and procure mater:als which were consumed in drilling these ten wells. Three of the wells financed under the project and one well outside the project turned out to be producers, leading to the discovery of four small oil fields with present recoverable reserves of approximately 14 million barrels. TPAO is in the process of developing these fields. d. Technical Assistance to TPAO 3.10 During the course of the project, 58 of TPAO's geologists and geophysicists were trained at various locations in the USA, UK and France for periods of two weeks to four months, in reservoir engineoring, geochemist:y, seismic field techniqves, seismic data processing, applied sedimentology, explorator. mana;ement, development geology, petrography, reservoir geology, and seismic software. Fifteen foreign consultants in various disciplines were employed by TPAO to work on various aspects of the basin studies as well as on the evaluation of seismic data. Most of the consultants came from established consulting firms and their duration of stay varied from two months to three years. e. Strengthening of GDPA 3.11 During the project, TPAO continued to handle the exploration data and discuss possible concessions with the international oil companies with the result that little activity took place until 1984 concerning the strengthening, reorganization and modernization of GDPA. At that time, the Bank took the initiative of appointing a consultant to diagnose the needs of GDPA and to develop a plan of action, and forwarded the plan of action to GDPA. The plan proposed training for geologists, engineers and other professionals at the offices of the Energy Resources Conservation Board in Calgary, Canada. The training was in structural geology, data processing, data management, computerization of the geological exploration program, the management and drilling of production wells and field inspection of existing drilling facilities, as well as heavy oil drilling and production. Other trainirg subjects included legal status, obligations to provide notices to licensors, as well as the analysis of conflicts concerning license holders.  f. Industrial Enerav Efficiency Audij 3.12 After considerable start-up delays, EIE, the agency responsible for the energy conservation component of the project, commissioned audits by expatriate consulting firms in the following five industries: (a) thermal power plant at Ambarli; (b) iron and steel plants; (c) the pulp and paper sector; (d) glass factories; and (e) the textile sector. The audits were completed by September 1984 and improvements based on the audits are under way. Project Cost 3.13 The final project cost as compared to the appraisal estimate is shown in Annex 2. As indicated therein, the actual cost was approximately US$20 mi lion equivalent (30%) more than the appraisal estimate, entirely because of an increase in the local costs due partly to the effects of high inflation and partly to the extension of the project area. The cost of seismic surveys, which was originally estimated at $12.4 million excluding contingencies, rose to $40.2 million mainly due to a doubling of the amount of seismic coverage under the project (4,309 line-km) as compared to the original estimate of 2,200 line-km. The cost of exploration drilling, which is another major item, increased by approximately $5 million due to the ir:reased number of weils (from 4-6 to 14) drilled as compared to the appraisal estimate. The above two major components accounted for 92% of the project cost. The technical assistance cost of training TPAO personnel was actually less by approximately $2 million due entirely to the lower cost of consultant services than origir,elly estimated at appraisal. The cost of other project components was 1ovwt, partly because technical assistance to GDPA was provided free of charge ty the Alberta Energy Conservation Board with the exception of travel and living expenses. The higher local costs of the project have been met from TPAO's resources. A sum of $133,000 of the Bank loan was unspent by the loan closing date and was cancelled. Procurement 3.14 In the initial stages of project implementation, there were significant delays in procurement due mainly to the unfamiliarity of TPAO (a first time borrower) with the Bank's procurement procedures. Towards the end of the project period, a Standard Bid Document for International Competitive Bidding (ICB) was cleared by the Bank, which minimized the difficulties encountered earlier. Other procurement of a specialized nature was done under limited international bidding. Consultants were selected on the basis of short lists approved by the Bank and an evaluation of the technical merits of  - 9 - the proposals received from those invited to participate. The Bank approved each of the appointments. Overall, the Bank and the borrower had no slgnificant disagreements over procurement matters. Disbursements 3.15 The project was completed by the end of 1985. Annex 3 gives the actual disbursements as compared to the appraisal estimate. By September 30, 1984, the date by which it was originally estimated that the loan would be fully disbursed, the actual disbursements were only 11% of the loan amount. However, there was a dramatic improvement since then and the remaining 89% of the loan was disbursed in the following two years. Because of the delays in the early stages of the project implementation, it was necessary to extend the loan closing date from December 1984 to December 1985; approximately US$133,000 left unutilized was cancelled from the loan in May 1986 (para 3.13). Achievement of Prolect Oblectives 3.16 A major objective of the project was to support TPAO's efforts in intensive exploration for hydrocarbons by providing sufficient foreign exchange to conduct these activities in the overthrust belt and carbonate platform area in southeastern Turkey. This objective has been partially achieved, although not in the form originally envisaged as can be seen from the following paragraphs. 3.17 The project was designed to start with studies of the geology of southeastern Turkey to be followed up by selections of areas for seismic coverage which would ultimately lead to the identification of sufficient drilling locations. The drilling locations as selected at appraisal did not show sufficient potential for conducting intensive coverage and so, other locations were chosen with the Bank's approval. The search for suitable structures to be tested ultimately moved to South Dincer, West Kozluca, overthrust zones in southeast Turkey and the Thrace basin. 3.18 The list of wells drilled in southeastern Turkey as well as in the Thrace basin is shown in Annex 4; it also indicates which wells were financed from the project. Out of the ten wells in southeastern Turkey financed from the Bank loan, five haai oil and gas shows, and three were producers and are being developed as small fields. As a result of the project, TPAO has been able to add approximately 14 million barrels of oil to its established recoverable reserves. However, the "finding cost" of the discovered oil is about 200% higher than what would be financially acceptable at the present crude oil prices, and therefore, the exploration effort has not been a commercial success. 3.19 Annex 5 shows the new field discoveries in southeastern Turkey as well as current production in the Cukurtas, Akpinar, Bati Kozluca and Bati Firat fields. Plans to develop these fields are presently under way. 3.20 Apart from its physical objectives, the institutional objectives of the project were also mostly achieved. TPAO has been strengthened as an institution, and is now better organized and managed, with staff considerably  - 10 - more skilled than before (para 6.01). GDPA has also been strengthened, with better capabilities of carrying out i' activities (para 6.05). Finally, GOT's efforts to reduce fuel consumption in the country also received a fillip through the energy audits arranged by EIE. IV. INSTITUTIONAL PERFORMANCE A. TPAO 4.01 TPAO, 93.3% owned by GOT at appraisal, has been the predominant organization in the Turkish petroleum sector, and at the time of preparation of the project, was responsible for practically all aspects of the oil business. Its activities included exploration, production, and refining of oil as well as transportation, purchase of imported crude and products to meet domestic requirements, and some wholesale marketing. 4.02 At appraisal, GOT, TPAO and the Bank felt that the unwieldy nature of the TPAO operations and its extensive activities in petroleum -efining and importation of foreign crude placed undue demands on the finances and management of TPAO, and tended to disperse the efficient use of management resources. Accordingly, it was agreed to: (a) separate domestic oil and imported oil related activities; (b) relieve TPAO of the responsibility for importation of crude oil and products; and (c) makc TPAO solely responsible for exploration, exploitation and processing of domestic petroleum resources. GOT also agreed to t e separation and transfer of the refining related activities to a subsidiary of TPAO by July 1, 1981. 4.03 There were initially difficulties in carrying out the reorganization of TPAO into a domestic exploration and production company since this required legislatioi ^n the part of the Turkish Parliament, as well as the support of the Ministry; these were not forthcoming. The necessary changes were not promulgated until May 1983 when a holding company (PETKUR) was created to oversee all activities in the petroleum sector including TPAO's domestic exploration activities. However, in June 1984, a Government Decree reversed the formation of PETKUR, and TPAO reverted back to a somewhat modified original Etatus. In retrospect, this was a financially astute decision as is clear from the following paragraphs.  - 11 - 4.04 The structure of the public petroleum sector that came into effect vas as followv: TPAO (direct responsibility for domestic exploration and production) aubsidiariat BOTAS _ Pipeline transportation DITAS - Marine transportation TUPRAS - Refining POAS - Marketing Associated Companies IPRAGAS - LPG distribution TUMAS - Engineering LIBYA-TURK - Engineering 4.05 TPAO functions as an operational company with direct responsibility for exploration and production of domestic oil. Its shares are all held by GOT. In its dual capacity, TPAO is also a holding company, holding 100% of the equity capital of each of BOTAS, DITAS, TUPRAS and POAS. TPAO's interest in the subsidiaries is limited to its investment therein, representation on the Board of Directors and the receipt of dividends. 4.06 In the process vf reorganization, separate accounting has been established for each of the! operating subsidiary companies, so that, now, this arrangement allows TPAO to receive dividends from the profits of its subsidiaries and make them available for exploration or other purposes without the imposition of another level of management control which would be the case if TPAO were subject to control by the holding company (PETIUR). With the present deterioration of crude prices, and their effect on TPAO's exploration and production profitability, the new status allows TPAO to finance the exploration activities from the profits made in other areas of the petroleum sector. A sul-ary table of TPAO's subsidiaries is shown in Annex 8. B. GDPA 4.07 After initial delays and the appointment of a new General Director of GDPA, a program was developed for the institutional strengthening of GDPA. Training of GDPA personnel was accelerated by sending selected individuals to Canada to become acquainted with the activitiea of the Alberta Energy Conservation Board, dealing with the licensing of leases for exploration and production activities, and dissemination of the results within GDPA. Since that time, GDPA has been reorganized, functionally, with more space given to the archives, the microfilming of field relinquishment reports and well data. GDPA also developed an arrangement with Petroconsultants of Geneva, Switzerland, to exchange information on licensing of new areas. From 1983 to 1986, GDeA initiated proposals for changes in the petroleum law in favor of the petroleum companies operating in Turkey. Effective January 1, 1985, exemptions from payment of sales taxes for materials used in petroleum exploration were introduced. Changes in the income tax laws were introduced  - 12 - in December 1985 as a re&ult of GDPA'a initiati7es to reduce the ta_ burden of foreign companies active in Turkey. Certain impediments to bringing foreign expatriate personnel hired by petroleum companies into Turkey were eliminated in M4arch 1986. C. KU 4.08 The final report on energy conservation was submitted by the consultants to EIE in September 1984. Some of the recomnendations of the *iergy conservation studies are being implemented or vill be implemented jortly; projects identified for the Ambarli power plant were included in the 986 investment program and are being implemented. The foreign currency requirements for the other industries, pulp and paper, ceramics and textiles, where energy savings have been identified, are being financed by the Bank under a subsequent loan. Performance of Consultants 4.09 One of the project components involved the appointment of consultants in order to conduct various basin studies within TPAO. Altogether 15 consultants from international consulting groups in Europe and North America were engaged by TPAO. These consultants comprised: geochemists, chemists, seismic interpreters, non-seismic interpreters, explorationists, carbonate petrographers, seismic processors, hardware engineers, and structural geologists. Some of the consultants performed assignments to the satisfaction of TPAO and their work resulted in meaningful contribution to the project, while others did not. The percentage of unsatisfactory consultants was relatively small, approximately 15%, and the remaining 85% performed their work satisfactorily. 4.10 Fiftyeight technical staff have undergone training from two weeks to four months in tne USA and Europe with consulting and operating firms in various aspects of petroleum sciences related to petroleum exploration, geology, seismic data processing, geophysics, petrochemIstry, petrophysics, reservoir engineering, sedimentology and seismic interpretations. There is no doubt that the training provided for tsii TPAO participants has resulted in establishing a stronger technical background within the TPAO organization and has helped the exploration department in building up a better understanding of the complicated geology of the country. Financial Performance 4.11 TPAO was required by the loan covenants to separate its financial activities with regard to imported oil from those relating to domestic oil because at appraisal, the importing activities were not profitable, while those relating to the production of domestic oil were. The rationale was that TPAO's financial requirements should be linked to the success of the exploration program, which would be based on the profits from development of oil fields discovered during earlier exploration activities. After the separation, however, the situation reversed itself. The price regime for petroleum products established subsequently by GOT yielded good profits to the  - 13 - refineries and the marketing companies while TPAO's production of domestic oil did not show any appreciable increase. TPAO, however, did enjoy the benefits of Increasing crude oil prices until the end of 1985, b.t during 1986 crude oil prices fell and TPAO's financial performance deteriorated. 4.12 TPAO's financial statements starting from 1984 and reflecting the financial position of the reorganized company cannot be readily compared with those of the earlier years. The subsidiary companies for transportation, refining and marketing function autonomously with their own Boards of Directors and their own balance sheets. The link between TPAO and these companies is only fiduciary and the balance sheet of the reorganized TPAO shows only the value of investment in subsidiaries as determined by the government auditors. 4.13 The summary income statements of TPAO for 1984, 1985, and 1986 are as follows: (TL Billions) 1984 18 18 Sales (crude oil and gas) 36.9 70.8 90.6 Net Operating Income (Production activities) 25.3 56.3 61.0 Interest Income (Net) 40.6 104.0 130.8 Ir.come Taxes 10.2 35.2 41.5 Net Profits after Taxes 48.4 134.5 200.1 Return on Capital Employed 24% 39% 38% (Based on r !alued assets) In 1984, TPAO produced 947,223 tons of crude cil and 31,000 TOE of natural gas. In 1985, the crude oil production increased by 9% to 1,030,288 tons and the production of natural gas by 71% to 53,000 TOE. The sales revenue, however, increased by 92% between the two years due to the effects of the pricing system, which allows international parity prices for "new oil", as distinct from a much lower fixed price for "old oil", namely, oil produced from wells which went into production prior to 1979. In 1986, TPAO had an output of 1.245.178 tons of crude oil and 279.002 TOE of natural gas. 4.14 TPAO's balance sheets as of December 31, 1984, 1985, and 1986 (Annex 6) show that it is in a satisfactory financial condition. Its current and debt-equity ratios have been satisfactory. The increase in long term debt at the end of 1985 is primarily due to the drawdown of Bank loans.  - 14 - 4.15 TPAO's summary funds statements for the three years 1984, 1985 and 1986 are given in Annex 7. It is seen that during these years, TPAO had a high self-financing ratio, higher than the 45X which was considered sufficient at the time of appraisal. 4.16 TPAO also fulfilled the financial covenants, which in brief were that the current ratio would exceed 1, the debt-equity ratio would not be greater than 50:50 and the liquid working capital would exceed two months' operating expences. Sustainability of TPUO 4.17 TPAO functions both as a company responsible for exploration, production and drilling, and as a holding company for other petroleum operations. TPAO receives its share of dividends from its subsidiaries. It then plows back a portion of the ai ii.ends to its subsidiaries as loans, credits or equity capital increase. 4.18 Since TPAO's own income from domestic production in 1985, a year in which oil prices had not fallen drastically, did not corer its exploration expenses, it used its income from dividends for its exploration, production, drilling and other activities. With the combined access to Bank funds and dividends from the subsidiaries, TPAO was generating funds in excess of those required for the exploration and other capital investment programs, and thus was not inhibited by financial constraints. From 1986, huwever, in view of the lower crude oil prices, TPAO's direct income has shown a reduction. On the other hand, the profitability of the subsidiaries was not expected to fall, since the refinery and selling margins are protected by the GOT's pricing policy. Therefore, TPAO's planned capital expenditure program -as not affected in 1986 also. 4.19 If one looks, however, into the future, at least until 1990, it appears that the magnitude of the dividends received from the subsidiaries will have a pronounced effect on the financial performance of TPAO. In order for TPAO to maintain its present momentum of exploration and development, it will need to supplement its net income froL. the direct activities of production of domestic oil with the dividends from the subsidiaries. This will enable GOT as the owner, and TPAO as the operator, to focus attention on the cost of exploration in Turkey and then weigh the results. To justify its continued funding, TPAO's exploration program will have to be continuously reviewed for tangible results keeping in view the changing prospects, expectations and costs incurred. V. BANK'S PERFORMANCE 5.01 In hindsight, the Bank's overall performance should be considered as somewhat mixed. The Bank participated fully in the initial structuring of the project and selection of areas for basin studies, seismic coverage, and exploratory drilling. When the detailed studies carried out by TPAO With the help of consultants showed no prospects in the areas originally selected, the Bank showed flexibility and, jointly with TPAO, agreed to consider other areas for further studies. However, in the early stages of development of the overall exploration program, when frequent consultations between the Bank  - 15 - staff and TPAO vere necessary, relatively fev contacts took place, resulting in the eatabliahment of practically two exploration programs: one financed from TPAO's own resources, and the other from the proceeds of the Bank loan. More frequent contacts between TPAO and the Bank to coordinate the two activities more closely would have been more advantageous. 5.02 The Bank's insistence on being a full participant in the exploration strategy placed heavy demands on TPAO's ulanning cycle for the exploration activities and prevented financing of certain parts of TPAO's overall exploration budget. The use of loan funds for specific components of the exploration program was considered by the Bank on a case-by-case basis and TPAO could not stop its exploration activities in other areas to coordinate vith the Bank on Bank-financed locations. This resulted in delay in the disbursement of funds. 5.03 Towards the end of the project, coordination between the Bank staff and TPAO regarding the overall exploration strategy improved considerably. In order to complete the exploration program, rapid decisions had to be made ir. locating suitable drilling locations in southeastern Turkey which resulted in small oil discoveries. 5.04 Regarding the separation of refining and crude purchasing activities and making TPAO solely responsible for domestic exploration and production, in retrospect it is evident that this component of the project received an unduly large share of the Bank's attertion. Looking at it from the present perspective, if GOT had not disbanded PETKUR and returned the subsidiaries in a financially sound state to TPAO, TPAO would have found it difficult to finance its activities in the future with the reduced cash flow arisin.g from the low prices of crude oil. The company is in a position to maintain its activities of prospecting for oil and gas in a difficult geological environment only because it receives profits from its subsidiaries. 5.05 On the other hand, the Bank's contribution to the professional training of TPAO's staff and specifically to the exploration department's policies was substantial and is much appreciated by TPAO's management. In the various meetings between the TPAO group and the Bank's technicai staff, the exploration department of TPAO learned to prepare and present exploration concepts in an internationally acceptable manner. They acquired knowledge in planning and programming and developing exploration strategies, casing design, well completion and development planning. TPAO has also avoided a costly and very risky exploration phase in the Hakkari area because of Bank advice. On the strength of Bank advice, TPAO participated in joint ventures with private foreign oil companies, especially during the latter part of project implementation. 5.06 The funds provided under the project enabled TPAO to purchase goods and materials for drilling, well completion, and field development which were essential to carrying out a rational exploration policy in Turkey at a time when oil prices were increasing rapidly and when the only reasonable alternative to reduce an undesirable dependence on foreign supplies was to continue exploration in the Turkish sedimentary basins.  - 16 - VI. CONCLUSIONS 6.01 Although a year late in implementation, the subject project has been a qualified success. As a result of the project, TPAO has been able to add co its established recoverable reserves approximately 14 million barrels of oil, although the exploration effort has not been a commercial success (para 3.17). TPAO has been considerably strengthened as an institution. Its staff has been trained and many of its technicians and engineers have been given an opportunity to improve their technical skills by attending courses and seminars in varioiis disciplines of petroleta sciences, especially in the areas of geophysics and geology. TPAO's management is stronger and more outward looking than before and is able to focus on closer cooperation with private companies in exploration ventures, even forming joint ventures with foreign oil companies. At this time there are more foreign companies operating in Turkey ir. exploration and development than at any time prior to the launching of this project. TPAO's oil importing and refinery activities have been separat-d from its exploration activities although the outcome of tie restructuring is different from that originally envisaged at appraisal. The net result, however, is such that now all the activities of TPAO are closely defined, properly identified financially and the performance of each petroleum activity is known. TPAO is still the holding company for all the state petroleum enterprises in Turkey and receives dividends from its subsidiaries which, with the approval of its Board, and the Minister of Petroleum, can be directed to any activities in the petroleum sector. This arrangement allows TPAO to carry out petroleum exploration programs even in the event of a fall in crude oil prices and a resultant diminution of its direct income. At the same time, in order to carry out a meaningful exploration policy, it is considered essential for TPAO to determine, more thoroughly than in the past, the financial implicat'-as of its exploration programs in addition to the geological chances of succ?ss. 6.02 Despite the institutional advances made by TPAO, there were some shortcomings in project implementation. The overall exploration program and strategy, particularly in the early phases of the project, should have been better coordinated; if this were carried out, and if there were more frequent contacts between the Bank staff and TPAO, some of the expenditures that were incurred separately by TPAO and tlose under this project could have been reduced. In retrospect, it also appears that the venture into financing of the four appraisal wells in Thrace and the considerable amount of seismic coverage under this project could have been avoided, and a more concentrated effort could have been made to interest private oil companies in the venture, rather than letting TPAO 'go it alone'. In spite of substantial efforts to analyze the geology and testing seismographically areas in southeastern Turkey, it has still not been possible to effect any major discoveries in that area. The geology is complex and exploration effort is quite expensive. The area has been explored extensively, and all the 'easy oil' has been found. There remains the difficult prospects where the cost and the risks are higher. 6.03 Turkey's low level of discoveries raises a question whether TPAO should be pursuing its exploration effort, on its own or whether it should be considering other means, such as joint ventures both onshore and offshore in Turkey, and possibly joint ventures overseas, perhaps in less geologically difficult areas, to obtain access to additional sources of crude oil.  - 17 - 6.04 On balance, it is clear that the funds provided undet thls lhan came at a time when there was no alternative for TPAO but to continue with its exploration program, and since crude oil prices were rising, it wa.s i justifiable expense at the time, where every country was seeking relief from tbe high cost of oil imports. As in every exploration project, the t1:,al form of the program and the outcome could not be predicted at the outset. 6.05 Two other aspects of project implementation need tc be mentioned. GDPA, the government agency responsible for granting licenses to foreign and domestic oil companies, has b'een strengthened. From its relatively obscure origin, GDPA has become a full-fledged agency with a well organizeu archives, much more easily available to potential licensors than was the case prior to the launching of this project. GDPA staff has also received training in essential disciplines for carrying out GDPA's activities. 6.06 Likewise, EIE has been able to conduct studies in energy conservation directed towards reducing the overal'l fuel consumption in Turkey. Improvements based on these studies are now under way. Lessons to be Learned 6.07 Although the Bank assigned experienced staff to handle the project, the outcome o' the project points to the need for much closer supervision by the Bank and more frequent consultations between TPAO and the Ban- staff than was actually the case. Since the subject project was among the earliest lending operations for petroleum, perhaps the Bank should have foreseen the need for closer super ision in the initial stages. 6.08 From the institution-building point of view, the lendi.ig operation was indeed a success but not from a commercial point of view. The project reises the question whether the Bank should finance exploration programs. This matter has subsequently been addressed by the Bank and an appropriate OMS has been issued in November 1984 s3tting out inter alia the criteria for Bank support of exploration programs.  - is - ANNX 1 Page 1 of 4 PZTROLE W EXPLORATION PROJECT (LOAM 1916=TU) PROJECT COMFLETION REPOlT ETEMT OF COMPLIANC VITE COVENANTS S5ctioO t4 rm t Ubstece of Covuat Extat of C liamce TMO wold: PA Section 3.02 (a) Establish and maintain until project Though the unit was set up late, it was saintained completion a project implmentation satisfactorily through the completion ot the project. unit adequately staffed with experi- enced staff. PA Section 3.03(i) (b) Transfer to IPRAS by January 1, 1991 Cosplied with, though late by a tfe sonths. responsibilities for importing and mrketing of imported petroleum. PA Section 3.03(ii) (c) Transfer to IPRAS operational con- Operational control was transtered after the enac- trol of facilities for refinirg tment, in May 1993, of the law restructu l TPAO. imported oil by July 1, 1991. PA Section 3.03(iii) (d) Separate by 12-31-81 all the acti- Separation of activities was delayed. Separation vities with respect to exploring, of activities was completed after the enactment producing, refining and distributing in, May 1993, of the law restructuring TPAO. domestic oil from ttose with respect to the importing of foreign petroleue and petroleum products. PA Section 3.04 (el Furnish to the Bank by Decenber 31, TPAO's staffing problns continued through mid-1993. 1911 recomndations to attract and Mid-1913, a consultant firm, was hired to do a retain qualified technical personnel study, and by the end of 1994 the implementation and to improve the operational etti- of recmendations was discussed. In addition, ciencey ot its staff, and thereatter although lite by about 9 months, the training of taku appropriate steps to isplemn t TPAO's staff progressed satisfactorily. The train- such recommendations. ing component assisted TPAO staff in interpreting seismic data, and carrying out geologocal and geophysical studies. Fiftyeight of TPAO's staff were trained inthe USA, UK and France. TPAO revised the salary structure, introduced incentives, provi- ded training facilities for the technical staff, which hasresulted in motivating technical staff to remain with the organization. Thus, though late, the covenant has been complied with and, at present, the morale of TPAO staff is satisfactory.  - 19 - ANNMX 1 Page 2 of 4 Sectiom of Agruuea" t Sebstameo of Coveneat IItent of CouliacC ................~~~~~.... .. . . . . ....... ....... ............ . PA Section 3.05(a) (Uf Ik later tha 4pril 30, 1961, tPAO MPAO forud the couittee is the f1ll of 1981. shall establish 35 exploratios com- mittee to evaluate the exploration drilling progras. PI Section 3 05(b) (g) At least one montb before movint a Cooplied witb. drilliag rig to as uticipated drilling location, the exploration comittee shall furaish to the Bank for approval the committees aissess- meat of the location. PA Section 3 06 (h) TPAO shall make arrangevnts for Complied *ith, though late by a few months. obtaining helicopter services as and *tea Deeded. PA Section 4 02 (i) TPAO thall, by April 1, 1981, Accounts sere separated after the enactsent, in establisb as of JaDUarY 1, 1981, Say 1983, of the las restructurinS ?PAO. and thereafter maintain separate accounts and financial statements with respect to internal and external activities. PA Section 4103 (j) Provide the Bank a copy of its TPAO submitted its 1981 and 1982 audited accounts audited accounts within 6 months only by mid-1983. Audited accounts were also rece- of the eqd of the fiscal year. ived for 1983-1986. tA Sectioa 4.06(a) (k) [sure that by July 1981, TPAO shall By 02/81, the D/S ratio was less then 1.0. It sas attain a ratio of its long-tere debt brought dotn to 38/62 by early 1983. thus the coy- to its equity not greater than 1.0. easnt was complied vith. Pi Section 4.06(b) (1) lImure that by July !, 1981 TPAO's the current ratio was not less than 1.0 by 07/S1. aggregate current liabilities do not During the first six months of 1963, the current exceed its aggregate current assets, ratio improved from 0.9 to 0.995. for 1984/86, the and maintain the position thereafter the curreAt ratios vere satisfactory. PA Section 4.06ic) (a) Oa the first day of each month after Cash and lines of credit exceeded two months of July 1, 1981, have liquid working operating expenses in 7/81. Coeplied with also capital, marketable securities and for the following years. guaranted lines of credit of at least two months estimated operating expenses.  - 20 - ANNEX 1 Pape I of 4 lecti. of Agrmmemt M tanee of Cemmmt ixteat of Cw lian A Setiot 4.67 (AD Icur long-ters debt osly if proj- Complied witb. ectd et r"mme ir at least two time the aggregte proJected debt service reqirbests. PI Sectiom 4.63 (o) kSinsig Jeuaary 1,1161 TPnO bhall Complied *iti. Is the process of reorgiantlom refrais from *oiy isternally gei- separate accolnto "ere established for eheb of srated fuds for its subsidiaries, the operating sobeidiary coepaies. Pi Sctio 4. 10 (p) htil completion of the project, lavestnet program suboited anueally. tPAO shall furnish to the hak ausnully by October 31 of each year its proposed investment program for the folloving year. 1A Sctioe 4. 11 (q) legising ith fiscal year 1981, TnO A cnit was established by 04/81 to complete revals- shall annually revalue its assets ation of assets by 09/S1. lowever, TPO revalued its aid subeit to tit heak proforwa acc- fixed assets during the first six ooths of 1913 in ounts uad finsacial statements based accordance with the fixed Assets levaluation law tkat on Buch revaluation, was enacted in the begining of 1983, which allows for only a one-tine revaluation, not an annual revaluation. GOt auesred that: LA Section 3.01(d) (a) If funds are inadeqate to meet the There wes no shortage of local funds necessitating local expenditures required .or carr- GOT's belp. Tieg out the project, GOT would pro- vide luch funds Al an equity contri- btioo to TPO. L Section 3.02 (b) If TPAO's accousts receivable There is no record of GOT ever being called upon exceed its sale for the previous to provide the difference. two mouths, GOT would provide much difference.  - 21 - A=1 Par 4 of 4 Section olf Agreemt Substuee of Covnaut ltent of Compliuce .................... .............................. .......................................... .......... U Sectiee 3.13 (c) The empuibility for t?tO Coplied ui;a, thoyth late ezehuge looses from the petroltu isported fom January 1, 1911, mld be trusferred from TPIO to IPUS. Li Sectioe 3.05 (d) It ld islpiemt a plu to streul- Thre vore delays Is the pmeste tioe of a piu of this GMP ie order to retais qual- actios by G6? to strength., CHI. for a long tine ified satiosal Wecialist in pet- GO? did aot take say action oc the cousultutc roleu esploration, production aid recomeadatioos. At the end of 1314, the ak took legislation, the initiative of hiring a coaueltut to diao the eeds of OD?A, ud to develop a pleu of aetioa. The plan proposed a trainin period for geologists, engiseers and other professional at the offiese of lEergy Resources Coservatios Board in Calgary, Canada. GDPA personnel received traiaing is well data storage and analysis.  - 22 - ANNEX 2 TURKEY PETROLEUM EXPLORATION PROJECT (LOAN 1916-TU) PROJECT COMPLETION REPORT PROJECT COSTS (US$ Millions) ADDraisal Estimate Actual X Project Local Foreign Total Local Foreign Total Cost Seismic Surveys, Data Processing and Reprocessing 3.0 9.4 12.4 30.2 10.0 40.2 62 Technical Assistance to TPAO 0.9 2.8 3.7 0.2 1.5 1.7 3 Training a) TPAO -- 0.2 0.2 0.2 0.2 0.4 1 b) MOE (GDPA) -- 0.1 0.1 -- 0.1 0.1 Exploration Drilling 10.0 4.0 14.0 7.9 11.5 19.4 30 Technical Assistance to GDPA 0.5 1.0 1.6 0.5 -- 0.5 1 Energy Efficiency Audits 0.6 2.0 2.6 0.6 1.6 2.2 3 Subtotal 15.0 19.5 34.5 39.6 24.9 64.5 100 Physical Contingency 2.6 2.7 5.3 15 -- -- -- Price Contingency 2.4 2.8 5.2 15 -- -- -- TOTAL 20.0 25.0 45.0 130 39.6 24.9 64.5 100  - 23 - ANNEX 3 PZTROLDU ZXPLORATION PROJECT (LOAN 1916-TU) PROJECT COSPLNTION UEPORT SCEEDULE Of DISIURSDIZNTS MS$ Killioss) Actual * IBRD Fiscal Year Appraisal Eotimte Actual S of Appraisal an4 Ouarter Culative Cuwlative Estimete iii March 31 1.0 0.0 0.0 June 30 4.0 0.0 0.0 1921 September 30 7.0 0.00 0.0 December 31 11.0 0.01 0.1 March 31 14.0 0.36 2.6 June 30 17.0 0.69 4.1 1983 September 30 20.0 1.29 6.5 December 31 22.0 1.91 8.7 March 31 23.0 1.99 8.7 June 30 24.0 2.31 9.6 198L4 September 30 25.0 2.7?'; 10.8 December 31 -- 4.45 17.8 March 31 -- 6.92 27.7 June 30 -- 10.13 40.5 September 30 -- 11.51 46.0 December 31 -- 12.41 49.6 March 31 -- 13.05 52.2 June 30 -- 13.34 '3.4 121h September 30 -- 15.17 60.7 December 31 -- 20.06 80.2 March 31 -- 21.94 87.8 June 30 -- 24.79 99.2 1987 September 30 -- 24.87 99.5 LaU Closint 12/S2 12/45  - 24 - ANNEX 4 Page 1 of 2 TURKEY PETROLEUM EXPLORATION PROJECT (LOAN 1916-TU) PROJECT COMPLETION REPORT WELL TESTING RESULTS Unur a.Shallo Wells (Osmancik Formatiqn) Wells Flow Rate -WHFP- Choke Observation (gas: MMCFD) (psi) (inch) (liquid: BBL/D) U-01 gas: 0.04 90 1/8 U-02 gas: 0.65 400 1/4 U-03 Dry well U-04 gas: 0.50 470 1/4 U-05 gas: 0.35 230 1/4 Project well U-06 gas: 1.00 170 1/2 U-07 gas: 0.27 100 1/4 Project well U-08 Dry well Project well U-09 Dry well U-10 gas: 0.08 40 1/4 Umurca Deep Wells (Cevlan and Hamitabad Formations) U-1 gas: 1.25 200 1/2 H-1 gas: 0.20 120 1/4 Project well C-1 gas: 1.04 100 1/8 C-2 Dry well  - 25 - ANNEX 4 Page 2 of 4 Southeast Turkey Wells Well Characteristics Observation Cukurtas-l Initial flow of oil: 400 BPD; Gravity 350 API Project Well water: 70 BPD Cukurtas-2 Dry well (off structure) Cukurtas-3 Dry well (off structure) Cukurtas-4 oil: 16 BPD water: 65 BPD Cukurt'w-5 (being tested) Bati-Kozluca-l Initial flow of oil: 80 BPD; Gravity: 130 API (pumping unit); water: 0.6 Project Well Bati Kozluca Initial flow of oil: 80 BPD; 2, 3 & 5 Gravity: 130 (pumping unit);water 0.6 Akpinar -1 Strong oil shows Project well Akpinar-2 Initial flow of oil: 232 BPD; Gravity: 290 API (pumping unit) Buyuk Pirin-l Oil shows Project well Kucuk Pirin-l Dry well Project well Kinik-l Dry well Project well Mutlu-l Dry well Project well K. Suvarli-l Dry well Project well Karabag-l Dry well ProJect well G. Kinik-l Dry well Tumay-1 Dry well Project well Bati Firat-2 Initial flow of oil: 300 BPD; Gravity: 320 API  - 26 - ANNEX 5 TURKEY PETROLEUM EXPLORATION PROJECT (LOAN 1916-TU) PROJECT COMPLETION REPORT NEW FIELD DISCOVERIES Cukurtas Akpinar Bati Kozluca Bati Firat Length - km 1.8 5.4 4.5 2.1 Width - km 0.7 0.7 1.1 1.6 Closure - km2 0.84 2.65 3.88 2.4 Pay Zone Mardin Mardin Alt Sinan Mardin Carbonates Carbonates Carbonates Carbonates Depth - m 2,820 3,120 1,514 2,360 Thickness - m 60 30 23 65 Porosity - X 2 5 25 5 Saturation - X 80 77 77 70 Estimated Oil in Place (volumetrically - 8 10.6 100 35 million barrels) Estimated Recovery 20 20 2 25 Factor - % Estimated Recoverable Reserves - 1.6 2.1 2.0 8.7 million ba-rels) Gravity of Oil OAPI 34 34 13 36 Number of Wells Drilled 6 4 5 9 Number of Wells Producing 2 2 4 5 Production per Well - BPD 40 125 65 336 Total Field Production - BPD 81 247 260 1,680  - 27 - ANNEX 6 TURKEY PETROLEUM EXPLORATION PROJECT (LOAN 1916-TU) PROJECT COMPLETION REPORT SUMMARY BALANCE SHEETS OF TPAO AS OF DECEMBER 31, 1984, 1985, 1986 (TL Billion) As of As of As of Dec. 31, 1984 Dec. 31. 1985 Dec. 31, 1986 ASSETS Current Assets 134.6 201.1 280.4 Cash and Deposits 35.8 106.6 191.4 Accounts Receivable 95.2 87.5 73.1 Other Current Assets 3.6 7.0 15.9 Less Current Liabilities: 94.3 104.2 89.0 Accounts Payable 59.0 12.2 23.1 Short-term Loans 3.3 14.9 20.0 Other Current Liabilities (mainly taxes) 32.0 77.1 45.9 Net Working Capital 40.3 96.9 191.4 Investment in Subsidiaries 51.0 110.8 151.0 Fixed Assets, at cost less depreciation 155.4 205.3 290.3 Net Assets 246.7 413.0 632.7 Financed by Long Term Debt 45.5 79.0 99.1 Stockholders' Equity 201.2 334.0 533.6 Total Capitalization 246.7 413.0 632.7 Current Ratio 1.43 1.93 3.2 Debt-Equity 18:82 19:81 16:84  - 28 - ANNEX 7 TURKEY PETROLEUK EXPLORATION PROJECT (LOAN 1916-TU) PROJECT COMPLETION REPORT SUMMARY SOURCES AND APPLICATIONS OF FUNDS OF TPAO FOR 1984-1986 (TL Billions) 1294 i1 2i8 Sources Net Income 48.4 134.5 200.1 Depreciation and Depletion 13.9 21.0 29.8 Loan Drawals 13.5 12.4 17.5 Equity Capital Increase 50.5