India - Refineries Rationalization Project

Docu he 0bi MITCacECt eport N.- W97 1 N Yyp , (FR) FOR OFFICI WI1E , T. ,03170 /4 T li/ (-)) Report No. 9742 PROJECT PERFORMANCE AUDIT REPORT INDIA REFINERIES RATIONALIZATION AND ENERGI CONSERVATION PROJECT (LOAN 2123-IN) JUNE 28, 1991 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. ABBREVIATIONS BHEL - Bharat Heavy Electricals, Ltd. BPCL - Bharat Petroleum Co., Ltd. Bombay Refinery CDU - Crude distillation unit CO - Carbon monoxide CRL - Cochin Refinery Ltd. EIL - Engineers India Ltd. EPC - Engineering, Procurement and Construction ERR - Estimated Rate of Return FCCU - Fluidized Catalytic Cracking Unit GOI - Government of India HPCL - Hindustan Petroleum Co., Ltd. Visakh Refinery ICB - International Competitive Bidding IOC - Indian Oil Corporation IRR - Internal Rate of Return LPG - Liquid Petroleum Gas MRL - Madras Refinery Ltd. NIOC - National Indian Oil Corporation OED - Operations Evaluation Department OCC - Oil Coordination Committee PCR - Project Completion Report PPAR - Project Performance Audit Report SAR - Staff Appraisa. Report UOP - Universal Oil Products Co. THE WORLD BANK FOR OFCIL USE ONLY WashinSton. 0 C. 20433 U.S.A. Office f DreCICeeral Opera4Ins trahastena' June 28, 1991 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Program Performance Audit Report on India Refineries Rationalization and Energy Conservation Project (Loan 2123-IN) Attached for information is a copy of a report entitled "Program Performance Audit Report on India Refineries Rationalization and Energy Conservation Project (Loan 2123-IN)" prepared by the Operations Evaluation Department. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their offcial duties. Its contents may not otherwise be disclosed without World Bank authoriation. FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT INDIA REFINERIES RATIONALIZATION AND ENERGY CONSERVATION PROJECT (LOAN 2123-IN) TABLE OF CONTENTS Prefacee. 1 Preface.......................................................... i Data Sheets.................................................... ii Executive Summary .................................. ......... iii PROJECT PERFORMANCE AUDIT REPORT Project Background........................................... 1 Project Objectives and Compaents............................. 3 Technology and Location........................................ 4 Financial Arrangements....................................... 5 Institutional and Organizational Arrangements.................. 5 Implementation Experience...................................... 6 Project Cost and Procurement................................... 9 Operational Experience and Outcome............................. 11 Conclusions and Recommendations................................ 16 Table 1 Commodity Balance of Petroleum and Petroleum Products. 21 Table 2 Historical Petroleum Product Prices in the Persian Gulf and Singapore Markets............................ 22 Table 3 India - Refineries Rationalization Project - EIL Organization. ................ .......... ......... 23 Table 4 Actual Completion Dates Versus Schedules at Appraisal. ................. oo ...................... 24 Table 5 Project Cost Estimate................................. 25 Table 6a Cochin Refinery Ltd. - Capacity Utiliration and Product Pattern.... ............................ 26 24ble 6b Madras Refinery Ltd. - Capacity Utilization and Product Pattern.................................. 27 Table c Bharat Petroleum Corporation Ltd. - Capacity Utilization and Product Pattern....................... 28 Table 6d Visakh Refinery - HPCL - Capacity Utilization and Product Pattern....... .............. ......... 29 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. TABLE OF CONTENTS (Continued) Pace No. Table 7 India - Refineries Rationalization Project Data and Assumptions Used for Ex-Post Economic Analysis........ 30 Table 8 Petroleum Product Demand Forecast..................... 31 PROJCT COMPLETION REPORT PART I........................................................ 33 1. Project Identity.......................................... 33 2. Background................................................ 33 3. Project Objectives and Description........................ 34 4. Project Design and organization.......... .................... 35 5. Project Implementation. ................................... 37 6. Project Results................. .......... . ............. 38 7. Project Sustainability............... 0 .... ............ .. 41 8. Bank Performance.......... ........... . ..................... 41 9. Beneficiaries' Performance................................ 42 10. Project Relationship......................................... 42 11. Consulting Services ....................................... 42 12. Project Documentation and Data....... 0 ............... 43 PART II.. ...... 0 . ........... .0................... . . . 44 1. General............ * *........... ...... ........ 0..... 44 2. Project Preparation and Description............ ...... 44 3. Performance of Consultants................................ 44 4. Performance of Project Team.............. . ............... 44 5. PCR Preparation................ ....... .............. ... . 44 PART III......................................................... 45 1. Project Timetable. ............................................ 46 2 Loan Disbursements .............. ........................... 46 3. Project Costs and Financing................................ 46 4. Project Results. .. .................. . ............................... 47 5. Status of Covenants...... ........ ......... *.. ..... 49 6. Use of Bank Resources....... . ............................ 50 1 PROJECT PERFORMANCE AUDIT REPORT INDIA REFINERIES RATIONALIZATION ENERGY CONSERVATION PROJECT (LOAN 2123-IN) PREFACE 1. This is a Project Performance Audit Report (PPAR) involving a project for rationalization, capacity expansion and energy conservation of five separate refineries in India. The loan in the amounc of US$200 million was approved in April 1982 and closed in September 1988, two years behind the planned closing date. The loan was almost totally disbursed (US$199.5 million) and helped increase India's refining capacity by 8 million tons per year. The rationalization scheme also included 2.8 million tons per year of conversion capacity for the production of light and middle distillates. 2. The PPAR is based on Project Completion Reports (PCRs) prepared by the Technical Department of the Asia Region and all the five refineries, the Staff Appraisal Report, the Loan Agreement, supervision reports, correspondence among the Bank Group, the Borrower and the Refining Companies; and internal Bank memoranda. An OED mission visited India in January/February 1990 and discussed effectiveness of the Bank's assistance with representations of the Refining Companies, Engineers India Ltd. (Engineering Consultants) and the relevant government officials. Their kind cooperation and valuable assistance in the preparation of this repo:t is gratefully acknowledged. 3. The PCRs provide a satisfactory account of the project experience. They discuss adequately the performance of the Bank and the Refining Companies. The PPAR elaborates on particular aspects such as the Bank's role in the preparation, design, appraisal and implementation of the project and draws attention to the factors that resulted in the superior project outcome. It concludes by enumerating the lessons that could enhance the effectiveness and quality of future Bank lending. 4. The draft PPAR was sent to the Borrower for comments. The final text of the report includes the few statistical corrections sent by the Borrowers. PROJECT PERFORM4ANCE AUDIT REPORT INDIA REFINERIES RATIONALIZATION AND ENERGY CONSERVATION PROJECT (LOAN 2123-IN) BASIC DATA SHEET KEY PROJECT DATA Appraisal Actual or Actual as N of IUS Expectblon Current Estimate Appraist Esimate Total Project Costs (Rupees millon) 9,227 7,008 78 Loan Amount (USS million) 200 199.5 99.75 CJUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS FY82 FY88 FY4 FMS FY86 FY87 FY88 FY89 Appraisal Estimate (USS million) 88.2 87.9 145.4 139.6 200 200 200 200 Actual (USS millon) 0 22.2 88.4 128.6 148 167.4 1986.1 199.5 Actual as X of Appraisal (X) 0 25.2 60.8 66.5 78 88.7 98.1 99.8 Date of Final Disbursement: September 27, 1988 STAFF INPUTS (STaff week@) Stage of Project Cycle EnI Through Appraisal 65.7 Appraisal Through Board Approval 11.0 Board Approval Through Effectiveness 12.4 Supervision 77.1 Total TA1M MISSION DATA Date No. of Specializations Performance Types of (go./yr.) Persons Represented Ratina Problem Identification/Preparation 11/w Appraisal 07/81 Supervision I 06/82 2 Finance/Refinery 1 Nne Supervision II 07/88 2 1 None Supervision III 09/86 8 1 None Supervision IV 11/87 2 1 None Supervision V 10/88 2 1 None Completion 09/88 PROJECT PERFORMANCE AUDIT REPORT INDIA REFINERIES RATIONALIZATION AND ENERGY CONSERVATION PROJECT (LOAN 2123-IN) 1. Intoductin petroleum products imbalance between refineries$ production and market Over the last three decades, demand. A parallel objective, was to India has had to allocate large =prove the energy efficiency of the parts of its development resources refineries, to enhance pollution to the energy sector in order to control and to ensure the supply of remove the constraints on its electricity to critical units in economic expansion. In addition to some of the refineries by providing the expansion of traditional energy captive power plants. resources such as coal and hydropower, the discovery of large 3. Inlementation Eg2erience reserves of oil and gas in the last two decades, especially in the The project involved four western offsbore region, has helped refining companies and five India to partially correct refineries, located in considerable supply/demand imbalances in the distances from each other. Project hydrocarbon sector. Nevertheless implementation, coordination and the country still remains highly supervision required substantial dependent on imported oil to meet effort both by the Bank and the its requirements for primary energy. implementing agencies. Project implementation was smooth and During the 1970s, the rapid trouble free. This can be growth of India's consumption of contributed to the considerable petroleum products outpaced the thought that was given during the growth of its refining capacity. By design phase of the project by the 1978/79, the then existing refining Bank as well as the refining capacity was not capable of meeting companiesO management and Engineers the domestic consumption. India was India Ltd. who acted as project importing not only 14.7 million tons managers, and the very high quality of crude oil to supplement its own of Indian project managers and production of 11.6 million tons, but staff. it also imported nearly 4 million tons of products, mostly middle A problem affecting all four distillates (kerosene and gas oil), refineries was the failure of carbon in order to meet the requirements of monoxide (CO) boilers because of the transportation and rural faulty burner management system and sectors. refractory design. The problem was compounded because the ownership ot 2. Proiect Obiective the foreign designer of the equipment changed hands just at the The main objectives of the time when the boilers were being project were to expand refining commissioned. While the joint capacity and modify processing venture supplying the CO boilers did configurations to reduce the not serve the refineries well, the iv local procurement for many of the relative shortage of conversion subcontract jobs resulted in capacity around the world is likely considerable savings. to widen the spread between middle distillates and fuel oil, thus enhancing the economics of the secondary processing facilities. 4. Results 6. Findings and Lessons Learned All project components met or surpassed their technical and A primary lesson for the Bank economic objectives. The capacity is that under certain circumstances utilization build-up has been very there could be considerable economic f^st at all refineries clearly merit in refinery projects. India indicating the technical capability undertook this US$1 billion project of the project and operational staff at a time when industry consensus of the refineries. Even at Cochin was that no refinery investment where two fires since the start of could be justified in the early the expansion project has seariously 1980s. disturbed the smooth running of the refinery, capacity utilization The cuccass of the project can reached nearly 106% in 1988/89. be traced to several major factors These results could not have been as follows: achieved without a thorough training program which each refinery devised the wholehearted support of the for all those who were to be enged Government in giving timely in the operation of the approvals, making funds available expansion/modification project. All and facilitating critical inputs by four refineries followed standards means such as the blanket approval; and practices that had been passed on to them by the previous owners the efficient carrying out of and joit,t venture partners. In most the engineering function by a refineries, small technological technically qualified and improvements are continuously under knowledgeable indigenous firm; implementation, making it possible to achieve marginal gains. the willingness of foreign suppliers of technology to work 5. Sustainability harmoniously with the owners and engineers; Despite the collapse of oil prices in 1985 and the shrinking the presence of capable project spread between crude oil and teams at all the refineries with distillate product prices, the suitable delegation procedures reestimated ERRs, four to five years enabling expeditious decision- after the commissioning of the making; plants, still remain reasonably robust. This is mainly due to the timely training of operational following factors: (a) timely staff; completion of the projects; (b) implementation of the projects a tradition of responsible and substantially in line with the cost disciplined approach to work and a estimates; (c) speedy hike of quest for excellence; production to full capacity; and (d) the use of Bombay High Crude with very effective support by the high middle distillate yield. The Bank staff both at the project V design stage and during implementation. This project, moreover, very clearly demonstrates that indigenously manufactured equipments, if procured through knowledgeable engineers and under strict monitoring and quality control procedures, can be beneficial for the project implementation in terms of both price and delivery. A point that was made repeatedly by the highly placed engineers at the refineries was that the local manufacturers usually provide a better after sales service. PROJECT PERFORMANCE AUDIT REPORT INDIA REFINERIES RATIONALIZATION AND ENERGY CONSERVATION PROJECT (LOAN 2123-IN) Proiect Backaround 1. Over the last three decades, India has had to allocate large parts of its development resources to the energy sector in order to remove the constraints on its economic expansion. In recent plan periods, this allocation has reached levels in excess of 25% of the total five year plan expenditures. This massive expenditure in the energy sector has resulted in the Aevelopment of large sources of energy. In addition to the expansion of the traditional energy resources such as coal and hydrcower, the discovery of large reserves of oil and gas in the labt two decades, especially in the western offshore region, has helped India to partially correct supply/demand imbalances in the hydrocarbon subsector. Nonetheless, the country still remains highly dependent on imported oil to meet its requirements for primary energy. This situation has, of course, its serious balance-of-payment implications for India. 2. In view of the fact that energy plays a critical role in r7celerat- ing the growth of Indian economy and because of the high foreign exchange demand of the energy sector, the Indian Government has, since the late 1970s, followed a strategy that strives to improve the efficiency of energy use while increasing domestic supplies of energy. The cornerstones of this strategy consist oft (a) developing coal, hydro and nuclear power; (b) intensifying efforts to explore for oil and gas; (c) bringing supply and demand for petroleum products in reasonable balance; (d) managing oil demand through raising product prices relative to those of other indigenous fuels, thus encouraging the substitution of oil products in many end uses; (e) encouraging energy efficiency and conservation measures; (f) carrying out research and development in new energy technologies; and (g) promoting a campaign for public awareness of energy issues. 3. Up to the early 1970s, even though approximately two thirds of the liquid fuel requirements were imported--12.4 million tons out of a total consumption of 19.5 million tons in 1970/71 (Annexure. Table 1)--tha import bill remained below 10% of total exports of goods from India. At the time of the first oil price hike in 1973/74 the import bill grew to over 22% of the value of exports. Thereafter it fluctuated between 25% and 30%, eventually rising to around 79% when oil prices increased for a second time in 1979/80. During the 1980s, increasing supplies of crude oil from both onshore and offshore fields helped ease the situation and by 1986/87 liquid fuel imports once again constituted about 25% of the value of exports. In quantity terms, imports in 1986/87 accounted for only one-third of the consumption (16 million tons out of 46.5 million tons of consumption). This trend reversed again as imports began to increase reaching 41% of total consumption by 1988/89 (21.8 million tons out of 53 million tons of consumption). -2- 4. During the 1970s, the rapid growth of India's consumption of petroleum products outpaced the growth of its refining capacity. By 1978/79, the then existing refining capacity was not capable of meeting the domestic consumption, either in absolute terms or in relation to the product demand pattern. India was importing not only 14.7 million tons o,& crude oil to supplement its own production of 11.6 million tons, but it also imported nearly 4 million tons of products, mostly middle distillates (kerosene and gas oil), in order to meet the requirements of the transportation and rural sectors. AlraLdy at the end of the 1970s imports of products constituted around 13-14 percent of the total domestic consumption. 5. Given the fact that most substitution efforts had already reduced the share of heavy fuel oil in the consumption market and that there were no easy and economic substitutes for the middle distillates on a large scale (the share of the middle distillates in the demand barrel had increased from 39.7% in 1970/71 to 44.7% in 1978/79). India basically faced two options: (a) it could postpone investment and continue importing products to supplement its own production allowing consumption to further outpace refining capacity and the balance between the demand pattern and the output of its refineries to exacerbate; or (b) it could further expand its domestic refining capacity introducing more secondary processing facilities in order to bring into better balance the refinary output to the demand pattern. 6. While the s3cond oil price shock in 1979/80 had led to a steep decline in petroleum consumption worldwide thus creating refining over- capacity, studies showed that most overcapacity resided in simple hydrookim- ming refineries which produced high volumes of fuel oil. And since all countries around the world were attempting to substitute for fuel oil (by other fo-u.' of energy such as coal, gas and nuclear power), there was in fact an overt , .y of fuel oil which ' d to the shutting down of simple refineries in the industrialized countries with the result that higher value distillates were becoming increasingly in deficit. Under these circumstances, the studies indicated that despite the seeming overall excess refining capacity there was need for some 60 million tons per year of conversion capacity in the U.S., Western Surope and Japan, while a similar capacity was required elsewhere. 7. Studies undertaken by the Government of India toward the end of 1970s (even before the second oil price increase) also indicated that capacity expansion for several of theo existing refineries including schemes for the conversion of fuel oil into middle distiliates would be economically feasible. The investment program envisaged in the Sixth Plan consisted of the expansion of six existing refineries--Cochin, Madras, Bombay, Visakh, Mathura and possibly Haldia for a total of 12 million tons. The Plan further envisaged two grassroots refineries at Rarnal and Mangalore for a JAt some of the Indian refineries expansion in distillation capacity was necessary to meet the increased regional demand for petroleum products, to balance the facilities, and to have larger, more economic sized secondary conversion facilities. - 3 - total capacity of 9 million tons. In thim way it was expected that by 1987/88 total refining capacity would reach 59 million tons, giving an effective throughput capacity of 53 million tons against a then anticipated demand of 48 million tons. Approvals were, therefore, given in principle and technical design work had gotten underway.2 The events of 1979/80. i.e., the second oil price increase and the resulting increase in the price spread between crude oil and petroleum products and more specifically between fuel oil and light and middle distillates (Annexure Table 2) further enhanced the economics of these expansion/conversion projects and indicated the need for their speedy implementation. Project Obiectiveg and Components 8. The main objectives of the project weres (a) to expand and modify refining capacity in order to reduce the imbalance between domestic demand for and supply of petroleum products; (b) to improve the energy efficiency of the sector; and (c) to enhance pollution control at some of the refineries. The expansion/modification component consisted of expansion of crude distillation capacity at four refineries including the installation of secondary conversion facilities as follows: Crude Distillation Fluidized Catalytic Unit Capacity Cracking Unit Capacity CDU FCCU million tonslyear Million tonslyear Cochin Refinery Ltd. (CRL) 1.2 (upgrade) 1.0 Madras Refinery Ltd. (MRL) 2.8 (new) 0.6 Hindustan Petroleum Co. Ltd. 3.0 (new) 0.6 (HPCL) Visakh Refinery Bharat Petroleum Co. Ltd. 1.0 (upgrade) 0.6 (BPCL) Bombay Refinery At these refineries, the expansion in distillation capacity was necessitated because of the increased regional demand for petroleum products. At the same time, such distillation capacity expansion allowed the construction of economically-sized secondary facilities. 9. The energy efficiency and pollution control components consisted of the installation of energy efficient crude distillation and cracking furnaces, air preheaters, waste heat recovery boilers and a sulphur recovery It should be appreciated that the Government of India has always had a concern on security grounds that too much dependence on the import of petro- leum products (and, in fact, crude oil) would place the country in a vul- nerable situation. As a general rule, therefore, a relative self-sufficiency of around 80%-85% in petroleum products has implicitly been aimed at in the planning exercise. plant. In addition, given the problem encountered with the regional electric power supplies, two of the refineries opted to construct captive power plants, thus increasing the reliability of service and enhancing refining capacity utilization and further promoting energy conservation through cogeneration of power and steam. 10. The Bank's involvement in this project was predicated on many grounds. To begin with, this project was of high priority for the Indian economy because it helped balance demand and supply of middle distillates thus increasing supplies of diesel oil and kerosene, two principal energy products used by the transportation and agricultural sectors; it assisted energy demand management through, inter alia, the conservation and energy efficiency subcomponents; it materially affected the import bill, thus reducing the balance-of-payments deficit and increasing growth potential of the whole economy. Given the discovery of large hydrocarbon resources in the late 1970s in India, there was need for reevaluation of policies concerning energy utilization, in which the refining sector played a critical role. By financing this project, the Bank felt it was placed in a better position to be engaged in a more meaningful dialogue with the Government of India in order to assist India in drawing up integrated energy programs to meet the growing requirements of an expanding economy. Technoloav and Location 11. Before finalizing the secondary processing facility design choice, an extensive and in depth analysis had been undertaken by the Government of India in order to evaluate the economic merits of two processes: first, the Fluidized Catalytic Cracking; and, second. Hydrocracking. While the yield as well as the quality of middle distillates produced by Hydrocrackers are superior, the process, entailing high pressures and temperatures, is also sophisticated and more difficult to operate. In the Indian context, however, several factors argued in favor of the Fluidized Catalytic Cracking (FCC) process option. Firstly, India required diesel oil of a relatively lower specification (cetane number CN 41), obtainable by blending straight run gas oil from the main distillation unit and the FCCU output. FCC unit in India could, therefore, be operated with less cracking severity which would permit an increase in the yield of diesel oil of up to 50 percent of the residual oil feedstock. Secondly, Bombay High Crude (light, 390API gravity with a very low sulphur content) constituting some 50% of the input to these refineries had a higher yield of straight run middle distillates. Thirdly. FCC units are capable of producing a high yield of Liquid Petroleum Gas (LPG) which has a middle distillate value in India as it replaces kerosene for cooking. Therefore considering diesel oil, kerosene and LPG, the effective middle distillate yield of an FCC unit in India was very high (65- 67 percent) placing it only a few percentage points outside of the Hydro- cracking middle distillate yield. The economic studies clearly showed the advantage of the FCC units and the Government of India decided to choose the FCC option. The very favorable terms that were extracted from the technology license holder also helped the government in arriving at this decision. - 5 - 12. The Government's choice of expanding the capacity of the four refineries was amply justified, because not only were the regional product requirements on the rise thus necessitating the implantation of additional capacity, but the difference in the investment cost of grassroots refineries and rehabilitation/expansion projects also indicated the enormous economic advantage of the latter approach. Furthermore both the crude distillation and secondary processing facilities were of reasonably adequate size for economic operations. In the case of Cochin and Bharat Petroleum (Bombay) refineries the crude distillation expansion was achieved through debot- tlenecking while in the other two refineries at Madras and Vizag new distillation columns were installed. There was adequate matching between the primary and the secondary processing facilities in all the four refineries. It is to be noted that the Government had also committed itself to the construction of two grassroots refineries as a part of its least cost studies. Financial Arrangements 13. The project was financed from several sources: loans from the Government of India, loan from the World Bank, private financing as equity from the foreign shareholders of Cochin and Madras refineries and the internal cash flow of the refining companies. While the private sector had a substantial shareholding in at least two refineries any further privatiza- tion was impracticable because: (a) the project facilities could not be separated from the existing refineries and given to private firms; and (b) the project facilities and energy efficiency investments were designed to .mprove and add conversion facilities to the existing refineries. In reality, there were no interests expressed by either local or foreign private enterprises in taking the project over, nor were the conditions internation- ally right for such investments by foreign firms as many were beginning to divest in refineries they owned in both developed and developing countries. Even though it took only a year between project identification (Nov. 1980) and loan negotiations (Nov. 1981), by the time the Board approved the project, about on third of the project procurement decisions had been made. Bank discussion with the refinery companies had, however, ensured that procurement decisions would follow sound practices. Institutional and Organizational Arrangements 14. Having joined the project in mid-course, the Bank accepted three basic decisions already made by the Government of India: first, the choice of capacities related to the expansion and secondary processing facilities at various refineries; second, the choice of technology for the secondary processing facilities; and third, the selection of Engineers India Ltd (EIL) as general engineers for the project. There were sound reasons for this acquiescence. Studies conducted by the Government indicated the correctness of the approach to both capacities and technology. In connection with EIL, it was not only the largest engineering company in the country, but it also had considerable experience in engineering and project management of refineries and petrochemical plants (having been involved in the expansion of - 6 - the Gujarat refinery, it had satisfactorily performed on a similar but smaller project). 15. This project was the most extensive and elaborate task undertaken by the four refining companies since their initial construction. Consequently each refinery had to create a suitable project management team which would n-Dt only supervise the implementation on site but also to interface with the Government, manufacturers, engineers and contractors. The refining companies had all selected Engineers India Ltd. (EIL) to provide the following services under the project: (a) basic engineering of non-proprietary process plants and all off-site facilities; (b) detailed engineering of all sections; (c) procurement services including expediting and inspection; (d) construction management and supervision; (e) project management services including schedule and program monitor- ing; and, (f) start up assistance. At EIL, the Manager of Projects was made responsible for the entire project. He was assisted by individual project managers for each of the refineries. The latter were in turn assisted by a task force of core personnel drawn from EIL's central departments dealing with various disciplines of Engineering, Procurement, Construction, Accounting and Finance. During the construction phase, EIL established project offices at all four refinery locations headed by a Resident Construction Manager. The site personnel, under Resident Construction Manager, was responsible for field engineering, construction supervision and quality control, stores management as well as scheduling and cost control (Annexure 3). In turn, the refinery project engineering team was responsible for the coordination amongst various concerned agencies including each refining company's technical division, the process licenser, the Central and State Governments, other Statutory Bodies and EIL. 16. The conditions attached to the loan touched on several financial issues which were considered essential by the Bank. The Government of India accepted: (a) to provide funds, facilities and other resources necessary to complete the project (including any cost overruns); (b) to allow the refineries to have a reasonable return on their capital (through the pricing mechanism); and (c) to relend at the specified rate of interest to the refineries (12%). The refining companies, in turn, accepted to furnish the Bank with regular financial reports, both during construction and after commissioning, and to follow prudent financial practices and comply with financial covenants related to debt equity ratios, current ratios, payment of dividends, incurring of other debts and making of additional investments. Implementation Experience 17. A detailed account of the implementation experience has been provided by each refining company in their Project Completion Reports attached hereto. The functions of these two groups of project teams, one - 7 - located at EIL and, the other in each refinery, were clearly laid out and understood and mechanisms and procedures were put in place for their interaction and joint cooperation. The fact that this large project, implemented at five separate locations in India, was completed under the appraised cost and substantially on time is a clear testimony to the effectiveness of the project management design as well as the managerial and technical capabilities of all the personnel involved. 18. The selection of EIL as general engineers for the project was sound. EIL's technical capabilities especially their considerable experience in the petroleum processing industries had been proven by their management of similar, though perhaps smaller, projects. But their major advantage resided in the fact that they were highly knowledgeable about the Indian conditions and domestic capabilities. In addition they were capable of offering the whole spectrum of project related activities, thereby facilitating 'he necessary coordination for effective project management. In carrying out their responsibilities, EIL embarked on a project management strategy the salient features of which were as follows: (a) the design basis was standardized and frozen at the start; (b) project task forces were made compact with minimum reporting levels; (c) project managers were empowered to take spot decisions; (d) project review meetings were regularly held at various levels, areas of concern were discussed and actions initiated in time; (e) effective coordination between EIL and the four refining companies was maintained to solve tecl.nical and material problems; (f) the various procedures for procurement and tendering activities were discussed and finalized before start up of work; (g) the vendor list was discussed and finalized before start up of work; (h) specific procedures were evolved in consultation with the Bank to deal with ICB requirements; (i) pre-bid meetings were held for specific items with vendors in order to save time on procurement actions; (j) subcommittees were organized with the refining company representa- tion in order to deal expeditiously with tendering and procurement questions; (k) repeat ordering on crash procurement procedures were developed to meet emergency requirements; (1) EIL's inspectors and expeditors were posted at critical vendors' locations to ensure timely manufacture and delivery of equipments; (m) independent performance audit was undertaken through the creation of monitoring groups reporting independently and on a continuous basis to EIL management and the Ministry of Petroleum on the progress of the priject. Furthermore, EIL took other actions during the construction phase in order to expedite project implementation and timely completion: (n) discussions with the Ministry of Petroleum resulted in the obtaining of a blanket import license for emergency situations; - 8 - (o) a detailed study was undertaken to minimize operational interference when connecting new facilities to the existing plant; (p) system checks were initiated sufficiently in advance and in parallel with construction in order to provide for a smooth commissioning; 19. The four refining companies established substantially similar project teams headed by a Deputy General Manager (Project). Typically a subcommittee of the Board of Directors including the Chairman and Managing Director was vested with the required delegation of power to approve contracts and purchases. The subcommittee in turn delegated authority with specified monetary ceilings to the Deputy General Manager (Projects) and other senior officers. In most instances only contracts with an amount in excess of $500,000 would be referred to the subcommittee. The refining companies also established their own monitoring and project management information system including project cost control and expediting. For the timely completion of the project, the refining companies often took special measures to remove obstacles. In several instances financial assistance was provided to vendors and ccntractors to help them finish a job. One refining company actually procured steel billets and supplied them to rolling mills in order to obtain reinforcing bars for constructio. The details of the radical measures taken by the refinery project teams are well documented in the PCR submitted by the companies. 20. All the refineries implemented the project substantially in line with the original schedule as given in the Bank's Staff Appraisal Report. Annexure Table 4 sets out the anticipated time of completion and the actual date. As shown in this Annexure, there have been no significant delays in the actual completion of different units at various refineries except in the case of Cochin where a major fire and explosion in March 1984 seriously damaged many of the already erected project facilities. The damage at Cochin was particularly heavy in the electrical system of the operating unit and boilers; in addition, the existing operational cooling tower collapsed completely and the new cooling tower under constructiont was partly damaged. When viewed against a background of building material shortages, labor unrest, power supply interruptions and delays in the delivery of critical items of equipment, the performance of the project teams at EIL and the four refining companies has been highly efficient and professional. This high performance of the project teams may have been due to an element of competition among the various refineries. But the competence and energy with which the various project teams approached this expansion/rehabilitation project can only be termed exemplary. There is no evidence that the domestic equipment manufacturers caused longer delays than overseas suppliers. With their knowledge of the manufacturing capabilities of the domestic suppliers BIL often brought the bidding for critical items forward so that more time would be available to indigenous manufacturers in case they were successful in the bids. The successful implementation of this project is a testimony to the continuing and dedicated effort of a group of highly qualified and knowledgeable individuals. 21. The commissioning of the new distillation and conversion processing plants have not been achieved without some hitches. The major problem was - 9 - the failure of the carbon monoxide (CO) boilers at all the refineries because of faulty burner management system and refractory design. The problem was compounded because the ownership of the foreign designer of the equipment changed hand. just at the time when the problems were discovered. In the event, it took some time for the new owners to respond to the refining companies' request for remedial action. once the ceramic anchors were changed and other modifications were made the CO boilers have been operating satisfactorily ever since. Other problems were encountered at various refineries. For example at Cochin, there was a higher than usual catalyst lose at the time of commissioning the Fluidized Catalytic Cracking Unit. Coking of the main column residue also took place whenever the output of clarified oil was brought down to the design standards. Moreover, the crude column bottom section had to be modified in order to process the designed quantity of Persian Gulf crudes. At the Bombay refinery of BPCL problems were encountered with the burners installed in the air preheaters. Such problems with equipment never seriously impeded the quick pick up of production to capacity at any of the refineries, though the Cochin refinery was hardly hit by two fires that affected operations for a length of time during 1985 and 1987. Proiect Cost and Procurement 22. In terms of project cost, the performance of the project teams has been equally impressive. In practically every instance the project has been realized at or below appraised costs (Annexure Table 5)3. Taken altogether, the cost underrun approximates the provision made in the appraisal report for contingencies. The EIL and the refinery managements attribute this to the discipline brought about by the Bank's ICB procedure as well as their own cost monitoring efforts. While it is true that during the early 1980s the world markets for machinery and equipment was somewhat depressed (because of the severe recession) and this helped keep equipment prices low, a comment often heard at the refineries was that the ICB forced the indigenous manufacturers-public sector or private sector--to tender their bids at prices which were competitive at international levels. 23. There has been some debate as to the procurement method pursued by the EIL and the refining companies. The Bank staff maintain that not 6..ough packaging was done by EIL ostensibly to facilitate the use of equipment and services of Indian origin. There is a statement in the PCR to the effect that this resulted in a heavy load being placed on the operations staff of the Bank. Moreover, the staff maintain that the objective of purchasing from the Indian manufacturers could have been reached through the ICB even if any particular tender package was won by a foreign company because the Indian manufacturer could act as a sub-supplier. In the first place, the frequency of seeking the Bank's approval and hence the load placed on the operational Project costs, especially for the Visakh Refinery differ from those given in the PCR. This is due to the fact that Visakh Refinery rationaliza- tion costs were estimated at the time of PCR preparation, as were the cost of captive power plants. - 10 - staff is a direct result of the rules associated with ICB procedure and can. therefore, not be avoide: for as long as ICB, with its guidelines, remains in force. Although the Bank's project staff greatly assisted the timely implementation of the projects by providing expeditious approvals and advice, the large number of items referred to them should not have appeared as unusual. 24. But more importantly, it is exactly this kind of detailed engineer- ing and procurement practice which should be promoted in developing countries in order to provide the necessary control over costs and help the development of local capability. After all this is precisely what the bidders/suppliers would have done in preparing their bids even if large sub-packages were put up for bidding. To further argue (as done in the PCR) that indigenous Indian manufacturers could supply their equipment as sub-suppliers to packages proposed by foreign suppliers is to state a position that is not borne by experience. It is normally easier for a domestic supplier (especially joint venture) to participate successfully in bids. But it is always more difficult--though not inconceivable--for the domestic manufacturers of equipment to participate with an expatriate main supplier at the bidding stage. In many instances the Bharat Heavy Electricals Ltd. (BHEL) acted as the main supplier but purchased parts of the package, e.g., burners or gas turbines from their overseas collaborators. A combination of detailed engineering and procurement often helps also to expedite government approvals for imports of those items which are not domestically manufactured. 25. The loan disbursement fell behind the appraisal estimate because of a slow start in 1982 and the fact that, by the time the loan was approved. about one third of the project procurement decisions had already been made. In addition, the approval of energy conservation measures by the Government of India took a while longer than originally anticipated. As loan closing date approached, some $54 million still remained undisbursed. At the request of Bharat Petroleum Corporation Ltd., and the Hindustan Petroleum Corporation Ltd., therefore, the Bank in 1986 agreed that the remaining part of the loan be disbursed substantially to finance two captive gas turbine power plants at the two refineries. The justification for the purchase of these power plants was the increasing unreliability of the national power grid and the periodic voltage and frequency fluctuations which seriously affected the operation of the refineries. Moreover, the inclusion of steam boilers in the power plants helped the refineries meet their steam require- ments with reasonably low investments. 26. The Bank's supervision activities were rather infrequent. There were only three supervision missions to India until the end of 1985 at which time most expansion/rehabilitation projects had been completed. This was a reflection of the speed with which the projects at various locations were being implemented and the fact that the monitoring and reporting indicated that any delays were being compensated by timely remedial actions. After 1985 there were two more supervision missions with the last taking place at the time of closing the loan in September/October 1988. - 11 - Operational ExDerience and Outcome 27. The project has fully realized its main objective of expanding and modifying refinery capacity in order to reduce the imbalance between domestic supply/demand for products. It has also met the objective of improving energy efficiency and pollution control at the refineries. As shown in Annexure Table 6,' the capacity utilization build up has been very fast at all refineries clearly indicating the technical capability of the project and operational staff of the refineries. The test run results have been reported in the PCRs prepared by the refineries and they show satisfactory outcomes. On the whole, high capacity utilizations have been achieved at all the refineries and even at Cochin, where two fires since the start of the expansion project had seriously disturbed the smooth running of the refinery, capacity utilization reached nearly 106% in 1988/89. 28. The middle distillate yields have also been near or superior to the designed values. This has been partly due to the fact that at certain refineries the Fluidized Catalytic Cracking units have been running above their designed capacity (e.g.. in Madras the FCCU throughput in 1988/89 reached 676,000 tons) and partly due to the higher use of Bombay High light crude (which has a higher middle distillate yield) in excess of what was anticipa.ted at the time of appraisal. of special significance are the fuel and lose figures. In practically all instances they are considerably lower than what was estimated at the time of appraisal. This, of course, speaks well for the refinery's energy efficiency projects that were implemented at the various sites. The existence of Distributed Digital Control System and Optimization Software at three of the four refineries (except Cochin where the installation was completed in 1990 but awaiting receipt of software package) has also made it possible for the operational staff to maximize middle distillate output in relation to the quality of the available crude oil and other variables. 29. The above results could not have been achieved without a thorough training program which each refinery devised for all those who were to be engaged in the operation of the expansion/modification projects. Where secondary processing facilities already existed such as at the BPCL and HPCL refineries at Bombay, there was ample familiarity with the FCC process. Other refineries also chose to send their operating staff for training to BPCL, HPCL and the Koyali Refinery of Indian Oil Corporation (IOC). Such outside training was also supplemented by the inhouse training that is continuously carried out at the refineries. Some refineries hired services of operational staff experienced in FCC operations from other refineries. In addition, all the four refineries followed standards and practices that have been passed on to them by the previous owners and joint venture partners (Burmah/Shell, Caltex, Exxon, Amoco/NIOC and Phillips). It is to be noted that India is well endowed with the requisite technical capability for the 'The data in these tables are somewhat different from those given in the PCR as they reflect actual annual refinery operational results ir3tead of averages. - 12 - operation of refineries with the current mix of processes and levels of technology. The existence of service support from many domestic manufactures as well as the execution of preventative maintenance means that the plants are normally well maintained and high capacity utilization can be realized. In addition, in most refineries, smail technical improvements are continuous- ly under implementation, making it possible to achieve marginal gains. The implantation of downstream units especially to produce feed stock for the petrochemical industry has enhanced the economics of many refineries. 30. In the Staff Appraisal Report, the financial analysis of the project was done on the basis of certain assumption in terms of capacity utilization and production build up, the profile of capital expenditure for each refinery, refining companies' needs for working capital and the related interest expenses and revenue computations in accordance with the "Retention Price Formula"5. While it was recognized that several companies had been able to earn returne in excess of 15% (partly because of savings effected in fuel and lose figures and partly on account of the free pricing of certain products), the SAR made its calculations on the strict application of the 15% return rule. In calculating the operating costs, the SAR took the data provided in each project's feasibility report. Crude oil input prices were also based on the Bank's projections in 1982 for imported crude, while the price of domestic crude (mainly Bombay High) was taken at $19 per barrel, equivalent to Rupees 1182 per ton. Furthermore, as was the rule in India, the difference in prices then paid by different companies on account of different sources of crude oil were smoothed out as if they were equalized through the crude Oil Price Equalization Account monitored by the Oil Coordination Committee. 31. In actual practice, the international crude oil prices collapsed just at the time when most refineries were beginning to commission their expansion/conversion capacity at the end of 1985 and beginning of 1986. Despite this major upheaval which resulted in many revisions of the input and output prices, the refineries' financial situation improved gradually with most achieving results by the late 1980s well above those anticipated at the time of the appraisal as shown belows The prices of over 80% of refinery products are regulated by the Oil Coordination Committee (Occ) of Government of India and determined on the basis of a "Retention Price" formula that would generate for an efficient refinery a 15% return (before tax) on net fixed assets and working capital. - 13 - ZINMNCIAL BESMLTI (in millions of current Rupees) 1981/82 1984/85 1987/88 Appraisal Anticipated Actual Anticipated Actual Bharat Petroleum Net Income(after tax) 60 630 138 608 760 Depreciation 174 225 533 374 635 Internal Cash Generation 334 855 671 982 1395 Debt/Equity Ratio 23/77 64/36 69/31 42/58 45/55 Madras Refinery Net Income(after tax) 47 101 106 221 246 Depreciation 21 23 113 209 222 Internal Cash Generation 68 124 219 430 468 Debt/Equity Ratic 18/82 79/21 66/34 54/46 52/48 Hindustan_Refinery Net Income(after tax) 145 140 119 476 1016 Depreciation 152 215 489 499 956 Internal Cash Generation 297 355 608 975 1972 Debt/Equity Ratio 31/64 68/32 67/33 42/58 51/49 1989 (45/55) Cochin Refinery Net Income(after tax) 47 106 26 128 195 Depreciation 14 155 36 155 208 Internal Cash Generation 61 261 62 283 403 Debt/Equity Ratio 64/36 80/20 88/12 57/43 79/21 1989 47/53 32. While the anticipated profitability did not materialize for most refineries in the year of commissioning (in most cases the conversion capacities came on stream towards the end of the year) by 1987/88 the net revenues after tax had increased to levels substantially in excess of what was estimated at the time of appraisal. This was partly due to a higher capacity utilization than estimated in the SAR and partly due to the returns on assets formula which is used by the Government of India in order to calculate each refinery's gross margin. The depreciation figures for the years in question also indicate a higher level of investment in practically all the refineries which is the result of other ongoing investments both during and after the implementation of the project. 33. During 1988/89 the Phillips Petroleum Company decided to sell its shareholding in the Cochin Refinery. The shareholders then decided to increase the capital of the Company by Rp 585 million. Since much of this - 14 - increase was subscribed by the Government (through a shift to equity of loans previously provided by the Government) the Company's long-term debt declined sharply in 1988/89 resulting in a marked improvement in the debt/equity ratio from 79:21 in 1987/88 to 47:53 in 1988/89. This has# of course, enhanced the financial strength of the Cochin refinery. 34. In 1985 Amoco sold its share in the Madras refinery to the Government of India and NIOC's shareholding was also reduced from 13% to 1.7%. The share capital of the Company was then increased from Rp 12.87 million to Rp 98.45. NIOC later reinstated itself at 13% by paying the capital increase. The Madras refinery has achieved all of the anticipated targets and has embarked on the implementation of a number of projects- notably a downstream aromatic unit. The Company's accounts show a higher level of depreciation of the energy conservation schemes in the year of commissioning as permitted by the Government. In the case of Hindustan Petroleum Corporation Ltd also, the debt/equity ratio dropped to 45:55 during 1988/89 from 62:38 in 1987/88 as a strong cash flow made it possible to retire a large borrowing. This refining company, too, has other downstream projects such as a propylene recovery unit under implementation. 35. While no attempt is made to recalculate the financial rates of return for the various refineries (because it is, to a large extent, dependent on government policy in respect of what they allow the refineries to retain), the reestimation of the economic rates of return would better capture the real benefits that have already accrued and are likely to accrue to the Indian economy from the implementation of this project. For this purpose actual costs and prices have been used for the years prior to 1989/90. For the years beyond the Bank's forecast of crude oil prices have been used. Other assumptions are discussed in Annexure 7. 36. As discussed earlier, the economic rate of return in this project is highly sensitive to the spread between crude and product prices during the lifetime of the investment. The SAR calculated that for the project as a whole a 10% drop in revenue would decrease the average ERR from 84% to 71%. It was further calculated that if crude prices remained constant in real terms (thereby fixing the price spreads instead of their escalation with the increasing crude oil prices) the average ERR would drop from 84% to 75%. This explains why the decline of crude and product prices in 1983 and their eventual collapse by 1986 has played such a major role in reducing the ERRs of the project at the various refineries. The price spread as estimated at the time :f appraisal and the actual price spreads since the commissioning of the expansion/rehabilitation project is shown in the table below. - 15 - DIFFERENCE BETWEEN PRICES OF PETROLEUM PRODUCTS AND CRUDE OIL (PRICE SPREADS) (S per ton in 1989 prices) 1985/86 1986/87 1987/88 1988/89 1989/90 M ATAL MR ACTUAL WR ACTUAL SAR ACTUA SAR ACAL LPG 327 106 237 118 248 92 258 101 269 73 Notor Gasoline 149 86 153 75 158 60 163 50 168 63 Kerosene 195 95 201 64 207 52 214 55 220 51 Diesel Oil 97 57 100 43 103 32 106 36 199 32 Fuel 011 (60 (33 (61 (30 (63 (24 (65 (25 (67 (32 Memot Crude Oil Price $/ton 372 272 383 118 395 135 407 100 419 119 37. The above table clearly indicates the precipitous drop in the price spreads occasioned by the collapse of oil prices in 1086, i.e., just at the time when the expansion/rehabilitation projects went into production at the various refineries. It can also be seen how crude oil prices had fallen by 56% in real terms in just 4 years from 1985 to 1989.' The estimated ERRs, recalculated four to five years after the commissioning of the plants, though substantially below the SAR estimates, still remain reasonably robust. This is mainly due to the following factors: (a) timely completion of the projects (b) implementation of projects substantially in line with the cost estimates (c) speedy hike of production to full capacity (d) taking advantage of the availability of Bombay High crude in order to push production of high and middle distillates above the quantities estimated at appraisal. ECONOMIC RATES OF RETURN OF EXPANSION AND REHABI&ITATION PROJECT (percent) Appraisal 1990 Estimate Estimate Cochin Refinery Ltd 87 16.0 Madras Refinery Ltd 99 19.6 Bharat Petroleum Corporation Ltd 52 16.8 Hindustan Petroleum Corporation Ltd 98 15.4 'This drop was steeper at 64% between 1981 and 1989. SourcS Bank's Price Prospects for Major Primary Commodities, Report No. 814/88 and Bank's Commodity Price Data, February 1990. - 16 - 38. Given all the factors previously mentioned about the quality of the technical staff at the refineries, their effective management, their highly well planned preventative maintenance scheme and their generally high capability, there is every expectation that efficient operation of the units can be sustained for the foreseeable future. The project's economics has been demonstrated under the most adverse set of conditions. The risks associated with the project can now be safely assumed to be negligible because not only are the plants working satisfactorily and at high capacity but the likelihood of crude oil and product prices declining to the 1986 levels is also very small. As argued previously, the trend in crude oil production capacity utilization indicates a tighter oil market within the next two or three years while the lack of sufficient conversion capacity is likely to widen the spread between middle distillates and fuel oil, thus enhancing the economics of the secondary processing facilities. Conclusions and Recommendations 39. It is clear from the foregoing analysis that this project has been very successful not only in achieving its formal objectives of reducing the imbalance between domestic supply of and demand for petroleum products, but also in improving the technical capability of the Indian refining industry in all its facets. India is certainly one of the few developing countries where such capability exists and it is to the Bank's credit that it facilitated the use of this capability. 40. In addition to recognizing the development effect of supporting indigenous technical capability the Bank's involvement was sought because the Government of India and the refining companies considered the Bank's technical assistance as valuable in ensuring efficient implementation of the project. Bank staff also played a crucial role in developing an integrated energy efficiency program for industry. 41. The success of the project can be traced to several major factors as follows: (a) the whole-hearted support of the government in giving timely approvals, making funds available and facilitating critical imports by means such as the blanket approval; (b) the efficient carrying out of the engineering function by a technically qualified and knowledgeable firms utilizing all modern management methods and procedures to reduce delay and monitor progress while taking timely corrective actions; (c) foreiE suppliers of technology willing to work harmoniously with the owners and engineers; (d) capable project teams at the refineries with suitable delegation procedures enabling expeditious decision-making; (e) timely training of operational staff to operate new processes and equipment resulting in rapid achievement of full capacity utiliza- tion; (f) a tradition of responsible and disciplined approach to work and a quest for excellence; - 17 - (g) very effective support by the Bank staff both at the project design stage and during implementation. This is all the more significant when the result of this project is viewed against scores of mega projects in India which suffer from delays running into years. 42. The experience with domestic manufacturing of many components of the project in India and their proper functioning afterwards speaks highly of the indigenous capability. The documented cases of delay in delivery certainly did not indicate any worse performance by the local manufacturers. The point was made repeatedly by the highly placed engineers at tb refineries that in many respects they got better after sales service from the local manufactur- ers. In addition, given the requirement for the borrowers to follow the ICB guidelines and the highly commendable job EIL did in the design and engineering of the expansion/rehabilitation units, the manner of procurement followed provided the opportunity for the indigenous manufacturers to have a chance in winning orders. The expectation that foreign suppliers of equipment packages would consider the inclusion of Indian-sourced components in their bid is at best a hope that is not usually borne out by experience. It is therefore, preferable to follow the EIL procedure if the Bank wishes to provide the domestic manufacturers with an opportunity of participating in the project. In fact, the Bank should, wherever the capability exists, insist on the adoption of this procedure even if it means placing a large burden on its project staff. This is a development function. 43. The refinery expansion/rehabilitation project was designed at a time when trends indicated that India was losing its comparative self-sufficiency in the domestic supply of petroleum products to the market. The project proved vary timely and b7 the time the new capacity went fully into production the country ac'ieved overall balance in its product supply, though the refineries could not supply the total requirements of middle distillates and the gap began wideninF again in 1987/88, By 1989/90 the shortage in middle distillate supply 1 :4 reached to just over seven million tons as compared with 2.2 million tons in 1986/87 (Annexure 1). 44. Recent studies made by the Bank staff and the Oil Coordination Comittee of the Government of India indicate that the demand for petroleum products is likely to increase at an annual rate of around 6.5-7.7, if the economy grows at the rate anticipated for Eighth Plan. This would translate into a demand of between 73 and 75 million tons by 1994-95. The middle distillate content of this consumption is also estimated to rise from approximately 61% to 62% (Annexure Table 8) further accentuating the middle distillate shortage. This is likely to be the case even though the growth of the light distillates (LPG, Motor gasoline and naphtha) is projected to be faster than middle distillates on account of the rapid increase in the scooter and motor vehicle pool and the requirements of the petrochemical industry. 45. On the supply side, the existing capacity of all the 12 refineries in India is estimated at 52 million tons capable of producing around 48 - 18 - million tons of products with a crude input mix of nearly 2/3 domestic and 1/3 imported. Although it was anticipated that by the end of the Eighth Plan (1994-95) this capacity would approach 65 million tons through the addition of three grassroots refineries at Karnel (6 mtpa), Mangalore (3 mtpa) Assam (3 mtpa) and the expansion of Madras refinery (.9 mtpa", approval has been given for only the Madras Refinery expansion and it now appears almost impossible to expect any new capacity addition anytime during the current Plan. In view of this delay it is certain that India's requirements for the import of petroleum products will grow from the present level of nearly 7 million tons to more than 20 million tons by 1994-95. By the end of the Eighth Plan, therefore, India's dependence on imported products will have grown to 36%, and more than 40% of India' s middle distillate consumption will have to be met by imports. While this estimate allows for incremental capacity increase at some refineries and a near full capacity utilization of the existing refineries, the extent of shortfall in middle distillates supply and the corresponding import requirements of around 20 million tons in 1994/95 is cause for serious concern. 46. This is happening at a time when a shortage in conversion capacity is appearing around the world. Recent studies clearly show that this tight situation is likely to continue on the basis of the firm projects under implementation and others announced to come on stream by the mid-1990s. According to one study' the investment in new cracking capacity will be insufficient to meet the projected changes in product demand. WORLD PRODUCT BALANCE 1992 AND 1995 (mb/d) Change Potential in Change in Crude Oil Surplus Demand Upgrading Capacity Distillation (deficit) 1988-1992 Light Distillates 1.06 .34 .41 (.31) Middle Distillates 1.23 .24 .62 (.37) Fuel Oil/Others (.24) (.47) .92 .68 Total 2.05 .11 1.94 -- 1988-1995 Light Distillates 1.47 .38 .61 (.48) Middle Distillates 2.12 .25 .94 (.93) Fuel Oil/Others (.56) (.52) 1.37 1.41 Total 3.03 .11 2.92 -- The potential deficits strongly suggest the need for further investment in conversion capacity. But they also show the pressure that is likely to come on an already stretched refining industry. For the time being the peak Petroleum Economics Ltd 1989. - 19 - demand for light and middle distillates can only be met if there are no accidents.$ Consequently, if supplies of these products are restricted for any reason, e.g. a refinery shut down or demand is stimulated--as happened during December of 1989--the existing capacity is incapable of coping with the pressures. During Dece.ber 1989 the cold spell in the eastern part of the United States sent gas oil prices soaring from $22/barrel at the beginning of the month to $32/barrel at the end of the month. 47. While it is anticipated that in actual practice refiners will operate their secondary processing facilities in such away as to produce the last incremental barrel of light and middle distillates, the demand will no doubt be brought into balance with supply by the upward movement of prices. It is, therefore, obvious that such a potential deficit for light and especially middle distillates will have serious repercussions for India: first on the grounds of security of supply; and second, the foreign exchange implication of such large quantities of imports of middle distillates. 48. India is once again at a crossroad not dissimilar to that existing at the beginning of the 1980s in terms of the imbalance between its projected petroleum product requirements and indigenous refining capacity. However, this time around the global setting is changing. At the beginning of the 1980s the world petroleum industry was just starting its long downward journey in terms of demand and prices which resulted in the price collapse of 1986. Beyond the temporary blip occasioned by the Persian Gulf crisis, the industry is looking forward to a period of sustained demand growth, albeit at a much slow rate, but enough to bring about some stability to the market. OPEC, too, has embarked on an approach which has, at its base, the desire to increase its market share and, hence, the enhancement of its effectiveness. The growth of the demand for oiL. is much more stable now than previously because fuel oil has been flushed out of the demand picture in the Industrial Countries where much of the substitution in the "under the boiler market" has already been achieved. The global demand for fuel oil and other heavy products are no longer expected to decline as they did since the early 1980s. But they are not expected to grow either. The growth in the demand f or liquid fuels i&, therefore, anticipated to come mainly from the transporta- tion sector and the rise of petroleum products as raw materials for the petrochemical industry. While the use of petroleum products in the residential and industrial market is declining in the Industrial Countries, it remains an important sector in the developing countries with little chance of major substitution in the near or medium term. This is indeed the case with India where middle distillates are not only used in the transportation and the agricultural sectors, but also as lighting and cooking fuels in the rural and urban areas (some relief is likely to come from the increased use of natural gas). The change in the global setting should be of concern both to the Indian Government and the Bank because any need for rationing or control arising from the non-availability of transportation fuel or fuel for OThe Persian Gulf War and the closing of the Kuwaiti refineries strongly influenced the price of jet fuel (kerosene) because of military requirements even though civil air transport had slackened considerably around the world. - 20 - agricultural use (tractors, water pumps, etc.) would have an enormous impact on the Indian economy, just at a time when the power system appears to be supplying a larger proportion of the latent demand with fewer interruptions. 49. India cannot afford to continue believing that large quantities of middle distillates (15-20 million tons per year) will be available from the regional market in the mid-1990s. The grassroots refineries, even if their construction is immediately started, are not likely to come on stream before 1995196. Additionally they will be extremely costly at a time when the government is attempting to reduce the budget deficit. The answer lies in the rapid expansion of the existing refineries along the same lines as the last expansion/rehabilitation project. This approach would have the advantage of bringing into action an already effective and efficient organization ready to march. It is not clear to what extent the four refineries at Cochin, Madras, Bomba and Visable can be expanded. Although their locations are very appropriate, there are some environmental impedi- ments at each site. But given the economics of expanding each of these refineries, even incrementally if need be, the government would do well to move in this direction. The forecast of regional demand certainly indicates that the expansion of these refineries would help balance the regional supply/demand picture. In view of the increasing demand for light distil- lates, the expansion of FCC capacity is likely to remain the conversion process of choice. 50. With the domestic enterprises capable of carrying out so much of the work associated with the construction of the refinery and given the buoyancy of the capital market and the large cash flow in all the refineries, a privatization approach could be pursued by the Government. The rapid subscription of the public to the Cochin refinery shares (sold by Phillips Petroleum in 1989) and the subsequent appreciation of these shares certainly would support this proposition. By innovative actions and the delegation of more operational and investment authority to the existing refining companies, the Government may help avert a very aerious situation which is fast in the making. The Bank should stand ready to assist in any way possible including financing the expansion/conversion projects. C=t1ODDITY BALANCE OF PBTR0LENU AND PETROLEUM PRODUCTS (million tons) Years ending in March 1971 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989(a) ---------------------------------------------------------------------------------------------------------------------------------- A. Crude Petroleum 1. Refinery Throughput 18.4 22.3 23.0 24.9 26.0 27.5 25.8 30.2 33.2 35.3 35.6 42.9 45.7 47.7 49.6 2. Domestic Production 6.8 8.4 8.9 10.8 11.6 11.8 10.5 16.2 21.1 26.0 29.0 30.2 30.5 30.4 32.0 (a) On-shore 6.8 8.4 8.5 8.7 8.3 7.3 5.5 8.2 8.2 8.6 8.9 9.4 9.9 10.2 10.9 (b) Off-shore - - 0.4 2.1 3.3 4.4 5.0 8.0 12.9 17.4 20.1 20.8 20.6 20.2 1.1 3. Imports 11.7 13.6 14.0 14.5 14.7 16.1 16.2 15.3 16.9 16.0 13.7 15.1 15.5 18.0 17.8 4. Exports - - - - - - - 0.8 4.5 5.5 6.5 0.5 - -- 5. Net Imports (3-4) 11.7 13.6 14.0 14.5 14.7 16.1 16.2 14.5 12.4 10.5 7.2 14.6 15.5 18.0 17.8 B. Products 1. Domestic Production 17.1 20.8 21.4 23.2 24.2 25.8 24.1 28.2 31.1 32.9 33.2 39.9 42.8 44.6 46.4 (a) Naphtha 1.2 1.9 2.0 2.1 2.3 2.4 2.1 3.0 3.0 3.6 3.5 5.0 5.6 5.5 5.4 (b) Kerosene 2.9 2.4 2.6 2.5 2.5 2.5 2.4 2.9 3.4 3.5 3.4 4.0 4.9 5.1 5.2 (c) High Speed Diesel 3.8 6.3 6.4 7.1 7.4 8.0 7.4 9.0 9.8 10.9 11.1 14.6 15.5 16.3 16.7 (d) Fuel Oils 4.1 5.1 4.7 5.3 5.6 6.4 6.1 6.9 8.0 8.0 7.9 8.0 8.0 8.5 8.9 2. Refinery Fuel and Lose 1.3 1.5 1.6 1.7 1.8 1.7 1.7 2.0 2.1 2.4 2.4 3.0 2.9 3.1 3.2 3. Domestic Consumption(b]17.9 22.4 24.1 25.5 28.2 29.9 30.9 32.5 34.7 35.8 38.5 40.8 43.4 46.4 49.8 of which: (a) Naphtha 0.9 1.8 2.2 2.3 2.5 2.4 2.3 3.0 3.0 2.8 3.1 3.1 3.2 2.9 3.3 (b) Kerosene 3.3 3.1 3.3 3.6 4.0 3.9 4.2 4.7 5.2 5.5 6.0 6.2 6.6 7.2 7.7 (c) High Speed Diesel 3.8 6.6 7.1 7.7 8.6 9.8 10.3 10.8 12.0 12.6 13.7 14.9 16.0 17.7 18.7 (d) Fuel Oils 4.7 5.8 5.7 5.8 6.7 7.1 7.5 7.2 7.3 7.6 7.9 7.9 7.9 8.1 8.4 4. Imports 1.1 2.2 2.6 2.9 3.9 4.7 7.3 4.9 5.0 4.3 6.1 3.9 3.1 3.9 6.3 5. Exports (c] 0.3 0.2 0.1 0.1 0.1 0.1 n.a. 0.1 0.8 1.5 0.9 2.0 2.5 3.4 2.3 6. Net Imports 0.8 2.0 2.5 2.8 3.8 4.6 7.3 4.8 4.2 2.8 5.2 1.9 0.6 0.5 4.0 --------------------------------------------------------------------------------------------------------------------------------- (a] Provisional. (b) Includes refinery fuel consumption. 1c) Excludes supplies of POL products to Nepal. Source: Economic Survey, various issues. M. - 22 - ANNEXURE TABLE 2 HISTORICAL PETROLEUM PRODUCT PRICES IN THE PERSIAN GULF AND SINGAPORE MARKETS ($ per ton) 1977 1978 1979 1980 1981 1982 Crude Oil Price(average) 95 100 136 222 250 226 Product Prices(average) Persian Gulf Market Gasoline 148 159 230 354 383 366 Kerosene 133 140 200 326 375 368 Gas Oil 115 123 181 291 332 323 Fuel Oil 77 74 103 179 215 191 Singapore Markets Gasoline 166 167 234 358 392 365 Kerosene 134 141 207 341 375 358 Gas Oil 119 122 182 301 332 320 Fuel Oil 80 80 119 180 226 197 Price Spreads(average) Persian Gulf Market Crude Oil-Kerosene 38 40 64 104 125 142 Fuel Oil-Gas Oil 38 49 78 112 117 132 Sincapore Market Crude Oil-Kerosene 39 41 71 119 125 132 Fuel Oil-Gas Oil 39 42 63 121 106 123 Source: Platt's Oil Price Handbooks, 1977 to 1982 INDIA-REFINERIES RATIONALIZATION PROJECT-EIL ORGANIZATION PROJECT ORGANIZATION (TYPICAL) CLIENT ENGINEERS INDIA MANAGEMENT MANAGEMENT MANAGER NAG R MANAGER MANAGER MANAGER MAAE PR-MNGR OFI OFI OF OF MANAGER MANAGER OF PLANNING PROCURE- CONSTRU- ENGINEER- PROCESS MANAGER PROJECTS & SCHEDU- MENT CTION NG C IL LIENT PROJECT PROJECT MANAGER MANAGER *-.-------------. PROCESS S ETS ENGINEERING PROCUREMENT COSTRUCTiON CO-ORDINATOR CO-ORDINATOR CO.CSDINATOR CO-ORDINATOR MANAGER PLANNING & TASIC FORCE PURCHASING SITE SCHEDULING GROUP LEADERS INSPECTION I TASK FORCE COST EF!MA- PIPING EXPEDITING FIELD ENGIN TiON . VESSEL CUSTOM EERING CONTI JL CIVIL CLEARANCE INSPECTION MATERIAL STRUCTURAL & TRANSPORT & OUALITY CONTROL ARCHITECTURE CONTROL ELECTPICAL SITE SUPERVI- INSTRUMENT- SION ATION PLANNING MECHANICAL WAREHOUSING EQUtPMENT ADMINISTRA- ROTATING TION EOUIPMENT ACCOUNIS 24 ANNEXURE TABLE 4 ACTUAL COMPLETION DATES VERSUS SCHEDULES AT APPRAISAL Cochin Refinery Ltd. Schedule at Aoraisal Actuals Crude Distilation Unit Revamping June 1984 September 1984 LPG Recovery Unit June 1984 March 1985 Secondary Feed Preparation Unit March 1984 March 1985 Fluidized Catalytic Cracking Unit March 1984 April 1985 Utility and Offaites March 1984 September 1986 Turbine Generator Set -- July 1986 Wagon Loading Facilities -- October 1986 Madras Refinery Ltd. Crude Distillation Unit July 1984 July 1984 Fluidized Catalytic Cracking Unit January 1985 December 1984 Captive Power Plant - December 1986 Bharat Petroleum Company Ltd. - Bombay Crude Distillation Unit Pump Replacement May 1983 May 1983 Kerosene Merox Unit December 1983 December 1983 Crude Distillation Unit Modification October 1984 September 1984 High Vacuum Unit/Fluidized Catalytic Cracking Unit October 1984 January 1985 Captive Power Plant January 1989 Energy Conservation Scheme I February 1986 March 1986 Energy Conservation Scheme II February 1987 March 1986 Energy Conservation Scheme III March 1989 February 1989 Captive Power Plant Septemberl988/ February 1989 Hinfuttn Petroleum Company Crude Distillation Unit-Visakh December 1984 December 1984 Fluidized Catalytic Cracking Unit-Visakh March 1985 Sulphur Recovery Unit-Bombay May 1982 December 1984 Energy Conservation-CO Boilers-Bombay may 1987 December 1986 Energy Conservation-New Crude Furnaces-Bombay August 1985 October 1985 25 ANNEXURE TABLE 5 Project CoSt Estimate (millions of rupees) Appraisal Estimates Actuals Foreign Logal Total Foreign Local Total Cochin Refinery Ltd. 692 904 1596 330' 13202 1650 Madras Refinery Ltd. 1010 1242 2252 243 1458 1701 Sharat Petroleum Corporation Ltd. Crude Unit & Secondary Processing Facility 789 1234 2023 252 1050 1302 Energy Conservation Schemes3 60 136 196 31 182 213 Hindustan Petroleum Corporation Ltd. Visakh Crude Unit & Secondary Processing Facility 1079 1225 2304 271 1344 1615 Sulphur Recovery Unit Bombay 16 39 55 7 60 67 CO Boiler Bombay3 31 39 70 33 44 77 Crude Oil Furnaces at Bombay3 20 75 95 31 57 88 TOTAL 3697 4894 8591 1198 5515 6713 Captive Power Plant' - - - 304 488 792 Captive Power Plant' BPCL 180 393 573 281 214 495 Ancilliary Plant at Visakh and Bombay HPCL 59 202 261 1 In the PCRs prepared by the four refineries the appraisal costs are given as those approved by the Government of India in 1981. These costs did not include price escalation. In practice the local inflation index rose by 60 per cent between 1980/81 and 1985/86 against an estimated figure of 50 per cent at appraisal. 2 Estimated breakdown. Appraisal estimates were global for the three projects at Bombay; local cost 606 million Rupees; foreign exchange cost 391 million Rupees for a total of 997 million Rupees. Not included in appraisal. 26 ANNEXURE TABLE 6a COCHIN REFINERY LTD. CAPACITY UTILIZATION ANr PRODUCT PATTERN (thousands of tons per annum) Appraisal 1981/82 Actuall Before After Expansion Expansion 1985/86 1986/87 1987/88 1988/89 1989/90 Product Yields Light Ends 498 1159 662 1118 1026 1132 976 Middle Distillates 1423 2437 1315 2198 2222 2631 2714 Heavy Ends 1064 627 595 639 679 779 633 Fuel and Lose 135 277 175 211 184 219 277 Total Throughput 3120 4500 2749 4166 4111 4761 4600 Capacity 3330 4500 4500 4500 4500 4500 4500 Capacity Utilization(%) 94.5 100.0 61.1 92.6 91.4 105.8 102.2 Fuel&Loos(S Throughput) 4.33 6.16 6.37 5.06 4.48 4.60 6.022 Middle Distillates Yield a 45.61 54.16 47.84 52.76 54.05 55.26 59.00 In all the years since 1985/86 until 1988/89. the proportion of Bombay High Light Crude has been more than 70% in the crude oil input. In 1988/89 it dropped to 62%, again rising to 71% in 1989/90. The high fuel and losses are due to the start of more secondary processing facilities sun as the bensene/toluene units. 27 ANNEXURE TABLE fb MADRAS REFINERY LTD CAPACITY UTILIZATION AND PRODUCT PATTERN (thousands of tone per annum) ADpraisal ..ACtUAl. Before After Expansion Expansion 1985/86 1986/87 1987/88 1988/89 Light Ends 430 1,176 980 1,035 1,065 1,159 Middle Distillates 1,256 2,902 2,563 2,506 2,443 2,741 Heavy Ends 850 1,112 1,163 1,301 1.249 1.185 Fuel and Loss 264 410 352 350 374 391 Total Throughput 2,800 5,600 5.058 5.192 5,131 5,476 Capacity 2,800 5.600 5,600 5.600 5,600 5.600 Capacity Utilization (0) 100 100 90.3 92.7 91.6 97.8 Fuel and Lose ( throughput) 9.43 7.32 6.96 6.74 7.29 7.14 Middle Distillates Yield () 44.86 51.82 50.67 48.27 47.61 50.05 28 Alp;XURE TABLE 6o BHARAT PETROLEUM CORPORATION LTD. CAPACITY UTILIZATION AND PRODUCT PATTERN (thousands of tone per annum) Appraisal Actual Before After Expansion Expansion 1985/86 1986/87 1987/88 1988/89 Light Ende 873 1,140 1,427 1,258 1,495 1,493 Middle Distillates 2,698 3,271 3,631 3,248 3,745 3,539 Heavy Ends /a 1,153 1,233 936 773 964 756 Fuel and Lose 276 356 395 300 335 344 Total Throughput 5,000 6,000 6,389 5,579 6,539 6,132 Capacity 5,000 6,000 6,000 6,000 6,000 6,000 Capacity Utilization (2) 100 100 106.5 93.0 109 102.2 Fuel and Lose (I throughput) 5.52 5.93 6.18 5.38 5.12 5.61 Middle Distillates Yield (2) 53.96 54.52 56.83 58.22 57.27 57.71 /a The low heavy end and high light and middle distillate yields are due to the much higher percentage of Bombay high light crude in the refinery throughput as compared with the appraisal estimates. 29 AWNXURZ TABLE fid VISAKR REFINERY - HPCL CAPACITY UTILIZATION AND PRODUCT PATTERN (thousands of tons per annum) Apraisal. &gtual LA Expansion Project 1985/86 1986/87 1987/88 1988/89 Prgaucts YLeld Light Ends 554 387 585 525 575 Middle Distillates 1,492 976 1,258 1,236 1,295 Heavy Ends 808 603 561 644 638 Fuel and Loss 146 118 155 147 145 Total Throughput 3,000 2,084 2,559 2,552 2,653 Capacity 3,000 3,000 3,000 3,000 3,000 Capacity Utilization (t) 100 69.5 85.3 85.1 88.4 Fuel and Lose (% throughput) 4.87 5.66 6.06 5.76 5.47 Middle Distillates Yield (M) 49.66 46.83 49.6 48.43 48.81 LA Frequent power failures from the Andhra Pradesh State lectricity Board network was responsible for both lower throughput and higher fuel and lose figures as compared with those anticipated at appraisal. 30 ANNEXURE TABLE 7 INDIA - REFINERIES RATIONALIZATION PROJECT DATA AND ASSUMPTIONS USED fOR EX-POST ECONOMIC ANALYSIS 1. At Cochin and BPCL refineries where distillation capacity was upgraded/expanded, operational and cost data related to 1983/84 were taken as the base against which the project's results were measured. Capital Costs 2. Actual annual capital costs as given in the Project Completion Reports were used. Canacity Utilization 3. Actual capacity utilization until 1989/90 was used in the calculation. For the years beyond until 1987/88, it was assumed that expanded capacity would be utilized at 95%. Crude Oil Prices 4. Actual crude oil prices were used until 1989/90. Crude oil prices were then projected in line with the Bank's Commodity Division's forecast (Report 814/88). Product Prides 5. Actual product prices were used until 1989/90. For the years beyond average ratios to crude for the preceding 5 years was used as follows. Product/Crude Oil Price Ratio LPG 1.67 Naphtha 1.30 Gasoline 1.45 Kerosene/Aviation Turbine Fuel 1.44 High Speed Diesel/Light Diesel Oil 1.27 Fuel Oil/Asphalt .8 Operating Cost 6. Act 1 annual operating costs (other than crude costs) as reported by the refine ..s were used until 1989/90. For the years beyond, the costs were assumed to remain constant at 1989/90 level in real terms. 31 ANNEXURE TABLE 8 PETROLEUM PRODUCT DEMAND FORECAST (million tons) 1989/90 1992/93 1994/95 LPG 2.2 2.8 3.2 Naphtha 3.6 4.2 5.5 Motor Gasoline 3.5 4.5 5.2 Aviation Turbine Fuel 2.0 2.3 2.6 Kerosene 8.7 10.7 12.3 High Speed Diesel Oil 20.6 25.9 30.0 Light Diesel Oil 1.1 1.1 1.1 Lubes 0.9 1.0 1.2 Fuel Oils 8.2 9.2 9.6 Bitumen 1.7 2.8 2.2 . Others _1.0.Lg1. 1-2 ; Total 53.5 65.6 74.1 Middle Distillates Ratio 60.6% 61.0% 62.1% §ourcess Oil Coordinating Commission - Government of India World Bank Estimates. - 32 - PROJECT COMPLETION REPORT INDIA REFINERIES RATIONALIZATION AND ENERGY CONSERVATION PROJECT (Loan 2123-IN) Technical Department Asia Regional Office - 33 - INDIA PROJECT COMPLETION REPORT REFINERIES RATIONALIZATION AND ENERGY CONSERVATION PROJECT (LN 2123-IN) PART I 1. Project Identity Project Namet Refineries Rationalization and Energy Conservation Project Loan No. LN 2123-IN RVP Unit: ASI Country: India Sector: Energy Subsector: Petroleum Products and Refining Industry 2. Background 2.1 Sector Development Objectives Energy is critical for the growth of the Indian economy. One of the major obstacles to accelerating economic growth has been the increasing cost of energy inputs and the widening gap between the demand for energy and the indigenous energy production. Closing this gap exclusively through energy imports would result in a heavy drain of foreign exchange. Rationing of energy supplies, particularly diesel oil, of which India is critically short, would on the other hand lead to serious disruptions of the economy. The Government's strategy is to reduce the net cost of energy imports through energy conservation, substitution of coal, natural gas and hydropower for petroleum products, improving the efficiency of existing refineries, adding refining capacity when this is economically justified, and increasing import of petroleum products when international prices favor this option. India will continue to follow a two pronged supply strategy; refining crude oil (both indigenous and imported) and importing refined products to supplement deficits. Among the sector objectives, maximum utilization of indigenous energy to displace petroleum products to the extent economically feasible, has high priority. The Government has over the past several years, accelerated its programmes to further explore and develop the country's energy resources. Coal, natural gas and hydropower, have increasingly displaced industrial fuels. This in turn has resulted in an increase in the proportion of distillate petroleum products in the demand profile, while that of fuel oil has decreased. The consequences of this change were an increased mismatch between the slate of pt-iucts produced at domestic refineries and the domestic demand for products. In order to meet increasing demand and a widening divergence between domestic refinery production and domestic demand, GOI adopted in the early 1980's a strategy of installing appropriate, moderate cost secondary conversion facilities, and supplementing deficits with imports. In addition GOI has attached high priority to rehabilitation of refineries. improving their production slate and energy efficiency, and installing pollution control devices. 2.2 Policy Context Coal, which India is abundantly endowed with, natural gas, the production of which has begun to increase over the past several years, and hydropower, which is being increasingly exploited, are three energy sources that have substituteC for fuel oil. However the displacement of large quantities of fuel oil resulted in the production of fuel oil from refineries exceeding demand; the refineries had no secondary conversion facilities to convert fuel-oil to required premium value distillate petroleum products. The project provided the refineries, besides other benefits, with the processing capability to convert fuel oil to premium value distillate products. This also facilitated the substitution of indigenous energy for fuel oil, and to some extent, diesel oil and kerosene. 2.3 Linkage Between Project, Sector and Macro Policy Objectives The Refineries Rationalization project met the objectives of the Government by improving the energy efficiency, capacities, environmental - and energy conservation aspects of existing refineries, increasing their * capacities and providing the processing capability to convert surplus fuel oil to kerosene and diesel. The project represented the first major step to rationalize the refining industry, as petroleum began to emerge primarily as the swing fuel to meet transportation and other energy requirements which could not be met by coal, natural gas or hydropower. 3. Project Objectives and Description 3.1 Project Objectives The main objectives of the project were to expand and modify refining capacity in order to reduce the imbalance between the domestic demand for and supply of petroleum products and to complement other investments in the energy sector. A further objective was to improve the energy efficiency of the refineries, and ensure the supply of electricity to critical units in some of the refineries by providing captive power plants. The project represented a major commitment by the Indian Government to improve the utilization of existing facilities by installing economically-sized facilities to increase the yield of kerosene and diesel oil, two products for wlh.ich the demand has continued to increase over the past decade. 3.2 Project Components The project comprised two major components: (i) a refinery capacity and secondary processing component; and (ii) an energy efficiency, and pollution control component. The refinery component consisted of several rehabilitation/replacement, energy conservation and modernization sub-components, besides the expansion of crude distillation capacity and - 35 - installation of seconday conversion facilities. A detailed description of project elements are given in the PCRs prepared by the refining companies, which are annexed to this report. The major refining sub-projects are listed below: (i) Cochin Refinery. Expansion of crude processing capacity from 3.3 million metric tons per annum (mmtpa) to 4.5 mmtpa, and a new Fluid Catalytic Cracking Unit of 1.0 mmtpa; (ii) Madras Refinery Ltd. Doubling the crude distillation capacity from 2.8 mmtpa to 5.6 mmtpa. and installation of a 0.6 mmtpa FCC; (iii) Hindustan Petroleum Company - Visakh Refinery. Crude processing capacity from 1.5 mmtpa to 4.5 mmtpa, and installation of a 0.6 mmtpa FCC; (iv) Bharat Petroleum Corporation (Bombay). Revamping and restoring the crude distillation capacity to 6.0 mmtpa and installation of a 0.6 mmtpa FCC; (v) Hindustan Petroleum Corporation- Bombay Refinery. Installation of a sulphur recovery plant; and (vi) The Energy Efficiency and Pollution Control component. This components consisted of: - the replacement or modification of low efficiency crude distillation and cracking furnaces, to increase efficiency from around 50% to about 90 Z; - installation of air preheaters and waste-heat recovery boilers; and, - installation of a sulphur recovery plant and pollution control devices. 3.3 Captive Power Plants In addition to the above, at the request of BPCL and HPCL, two captive power plants were included in the project in 1986. The primary justification for captive power plants was the increasing unreliability of power from the national grid, resulting from increased power demand by both domestic and commercial consumers. As power demand from the national grid increased power dips and failures became more frequent, interrupting refinery operations. Refineries had to take measures to protect critical equipment from shutting down due to power failure. 4. Project Design and Organization 4.1 The project was in effect five separate project investment components rolled into one to facilitate Bank financing, implementation and - 36 - supervision. The major component, the refinery capacity expansion, and the installation of secondary processing facilities in and modernization of four refineries, was conceived in the aftermath of the rapid escalation of crude oil prices, at a time when the idustry in western Europe and North America was beginning to restructure, and shed distillation capacity. Based on extensive studies, GOI decided to implement the project. Critical to the design was the assessment of market demand, and the petroleum products' demand profile; these assessments have proven to be correct in both respects. Actual demand was, in fact, above the projections and the demand profile more skewed towards middle distillates (kerosene and diesel oil) than was originally assumed, making the project even more viable. A third important factor was the selection of technology for the conversion process. The technologies considered were (i) hydrocracking, which is a hydrogen addition, high temperature and high pressure process; and (ii) fluid catalytic cracking (FCC) which is a carbon rejection, relatively low temperature and low pressure process. The latter has been the work-horse in the United States since the late 1960's, while hydrocracking is a more recent development and has been adopted only by the more sophisticated refineries due to the more complex nature of the operation. FCCs are less capital intensive than hydrocrackers, but the yield of middle distillate products, which India needs, as well as the quality of middle distillates, are far superior from a hydrocracker than from a FCC. Further, FCCs give a high yield of gasoline, the demand for which is not as high as for kerosene and diesel oil. India had a difficult choice to make: either a FCC in the interest of lower capital costs, but a lesser yield of middle distillates or the more costly hydrocracker. India opted for the former, based on their demand projections which anticipated consumption to increase to such a level that all FCC products including gasoline would eventually be absorbed by the late 1980's. This decision has proven to be sound. The FCCs came into operation 20 months ago. All products have been absorbed by the market, and the units have proven to be both financially and economically attractive. 4.2 The project was well prepared; the technical design, while not innovative, appears seven years later to be both bold and appropriate with respect to anticipated requirements. Project objectives and scope were well understood by all key personnel, and the project was timely. The responsibility for the project components was shared by the four companies. Engineers India Limited (EIL) was appointed as Project Manager and co- ordinated activities. Each refinery had a General Manager (Projects) who had the primary implementation responsibility; sub-components for any particular refinery in turn were handled by a project manager. While overall project organization was good and worked satisfactorily, packaging of project components could have been better organized to facilitate procurement, supervision and disbursement, and to reduce Bank--as well as refineries'--staff time needed to clear documents and handle procurement matters. EIL functioned for the most part as an Engineering, Procurement and Construction (EPC) contractor. The only aspect of work not handled by EIL was actual construction. Numerous relatively small items of equipment needed for the project were procured (all correctly within Bank guidelines) in a continuous stream, putting a heavy burden on Bank staff, who had to review every item procured. Items procured ranged from simple valves, bulk materials through power generating sets and carbon monoxide boilers. Many large items that should have been packaged for ICB were broken-up to sub- - 37 - components to facilitate the use of equipment and services of Indian origin. The same objective could have been reached through ICB. With a domestic preference of 15Z, Indian suppliers could also have supplied items of acceptable quality as a sub-supplier, even if any particular tender package was won by a foreign company. At the peak of project implementation it was not unusual to receive 15 or more items for procurement approval every week. So much so, that the Bank's disbursement unit, while expeditiously disposing of payment claims, pointed out the heavy load placed on the unit. Extra time taken during project preparation could have resulted in better packaging of procured items. Further the use of a special account would have reduced the number of disbursement/ withdrawal claims. Not withstanding this deficiency, the project organization was satisfactory; procurement followed Bank guidelines and not one procurement decision in this $1 billion project had to be reversed. 5. Project Implementation 5.1 General Despite the fact that the project involved four refining companies and five refineries, project management, coordination and implementation were quite satisfactory. The staff assigned were qualified, experienced, dedicated and competent. Communication between EIL the and refineries and relations between key personnel were good. The closing date of the project was September 30, 1986. Two one year extensions were given and the project closed with all but $0.5 million of the $200 million Bank Loan disbursed; all project components were completed on September 30, 1988. The extensions were necessitated due to two reasons: (i) to complete energy conservation components, which even though identified at appraisal, had not been approved by GOI; and (ii) to utilize savings to implement captive power projects in two refineries. 5.2 Variances Implementation Schedule. The feasibility studies on the energy conservation components were prepared by the different refineries, in parallel with the implementation of other projects. Approval by GOI agencies for these components required between 9 months to a year. In the aftermath of the oil price escalations in 1970, inclusion of energy conservation measures was of high priority to GOI. It took more time than anticipated, however, to fully prepare these components for presentation to GOI. Cost Estimates. The base cost of the project at loan closing date was substantially below appraisal estimates, even after inclusion of two captive power plants which were not within the original scope of the project. This can be attributed to (i) well-based cost estimates and not having to use physical contingencies; (ii) the decline in price of process equipment due to the recession that followed the 1980 oil price increases; after the price increases, major process industry contracts were cancelled world-wide; there was both idle construction and shop capacity, and under- utilized manpower, and India was able to take advantage of the acute competition that followed; and (iii) notwithstanding some of the project implementation delays, the utilization of Indian contractors for a -3F - substantial part of the installation and construction work, and project supervision by the refineries, reduced labor/construction costs significantly; this also reduced the proportion of foreign exchange in the project. 5.3 Project Risks Project risks listed in the appraisal report, such as crude oil availability, market demand for petroleum products and the integrity of the selected process technology, do not at this stage, appear to be subjects of major concern. Crude oil production has exceeded demand world-wide, and is likely to remain abundantly available during the economic life of the project. FCC and other process technologies chosen have proven to be reliable. However there was one risk that was not identified: the risk of selecting inexperienced sub-contractors. There was one major failure which could be attributed to this reason. Three Carbon Monoxide boilers failed in three FCC Units. These were supplied by a local company, in erstwhile collaboration with a reputable foreign company. The local contractor had little installation experience in this type of boiler and the refractories in the boilers failed. The resulting losses far exceeded the cost of the unit. After considerable negotiations, and with the help of the foreign company, which was also partly responsible for the failures, the boilers were repaired and put into use. Another recurring problem that delayed the implementation of some components, which in a less robust project could even have affected the economic viability, is the inordinate time taken for issue of import permits by GOI agencies, after the decision has been taken to award a contract. In some instances the delay was as much as 9 months. 6. Project Results 6.1 Objectives The project has met its objectives with respect to increasing refineries' production and the yield of distillate products and improving the production and energy efficiency of the refineries. The project has also assisted GOI to enhance benefits of indigenous crude oil from the Bombay High, the full benefits of which were not foreseen at appraisal. Without the project, India would have had to import a significantly larger volume of middle distillate products. The primary results from the project are: (i) increased throughput; (ii) increased efficiency/reduced energy consumption in refineries; and (iii) increased output of middle distillate (kerosene and diesel). In the performance indicators given below, the actual fuel consumption and losses are higher after the project due to the fact that secondary conversion facilities consume more fuel. This is amply compensated however by greater output of distillate products. The three direct benefits of the project are summarized below: - 39 - 6.2 Direct Benefits FY Ending March 31 1981 1988 Actual Appraisal Actual 1. Refinery Crude Oil Throughput (OOOMTPA) BPCL Refinery 5,000 6,000 6,000 HPCL Refinery 1,500 4,500 4,500 CRL Refinery 3,300 4,500 4,1321/ MRL Refinery 2,800 5,600 5,600 2. Fuel & Losses (Z of throughput) BPCL Refinery 5.54 5.93 6.15 HPCL Refinery 8.53 7.56 7.56 CRL Refinery 4.52 6.16 6.7 MRL Refinery 9.43 6.89 7.1 3. Middle Distillates (OOOMTPA) BPCL Refinery 2,698 3,270 3,472 HPCL Refinery 772 2,264 2,264 CRL Refinery 1,611 2,705 2,4231/ MRL Refinery 1,256 2,624 2,618 Did not reach SAR projections in 1988 due to a 1986 fire and explosion. As from January 1989, projected levels have been reached by all refineries. 6.3 Economic Impact The total project comprised 5 refineries and the project investments were mainly to increase the feed throughput and improve product yield and energy effieiency. Each refinery had several sub-projects, each of which was justified either on the basis of its economic merits or the need to improve operating reliability. For the economic return (ERR) calculations, sub-projects have been aggregated for each refinery. The following data and assumptions were used for the economic evaluation: (i) the cost of actual project investments for each refinery, as supplied by the refineries in their PCRs. In the case of HPCL the final cost figures were not provided, and assumptions had to be made to assess the final project costs; (ii) benefit estimates are based on: the incremental production from the refineries valued at border prices based on Singapore prices; and the Bank's commodity forecasts for crude oil prices; (iii) incremental operating costs are based on past experience and the Bank's assessment of additional costs for energy, chemicals, labor, etc.; and -40 - (iv) local project costs have been converted to US$ according to the average exchange rate for each year per IMF data. Economic Impact 1. Economic Rate of Return Appraisal Actual (ERR) BPCL Refinery 66Z 67Z HPCL Refinery 1222 57Z CRL Refinery 1032 41% MRL Refinery 1172 81% The ERRs are substantially lower than SAR estimates for all refineries, except for BPCL. This is due to the drastic increase in crude oil prices in the early 1980s and the resulting decline is the margin between products and crude oil. Margins were at their highest levels in history at appraisal and declined to levels unforeseen either by the Bank or by any of the major international oil companies or energy agencies. The actual ERR is based on margins over the past several years and those likely to prevail over the project payout period based on Bank's assessment of petroleum products supply and demand. The ERR though lower than at appraisal are quite robust. The disruption of operations in CRL, resulting from a major fire and explosion in March 1984 also contributed to a lower ERR. 6.4 Financial Impact The financial IRR at project appraisal was based on projected refinery retention prices and was estimated at 15Z-17% for the different refineries. These retention prices are set by GOI to produce, for each refinery with its specific configuration, a return of 12% on the sum of net fixed assets in operation plus normal working capital. Further, the refineries earn incentives if they surpass established norms for crude throughput, fuel and losses and production of high value products. As the GOI established return is calculated on the whole of each refinery's operation as reflected in its balance sheet, the significance of a financial IRR for the project needs to be interpreted with care. No new estimates for the financial IRR have therefore been made, but based on the total financial performance of each refinery, it is within the 15%-17% range as estimated at appraisal. The project had a beneficial fiscal impact for GOI, which retains the difference between the high retail prices for petroleum products (less distribution costs) and the relatively low refinery retention prices. The alternative to increase domestic refining of high value products through the project would have been to import these products at higher cost. Defining the fiscal benefits of the project as the difference between the CIF Bombay cost plus cost of domestic transport of incremental products for project refineries less the refinery retention prices and distribution costs for these products, the fiscal benefit in FY88 alone is estimated at about US $60 million equivalent. 6.5 Project Impact The project has enabled the refineries to minimise their output of fuel oil and increase the yield of middle distillate products and thus facilitated the use of indigenous coal and natural gas instead of fuel oil. The refinery staff gained valuable experience in implementing a large project and in negotiating with suppliers of technologies. The sulphur removal facilities provided under the project has helped reduce emission of sulphur and the formation of corrosive acids and captive power plants have reduced shutdowns due to power shortages/failures. Each refinery added on the average 12 additional staff to operate and maintain the new facilities. 7. Project Sustainability 7.1 Future Benefits The benefits from the new conversion facilities are likely to increase over time, as demand for distillate petroleum products grows; the energy conservation items, even at a time when the price of crude oil declined to its lowest level in this decade, retained their economic viability; the captive power plants, which were justified primarily to ensure the power supply reliability, have become even more critical as demand for power from the national grid increased further, resulting in more frequent power dips and disruptions. The project would become uneconomic only if demand were to decline, or the price margin between distillate products and crude oil and fuel oil were to decline substantially. The probability of this happening is considered low. 8. Bank Performance 8.1 Strengths and Weaknesses The main Bank contributions were: (i) introduction of a sense of orderliness and urgency in project implementation and cost efficiency resulting from the Bank's procurement practices, supervision missions and quarterly progress reports; (ii) protection of refinery project officers from outside pressures in procurement matters; and (iii) providing access to data and technologies. 8.2 Performance During Project Cycle The Bank played a major role in designing the project and organizing the four refining companies to implement the project in five refineries. This was the first Bank loan to the refining industry in India. The excellent relationships developed by the identification/ preparation/appraisal teams facilitated the subsequent trouble free implementation of the project. 8.3 Lessons For Other Projects The main lesson of this project relates to procurement; it facilitates procurement and project implementation if the number of -42 - procurement packages is minimized. This would undoubtedly require a more advanced and detailed project preparation than was the case with some of the components of this project. A second lesson is that local industries supplying critical equipment should have adequate experience and/or the support by an experienced foreign partner. Local firms can start off as jcint venture partners to foreign firms. By giving preferential treatment to local components in a joint venture, the foreign firms would be encouraged to form joint ventures. As local companies gain experience, the role of the foreign partner could be reduced. To accelerate the process before the local company has gained enough experience would not either be in a project's or the national interest. 9. Beneficiaries' Performance The four refining companies gave high priority to the project. The staff were efficient and dedicated and Bank guidelines were followed rigidly. The refineries tried to out perform each other. On receipt of bids for major items, very often within a week of submission of the evaluation, a project team would come to Washington to review the evaluation jointly with the Bank and answer querries. Very often they departed from Washington with the Bank's no objection to their evaluation. The borrower gained valuable experience in project implementation and in . working under pressure. It was evident that as the project commenced to wind down, the staff was actively looking for new projects and a continued association with the Bank. 10. Project Relationship Relationship between beneficiaries and Bank staff were cordial at all times. The Beneficiaries respected the Bank's needs to follow established guidelines. The Bank in turn recognized the special requirements of the Beneficiaries and accommodated these to the extent feasible and without undue delay. The Bank's disbursements department processed withdrawal applications expeditiously, despite the large number of requests received at the peak of project implementation. The Bank's procurement specialists responded quickly to requests of the Beneficiaries to review documents and to clear no objection telexes as soon as possible. The Bank missions met regularly with concerned government agencies. The Beneficiaries relationship with contractors and suppliers was cordial and the Bank received no complaints from suppliers against any of the Beneficiaries. 11. Consulting Services EIL was the primary consultant/project management firm engaged. Undoubtedly, this was a major project. EIL's contribution to the design of the project and its organization seems to have been minimal. EIL could have taken a more aggressive role to package the major components of the project. EIL gained valuable experience implementing the project and EIL staff were competent and worked well with the refineries' project teams. The refineries had no complaints against EIL. Process license technology and process engineering and start-up and commissioning services were provided by UOP, a US company. Performance of the licensor was very good and the projects exceeded process guarantees. -43 - 12. Project Documentation and Data The legal documents were adequate. The staff appraisal report provided an excellent framework for project implementation. Due to the fact that four refining companies were involved, and projects were in on- going refineries, other projects undertaken by the refineries tended to get absorbed as part of the original project. As long as there was no cost overruns the refineries were not required to prepare revised cost estimates. Since all sub-projects undertaken (whether they were in the original list of items at appraisal or not) were within the original objective and scope of the project, and contributed both to project costs and benefits; no attempt was made to separate items that were not in the original cost estimates. Documentation on other aspects of project implementation for PCR preparation were readily available. -44 - PART II Preface 1. General Preparation of project completion reports by the beneficiaries BPCL, CRL, HPCL and MRL commenced prior to the issue of the revised guidelines for preparation of project completion reports. Part I of the PCR has not been reviewed by the four refining companies. The project completion reports by three companies are given in annexures 1, 2, and 4. 2. Project Preparation and Description The PCRs provide in substantial detail the project history, project description, cost estimates, at identification and appraisal, and reason for cost overruns and underruns. The economic rates of return estimated by the companies are in agreement with that of the Bank in Part I of this PCR. There are some minor variations due to differences in methodology and petroleum and crude oil price assumptions. The results show clearly that the economic viability of the project has withstood the price volatility of the oil markets and is likely to remain attractive over the economic life of the project. 3. Performance of Consultants The PCRs prepared by the different Refineries are similar in their observations and conclusions with respect to the performance of consultants. The refineries have high praise both for EIL and UOP the process licensor. With respect to Bank performance, inspite of the fact that our procurement guidelines necessitated changes in the refineries' procurement procedures, the PCRs comments are favourable and view the Bank input as having enabled the companies to streamline their own procedures. 4. Performance of Project Team The PCRs also have some limited comments on their project team organizations and operating procedures, which are more modest than the Bank's assessment of Refinery Project staff performance. The refineries conclude that the project teams had functioned well and implementation arrangements were satisfactory. No special changes are contemplated in their project management and implementation procedures. The PCRs include comments on the valuable experience gained by staff during project implementation. 5. PCR Preparation The PCRs were prepared by the project teams under the guidance of the chief executives of the refining companies . The project teams were headed by a staff member at the rank of a deputy general manager or a higher ranked official with adequate powers to respond to any matter in connection with the implementation of the project. -45 - PART III 1. Project Timetable Date Date Date Item Planned Revised Actual - Identification (Executive Project Summary) - November, 1980 - Preparation - June 1, 1981 - Appraisal Mission - July 14, 1981 - Loan Negotiations October, 1981 - November, 1981 - Board Approval December, 1981 - April 6, 1982 - Loan Signature - May 5, 1982 - Loan Effectiveness - June 29, 1982 - Loan Closing September 30, September 30, September 30, 1986 1988 1988 - Loan Completion September 30, September 30, September 30, 1986 1988 1988 (Issues raised at each stage of project cycle) Comments An issue raised at the Decision Memorandum meeting of August 5, 1981 was with regard to the price structure of petroleum products and whether there were any distortions of consumption patterns. The Decision Memorandum suggested that GOI be asked to review the price structure for petroleum products at the retail level to determine its impact on consumption patterns. At a meeting held on September 21. 1981 at which representatives of the then Energy Department, and ASA & B were present, the Industry Department elaborated on the pricing structure and the meeting concluded that the level and structure of pricing was acceptable. GOI was therefore not requested to carry out the study. - 46 - 2. Loan Disbursements Cumulative Estimated and Actual Disbursements (US$ Million) Period Ending Appraisal Estimate Actual Actual as Z of Estimate 6/30/82 33.2 0.0 0.0 12/31/82 59.6 8.4 14.15 6/30/83 87.9 22.2 25.26 12/31/83 118.6 40.9 34.46 6/30/84 145.4 88.4 60.77 12/31/84 167.8 109.9 65.48 6/30/85 189.5 123.6 65.52 12/31/85 200.0 131.1 65.54 6/30/86 146.0 72.98 12/31/86 155.8 77.88 6/30/87 167.4 83.72 12/31/87 183.6 91.79 6/30/88 196.1 98.07 12/31/88 199.5 99.8 3. Project Costs and Financing A. Project Costs Estimate (In Millions of Rupees) Appraisal Actual Local Foreign Total Local Foreign Total HPCL - Visakh 1,224.61 1,078.89 2,303.55 1,612.491/ 691.061/ 2,303.55 - Bombay 38.59 16.59 55.26 46.971/ 8.291/ 55.26 MRL 1,241.96 1,010.52 2,252.48 1,457.68 243.42 1,701.10 CRL 904.54 691.89 1,596.43 1,319.841/ 329.961/ 1.649.80 BPCL 401.42 788.34 1,234.48 1,088.90 204.80 1,293.70 Energy Conservation 605.96 391.07 997.03 --- .-- -- * -- -- *--2/ TOTAL 5,250.19 3,977.38 9,227.57 5,525.88 1,477.53 7,003.41 NOTEs The cost underrun approximately equals provisions for contingencies. 1/ Estimated breakdown 2/ Included in costs for each refinery - 47 - B. Project Financing SAR Loan Projections Source Agreement Revised Final Less Actual (US$'000) (US$'000) (US$'000) IBRD 200 - 199.5 (0.5) Co-Financing NA NA NA NA Internal Cash Generation, Ref. Cos. 350 - 283.5 (66.5) TOTAL 550 - 483.0 (67.0) 4. Project Results A. Direct Benefits 1981 1988 FY Ending March 31 Actual Appraisal Actual 1. Refinery Crude Oil Throughput (OO0MTPA) BPCL Refinery 5,000 6,000 6,000 HPCL Refinery 1,500 4,500 4,500 CRL Refinery 3,300 4,500 4,132 MRL Refinery 2,800 5,600 5,600 2. Fuel & Losses (Z of throughput) BPCL Refinery 5.54 5.93 6.15 HPCL Refinery 8.53 7.56 7.56 CRL Refinery 4.52 6.16 6.7 MRL Refinery 9.43 6.89 7.1 3. Middle Distillates (OOOMTPA) BPCL Refinery 2,698 3,270 3,472 HPCL Refinery 772 2,264 2.264 CRL Refinery 1,611 2,705 2,423 MRL Refinery 1,256 2,624 2,618 - 48 - B. Economic Impact 1. Economic Rate of Return Apraisal Actual (ERR) BPCL Refinery 66% 67% HPCL Refinery 1222 572 CRL Refinery 1032 41% MRL Refinery 117Z 812 Notes: (i) The ERR are substantially lower than SAR estimates for all refineries, except BPCL. This is due to the drastic increase in crude oil prices in the early 1980s and the resulting decline is the margin between products and crude oil. Margins were at their highest levels in history at appraisal and declined to levels unforeseen either by the Bank or by any of the major international oil companies or energy agencies. The actual ERR is based on margins over the past several years and those likely to prevail over the project payout period based on Bank's assessment of petroleum products supply and demand. The ERRs though lower than at appraisal, are quite robust. The especially lower ERR for CRL is due to the disruption of operations resulting from a major fire and explosion in March 1984: (ii) Project cost data has been supplied by the refineries in their PCRs. In the case of HPCL the final cost figures was not provided, and Bank assumptions had to be made to assess the final project costs; (iii) Project benefits are based on: the incremental production from the refineries, valued at border prices based on Singapore prices; and the Bank's commodity forecasts for crude oil prices; (iv) incremental operating costs are based on past experience and the Bank's assessment of additional costs for energy, chemicals, labor, etc.; and (v) local project costs have been converted to US$ according to the average exchange rate for each year per IMF data. C. Financial Impact The financial IRR at project appraisal was based on projected refinery retention prices and was estimated at 152-17% for the different refineries. These retention prices are set for each refinery with its specific configuration by GOI to produce a return of 122 on net fixed assets in operation plus normal working capital. Further, the refineries earn incentives if they surpass established norms for crude throughput, fuel and - 49 - losses and production of high value products. As the GOI established return is calculated on the whole of each refinery's operation as reflected in its balance sheet, the estimate of a financial IRR for the project becomes a subjective exercise. No new estimates for the financial IRR have therefore been made, but based on the total financial performance of each refinery, it is within the 15Z-172 range as estimated at appraisal. The project had a beneficial fiscal impact for GOI which retains the difference between the high retail prices for petroleum products (less distribution costs) and the relatively low refinery retention prices. The alternative to increasing refineries' production through the project would have been increased import of products at higher cost. Defining the fiscal benefits of the project as the difference between the CIF Bombay cost of incremental products for project refineries less the refinery retention price and distribution costs for these products, the fiscal benefit in FY88 is estimated at US $60 million equivalent. 5. Status of Covenants In addition to the Bank's standard covenants on procurement, insurance, relending, reporting, etc., the following specific covenants were agreed to under the project: - 50 - Loan Agreement Subject Status Section 3.03 Submit proposals to Bank Complied but late; for Part F (Energy Con- last proposal 1986 servation) of Project by 12/31/82 Section 4.02 Make proper use of Complied pricing mechanism Project Agreement Section 4.01 Submit financial state- Complied ments and audit re- ports within 6 months Section 4.03 Maintain a debt/equity Complied, except ratio of under 65:35; for CRL after its current ratio over 1984 explosion 1.2:1; not pay divi- and fire;* terms dends if current ratio for current ratio below 1.3:1; debt ser- redefined during vice coverage over 1.4; project and not invest over $10.0 equivalent out- side the project in any year 6. Use of Bank Resources A. Staff Inputs Stage of Project Cycle Final Through Appraisal 55.7 Appraisal through Board Approval 11.0 Board Approval Through Effectiveness 12.4 Supervision 77.1 TOTAL 156.20 * Cochin achieved this financial covenant later in 1989. - 51 - B. Missions Stage of Month/ Number of Days SpecializatiTn Performanci ating Types of Project Cycle Year Persons in Field Represented / Status Problems Through Appraisal 11/80 4 16 Refining, NA NA Economics Finance 6/81 4 17 - do- NA NA Appraisal through Board Approval 7/81 4 15 - do - NA NA Board Approval through Effective- ness 12/81 3 8 - do - NA NA Supervision 8/82 2 15 Finance/ 1 none Refinery 7/83 2 18 1 none 9/86 3 16 1 none 11/87 2 15 1 none 10/88 2 8 1 none 2/ Key to Status: 1 = problem free