Tunisia - Gas Infrastructure Development Project

IV 6 YD clom- TeAI The World Bank FOR OFFICLAL USE ONLY Repont No. P-5552-TITN MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AMOUNTING TO US$60 MILLION EQUIVALENT TO THE SOCIETE TUNISIENNE DE L' ELECTRICITE ET DU GAZ OF TUNISIA WITH THE GUARANTEE OF THE REPUBLIC OF TUNISIA FOR A GAS INFRASTRUCTURE DEVELOPMENT PROJECT OCTOBER 21, 1991~ lhds document has a resticted distribution and may be owd by nEcpients only in the performance of their officidal duties. Its cortents may not othenrise be disclosed without World Bank authorization.  CURRENCY EOUIVALENTS Currency Unit - Tunisian Dinar (TD) Tunisian Millimes 1,000 G TD 1.000 TD 0.84 (March 1991) US$1 1 TD = US$1.18 FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES 1 ton of oil equivalent (toe) - 10,000 thermies = 42 GJ = 39.7 million Btu = 10.2 million kcal (PCI) 7.45 barrels (360 API) 1 barrel of oil - 42 US gallons - 159 liters = 0.137 toe 1 cubic meter = 35.3 cubic feet 1000 cubic meters - 0.972 toe (Hassi R'Mel gas) - 1.160 toe (El-Borma gas) = 1.160 toe (El-Franig gas) = 0.940 toe (Miskar gas) 1 ton fuel-oil N02 0.979 toe - 6.62 barrels 1 ton LPG - 1.106 toe 1000 gas-oil - 0.868 toe - 844 kg 1000 jet fuel - 0.822 toe = 794 kg 1000 kerosene = 0.823 toe - 798 kg 1000 gasoline - 0.789 toe - 755 kg lton coke = 0.689 toe 1 MWh - 0.283 toe (based on 1989 efficiency) 1 ton wood = 0.340 toe (average) 1 ton charcoal - 0.792 toe (average) 1 Kilowatthour = 1,000 watthours 1 Gigawatthour (GWh) = 1 million KWh Note: all volumes are based on 1 atmosphere pressure and 15 degrees Celsius. PRINCIPAL ABBREVIATIONS AND ACRONYMS USED AME Agence de Maitrise de 1'Energie (Agency for Energy Conservation) BG British Gas Company ETAP Entreprise Tunisienne d'Activites Petrolieres (Tunisian Company for Petroleum Activities) ICB International Competitive Bidding LPG Liquified Petroleum Gas SNDP Societe Nationale de Distribution Petroliere (National Company for Petroleum Distribution) STEG Societe Tunisienne de l'Electricite et du Gaz (Tunisian Company for Eleetricity and Gas) STIR Societ6 Tunisienne des Industries de Raffinage (Tunisian Refining Company) TMP Trans-Mediterranean Pipeline  FOR OFFICIAL USE ONLY TUNIS GAS INFRASTRUCE DEVELOPMEtNT PROJECT LOAN AND PR0JECT SUMMARY Societe Tunisienne de l'Electricit6 et du Gaz (STEG) GuW nnor. Republic of Tunisia Loan Amount: US$60 million Donn$: Seventeen years, including a 5-year grace period, at the Bank's standard variable interest rate. STEG will assume the foreign exchange risk on the loan amount. Fnancing Phn: (USS Million) IBRD 60.0 STEG ".6 Total 98.6 Economic Rate of Retum: 16X Staf LADRRal Repoud: Report No. 9546-TUN dated October 21, 1991 MID: Map No. IBRD 23000 This document has a restricted distribution and may be used by recipients only ir the per. "rmance of their official duties. Its contents may not otherwise be disclosed without World iantk a .thorization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A LOAN TO STEG WITH THE GUARANTEE OF THE REPUBUC OF TUNISIA FOR A GAS INFRASTRUCTURE DEVELOPMENT PROJECT. 1. This memorandum and recommendation for a proposed loan to the Societ6 Tunisienne de l'Electricit6 et du Gaz (STEG) with the guarantee of the republic of Tunisia, for US$60 million equivalent is submitted for approval. The proposed ioan will be on standard IBRD terms with seventeen years of maturity including five years grace and will finance a Gas Infrastructure Development Project. Backgound 2. The Energy sector plays an important, although declining, role in Tunisia's economy. Petroleum exports account for about 15% of total exports while oil revenues represent over 20% of budgetary receipts. In addition, petroleum products supply over 65% of the country's energy requirements. In recent years, however, oil production has been declining and steadily threatening the country's export base. One implication of this trend is that Tunisia is likely to become a net oil importer during the 1990s despite the Government's efforts to attract additional foreign investment for oil exploration. Against this background, the Government has accelerated its efforts to enhance the efficiency of energy use in the economy and to actively promote the use of the lowest cost sources of energy. 3. The Government's diversification strategy strives, in the short and medium-term, to identify the least-cost fuels mix for the industrial sector and for power generation and in the long-term, to develop new and renewable domestic energy resources. The availability, in recent years, of imported Algerian natural gas from the trans-mediterranean pipeline (TMP), which connects the Italian gas market to the Hassi R'Mel field in Algeria, has induced a substantial increase in the use of natural gas as a replacement for fuel oil in electric power generation from 38% in 1983 to 76% in 1989. However, as indicated by the results of a recent fuel substitution study, there is still scope to make more and better use of natural gas in the power subsector and more significantly in the industrial, tertiary and residential sectors, where penetration of natural gas has been limited despite its potentially high economic and financial benefits. Ratinale foW Bank Ino 4. The key objective of the Bank's macroeconomic assistance strategy is to allow Tunisia to achieve sustained growth in the framework of an internally and externally balanced economy. For the energy sector, this translates into a strategy based on promoting policies for, and facilitating the adaptation of the Tunisian economy to, a more diversified and lower cost energy supply mix, and providing the incentives and institutional support necessary for more efficient energy use. In recent years, both Bank lending and technical assistance operations have supported this strategy. An energy conservation demonstration project (LN 2735) has provided the framework for an energy audit program and contributed to strengthening the capacities of the Agence pour la Maitrise de l'Energie (AME). This project was also helpful to introduce  - 2 - significant improvements in the existing legislative framework for energy conservation in the main user sectors. 5. On the supply side, there has been an extensive program of support to the power company, STEG, and a petroleum exploration promotion loan, to support Government's efforts in attracting foreign investors, (Loan No. 3023- TUN approved in 1989). Two joint studies, one to assess the country's long- term fuel supply options and another to examine energy consumption patterns in the household sector, were both completed with the support of the Energy Strategy and Management Assistance Program (ESMAP). The energy substitution study thoroughly reviewed the technical, economic and significant environmental implications of the two main options for diversification, imported coal and natural gas, and was instrumental in leading to a strategic decision by STEG in favor of natural gas fired power stations - including combined cycle - at least until the year 2000. 6. The proposed project would be a further step toward promoting greater utilization of natural gas which is cheaper and cleaner for the environment than commercial fuel alternatives. It would also contribute to the resolution of a number of important questions relating to the pricing and institutional framework for natural gas operations in the Tunisian energy sector. Furthermore, the Bank's involvement in the project is particularly appropriate given the regional cooperation implications of increasing Algerian gas use by Tunisia. En QNGR a"t b 7. Associated gas production from the El-Borma oil field is declining rapidly as this field nears depletion. As a result, the Gabbs region, the main industrial center in southern Tunisia, will face a significant energy supply deficit by 1993, since it depends on this associated gas for fuel supply. Bank analyses have confirmed that it would be more economic to continue to supply Gabbs and its region with natural gas rather than convert existing industries to fuel oil and transfer some of STEG's power generation facilities in Gabbs further north on the TMP. Consequently, the objectives of the project are to (i) provide a least-cost energy supply alternative for the Gabbs region and other gas markets along the pipeline route; (ii) develop a gas infrastructure network in the southern part of the country to facilitate domestic gas field developments; (iii) develop a sound gas subsector strategy while rationalizing and strengthening the subsector's institutional set up; (iv) promote increased penetration of natural gas in the industrial and premium fuels markets; and (v) enhance the security of gas supply in Tunis. The project will achieve these objectives by supporting po' icy and institutional changes and financing investments as follows: (a) Construction of a 240-km Pipeline Between M'saken and Gabes. Among the several options considered for supplying Gabbs with imported natural gas, the co-struction of a North-South pipeline between M'saken and Gabbs turned out to be the most attractive one, based on existing demand in the Gabbs area as well as that of major industrial regions (Sfax, Skhira and Sahel) along the pipeline route. The pipeline would connect the southern gas network to the northern grid and the TMP, thus permitting the transport of gas to Gabbs.  - 3 - (b) Security of suDDlv in the citg of Tunis. The proposed projo3ct will finance the completion of an existing loop around Tunis, to address immediate security concerns as a short-term measure. Regarding long- term gas supply security concern, the project will provide support for a study to: (i) review the network configuration options and recommend a least-cost solution to improve the security of gas supply; and (ii) design a nation-wide supervisory control and data acquisition system (SCADA), to ensure the optimal management of the country's gas supply network. (c) Rationalization and Development of the Gas Subsector. In the future, natural gas is likely to play an increasing role in the Tunisian fuels market for the following reasons. First, increased fuel substitution will be needed to reduce the country's cost of energy. Gas, with its high economic benefits relative to refined petroleum products, will like}.y take an increasing share in the fuel market. Second, the planned capacity of the TMP will almost double in the mid 1990s to tap emerging gas markets in Europe, including, Italy, Yugoslavia and possibly Czechoslovakia. Therefore, it is expected that Tunisia will significantly increase its transit rights. As a result of these changes, the efficient management and marketing of Tunisia's increased gas resources will be critical, and will require an appropriate framework for the development of the gas subsector, including pricing policies and strategies to promote gas penetration in the industrial, residential and commercial sectors. Consequently, the proposed project will support a study to: (i) investigate and recommend appropriate institutional arrangements for the development of the gas subsector, including options for private sector involvement in gas distribution; and (ii) recommend pricing policies and strategies to promote further consumption of gas in the industrial, residential and commercial sectors, including alternative schemes for financing consumer connection and/or conversion costs. (d) Technical Assistance and Training. The proposed project will also provide technical assistance and training services to relevant STEG staff in gas sales, engineering and conversion. 8. The estimated total project cost, excluding interest during construction (IDC), is US$98.6 million with a foreign exchange component of US$60 million which the Bank will finance. STEG will borrow directly from the Bank and be responsible for project implementation. A breakdown of costs and the financing plan are shown in schedule A. All goods and services financed by the proposed loan will be procured in accordance with Bank guidelines. Amounts and methods of procurement and of disbursements as well as the disbursement schedule are shown in schedule B. A timetable of key project processing events, and the status of Bank group operations in Tunisia, are given in schedules C and D, respectively. The Staff Appraisal Report, No. 9546-TUN dated October 16, 1991 is also attached.  -4- ISue and A#M Aa. 9. Issues. The following issues, critical to the development of the natural gas subsector in Tunisia, will require careful attention. First, it is now Tunisia's policy to promote gas use in the premium fuels market where the substitution would yield the highest economic benefits. However, several constraints impede the expanded use of gas in this market. These include: (a) the high connection/conversion costs for small consumers relative to their capacity to pay; and (b) the insufficient marketing and promotion of gas to potential consumers by STEG due to inadequate financial and human resources. Second, STEG's presently good financial performance may, in the future, deteriorate due to a number of factors which include: (a) STEG's expanded capital investments to replace and supplement existing generating capacity over the next five to six years; and (b) the expected increase in STEG's fuel costs resulting from the increasing substitution of imported gas for domestic (El Borma) gas, which STEG receives at virtually no cost and from the action proposed under this project, to increase the transfer price of Algerian gas from ETAP to STEG . The above adjustment is intended to ensure, for economic efficiency reasons, that the transfer price of gas as well as current electricity tariffs, both of which are presently slightly below their long-run marginal supply costs, reflect economic cost. Apart from these adjustments, energy pricing in Tunisia is generally sound. Given the above, STEG's continued financial viability will require a number of actions including tariff increases, equity injections, as well as other measures to strengthen STEG's balance sheet. Finally, there is need to develop and implement an overall long-term strategy for the Tunisian Gas subsector, and rationalize and strengthen its institutional organization. 10. Actions Agreed. The main policy objective of the proposed project is to establish an appropriate framework for the development of the gas subsector in Tunisia. To this end, it will provide the analytical foundations for tackling the above issues and propose appropriate measures for their future resolution. Consequently, during negotiations, the Bank, STEG and the Republic of Tunisia agreed that: (a) STEG will prepare, by March 31, 1993, under terms and conditions satisfactory to the Bank, a study on the feasibility of accelerating natural gas penetration in the industrial, residential and commercial sectors. The study will recommend: (i) a long-term gas strategy; (ii) an appropriate institutional organization; and (iii) appropriate policies for the pricing of gas at the retail level and the financing of consumers conversion/connection costs, in order to expand gas use in these sectors. STEG also agreed to review the recommendations of the study with the Bank, and start implementing agreed recommendations not later than June 30, 1993; (b) the Government will maintain all petroleum product prices at economic cost, and adjust, by June 1994, electricity tariffs and the transfer price of gas from ETAP to STEG to reflect their economic costs; (c) the Government and STEG will take all necessary measures to enable STEG to achieve:  (1) In the medium-term (1991-93): (i) a self-financing ratio of its overall annual capital investment of at least 25%; and (ii) starting in 1992, a debt service coverage ratio of at least L5. (2) In the long-term (1994 and thereafter): a self-financing ratio of its overall annual capital investment of at least 30%. Als.,, in order to monitor the respective performance of electricity and gas operations and ensure their long-term viability; starting in 1994, both activities will generate incomes sufficient to at least fully cover their total respective costs of supply. Total supply costs of electricity and gas are defined as fuel costs at border prices plus distribution, other operating costs (including depreciation and interest) and foreign exchange losses. STEG's projected financial situation is expected to be satisfactory based on the above targets; (d) Government and STEG will sign a performance contract, satisfactory to the Bank, which outlines the mutual obligations of the State and the enterprise. Signature of the STEG performance contract is a condition of effectiveness of the proposed loan. The performance contract will provide an appropriate framework for the achievement of these targets, which will be largely contingent upon the timely implementation of tariff measures and/or equity increases by Government; (e) STEG will prepare separate proforma financial zratements for its electricity and gas operations and have its accounts audited from 1991 onwards by auditors acceptable to the Bank; and (f) STEG will submit to the Bank, by December 31, 1992, the environmental standards and necessary codes of practices for the pipeline construction and gas transmission as well as an emergency and safety manual. Environment 11. The project has been reviewed under the provisions of Operational Directive 4.00 Annex A (Environmental Assessmer:t) and placed in an environmental screening category "B". A preliminary environmental assessment was conducted by an international engineering firm in order to identify major environmental issues related to the construction and transmission of the pipeline, to propose mitigating measures which could be incorporated in the project and determine whether an environmental impact assessment is necessary. The study concluded that the pipeline route does not have an adverse effect on the environment, and that an environment impact assessment is not necessary. A copy of the environmental screening is in the project file. Prolect Benefits 12. The proposed project would provide the least-cost solution for meeting the energy needs for a major industrial center and power generation plants in southern Tunisia, and enhance the security of gas supply in Tunis, the capital. It would also help to establish the foundation for the gas subse.-tor's  - 6 - long-term development strategy, and ultimately contribute to the penetration of gas in market segments where its economic benefits are the highest, particularly the premium fuels market in the residential and commercial sectors. The benefits of expanded gas use include: (a) cost of foreign exchange savings through the replacement of oil imports with cheaper gas imports; and (b) environmental improvement since gas is a cleaner burning fuel in relation to oil. The investments financed under the project are expected to have an economic rate of return of about 16X. 13. The main risk associated with the project would be the cessation of gas supply between Algeria and Tunisia. However, this risk is considered minimal, given that since 1984 the TMP has been operating under a 25-year contract among several countries and gas from the pipeline meets about 30X of Italy's gas demand. Difficulties may arise from lengthy procedures for land acquisition from private land owners, although there are no people to be resettled. Tunisian legal provisions governing land acquisition and related compensation procedures were reviewed and found to be generally saticfactory. To avoid delays in project implementation, STEG has established a project team which will be responsible for land acquisition. Furthermore, STEG already has initiated the legal procedures for acquiring the land. Concerning the economic justification of the project there is, of course, an unlikely possibility that the El-Borma field's current level of production would continue for the next five years and this could have an impact on the project's rate of return. However, resulcs of the sensitivity analyses indicate that, even in the unlikely event El-Borma produces 50% above its planned levels, the project would still yield a 10% return. 14. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank, and recommend that the Executive Directors approve the proposed loan of US$60 million. Lewis T. Preston President Attachments Washington D.C. October 21, 1991  7. Scheadle A Page 1 of 2 Tunisia: Gas Infrastruture Devwooment Preiect Prolect Cast Sainrv teuclidinm IDC) nW Nillia USS Million a) Material LCF.C Io 1. Line Pipes * Main Line (Sousse-Gabbs) 24,6 24,6 * Spur Lines t " ) 2.7 2,7 e Tunis Loop 0,7 0,7 Sub-Total 28 0 2&.0 2. Valves f Main Line (Sousse-Gabbs) 2,9 2,9