Morocco - Petroleum Exploration and Essaouira Appraisal Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 8640 PROJECT PERFORMANCE AUDIT REPORT MOROCCO PETROLEUM EXPLORATION AND APPRAISAL PROJECT (LOAN 2271-MOR) MAY 4, 1990 Operations Evaluation Department 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. COUNTRY EXCHANGE RATES Moroccan Dirham (DH/US$) Appraisal Estimate US$1.00 - DH 6.30 Actual 1983 - 7.11 1984 - 8.81 1985 - 10.06 1986 - 9.10 1987 8.36 1988 8.21 ACRONYMS AND ABBREVIATIONS Bbls - Barrels of 42 US gallons BCF - Billion cubic feet boe - Barrels of oil equivalent BRPM - Bureau de Recherches et de Participations Minieres CFP - Compagnie Francaise des Petroles ELF - Societe Nationale Elf-Aquitaine ERR - Economic rate of return FRR - Financial rate of return MMCFD - Million cubic feet per day MER - Ministry of Energy and Mines MTOE - Million tons of oil equivalent N/A - Not applicable n/a - Not available ONAREP - Office National de Recherches et Exploitations Petrolleres PCIAC - Petrocanada International Assistance Corporation PCR - Project Completion Report PPAM - Project Performance Audit Memorandum PPAR - Project Performance Audit Report SAR - Staff Appraisal Report SCP - Societe Cherifienne des Petroles FOR OMICIAL USE ONLY THE WORLD BANK Washonton. DC 20433 US A O01ke ts OneCatweeal May 4, 1990 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Performance Audit Report on Morocco Petroleum Exploration and Appraisal Proect (Loan 2271-MOR) Attached, for information, is a copy of a report entitled "Project Performance Audit Report on Morocco - Petroleum Exploration and Appraisal Project (Loan 2271-MOR)" prepared by the Operations Evaluation Department. Attachment This documaent ha estrieted ditdbuon end may be ed by redpeas only in the perfornamme of their official duties. Its contents may not otherwise be disclosed without World Bank authoamon. OR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT MOROCCO PETROLEUM EXPLORATION AND APPRAISAL PROJECT (IDAN 2271-MOR) TABLE OF CONTENTS Page No. Preface ..................................................... i Basic Data Sheet ............................................ 11 Evaluation Summary .......................................... iv PROECT PERIORMANCE AUDIT MMRNU I. BACKGROUND ......................................... 1 Project Environment ................................ 1 Previous Bank Projects in the Sector . 2 Rationale for Bank Involvement ............... 2 Project Justification ........................ 3 Project Objectives ........................... 3 Project Description .......................... 3 Implementation Arrangements .................. 4 II. IMPLEMENTATION EXPERIENCE ........................... 4 Changes in Project Scope ..................... 4 Project Implementation ....................... 5 Project Costs and Financing .................. 5 Procurement and Disbursements ................ 6 Performance of Consultants ................... 7 III. PROJECT OUTCOME ..................................... 7 Appraisal and Exploration .................... 7 Exploration Promotion ........................ 8 Institutional Development .................... 8 Economic Performance ......................... 9 Financial Performance ........................ 10 IV. FINDINGS AND ISSUES ................................. 11 Project Concept and Design ................... 11 Performance of the Bank ...................... 13 Performance of the Borrower ................... 14 Sustainability ............................... 14 Lessons of Experience ........................ 14 ANNEX 1 Meskala Petroleum Finding Costs .............. 16 ANNEX 2 ONAREP: Sources and Uses of Funds ............ 17 This document has a restricted distribution and may be used by recipients only in the performance of their oficial duties. Its contents may not otherwise be disclosed without World Bank authorization. Table of Contents (Cont'd) Pane No. ATTACHMENT Comments from the Borrower ................. 18 PROJECT COMPLETION REPORT PART I Project Identity ................................... 21 Background .............................. ......... 21 Project Description ................................ 22 Project Design and Organization .................... 22 Project Implementation Results ..................... 24 Project Sustainability ............................. 27 Bank/Borrower Performance .......................... 27 Summary of Lessons Learned ......................... 28 PART III Related Bank Loans ................................. 30 Project Timetable .................................. 31 Loan Disbursement Schedule ......................... 32 Project Implementation Indicators .................. 33 Project Costs ...................................... 34 Project Financing .................................. 35 Project Results..................................... 36 A. Direct Benefits ........................... 36 B. Economic Impact ........................... 36 C. Financial Impact .......................... 37 D. Studies ................................... 37 Status of Covenants ................................ 38 Staff Inputs ....................................... 39 Major Project Missions ............................. 40 PROJECT PERFORMANCE AUDIT REPORT MOROCCO PETROLEUM EXPLORATION AND APPRAISAL PROJECT (LOAN 2271-MOR) PREFACE 1. This is a Project Performance Audit Report (PPAR) on the Petroleum Exploration and Appraisal Project, involving an IBRD loan in the amount of US$75.2 million to Office National de Recherches et d'Exploitations Petrolieres (ONAREP), with the objective of assisting the delineation of hydrocarbon reserves discovered under a previous Bank project and promoting additional petroleum prospects among international oil companies. The loan was approved on April 26, 1983. The Loan Agreement was signed on May 23, 1983, and became effective on October 5, 1983. US$10.0 million of the loan amount was cancelled in September 1986 at the request of the Borrower. The closing date of June 30, 1986 was extended to June 30, 1988. Final disbursement was made on January 30, 1989. 2. The PPAR consists of the Project Performance Audit Memorandum (PPAM) prepared by the Operations Evaluation Department (OED) and the Project Completion Report (PCR) prepared by the Europe, Middle East and North Africa regional department. The PPAM is based on the attached PCR, the Staff Appraisal and the President's Reports, the loan documents, the transcripts of the Executive Directors' meetings at which the project was considered, on a study of project files, and on discussions with Bank staff. An OED mission visited Morocco in January 1990, and discussed the effectiveness of the Bank's assistance with ONAREP and the Ministry of Energy and Mines (MEM). Their kind cooperation and valuable assistance in the preparation of this report is gratefully acknowledged. 3. The PCR provides a good account and assessment of the project experience, and discusses the performances of the Bank and the project executing agency. The PPAM elaborates on particular aspects of project implementation, the design of the project, and the performance of the Bank. 4. Following standard OED procedures, copies of the draft PPAR were sent to the Government and the Borrower. The comments received from ONAREP have been reproduced as an Attachment to the PPAR. i MOROCCO PETROLEUM EXPLORATION AND APPRAISAL PROJECT (WA 2271-OR) BASIC DATA ShEET KEY PROJECT DATA Appraisal Actual or Actual as % of ;ecta Current Eatimate Aor. Estimate Total Project Cost (US$ million) 106.2 86.6 81.5 Loan Amount (US$ million) 75.2 65.2 86.7 Date Physical Components Completed 12/85 03/88 187 La Proportion Completed by this Date 100 90 90 Economic Rate of Return (%) N/A N/A Institutional Performance Satisfactory Satisfactory /A From loan signing to project completion for the revised project. The project as originally defined was completed with a delay of about one year, or 30% (PPAM, para. 21). CUMUnATIVE ESTIMATED AND ACTUAL DISBURSEMENTS (US$ million) As of June 30, 2img 12A2 12g 1212gA 12im2 (i) Appraisal Estimate 30.2 65.2 75.2 (ii) Actual 17.2 35.2 46.1 54.6 64.5 65.2 (iii) (ii) as % of (i) 56.9 54.0 61.3 72.6 85.8 86.7 Date of Final Disbursement: 01/30/89 PROJEC-T .DATES Original.Plan Revised .Actual First Mention in Files 12/10/81 Negotiations 03/09/83 - 03/09/83 Board Approval 04/26/83 - 04/26/83 Loan Agreement Date 05/23/83 - 05/23/83 Effectiveness Date 08/00/83 - 10/05/83 Closing Date 06/30/86 06/30/87 06/30/88 iii (Staff-Weeks) Bank FY IM I2M I 1984 I M IM IM1 Toai Preappraisal 6.4 20.6 2! 56.8 Appraisal 3.9 37.4 40.9 Negotiations 10.5 10.5 Supervision 6.4 31.7 34.2 22.7 20.5 15.5 131.0 Other 0 .. Totals 6.4 24.6 84.1 31.8 34.2 22.7 20.5 15.5 239.8 MISSION DT Month/ No. of No. of Date of YeaL WeeJka . erann Nanweeks Report Preparation I 12/81 1.4 6 8.4 03/24/82 Preparation II 04/82 0.4 1 0.4 04/06/82 Preappraisal 06/82 2.4 6 14.4 08/12/82 Appraisal 11/82 2.2 4 8.8 12/30/82 Post-appraisal 03/83 1.0 7 7.0 04/04/83 Supervision I 06/83 2.0 3 6.0 08/01/83 Supervision II 01/84 1.0 4 4.0 04/05/84 Supervision III 07/84 1.4 4 5.6 08/27/84 Supervision IV 02/85 2.6 5 13.0 04/05/85 Supervision V 09/85 2.2 3 6.6 11/18/85 Supervision VI 06/86 1.6 4 6.4 08/20/86 Supervision VII 04/87 2.0 2 4.0 04/15/87 Supervision VIII 10/87 1.8 4 7.2 10/30/87 Supervision IX 03/88 0.6 1 0.6 03/29/88 Supervision X 04/88 2.2. 1 ...2 n/a Total 24.8 94.6 OTHER PROJECT DATA Borrower: Office National de Recherches et d'Exploitations Petrolieres (ONAREP) Executing Agency: ONAREP Fiscal Year of Borrower: January 1 - December 31 Follow-on Projects: None iv PROJECT PERFORMANCE AUDIT RE"RT MOROCCO PETROLEUM EXPLORATION AND APPRAISAL PROJECT (LOAN 2271-MoR) EVALUATION SUMMARY Introduction 1. The Petroleum Exploration and Appraisal Project was the Bank's third operation in Morocco's petroleum subsector. It supported the Government's strategy of expanding hydrocarbons exploration and expediting the development of known reserves (PCR, Part I, paras. 1.01-1.02; PPAM, para. 10). It comprised exploration and appraisal drilling, geophysical surveys, and assistance for promoting prospective areas to private oil companies, along with technical assistance and studies (PCR, Part I, para. 1.04; PPAM, para. 11). It was implemented by the Office National de Recherches at d'Exploitations Petrolieres (ONAREP), with assistance from expatriate consultants and specialists (PPAM, paras. 12-13). At appraisal, the total cost of the project was estimated at US$106.2 million equivalent, of which about 71 percent (US$75.2 million) would be financed by the Bank. Obiectives 2. The principal objective of the project was completion of the assessment of the Neskala gas discovery brought about under the first Bank petroleum project, as well as the evaluation of the petroleum potential of the greater Meskala horst block. The project also aimed at ensuring the continuation of ongoing efforts by ONAREP directed towards attracting additional foreign investment in exploration, and at helping ONAREP and the Government implement a medium-term institutional plan for ONAREP (PCR, Part I, para. 1.03; PPAM, paras. 7-10). ImRlementation Experience 3. The scope of the project was expanded during implementation by the addition of four exploration/appraisal wells, extra geophysical surveys, and geological studies. However, comprehensive engineering studies related to gas treatment and transport included in the original project scope were not undertaken, because of the disappointing results of the Meskala appraisal program (PCR, Part I, paras. 1.13-1.15; PPAM, paras. 14-16). Project implementation was generally uneventful, except some initial difficulties in well drilling (PCR, Part I, para. 1.12; PPAM, paras. 17-20). There was a delay of about one year in completing the original project. However, the completion of the expanded project was delayed by 27 months in comparison to the original project completion date (PCR, Part I, paras. 1.15-1.16; PPAM, para. 21). V 4. There was a cost underrun of about 28 percent (US$29 million) on components included in the original project scope, due to improvements in drilling performance, reductions in project scope, and decline in the cC-3t of petroleum equipment and services as a result of the appreciation of the US dollar and depressed market conditions. Despite the increase in the number of wells drilled, the total cost of the revised project was 18.5 percent lower in US$ terms than the original cost estimate. However, in terms of local currency, there was a cost overrun of 47 percent, reflecting the depreciation of the local currency and the expansion of project scope (PCR, Part III, Table 5; PPAM, para. 24). Disbursements were slower than estimated due to implementation delays and lower project costs. The loan closing date was extended by 24 months in two stages. US$10.0 million of the loan amount that was not needed for project implementation was cancelled (PCR, Part I, paras. 1.14-1.15; PPAM, paras. 27). Results 5. The appraisal and exploration wells supported under the project yielded disappointing results. The recoverable reserves of the Meskala field turned out to be about one-tenth of the appraisal expectations, ruling out a lerge-scale gas development scheme. Instead, ONAREP has implemented, outside the scope of the Bank project, a small development scheme for rapid utilization of the known Meskala hydrocarbon reserves to supply a phosphate plant (PCR, Part I, para. 1.16; PPAM, paras. 30-32). In contrast, the project's exploration promotion component was highly successful in attracting private risk capital for exploration in Morocco (PCR, Part I, pira. 1.16; PPAM, paras. 33-34). Institutional development efforts were also successful. However, they were directed toward the needs of an institution with substantial hydrocarbons production capacity. When this expectation did not materialize, it became necessary to restructure ONAREP to better suit its reduced scope of activities (PCR, Part I, para. 1.18; PPAM, paras. 35-40). 6. The direct economic benefits of the project were considerably below appraisal expectations, due to the significant reduction of the hydrocarbons reserves and production potential of the Meskala area (PCR, Part III, Table 7B; PPAM, paras. 41-44). ONAREP's financial situation remained weak, because of the failure of its exploration and development activities to generate substantial hydrocarbons production and revenues (PCR, Part I, para. 1.17; PPAM, paras. 45-47). Sustainability 7. The main benefits of the project were the delineation and primary development of a small but economically exploitable gas field, the attraction of international risk capital for hydrocarbons exploration in Morocco. and the development of ONAREP as a mature national oil company. The benefits derived from gas production appear to be sustainable. However, the sustainability of the benefits of the project's exploration promotion component is uncertain, due to lack of commercial hydrocarbon discoveries. Given ONAREP's weak financial situation and heavy dependence on budgetary transfers, its status as an independent government enterprise may be jeopardized by ongoing efforts to reduce the coun.ry's fiscal deficit (PPAM, paras. 62-65). vi Findings and Lessons 8. Overall the project was a qualified success. It achieved its exploration promotion, institutional development, and hydrocarbon reserve delineation objectives. However, it failed to discover or establish large reserves and to contribute substantially to Morocco's hydrocarbons production potential. 9. The timing, scope, and scheduling of the project were based on assumptions of hydrocarbon potential which, in retrospect, turned out to be extremely optimistic. As a result, finding costs for the hydrocarbons reserves in the Neskala area were approximately four times as large as the worldwide average (PPAM, para. 44). Given the high risks involved, this is not an unusual occurrence in petroleum exploration, where failures outnumber successes. Nevertheless, with hindsight the audit concludes that this high cost could have been significantly reduced by, first, delaying the project until the results of the appraisal wells which were beirg drilled under the first petroleum project were at hand and, second, opting for a project that would be implemented in stages, rather than as an all-out exploration/appraisal campaign (PPAM, paras. 49-57). 10. The Bank has spent a large amount of technical manpower in preparing and supervising the project. At times, Bank staff were involved in decision making in a way to cause the resentment of the Borrower's staff. Although the Borrower appreciates the value of the technical expertise brought by the Bank staff in resolving operational difficulties and in contributing to the professional development of its staff, it considers the insistence of the Bank staff to vet all well locations and drilling and testing programs as an unwarranted interference in an area where it alone is accountable for the results (PPAM, paras. 58-60). 11. Project experience suggests the following lessons: - In preparing the implementation schedules of projects with unusual difficulties, sufficient time needs to be allowed for those providing technical assistance to familiarize themselves with and adjust to the project environment (PPAM, para. 66); * Institution building within the context of an exploration, research, or pilot project, whose outcome cannot be safely predicted, should be limited to the minimum needed for successful project execution, in order to avoid the difficulties inherent in restructuring in case of unfavorable results (PPAM, para. 67); and - The scope of an exploration project needs to be limited to only those components which can be justified and clearly defined on the basis of available data during preparation, in order to avoid the risks inherent in Bank vetting of expluration decisions during implementation (PPAM, para. 69). 1 PROJECT PERFORMANCE AUDIT ME(DRANDUM MOROCCO PETROLEUM EXPLORATION AND APPRAISAL PROJECT (IAN 2271-MOR) I. BACKGROU Prolect Environment 1. Energy Situation: Morocco suffers from a drastic imbalance between dom(stic production and consumption of both commercial and traditional forms of energy. On the commercial side, in 1981, primary production amounted to about 0.69 million tons oil equivalent (KTOE), mostly (68 percent) coal and hydropower. This compared with total domestic demand for commer-tal energy of about 4.75 MTOE. The deficit was made up almost entirely by oil imports, which constituted about 85 percent of supply and absorbed about 49 percent of export earnings. Demand for traditional energy amounted to about 2.60 MTOE in 1981. To satisfy this demand, wood was being extracted fromn the country's forests at rates exceeding the rate of natural growth by a factor of about three.' 2. The rising oil bill, which exceeded US$1.0 billion in 1981, had been a major reason for a marked deterioration in Morocco's overall economic performance in the past several years. The Government was attempting to curb the growth of energy demand through price increases and an active campaign to induce energy savings. In an effort to expedite the development of domestic energy supplies, it had also begun to implement a number of important investments in petroleum exploration, expansion of hydroelectric power generation capacity, the development of oil shale deposits, and reforestation. At the same time, the Government was making special efforts to attract foreign risk capital for petroleum exploration through formal presentations and discussions with international oil companies. 3. In view of the limits on available coal and hydro resources and the long time required for oil shale development, a successful petroleum development program would provide the best prospect in the near term for increasing indigenous supplies. One potentially significant step in this direction had already been achieved through the discovery of gas and condensates in Meskala in the Essaouira Basin under a previous Bank project (Loan S-18-MOR) (PPAM, para.4). The assessment of Meskala's hydrocarbon potential was therefore a priority objective of the Government's energy investment program and appeared to be the single most promising option for alleviating Morocco's dependence on imported energy in the short term. , 1/ SAR. Norocci: Petroleum Exploration and Essaouira Appraisal Report, Report No. 4283-MOR, April 4, 1983, paras. 1.01-1.02. 2 Previous Bank Proects in the Sector 4. The Petroleum Exploration Project (Loan S-18-MOR), approved in April 1980, was the Bank's first operation in the Moroccan petroleum sector. It was also the first Bank loan for exploration drilling. The project supported a three-and-a-half year time slice of the petroleum activities of the Bureau de Recherches et de Participations Minieres (BRPM), whose petroleum and oil shale operations were taken over by the Office National de Recherches et Exploitations Petrolieres (ONAREP) in 1981. 5. The project was completed essentially on schedule and accomplished its major objectives. Exploration in the Essaouira Basin resulted in the discovery of gas and condensate at Meskala in sedimentary strata not previously produced in the basin. A successful exploration promotion campaign yielded nine contracts with foreign oil companies. ONAREP's exploration equipment was rehabilitated and its drilling capability and efficiency improved. ONAREP emerged at the completion of the project a stronger organization through the technical assistance provided under the project and the experience gained by its staff while working on the project alongside various expatriate specialists. 6. The Oil Shale Engineering Project (Loan 2114-MOR), approved in March 1982, constituted the initial phase of a possible commercial development of an oil shale industry in Morocco. As a consequence of the decline of oil prices, which rendered oil shale development uneconomic, only the construction of a test station for recovery of oil from shale and a comprehensive feasibility study of a commercial oil shale mine and plant were completed. The project was terminated in December 1986 at a cost of US$11.3 million equivalent, about 12 months later than estimated, and at about 45% of budgeted cost. Project implementation did not present major problem. and institutional performance was good. However, operating results of the test station stayed below expectations.3 Rationale for Bank Involvement 7. In the abseace of viable alternatives for substantially increasing domestic energy supply in the short term, the acceleration of petroleum exploration and development was a high Government priority. In light of this, the Bank's lending strategy in the petroleum sector was aimed principally at assisting Morocco to pursue the two principal strategic options available to it in expediting exploration and development of domestic oil and gas: (1) the rapid assessment of discovered resources by following up on the encouraging results achieved at Meskala under the previous Bank project; and (2) the active encouragement of new investment in exploration by foreign companies. Z/ PPAR. Morocco: Petroleum Eploration Project (Loan S-18-MOR), Report No. 6763, April 30, 1987, PPAM, para. 1, and PCR, para. 8.01. 2/ PCR. Morocco: Oil Shale Fngineering Project (Loan 2114-MOR), Report No. 7141, Feb 24, 1988, PCR, Highlights, page iv. 3 8. By its presence, the Bank aimed also at helping ONAREP undertake a more efficient exploration program by improving project design and ensuring adequate implementation arrangements. As was the case for the first exploration project, the Bank loan would be a vehicle for the transfer through technical assistance of the most up-to-date oil industry technology and management skills. It would also assist in the implementation of a medium term plan for ONAREP aimed at strengthening its technical, managerial, and financial capabilities so as to enable the company to better fulfill its mandate in the petroleum sector. Project Justification 9. The project was justified by both the size of the potential gas market and preliminary estimates of hydrocarbon reserves discovered at Meskala. Preliminary estimates indicated that about 175 million cubic foot per day (MMCFD) of gas could be absorbed readily by the mid- to late-eighties in the market. Combined with associated liquid hydrocarbons, the production of this amount of gas could substitute about half of Morocco's oil imports, yielding gross foreign exchange savings on the order of US$550 million per year. Although the size of the recoverable hydrocarbon reserves in Meskala was uncertain, they were expected to be large enough to sustain a plateau production of 90 MMCFD, about one-half of the potential demand. Project Obiectives 10. The principal objective of the project was completion of the assessment of the Meskala gas discovery, as well as the evaluation of the petroleum potential of the greater !!-:ala horst block. The project also aimed at ensuring the continuation of ongoing efforts by ONAREP directed towards attracting additional foreign investment in exploration, and at helping ONAREP and the Government implement a medium-term institutional plan for ONAREP. Project Description 11. The project initially comprised the following: (1) Delineation and appraisal of the Meskala discovery through two appraisal and three distant step-out wells, six crew-months of high-resolution seismic survey, and -a reservoir study of the Meskala area; (2) Exploration of the potential of the Essaouira basin by drilling up to four exploration wells and conducting seismic and airborne gravity and magnetic surveys; (3) Exploration promotion (42 crew-months of reconnaissance seismic surveys, the drilling of up to four exploration vells--to the extent that such wells were not drilled in the Meskala area--, and the preparation of data packages for areas to be promoted); and (4) Technical support, studies and training (including a comprehensive gas utilization study, detailed design of pipeline and surface 4 facilities, and the second phase of the institutional studies started under the first petroleum project).' Implementation Arrangements 12. Primary responsibility for the implementation of all exploration activities in the Essaouira Appraisal Area was assigned by ONAREP to a joint task force set up essentially for this purpose and comprising ONAREP personnel and an expatriate assistance team. The Bank agreed with ONAREP that oil companies would be better able than independent petroleum consultants to provide the assistance needed, particularly _n regard to integrated management of the Essaouira operatioas, replacement of personnel if, and when, necessary, and consultative head office support. ONAREP contracted with an international oil company for the supply of expatriate specialists needed. 13. Drilling of the exploration and appraisal wells was executed by ONAREP which utilized for this purpose its four heavy duty drilling rigs and labor. ONAREP's labor force was reinforced through the contracting of about six skilled technicians to help man two of its rigs. These were supplied by an international drilling contractor. The geophysical surveys were conducted by foreign contractors. The studies were executed by experienced engineering or consulting firms under contract to ONAREP. II. IMPLEMENTATION EXPERIENCE Changes in Prolect Scope 14. By August 1986, overall project implementation was 95% completed with a savings in foreign exchange costs of about US$20 million. Upon ONAREP's request to utilize part of the savings to finance its 1986/87 exploration program, the Bank agreed in September 1986 to enlarge the scope of the project to include the drilling of four additional exploration/delineation wells, additional gephysical surveys amounting to 30 crew-months of field work, and a study of the petroleum potential of the South-Atlas basin. 15. In June 1987, Petrocanada International Assistance Corporation (PCIAC, the Canadian Government's aid agency for petroleum) granted Can$15.6 million towards the drilling of one offshore and up to five onshore exploration wells. Under the agreement ONAREP was obligated to contribute US$3.0 million towards the cost of the offshore well and provide its drilling rigs for the drilling of onshore wells. ONAREP, with the Government's concurrence , requested the Bank to allow the use of uncommitted funds of this loan to cover part of its required contribution towards the offshore well. In December 1987, the Bank agreed to ONAREP's request. A,/ The PCR (para. 1.04) states that the project contained 12 appraisal/exploration wells. The Loan Agreement (Schedule 2) provided for two appraisal and three exploration wells and up to four additional exploration wells if certain conditions were met. 5 16. Due to the disappointing results of the Meskala appraisal program, engineering studies related to gas treatment and transport facilities, as well as long-duration production tests on unsuccessful appraisal wells were not performed.s Project Implementation 17. Despite abundant expatriate assistance, ONAREP has initially experienced difficulties in drilling and testing project wells. The major problem was the slow rate and high cost of drilling due to the generally hard and compact formations in Meskala, frequent drill pipe failures, and lack of timely availability of supplies and spare parts. Too often the drilling and mud systems were operated at less than capacity, due to lack of spare parts and, on occasion, shutdown time resulted from a temporary lack of consumable items at the drill site. 18. Subsequently, the efficiency of the Meskala drilling operations has substantially improved. Overall drilling time, which was a cause for concern at the beginning of the project, has been halved. In addition, most of the previous problems with down-hole equipment have been substantially alleviated. 19. The additional seismic survey was delayed by about seven months due mainly to mechanical difficulties with the contractor equipment. These difficulties could not be corrected in the field and the entire geophysical drilling equipment had to be replaced with a new unit purchased by the contractor from abroad. In addition, the South-Atlas basin geological study progressed somewhat more slowly than expected, because of some operational difficulties faced by the consultants in collecting geological samples in the field. 20. With the assistance of expatriate consultants financed under the project, ONAREP has organized periodic exploration promotion conferences both in Morocco and abroad. These were well organized and attended, and resulted in keeping the involvement of private oil companies at a relatively high level despite lack of exploration success (PPAM, paras. 33-34). 21. Implementation Delays. The project was expected to be completed in December 1985. The completion of the revised project was delayed until March 1988, with an apparent time overrun of about 27 months. However, the project as originally defined was 95 percent complete by August 1986, suggesting an implementation delay on the order of about one year compared to appraisal estimates. Proiect Costs and Financing 22. Project Costs. The project was estimated to cost US$106.2 million equivalent (including physical and price contingencies, duties and taxes, and 1./ ONAREP has brought the Meskala gas field into production with financing from French suppliers and USAID (PPAM, paras. 31-32). 6 capitalized front-end fee) of which US$75.2 million, or 71 percent, represented the foreign exchange component. 23. The last updated cost of the original project (US$76.4 million) was prepared in August 1986. 6 Since at this time the original program was almost entirely completed (PPAM, para. 21), the data point to a cost underrun of US$29.8 million, or 28 percent. This saving was due to (i) the reductions in drilling time and consumption of drilling equipment as a result of improvements in well design and drilling performance; (ii) six unsuccessful wells' not needing well completion equipment and long test operations; and (iii) major reduction in the scope of the detailed engineering studies for pipeline and surface facilities (PPAM, para. 16). Also the provisions for physical and price contingencies proved to be on the high side, due to improved drilling performance, depressed conditions in the petroleum supply and service industries, and the appreciation of the US dollar. 24. According to ONAREP's financial records, the total cost of the revised project was DH 944.7 million distributed as follows: Studies 90.9 Geophysical Surveys 235.8 Exploration Well Drilling 276.2 Appraisal Well Drilling 301.8 Well Completion and Testing 40.0 Total Cost 944.7 This represents a cost overrun in DH terms of about 47 percent over the appraisal estimate of DH 669.1 million. This is due mainly to the depreciation of the local currency and the inclusion of additional exploration wells in the project scope (PPAM, paras. 14-15).' 25. Project Financing. About 73 percent of the cost of the project was financed by the Bank loan, Government contributions to ONAREP providing the balance (PCR, Part III, Table 6). The Bank's contribution to project financing was slightly above the appraisal estimate of 71 percent. Procurement and Disbursements 26. Procurement. Under the first petroleum project, ONAREP had gained wide experience in Bank procurement procedures and had made substantial improvement in procurement and purchasing, staffing and timing for approval of payments, and budgetary appropriations. The progress continued under this project. All procurement was conducted according to Bank guidelines with only ,/ Supervision Report dated August 20, 1986, Aide Memoire, Attachment. ,1/ The PCR (Part III, Table 5) estimates the total cost of the revised project at US$ 88.9 million. This figure is the same as the revised cost estimate prepared during the supervision mission of August 1986 and does not include expenditures incurred in 1987 and 1988 (Supervision Report dated August 20, 1986, Aide Memoire). 7 normal monitoring by the Bank. Disagreements between the Bank and the Borrower were rare. 27. Disbursements. Disbursements lagged behind appraisal estimates due both to slow drilling progress and to lower-than-estimated project costs (PCR, Part III, Table 3). US$10.0 million of the loan amount was cancelled on September 5, 1986 and loan closing date extended to June 30, 1987.6 The loan closing date was further extended by 12 months to June 30, 1988 to permit the completion of the South-Atlas study added to the project scope (PPAM, para. 14). Performance of Consultants 28. Throughout project implementation, ONAREP was assisted, in addition to the expatriate consultants provided to the Essaouira management team by a multinational oil company, by independent exploration promotion consultants and four teams of consultants working under bilateral agreements with Canada, Romania, USA, and USSR. ONAREP has not experienced particular difficulty in managing the work of this multinational group of consultants. 29. The performance of the consultants was generally satisfactory, and their presence has substantially contributed to the improvement of the efficiency of operations and to the launching of successful exploration promotion campaigns. III. PROJECT OUTCOME Anraisal and Exploration 30. Drilling in the Meskala area has yielded a series of disappointing results. All of the five appraisal wells supported under this project (MKL- 105 through MKL-109) have been dry and were abandoned. The geology of the Keskala reservoir has proved to be extremely erratic. Only a replacement well to the discovery well (MKL-101 bis) was completed as a producer. None of the six exploration wells drilled under the project discovered commercial accumulations of hydrocarbons. 31. Meskala Field Development. On the basis of additional information obtained through appraisal drilling, the recoverable reserves of the Meskala gas field were downgraded to about 35 billion cubic feet (BCF) of gas and 1 million barrels (Bbls) of condensate from about 330 BCF and 20 million Bbls, respectively, expected at appraisal. 9 Given the limited production potential J/ EM2DR telex to ONAREP and the Ministry of Finance dated October 16, 1986. 2/ The latest reserve estimates prepared by ONAREP on the basis of field pressure/production data put Meskala's recoverable reserves at 38.8 BCF of gas and 1.5 million Bbls of condensate (PPAM, Annex 1). 8 that has emerged (about 5 MMCFD over a twenty-year period), ONAREP has prepared a-4 implemented, outside of the project scope and wita assistance from USAID and equipment suppliers, a small project for rapid utilization of known Meskala reserves and gas coming from nearby Toukimt field to supply a phosphate drying and calcination plant at Youssoufia. 32. The construction of gas production facilities at Meskala were completed in August 1987. However, due to depressed phosphate demand and difficulties experienced in burning gas in phosphate calcination units, gas production has remained at 20-38 percent of the design capacity of 7 MMCFD. Nevertheless, this small field development proved to be timely as the deliverability of gas from the Societe Cherifienne des Petroles (SCP) fields supplying the Youssoufia plant (Jeer and Kechoula) had to be reduced because of serious water incursion.'0 Exploration Promotion 33. ONAREP's efforts to attract international oil companies to invest in Morocco have been successful. Some fifteen petroleum exploration agreements, envisaging total investments of US$175 million, were signed with foreign oil companies since 1981. Total investments of ONAREP's joint- venture partners during 1981-1988 amounted to DH 1,511 million (about US$202 million). 34. Exploration promotion results given above represent the combined results of this project and the Petroleum Exploration Project (Loan S-18- MOR). As of February 1984, only four firm proposals with only one well drilling commitment (or a back-out penalty of US$3.0 million) were received from international oil companies. Therefore, it can safely be assumed that a very important part of this success is attributable to exploration promotion efforts assisted under this project. Notwithstanding ONAREP's success in attracting reputable foreign companies, no significant discoveries have so far resulted. Institutional Development 35. ONAREP was established in November 1981 as a public enterprise to take over from BRPM, which had hitherto conducted petroleum activities, the exploration and production of oil, natural gas, and shale oil, as well as to serve as the national counterpart in joint ventures with foreign oil companies. All staff, physical facilities, assets and liabilities of BRPM pertaining to these activities were subsequently transferred to ONAREP. 36. Initially ONAREP was working with the organization inherited from BRPM. In the course of project implementation, the need for a comprehensive and wide-ranging study to help restructure and develop ONAREP as a national oil company became apparent with the increase in its projected activities following the discovery of Meskala. The first phase institutional study was completed by consultants in October 1983. Subsequently, ONAREP has adopted a 12/ Aide Memoire, Supervision Mission, 1-9 October 1987, paras. 2-5. 9 modified organizational structure along the lines suggested by the study. It also started work on a two-year program for design and implementation of a new management information system. 37. At the time of its creation in 1981, ONAREP had a total of about 900 employees, of which 110 were professional staff. The total number of employees increased to 1516 in June 1988. Along with strengthening its cadres, ONAREP has also embarked on an ambitious and highly successful training program. 38. But CNAREP's institutional development efforts were based on expectations of exploration success and large-scale hydrocarbons development. When this expectation failed to materialize, ONAREP was confronted with the necessity of restructuring its organization in line with its role in the Government's new petroleum strategy. This new role is basically threefold: (1) non-revenue-earning public service activities, on behalf of the Government, in the area of information services on Morocco's petroleum potential; (2) development and production of its existing small gas fields; and (3) limited revenue-earning activities in areas where it has a comparative advantage, such as providing petroleum drilling services (PCR, Part I, para. 1.18). 39. In line with its new corporate strategy, ONAREP has drastically reduced its exploration activities and initiated a program of voluntary separation in 1988. So far some 690 employees have opted for separation with indemnity. The Government has contributed DH 35.0 million (about US$4.3 million) for the payment of separation indemnities through an extraordinary budget allocation. At the beginning of 1990 ONAREP had 902 employees, ' including 75 temporary staff. ONAREP management estimates that about 400 of the remaining staff are surplus. * 40. Thus, institution building under the two petroleum projects, although highly successful, turned out to have been directed largely towards areas which are no more essential to ONAREP, such as well drilling and testing. A similar development was noted under the Oil Shale Engineering Project (Loan 2114-HOR). During the implementation of this project, ONAREP had built up a specialized work force of 45. But, when it became apparent that oil shale development would not be economically viable, it stopped recruiting for the division and reduced its oil shale staff to its present size of one, through natural attrition and transfers to other units. These experiences point to a need for extreme caution in formulating institution building objectives of exploration and research projects (PPAM, para. 67). Economic Performance 41. During project appraisal, the economic benefits to be derived from the project were estimated under three different scenarios, where recoverable gas reserves ranged from a low of 210 BCF to a high of 460 BCF. In what was then considered to be the best estimate (recoverable reserves of 330 BCF of gas and 20 million Bbls of hydrocarbon liquids with a production potential of 90 MMCFD of gas and 5,400 Bbls of condensate), the development of the Meskala 10 gas reserves, at an estimated cost of US$516 million in 1983 prices, would yield an economic rate of return (ERR) of 24 percent. 42. However, the President's Report did not give an estimate of the ERR for the project. Instead, it stated that the program was the minimum program needed for an adequate assessment of the Meskala discovery and a determination of its commerciality. 43. 210 BCF of gas and 20 million Bbls of condensate reserves considered to be the worst-case scenario at appraisal (PPAM, para. 41) correspond to about 56 million barrels oil equivalent (boe)." Thus, the cost of the exploration and appraisal program envisaged (US$73.3 million, excluding exploration promotion and technical assistance, but including physical and price contingencies) translated into US$1.3/boe, which compared very favorably with the then prevailing petroleum prices (US$30/boe). 44. Annex 1 gives an ex post estimate of the finding costs for the hydrocarbon reserves of the Meskala field. Based on ONAREP's accounting data, the finding cost for the Meskala area hydrocarbon reserves come to about US$13/boe, which is approximately four times larger than the average petroleum finding costs of major oil companies outside the USA.12 Financial Performance 45. It was recognized at appraisal that ONAREP would continue relying on budgetary allocations, due to its relatively minor income generation capability. It was, however, hoped that success of its exploration and development efforts would make possible a transformation of ONAREP from an essentially exploration entity into a revenue generating production company. 46. This hope did not materialize due to the failure of ONAREP's exploration/development activities to generate substantial hydrocarbons production and revenues. ONAREP's financial situation continued to deteriorate despite reduction of its exploration activities, due essentially to the effect of heavy debt service obligations. In 1988, ONAREP was dependent on budgetary allocations for more than 55 percent of its total resources, revenues from joint ventures, direct petroleum sales and contract drilling providing the balance. A large part of the total resources available (61 percent) was allocated to the repayment of the Bank loans and fixed charges, leaving almost no resources for new investments. 47. Despite restructuring its activities and organization, ONAREP's financial position is likely to remain weak in the medium term, unless it is 11/ 1 boe equals 5,800 cubic feet of gas (Natural Gas Terms and Measurement, Shell International Gas Limited, Publication No. SIG/69/1, September 1969, Table 14). 12/ Petroleum finding costs outside the USA for major US oil companies are reported to be US$ 3.14/boe in 1988 (Platt's Oilgram News, April 25, 1989, Vol. 67, No. 79, page 5). 11 relieved of its debt service obligations, which are expected to equal 88 percent of its projected financing gap during 1988-1992 (PPAM, Annex 2). IV. FINDINGS AND ISSUES Project Concept and Design 48. In contemplating the use of borrowed funds for exploration and appraisal, the project departed radically from the practice of the international petroleum industry, where exploration has traditionally been an equity risk. This departure was justified on grounds that it represented the best energy strategy for the country and the most appropriate gas field development strategy. This implied that potential risks involved in further exploration and appraisal of the field had been assessed and the program design and size optimized. 49. Project Scope. The scope of the project was determined on the assumption that the Meskala discovery had opened a gas-bearing area of some 300 square miles with a gas column thickness of about 1,700 meters. For a field of this magnitude, the project represented an acceptable exploration/ appraisal investment (PPAM, para. 43). However, very few safeguards were provided for reducing the project scope in case the initial results would be disappointing: well drilling would be done with four drilling rigs operating simultaneously, and eight wells and the major portion of geophysical surveys were scheduled to be completed within 18 months from project start. The cost of these works represented about 40 percent of total project cost. 50. Project Timing. The discovery well at Meskala (MKL-101) was completed in December 1981. At the time the present project was prepared, one appraisal well (MKL-102) was completed and tested, and three additional wells were drilling (MKL-103, MKL-104, and OTA-3) under the first project. These were expected to be completed by April 1983. In addition, a reservoir engineering study was commissioned for completion in July 1983. The project was appraised in November 1982 in the midst of these activities, which could produce a clearer picture of the Meskala discovery, and presented to the Board of Executive Directors in April 1983, the expected completion date of the appraisal and exploration wells included in the scope of the first petroleum project. 51. Although consideration was given in the Bank to delaying the project until the results of the three wells then drilling would be known, this was rejected because of staff doubt about the possi:oility of assessing a field of the size and complexity of Meskala with a small number of wells. 52. In retrospect, the decision to go ahead with the project before the appraisal and exploration wells drilling under the first project were completed proved to be a costly mistake. Subsequently, MKL-103 and MKL-104 proved to be productive. However, none of the tests proved to be as prolific as the discovery well and the hoped for Paleozoic gas was not forthcoming in commercial quantities. The exploration well OTA-3 in the same area was 12 abandoned as a dry well.13 These results clearly proved that reservations about the extent and quality of the gas reservoir at Meskala were well grounded (PPAM, paras. 54-55). The Bank staff associated with the project admit that, if known in advance, these results would certainly have led to a project of much more restricted scope than the present project and to a step- by-step implementation. 53. Risk Assessment. The overriding influence in determining the scope, timing, and the implementation mode of the project was thus the perception of the size of the Meskala discovery. Although relatively small by international yardsticks, the Meskala discovery appeared to be a giant by country standards. Oil and gas exploration has been conducted in Morocco since 1928. Between 1928 and 1983, about 200 exploration wells were drilled, resulting in 22 small oil and gas discoveries. Before the discovery of Meskala, Morocco's recoverable gas reserves stood at 25 BCF. Thus, with about 300 BCF of prospective reserves, Meskala was expected to contain more than ten times the known gas reserves in the country. On the other hand, its distant location to markets, the need for expensive infrastructure facilities, and the heavy pressure exerted by oil imports necetaitated a quick assessment of its reserves and production potential. 54. There were, however, a number of uncertainties. The Meskala reservoir characteristics were poor and the geological and geophysical knowledge of the structural configuration and the extent of the gas accumulation was still quite limited. The gas was contained beneath a thick salt layer which hampered obtaining good quality seismic reflections. The gas producing zone had very poor petrophysical properties. Furthermore, the reservoir was believed to be compartmentalized by minor, though sealing, faults. 55. Also, at the request of ONAREP, a major international oil company (CFP) had made an independent appraisal of the Meskala discovery. Their main conclusion was that a more thorough evaluation of existing data and the systematic acquisition of new data was absolutely necessary before a competent appraisal of the discovery could be made. They were concerned with overall reservoir quality which appeared to be very poor, excessive pressure drawdown during the long duration gas production test at the discovery well, and the quality of the work associated with the identification of the local and regional aspects of the discovery. 56. A team of Bank technical specialists visited CFP offices in early April, 1982. At the end of discussions, no agreement could be reached regarding the gas potential of the paleozoic, the optimum well completion method, or the regional implications of the gas discovery. Neither the CFP nor the Bank staff altered their analysis of the Meskala gas discovery appreciably. 12/ rPAR. Morocco: Petroleum Exploration Project (Loan S-18-MOR), Report No. 6763, April 30, 1987, PCR Annex 1, paras. 8 and 19. 13 57. There was thus good ground to approach further appraisal of the Meskala area with extreme caution and to ascertain whether on a risk adjusted basis the project represented the most appropriate use of scarce funds. This was not done. Neither was much thought given to the implications for ONAREP of an exploration/appraisal program of this magnitude, if reserves proved to be lower than expected. In this respect, it is worth noting that ONAREP tends to blame the over optimistic reserve and production scenarios adopted by the Bank staff and presented to Moroccan authorities for the ambitious appraisal program, which, in retrospect, they consider to have been highly imprudent (PCR, Part I, para. 1.05). Performance of the Bank 58. During the implementation of the first petroleum project, ONAREP had found at times the Bank to be overly involved in the implementation of the project. Bank staff had indeed been too closely associated with day-to-day project operations following the Meskala discovery. The PCR for the Petroleum Exploration Project (Loan S-18-MOR) justified this close involvement with project implementation by ONAREP's lack of experience and the difficult technical problems posed by this deep and difficult high pressure discovery well, which would have been 4 challenge even to an experienced oil company. In view of this factor and the potentially large gas and condensate reserves at stake, Bank staff felt justified in pressing for quick and decisive action to follow-up this discovery and determine whether it was going to live up to the indicated potential. 59. Bank staff continued to be closely involved also in the implementation of the present project. In addition to regular supervision missions, the Bank's technical experts often visited Morocco to assist ONAREP in implementing various aspects of the project. In accordance with the agreements reached at negotiations, ONAREP provided to the Bank progress reports on both a monthly and semi-annual basis. In addition, weekly telexes summarizing drilling and testing status of wells were sent to the Bank, "in order to allow the Bank to reach an informed judgment on the progress of drilling and the locations of new wells." The extent of the Bank staff involvement in project implementation is made clear by the following statement: "The Bank missions have, as a result, found it necessary to override the ELF team suggestions in several instances, particularly with regard to well location and testing." 60. The Borrower appreciates the value of the technical expertise brought by the Bank staff in resolving operational difficulties and in contributing to the professional development of ONAREP's technical staff. However, it considers the insistence of the Bank staff to vet well locations and drilling and testing programs as an unwarranted interference in an area where it alone is accountable for the results. This appears to be an issue JA/ PPAR. Morocco: Petroleum Exploration Project (Loan S-18-MOR), PCR, para. 7.05. 14 deserving careful consideration in any future exploration project that the Bank may finance (PPAM, paras. 68-69). Performance of the Borrower 61. Despite initial difficulties, ONAREP's overall performance was satisfactory. It complied with loan covenants, made good use of the technical assistance and training opportunities provided under th. project and through bilateral agreements. It has also showed considerable maturity in initiating exploration promotion campaigns and playing its role correctly under the resulting agreements. Sustainability 62. The main benefits of the project were the delineation and primary development of a small but economically exploitable gas field, the attraction of international risk capital for hydrocarbons exploration in Morocco, and the development of ONAREP as a mature national oil company (PPAM, paras. 31-40). 63. Despite the retrenching of international oil companies following the collapse of oil prices in the early 1980s, interest in Morocco remained relatively high. However, no commercial discoveries have yet resulted. It is therefore too early to determine whether the benefits of the exploration promotion efforts will be sustainable in the future. 64. Gas production from the Meskala gas fields appears to be sustainable, because, first, even under the current low petroleum prices and production rates the fields generate enough revenue to cover operating expenses and contribute to ONAREP's total financing requirements and, second, ONAREP has the reuisite technical expertise to maintain the present gas production rates. 65. Despite the curtailing of its exploration activities, ONAREP is still expected to play an important role in Morocco's petroleum sector as the Government's agent in promoting the country's prospective areas, following up on any discovery, and providing a repository of national hydrocarbons know- how. Thus the institutional gains represent an economic benefit for the country. However, given the small share of its operational revenues in meeting its operating expenses and debt service requirements, ONAREP will continue to rely on important budgetary transfers (PPAM, para. 47). This appears to be assured at present. But presently ongoing efforts to reduce Morocco's fiscal deficit may jeopardize ONAREP's survival as an independent public enterprise. U1/ In 1988 the Meskala and Toukimt fields produced 1.161 MMCF of gas and 10,105 tons of condensate, representing 45 percent of installed capacity. Net revenues in 1988 were DH 51 million. 15 Lessons of Exyerience 66. Despite the availability of qualified technical assistance and ONAREP's experience in working with expatriate specialists, considerable difficulties were initially experienced in well drilling and testing. These continued for about one year, after which the efficiency of ONAREP's drilling operations showed substantial improvement (PPAM, paras. 17-18). This indicates that even tte most capable experts need a certain amount of hands- on experience before they can adjust to the project environment and make the contribution expected from them. This observations suggest that In preparing the implementation schedules of projects with unusual difficulties, sufficient time needs to be allowed for those providing technical assistance to familiarize themselves with and adjust to the project environment. 67. Both under the Oil Shale Engineering Pioject (Loan 2114-MOR) and under the two petroleum exploration projects (Loans S-1':-OR and 2271-MOR) ONAREP had successfully upgraded its technical capabilitias in oil shale processing and well drilling and testing. However, it fat-d the very difficult problem of reducing the size of its technical st.Zf when the results of the projects proved to be insufficient for gainfully emloying the staff resources developed. This experience suggests a lesson app.Scable to all research/exploration projects whose results cannot be safely predicted at the preparation stage: Institution building within the context of an exploration, research or pilot project should be limited to the minimum needed for successful project implementation, in order to avoid the difficulties inherent in restructuring in case of unfavorable results. 68. Despite the explicit provisions of the Loan Agreement providing for Bank review and approval of surveying and drilling programs of the Borrower, Bank staff's active involvement in decision making in regard to well location, drilling and testing appears to have generated resentment on the part of ONAREP staff (PPAM, para. 60). 69. Given the risky nature of petroleum exploration and the subjectivity involved in interpreting geological and geophysical data, it is very difficult to reconcile the Bank's desire to ensure efficient use of loan proceeds with the borrower's right to make independently the decisions for which it alone is responsible. This difficulty would not normally arise if the exploration program, including well locations, drilling and testina programs, etc., were clearly defined during project preparation. These observations point to the following lesson: Given the risky and somewhat subjective nature of petroleum exploration and the risks inherent in Bank staff's vetting exploration decisions during implementation, there is a need to clearly define all relevant details of an exploration project during preparation and to limit the scope of the project to only those components which can be justified and defined on the basis of available data. 16 ANNEX 1 MOROCCO PETROLEUM EXPLORATION AND APPRAISAL PROJECT (LOAN 2271-MOR) Meskala Petroleum Finding Costs Exploration/Appraisal Costs (DH million) Basin Studies 9.3 Geophysical Surveys 207.0 Exploration/Appraisal Drilling 516.8 Well Completion and Testing 01.2 Total 803.3 Recoverable Hydrocarbon Reserves Discovered Al Gas, BCF 38.8 Condensate, million Bbls 1.5 Total, boe 8.2 k/ Petroleum Finding Costs, DH/boe 97.96 US$/boe 13.1 S/ A/ Estimates prepared by ONAREP in May 1989 on the basis of pressure and production data. k/ 1 boe - 5,800 cu ft of gas. c/ Converted at the arithmetic average exchange rate of 7.49 DH/US$ for 1980-1988. 17 ANNEX 2 MOROCCO PETROLEUM EXPLORATION AND APPRAISAL PROJECT (LOAN 2271-MOR) ONAREP Sources and Uses of Funds 1988-1992 (After Restructuring) (Million DH) Uses of Funds Public Service Activities 572.1 Participations 303.8 Other Activities 58.0 Subtotal 933.9 Debt Service 982.1 IBRD 955.2 Other Creditors 26.9 Total Uses 1.916.0 Sources of Funds Own Resources 791.1 of which Savings from Restructuring 164.6 Disbursements from Loan 2271-MOR 12.5 Subtotal 803.6 Government Contributions 1,112.4 Total Sources 1.916.0 Source: ONAREP 18 ATTACHMENT Page 1 of 2 COMMENTS FROM THE BORROWER (Working Translation) To: Mr. Alexander Novicki Chief, Plicy-based Lending, Industry, Public Utilities, and Urban Sectors Division Operations Evaluation Department World Bank Washington, USA. From: Mohamed Douieb Director General ONAREP Rabat, Morocco. Subject: Project Performance Audit Report, Petroleum Exploration and AMraisal Project (Loan 2271-NOR) We would like to thank you for your letter of March 19, 1990 requesting our comments on the abovementioned report, as well as the Project Completion Report. After review, we are of the opinion that the two texts faithfully reflect different stages of the loan and draw pertinent lessons. We would like to take this opportunity to thank the World Bank once more for the technical and financial assistance which it has provided us in our efforts to rekindle and promote petroleum exploration in Morocco. With our best regards. 19 ATTACHMENT Page 2 of 2 RABAT, LE 11/4/90 A 10# TELEX N 129 A : MONSIEUR ALEXANDRE NOUICKI CHEF DE DIVISION EVALUATION DES PRETS-A L'AJUSTEMENT MACRO-ECONOMIQUE A L'INDUSTRIE ET AU SECTEUR ENERGITIQUE BANQUE MONDIALE UASHINGTON U S A TELEX N 248423 DE : MOHAMED DOUIEB DIRECTEUR GENERAL ONAREP RABAT-MAROC TELEX N 31715 M OBJET / RAPPORT D'EVALUATION RETROSPECTIVE DU PROJET DE PROSPECTION ----- ET D'EVALUATION DES RESSOURCES PETROLIERES ( PRET 2271-MOR) NOUS VOUS REMERCIONS POUR VOTRE LETTRE DU 19 MARS 1990 NOUS DEMANDANT NOS OBSERVATIONS SUR LE RAPPORT CITE EN OBJET AINSI QUE SUR LE RAPPORT D'ACHEVEMENT DU PROJET. APRES EXAMEN, LES DEUX TEXTES NOUS SEMBLENT REFLETER FIDELEMENT LES DIFFERENTES ETAPES DU PRET ET EN TIRER LES CONCLUSIONS PERTINENTES. NOUS SAISISSONS CETTE OCCASION POUR REMERCIER ENCORE UNE FOIS LA BANQUE MONDIALE POUR L'ASSISTANCE TECHNIQUE ET FINANCIERE QU'ELLE NOUS A APPORTEE DANS NOS EFFORTS DE RELANCE ET DE PROMOTION DE LA RECHERCHE PETROLIERE AU MAROC. AVEC NOTRE CONSIDERATION DISTINGUEES. OFREP 31715M 248423 WORLDBANK 20 PROJECT COMPLETION REPORT Morocco: Petroleum Exploration and Essaouira Aoaraisal Prolect Loan No. 2271-MOR Industry and Energy Division Country Department II Europe, Middle East and North Africa Region 21 PROJECT COMPLETION REPORT Morocco,__ Petroleum Exloration and Essaouira Appraisal Project Loan No. 2271-MOR Project Identity Project Name: Petroleum Exploration and Appraisal Loan No.: 2271 - MOR RVP Unit: EM2 Country: Morocco Sector; Energy Subsector:1 Petroleum Backgron 1.01 The Petroleum Exploration and Appraisal Project (US$ 75 million), hereafter referred to as "the Project" was the second Bank loan in Morocco's petroleum sector, following an initial loan of US$50 million, made in 1980, to finance exploratory drilling by the Bureau de Recherches et de Participations Minieres (BRPM). This project led to the discovery of the Meskala gas field in the Essaouira Basin. Testing of this field established the presence of good quality gas and indications of its extension over a larger regional area. However, it was difficult to reliably estimate economically recoverable reserves given that the extent of the reservoir was unknown and data on recoverablility were insufficient. To resolve these uncertainties, Morocco required a program of drilling and geophysical surveys to appraise the Meskala discovery and explore its potential. 1.02 The first petroleum project upgraded exploration equipment and improved the capability of BRPM (the original Borrower) for selecting, exploring and evaluating petroleum prospects. From BRPM, the Government of Morocco, in 1981, created ONAREP (Office National de Recherches et d'Exploitation Petroliere), as the Government arm in petroleum exploration and production. The newly created ONAREP became the Borrower under the Project. Given Morocco's high oil import bill (about 13% of export earnings) and the Government's priority for accelerat- ing petroleum exploration and development to help reduce this burden, the Bank' s lending strategy was to assist Morocco in its assessment of promising results of the previous exploration project and encourage new investment in exploration by private parties. At the time the Project was appraised, there was some renewed interest among international oil companies in Morocco's petroleum prospects. 22 Project Description 1.03 Objective. The Project's objectives were to (a) complete the delineation and appraisal of the Meskala field, including the adjacent areas in the Essaouira basin, in order to assess the potential contribution in meeting Morocco's energy needs, (b) carry out preparatory studies necessary to identify policies, investments, institutional arrangements and modifications to Morocco's overall energy strategy for eventual marketing of gas and condensates, (c) evaluate and promote other prospects in order to attract further investment from foreign oil companies and (d) stringthen ONAREP's technical and managerial capacity for more effective planning and implementation of its functions. 1.04 Commonents. The Project consisted of the following components: (a) drilling, testing and completion of up to 12 appraisal/exploratory wells, (b) geophysical studies, (c) technical studies in the areas of reservoir engineer- ing, gas utilization and detailed design of pipeline and service facilities, (d) gathering, analysis and presentation of data for exploration promotion, and (e) technical assistance and training for ONAREP, the Borrower. Project Design and Organization 1.05 Given favorable geological indications of petroleum and high expectations resulting from the success of the first project, the logical next step was to conduct more proving work to better determine the potential of the area containing the discovery at Meskala as well as the surrounding areas. There was a great sense of urgency and excitement about developing the area. This was reflected in a Bank mission's audience with the King of Morocco during the preparation of the Project and there was a general feeling that the discovery at Meskala justified past exploration efforts in Morocco. Originally, ONAREP was resistant to the idea of private participation in the exploration effort but was more open to it after discussions with the Bank. The Bank prepared a project brief April 1982. 1.06 Amid the considerable enthusiasm over the Project, an issues paper noted the poor characteristics of the overall reservoir of the area of exploration and appraisal, citing Triassic siltstone in the wells drilled up to that point. At the same time, there were indications that the reserve quality would improve in various locations. In any case, no foreign oil company was willing to commit to a program of any appropriate size. Most of the oil company interest had been directed towards the offshore areas. Continued Bank involvement in the exploration work was justified on the grounds that the area of gas discovery was mainly oriented towards meeting the needs of the domestic market, making broad oil company interest unlikely without the promise of substantial export potential. Furthermore, the new petroleum entity, ONAREP, needed Bank assistance to strengthen and streamline its operations, develop a least-cost appraisal strategy, and prepare an exploration promotion package. 23 1.07 The Project's design focussed on preparing a gas development program and generating information needed by the Government in its decision-making on energy policy and investment as well as strengthening ONAREP's capacity to design and implement petroleum exploration and development strategies. The main project risks were the uncertainty surrounding the commercial viability of the Meskala field and the justification for broadened exploration. In addition, there was some concern about ONAREP's ability to implement the Project. The Bank and the Government tried to reduce these risks by designing a work program adaptable to evolving results and providing ONAREP with training and technical assistance. 1.08 To assure flexibility and control in project oxecution, the Bank and ONAREP agreed to reviews on a semi-annual basis, or more frequently as needed, particularly when significant revisions to the Project seemed appropriate. ONAREP agreed not to revise plans without Bank consent and to review future plans for exploration or appraisal activity in the Essaouira basin with the Bank. During the Project's design phase, there was some criticism within the Bank that the appraisal mission had not outlined, for the Government, a detailed plan to build up ONAREP as an institution. At the review meeting for the Project appraisal report, the principal issue was whether or not it was appropriate for ONAREP to take the risk in implementing its further exploration and appraisal program. There was a strong feeling that the extremely limited prospects for discovery, under certain geological conditions, should be reflected in the draft report to be reviewed with the Government. The Projects Department also expressed some concern about the risk and its possible impact on Bank relations with the Government of Morocco. Although the Programs Department shared similar concerns about the risk, it held the view that petroleum exploration by nature was a risky business and that in those cases when the Bank decided to get involved, it had accepted the risk of failure and the possible impact on its image. They also believed that risks were smaller than the Bank had accepted in an earlier petroleum project (oil shale development) and in both cases it did not seem very likely that country relations were at stake. 1.09 When the Project was presented to the Board of Directors there were several questions about the design, particularly concerning the rationale for combining appraisal and exploratory drilling and how the geophysical studies would relate to decision-making on the drilling program. The main response was twofold: (a) The focus of appraisal drilling was on evaluating gas reserves and their availability in the immediate vicinity of the discovery well. The purpose of exploratory wells, farther away from the Meskala discovery, was the search for reservoirs of a better quality than the discovery area and the testing of boundaries of the Meskala gas accumulation. (b) During each phase of the drilling program, the results of geophysical surveys would be analyzed for decisions on the location and objectives of the next drilling phase. If the results of the previous phase were very discourag- ing, the subsequent drilling would be oriented to other exploration basins. 24 Project ImpIementation and Results 1.10 The overall technical implementation of the Project was satisfactory. (See Part III, Table 4). The exploration promotion component of the project attracted a considerable amount of private oil company investment in exploration (para. 1.14). Unfortunately, the exploration part of the Project led to no major discoveries and appraisal of the Meskala field led to a significant downsizing of its reserves. Another constraint to production at Meskala was lower demand than expected from the only potential user of its gas, a phos-phate plant. The Project's timetable is given in Part III, Table 2). There were two extensions of the Project's closing date because of ONAREP's request to use the remaining funds for exploration drilling. ONAREP had increased its staff in anticipation of expanded exploration and production. However, a smaller program resulted and its high cost of operations led to a substantial increase in the ONAREP's debt. 1.11 The first full supervision report, prepared in June 1983, indicated satisfactory progress. It also reported on the progress made in the consultant study of ONAREP's organization. The study, prepared by the Arthur D. Little (ADL) consulting firm, was implemented in two phases. The first phase, begun under the first petroleum project, consisted of (a)/clarifying company objectives, (b) assessing ONAREP's technical capability, (c) evaluating management systems, (d) preparing organizational schemes for five-year strategy and (e) preparing a final, detailed set of recommendations. The first phase, completed in 1983, outlined several obstacles to ONAREP's development including the irregularity of its financing, a lack of staf' motivation and a lack of adequate responsibility for the management of its operations. ADL provided a long list of detailed recommendations focussing on (a) a "contract program" between ONAREP and the Ministry of Finance aimed at gradually relaxing the Ministry's financial controls on ONAREP based on attainment of pre-set targets in technical performance, budgeting and planning and (b) a "charter " governing relationships between the Ministry of Mines and ONAREP in order to strengthen the technical supervision of ONAREP's exploration/production planning and operations. 1.12 In 1984, there was some concern raised about the slow rate and high cost of drilling, due to slow penetration of hard, compact geological formations in the target area. However, there were reports of progress in geophysical data acquisition and the response to exploration promotion was encouraging. On the institutional side, ONAREP made plans to prepare a development plan with USAID assistance. The Bank noted problems with information retrieval, particularly updated schedules of past costs and future expenditures. In order to improve data management, there were plans to introduce, with Bank assistance, a computerized information system. 25 1.13 By May 1985, the drilling of six appraisal wells had given nono indication of significant petroleum potential. As a result, there was a reduction in estimated recoverable gas reserves from 330 billion cubic feet (bcf) of gas and 20 million barrels of associated liquids to 35 bcf and 1 million barrels of associated liquids. Furthermore, it was necessary to amend the loan agreement order to implement additional geophysical work to support the exploration promotion of areas less studied than those in which international oil companies already had done some exploration work. Since it was important that gravity and magnetic surveys precede seismic work in these areas, ONAREP requested that the scope of the Project be modified to allow for the implementation of such survey work in selected areas. It was proposed that the foreign exchange cost of this work (about US$ 1.5 million) be included under the seismic work already part of the Project. At this time, the mission estimated a US$10-15 million underrun in project cost. There was discussion of cancelling part of the remaining funds with a final decision pending the results of subsequent well drilling. 1.14 By November 1985, the Project was 80% complete. The Meskala field came on stream to supply up to about 4 MMCFD of gas to the phosphate plant at Youssoufia through 1998. The Borrower had complied with all loan covenants. In September 1986, the Project was 90% complete, but its total cost was expected to be US$ 55.2 million instead of US$ 75 million as originally planned. At the same time, major geological survey work required extension of the closing date from June 1986 to June 1987. The Government and ONAREP had requested the use of the remaining funds for additional drilling and seismic work. The Bank insisted that, in the face of disappointing earlier exploration results, ONAREP's future involvement be limited to only minimum and low-risk exploration. zimately, there was an agreement to cancel US$10 million of the original program but at the same time approve a limited program of US$ 10 million in foreign exchange and US$ 4 million in local currency, consisting of (a) a geological study of the South-Atlassic region (b) additional geophysical surveys and export promotion and (c) drilling of three wells (1 stratographic, 1 delineation and 1 exploration). The reduction of the Project's original cost resulted from fewer funds required for the development of the Meskala field and lower costs of petroleumrelated equipment, reflecting market conditions different from those at the time of project appraisal. Total disbursements under the loan amounted to US$ 64.49 million and actual Project costs are estimated at about US$ 88.9 million. A detailed comparison of the original and revised project costs is given in Part III, Table 5. The Ministry of Mines expressed its interest in having the Bank continue its support of the exploration effort beyond the closing date of the Project. Given ONAREP's budget constraints, the Bank recommended that ONAREP leave future risky exploration programs to the international oil companies. 1.15 In April 1987, all components of the Project had been completed except for the additional survey work mentioned above. ONAREP had requested a second one-year extension of the Project's closing date, from June 30 1987 to June 30 1988. The Bank supported the request for the extension because it permitted the loan to cover, with available funds, additional work required for geophys- ical surveys. The final disbursement schedule (Part III, Table 3) shows that 86% of the total loan amount was disbursed. The Bank and ONAREP agreed that ONAREP would pay any costs outside the scope of the funds available through the the Bank loan. By October 1987, the drilling component of the project had been completed -- a total of 12 onshore wells. The remaining activities were the study of the South Atlassic region, further work in the Essaouira Basin and 26 continuing exploration promotion efforts. ONAREP requested use of US$2 million in uncommitted loan funds to cover most of the counterpart financing required by Petro-Canada International Assistance Corporation as a condition of a US$15.6 million grant towards offshore well drilling in the Agadir area and up to five onshore wells in the Doukkala area. The drilling of the offshore well was completed in 1988. This action required an amendment of the loan agreement. In actuality, only US$0.5 million of Bank funds were used for the Agadir offshore well, which was dry. 1.16 By March 1988, overall Project implementation was near completion and all loan funds had been committed. Most of the Project's components had been accomplished on schedule. The results of the specific Project components are as follows: (a) Exploration/Anraisal Drilling: The drilling component covered 12 onshore wells and one offshore well. These wells consisted of seven appraisal wells (six in Meskala and one in Zelten) and six exploration wells (five onshore and one offshore) in the Guercif, Aknoul and Doukkala areas. The drilling work on the exploration wells was designed for gathering data on the fields as well as exploration work. All wells drilled showed no major production prospects and this result led to postponement of prior plans for large-scale gas development. Instead, ONAREP prepared plans for developing and marketing the modest Triassic reserves in the Meskala field. The Meskala field began production in 1987 with financing from French suppliers and USAID. Its output is about 4 MMCFD. The Project's appraisal report had estimated the economic rate or return on the Meskala Project at 24%, based on the much higher reserve and production estimates before the detailed drilling program took place. As a result of the reduced scale of the Meskala operation, the Bank revised its economic rate or return estimates. The results and assumptions of this analysis are given in Part III, Table 7. They indicate that, from an incremental perspective, investment to produce gas from the modest reserves at Meskala has yielded a high rate of return (45%). However, if all investments in fields prior to 1985 are taken into account the rate of return is substantially lower (6%), though still positive. (b) Geophysical Surveys and Technical Studies. To date, geophysical surveys, including data processing and interpretation, consisted of about 7,000 km of seismic profiles and 22,000 gravimetry and magnetic stations). Most of the Project funds for studies were allocated to the reservoir engineering study, which was completed on schedule. Studies on gas utilization and pipeline design were abandoned due to Meskala's reduced production prospects. ONAREP carried out its own institutional study internally. 27 (c) Exloration Promotion. The Project has attracted investment from at least 12 oil companies. The investment of these companies accounted for a significant portion of the US $175 million private international oil companies invested in oil exploration in Morocco during 1981-87. (d) Technical Assistance and Training. Given the shift to a scale of operation at Meskala much smaller than anticipated, there was a reduction in technical assistance from Elf-Aquitaine. There was also a reduction in the scope of the Project's training component due to the availability of training from USAID and the international oil companies. Project Sustainability 1.17 The Government's strategy for the petroleum sector is now to concentrate public investments on (a) promotional geological and geophysical studies and (b) appraisal/development of low-risk, low-cost commercial reserves in joint venture with oil companies. In order to implement this new strategy, ONAREP has begun a wide-ranging restructuring of its operations. The restructuring is necessary because ONAREP's organization and staffing were geared to a larger scale of petroleum operations than what actually materialized. ONAREP's financial situation had deteriorated due to heavy debt service and lower sales of gas than originally forecast marked by increasing recourse to short-term borrowing and increases in arrears. Given the persistent debt service projected in the future and uncertainties surrounding gas sales (barring a major commercial discovery), ONAREP will continue to require budgetary transfers. Therefore, the Bank recommended that ONAREP reduce its costs of administration to take into account its reduced activity, particularly drilling, while (a) maintaining a structure capable of continuing the ongoing exploration promotion effort, (b) acting as a resource to international oil companies and (c) responding rapidly to expansion of operations which may result from further commercial discoveries. 1.18 In June 1988, ONAREP, with Bank help, outlined a plan for restructuring, which defines its role in the Government's new petroleum strategy and identifies actions which ONAREP and the Government should take in order to assure that ONAREP is able to fulfill its role effectively. ONAREP's new role is basically threefold: (a) non revenue-earning public service activities, on behalf of the Government, in the area of information services on Morocco's petroleum potential; (b) development and production of its own existing small gas-producing fields and (c) limited revenue-earning activities in areas where it has a comparative advantage such as providing petroleum drilling services. Bank/Borrower Performance 1.19 Although the Bank initially faced ONAREP's and the Government's strong reluctance to scale down ONAREP's exploration efforts, the Bank, pointing to the poor results of exploration under the project, was instrumental in ultimately convincing the Government to reorient its strategy and to use primarily private funds in future petroleum exploration. 28 1.20 The Bank put a considerable amount of effort into Project's preparation. The Government and the Bank discussed and accepted the risks associated with the exploration part of the Project. Supervision reports were generally very thorough and well-prepared. Given the highly technical nature of the Project, the Bank's supervision work did not cover ONAREP's financial and institutional situation extensively. The early reports (1983 to 1986) focus mainly on the technical aspects of the project. ONAREP's difficult financial situation was not detailed in any supervision report but mentioned in the aide memoire attached to a 1987 supervision report. The Borrower performed well, except for some occasional problems with reporting on updated costs and planned budget expenditures. However, this situation should be improved with the installation of a computerized data management system (para. 1.12). Disbursements under the Project were slower than expected but the delay was due mainly to necessary changes in the scope and cost of the Project. The Bank/Borrower relationship was generally good. Summary of Lessons Learned 1.21 There are basically three lessons to be learned from the Petroleum Exploration and Appraisal Project concerning future Bank operations in the petroleum sector: (a) Petroleum exploration promotion is a viable area of Bank energy sector operations. It has been effective in attracting a considerable amount of private investment to Morocco's petroleum sector and similar projects have proven effective subsequently in other countries. (b) The role of the Bank in financing actual exploration work is less clear-cut than in the case of exploration promotion; however, given ONAREP's financial constraints and success in attracting private investment, the financing of a stand-alone exploration project seems retrospectively to have been too risky. Fortunately , when it became clear that the results of the appraisal drilling were not very encouraging, more emphasis was placed on the exploration promotion aspect of the Project. The fact that risk capital invested by ONAREP in exploratory work did not produce significant discoveries (other than improved geological knowledge) was partially mitigated by the successful exploration promotion effort which attracted a substantial amount of private investment (para. 1.14). Despite a tremendous amount of enthusiasm, on the part of the Government, for ONAREP to invest in and implement its own exploration programs and the fact that the Bank and the Borrower were well aware of the risk involved, the disappointment of failure to produce commercially viable discoveries in a stand-alone exploration project may have seriously strained the Bank's relations with Morocco in energy sector development. 29 (c) In financing any expanded exploration effort, particularly with a new institutional entity as a borrower, the Bank may have to devote a significant amount of supervision time to the financial/institutional side of the Borrower. In the case of Morocco, institution-building work began during the first petroleum project and continued through the Ex;1-^stion and Appraisal Project. However the main focus of the Exploration and Appraisal Project was on the technical aspects of oil exploration, appraisal and promotion, which feature prominantly in the supervision reports. ONAREP expanded its activities based on its optimistic projections of the size of the discovery. Due to a scale of operation much lower than expected, ONAREP has encountered financial and institutional problems and these should be the focus of the Bank's future involvement in the sector. In designing any future petroleum projects, the long-term development of a new organizational entity should be weighed carefully, keeping in mind the risky nature of the project and thus taking care to build the institution in phases, avoiding overstaffing, and monitoring financial/- institutional developments closely, along with the technical aspects of the project. "Jo 1< i'' 00 iii li, ti> 00Oq.. 0 oQ NU~ 00 00 31 PROJECT COMPLETION REPORT Morocco: Petroleum Exploration and Essaouira Appraisal Project Loan No. 2271-NOR PART III Table 2 Prolect Timetable Original Actual Project Brief 3/82 3/82 Project Preparation Mission 6/82 6/82 Appraisal Mission 11/82 11/82 Negotiations 3/83 3/83 Board Approval 4/83 4/83 Loan Signature 5/83 5/83 Effectiveness Date 10/83 10/83 Closing Date 6/86 6/88 Last Disbursement 12/86 1/89 Comments: The closing date of the Project was delayed by two years to complete additional geological studies and survey work in support of petroleum exploration promotion. 32 PROJECT COMPLETION REPORT Morocco: Petroleum Exoloration and Essaouira Aggraisal Project Loan No. 2271-MOR PART III Table 3 Loan Disbursement Schedule Estimated Actal % Est/Actual 1983 - - 1984 30.2 17.18 57 1985 65.2 35.21 54 1986 75.20 46.05 61 1987 75.20 54.61 73 1988 75.20 64.49 86 Actual/Total Disbursement: 86% Cancellation: US$ 10 million ROJECT COLION REPORT MOROCCO: PETROLEUM E RATION AND ESSAOUIRA APPRAISAL PROJECT Table4 Proiect Inlementation Indicators Indicator Asnraisal Estimate Actual Drilling of exploration and Drilling of 9 wells Original drilling program delayed due appraisal wells (5 for appraisal and 4 for to longer drilling time than expected exploration by 12/84 for initial wells at Heskala, and modification/expansion of program due to results of survey work. A total of 13 vells vere drilled: 7 for appraisal and 6 for exploration/ data gathering. Nine onshore wells completed by 1986. A further 3 onshore wells completed in 1987 and 1 offshore well in 1988. Acquisition and interpretation Completion by 11/83 Original surveys completed in 1984. of gravity and magnetic data Additional survey work was completed in 1987. Area surveyed exceeded that planned in SAR. Studies (reservoir Completion by 12/85 Host of the Project funds for studies engineering, gas utilization vent to the reservoir engineering pipeline design and institutions) study, which was completed on time. Studies on gas utilization and pipeline design were abandoned due to lower than expected output from Heskala. ORAEUP carried out an internal institutional study. PROJ.CT COMPLETION RKPORT IIoRoccLTRg aM. KXPt.0RATION AMD XSSAQUlRA APeRAISAL PROJECT rrojects Costs (July 1986 - US$ Million) SAR Estimate (19) Revised-.91imite Estimated Actual Proiram WoCAL FORI-C TOTAL LOCAL [81 TTA LcAL FO8188 WAL 1. Drilling 15.1 27.9 43.0 16.0 30.0 46.0 17.0 33.3 50.3 2. Well Completion 1.6 4.7 6.3 1.0 A.0 3.0 1.5 2.2 3.7 3. Sesimc Surveys 3.7 14.5 18.2 3.0 13.0 16.0 3.5 17.7 21.2 4. Gravity/Magnetic Surveys 0.5 4.1 4.6 0.5 2.3 2.8 0.5 2.3 2.8 i 5. Essaouira Task Force 0.8 6.0 6.8 0.5 2.0 2.5 0.5 2.0 2.5 6. Drilling Technicians 0.3 1.8 2.1 0.1 0.5 0.6 0.1 0.5 0.6 7. Studies 0.8 1.8 2.6 0.1 5.0 5.1 0.1 5.0 5.1 8. Meskala Surf. Facilities Design 2.0 2.0 4.0 0 0 0 0 0 0 9. Training Q1 .? 1i. a Q0 -,2 Q_ _ _A 0 AAl Total base cost: 25.3 63.5 88.8 21.2 55.0 76.2 23.2 63.2 86.4 Physical Contingency 2.5 5.8 8.3 - - - 0.3 1.0 1.3 Price Contingency 3.2 5.7 8.9 - - - 0.2 0.8 1.0 Front End Fee - 0,2 0,2 _- Q0,2 QA? Total Project Cost: 31.0 75.2 106.2 21.2 55.2 76.4 23.7 65.2 88.9 35 PROJECT COMPLETION REPORT Morocco: Patroleum Exloration and Essaouira Aporaisal Project Loan No. 2271-NOR PART III Table 6 Project Financing (in US$ million) SAR Est. Revised Est, Actual IBRD Loan 75.2 55.2 65.2 Government Contribution 2.L1 2.2 2.7 TOTAL 106.2 M,. 8.9 36 PROJECT COMPLETION REPORT Morocco:- Petroleum Exploration and Essaouira Appraisal_Project Loan No. 2271-MOR PART.III Table 7 Project Results A. Direct Benefits Anpraisal Estimate Actua 1. Increased knowledge of the produ- 1. Geological work indicated re- etion potential of the Meskala dis- serves and production possibili- covery. ties to be considerable smaller than expected. 2. Plateau production from the Mes- 2. Lower reserve estimates and de- kala field in the order of 90 MMCFD. mand for gas than foreseen at ap- praisal have led to much lower pro- duction, in the order of 4 MMCFD. 3. The project attracted investment 3. Expanded investment by interna- from at least 12 oil companies (see tional oil companies in exploration para. 1.16 c). work in Morocco. B. Economic Inmact haraisal Est. Actual (PCR Est-) ERR 24% 45% (excluding sunk costs) 6% (including sunk costs) Note: The original ERR was based on gas reserves of 330 BCF and plateau gas production of 90 MMCFD. Actual reserves were found to be only 35 BCF and plateau production is about 4 MMCFD. 37 PROJECT COMPLETION REPORT Morocco: xtplum Uloratign ad Essaauira &Mraisal Project Loan No. 2271-MOR PART III Table L (continued) C. Financial Imact Not applicable. No financial rate of return calculated at time of appraisal. D...ftidLs Appraisal Est. Actal 1. Studies of reservoir engineering 1. The reservoir engineering study gas utilization, pipeline design and was completed but those on gas util- organizations were to assist ONAREP ization and pipeline design were in the implementation and management abandoned due to lower than expected of its Neskala production facility. output from the Keskala field. 38 PROJECT COMPLETION REPORT Moroccg: PetMleum Exploration and Essaouira Appraisal Project Loan 2271_- MDR lablei Status of Covenants Acreement/Section Loan/4.01 -4.07 Regulations governing In compliance general management and operations of the Borrower Loan/5.01 Maintenance of accounts In compliance in accordance with sound financial practices Loan/5.02 Appropriate audits of In compliance accounts, their submission to the Bank along with other necessary records Loan/5.03 Assurance of no existing In compliance liens and rule governing the creation o iens Loan/5.04 Preparation and submission In compliance of all necessary financial or other data Loan/5.05 Ratio of current assets In compliance to liabilities should not be less than 1.0 Loan/Schedule Adherence to allocation In complilance of expenditure categories Loan/Schedule No withdrawals prior to In compliance agreement except for limit o US$ 7 million in expenditures incurred after 11/15/82 an before the loan Agreement Rules governing xpenditures under categories 2and 3. Loan/Schedule Rules governing procurement In compliance and loan disbursement Guarantee/3.0 Basic obligations of In compliance guarantor visL-vis loan repayment and support of the Borrower Guarantee/3.0 Rules governing liens. In compliance All funds providedb the Guarantor to be cn Loan of grants etc. 39 PROJECT COMPLETION REPORT Morocco: Petroleum Exploration and Essaouira Aaraisal Prolect Loan No. 2271-MOR PART..III Table 9 Staff Inputs ( in staffweeks) Total Through Appraisal 36.0 Through Board Approval 72.7 Supervision 133.8 Total 242.5 PROJECT COMPLETION REPORT Morocco: Petroleum Exploration and Essaoiura Appraisal Reoort Loan No. 2271-MOR Table 10 Maor Project Missions Month/ No. Days in Performance Activity Year Persons Field Specialization Rating Comments Preparation 12/81 6 7 EC; GE; DE; FA n.a. Supervision of first petroleum project and preparation of further appraisal work. Led to preparation of Project Brief in 3/82. 4/82 1 2 GE n.a. Meeting with the Compagnie Francaise de Petrole to discuss technical problems with the Meskala gas discovery. CFP expressed concerns about the overall quality of the reservoir. Preappraisal 4/82 4 f/time 12 FA, PE, GP n.a. Prepared very detailed back-to-office report and defined 2 p/time GE, LO components of Project. Appraisal 11/82 4 GE, GP, FA, PE n.a. Prepared issues paper with a summary project description. Technical 3/83 7 GP n.a. Participation in geophysical technical meeting and review Mission of progress on survey work. Supervision 6/83 3 10 FA. GE, PE 2 Progress satisfactory. Elf-Aquitaine technical assistance almost fully deployed. 1/84 4 5 FA, GE, GP 2 Drilling of first well complete. Detailed exploration/ & 3/84 PE appraisal program agreed with ONAREP. Hard, compact formations at Meskala have caused slow drilling rate. 7/84 4 7 FA, GE, GP. PE 2 First two wells completed. Three mere wells in progress. Key decisions need to be made on exploraton/appra isal strategy. Aerogravity and magnetic Surveys completed. Training program proceeding well but may be need strengthening in drilling/production areas. Revised cost in line with appraisal estimates. Rate of disbursement should increase with faster pace of drilling. 2/85 5 13 FA, GE, GP. PE 2 Six wells drilled, all dry for various reasons. Estimated recoverable reserves revised downward, from 330 bcf of gas and 20 million bbls of associated liquids to 35 bcf of gas and 1 million bbls of condensate. Amendments to loan agreements required for further gravity/magnetic surveys. Exploration promotion successful. Loan disbursements slow due to changes in project scope and cost of components. Moderate problems with procurement and consultant perfomance. Table 10 (Continued) KaJor Proiect Nission Activity Month/ No. Days in Performance Year Persons Field Specialisation Rating Conmnts Supervision 9/85 3 11 PE. GP 2 Project is 80% complete. Meskala field b t into production at 200.000 cu.ft./day. Eight wells drilled--6 appraisal and 2 exploratory. Seismic work satisfactory. Exploration promotion very successful All covenants complied with. Closing date extension requested for major geological study in South Atlas area. Additional exploratory well drilling requested. 6/86 4 8 EA, GE. SP. PE 1 Project over 95% complete. Nine wells drilled. A l geophysical surveys complete. Agreement to extend closing date to June 1987. Propose (a) cancellation of about US$10 million in foreign exchange and US$4 million in local currency consisting of (I) South Atlassic gelogical study. (ii) additional geophysical survey and export promotion and (iii) drilling of 3 additional wells (1 stratigraphic, I of delineation, and exploration). Total revised project cost estimated at US$96.2 million. 4/87 10 PE. GP 2 Revised project 80% complete. Twelve wells drilled. Geophysical work completed including 70 crew months (5.500 kes) of seismic profiles and 20.000 stations of gravimetric/sagnectic surveys. Addtional seismic work in South Atlassic region and related exploration promotion to bo completed. Second one-year extension of closing date (to 6/88) requested to complete this work. New loan amount * US$65.2 million. 10/87 4 9 FA, GP. PE 2 Project implementation 90% complete. Geophysical work complete including 80 crew-months (7.000 kms) of seismic profiles and 22.000 stations of gravimetric/magnetic surveys. Production at Meskala lower due to reduced demand from Phosphate plant. Remainin activities (a) South Atlas study; (b) Essaouira-Doukkala basin study, and (c) continued exploration to use US$ 2 million of uncomitted loan funds to cover counterpart funding required by Petro-Canada International Technical Assistance Cor (PCIAP in execution of its US$15.6 million drilling grant. Major Protect Mit *o Month No. Days in Peformance Activity Year Persons Field Specialization Rating Comments Supervision 3/88 1 3 PE n.a. Review with ONAREP and PCIAC drilling program of Agadir offshore well. 4/88 1I1 FA 2 Project nearly completed and all loan funds committed. Agreed with ONAREP on allocation of remaining loan funds. All convenants complied with. Supervision report include findings of 3/88 mission to discuss drilling program for Marcan No. I well. FA a Financial Analyst GE a Geologist GP - Geophysist PE - Petroleum Engineer n.a. = not applicable A/ Includes work on preparation of the Petroleum Technical Assistance Project.