Peru - Petroleum Refineries Engineering Project

The%W L2As:PAIUNA J3 / X V..'t ti / '' '.F'ti 79 / uEvU: FOR OFFIC Report No. 9668 PROJECT COMPLETION REPORT PERU PETROLEUM REFINERIES ENGINEERING PROJECT (LOAN 2117-PE) JUNE 21, 1991 Infrastructure and Energy Division Country Department IV Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  PERU PROJECT COMPLETION REPORT PETROLEUM REFINERIES ENGINEERING PROJECT (Loan 2117-PE) I. Fiscal Year January 1 - December 31 Weights and Measures Metric System Glossary of Abbreviations PETROPERU - Petr6leos del Perd (National Petroleum Company) bpd - Barrels per Day EPF - Empresa Petrolera Fiscal  FOR OMFCIAL USK OWLy THE WORLD BANK Washington, D.C. 20433 U.S.A. ONice M Dirctmnetwal OCWRitam EvakutMm June 21, 1991 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Peru Petroleum Refineries Engineering Project (Loan 2117-PE) Attached. for information, is a copy of a report entitled "Project Completion Report on Peru - Petroleum Refineries Engineering Project (Loan 2117- PE)" prepared by the Latin America and the Caribbean Regional Office. No audit of this project has been made by the Operations Evaluation Department at this time. !~~~~~~~~~~~~~~ Attachment This document t.. 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.  FOR OFFICIAL USE ONLY PROJECT COMPLETION REPEORT PETROLEUM REFINERIES ENGINEERING PROJECT (Loan 2117-PE) Table of Contents Page No. Preface . ....................................... * ..... Evaluation Summary ... ... ...... .... .................. .. ii PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVES Project Identity ........ #* ............. ..................... 1 Background ................................................. 1 Project Objectives and Description .......................... 3 Project Design, Organization and Implementation ............. 3 Project Results . .... . .......... . . 8 Bank and Borrower Performance .............................. . 9 Financial Performance ........ .. .............. 9 Consulting Services ......................................... 10 Lessons to be Learned ..... ............ . ... ................. . 10 PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE ...... 11 PART III: STATISTICAL INFORMATION Related Bank Loans and Credits .................... . .. * ....... 12 Project Timetable ... ........................ .. 12 Loan Disbursements ..................... 13 Project Implementation .......................... . . 13 Project Costs and Financing ..... . . ..... * .... 14 Project Results ................. . ............................ it Status of Covenants .. ....... .. . ...... ...... . 15 Use of Bank Resources ................................. ...... . 16 MM IBRD NO. 16101R This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  i PERU PROJECT COMPLETION REPORT PETROLEUM REFINERIES ENGINEERING PROJECT (LOAN 2117-PE) PREFACE This is the Project Completion Report (PCR) for the Petroleum Refineries Engineering Project in Peru, for which Loan 2117-PE in the amount of US$ 7.3 million was approved on March 25, 1982. The loan was closed on June 30, 1987, three years behind schedule. It was 87% disbursed and about US$ 0.7 million was cancelled. The last disbursement date was on June 15, 1987. Parts I and II of th' PCR were prepared by the Infrastructure and Energy Division of Country Departmenc IV of the Latin America and the Caribbe.ln Regional Office. In accordance with the old procedures for preparing PCRs, the Borrower prepared a summary report on project implementation, the findings and conclusions of which have been reflected in Part I of this PCR. Subsequently, the Borrower was requested to prepare Part II, but has asked that the PCR be released without it. Preparation of this PCR was started during the Bank's final supervision mission of the project in November 1987, and is based, inter alia, on the President's Report; the Loan, Guarantee, and Project Agreements; supervision reports; correspondence between the Bank and the Borrower; and internal Bank memoranda. However, the information contained in this report comes from Bank files with limited information related to recent developments in the sector, since, after Bank disbursements suspension in May 1987, little direct contact with country or sector officials has been made on this project.  ii PROJECT COMPLETION REPORT PETROLEUM REFINERIES ENGINEERING PROJECT (LOAN 2117-PE) EVALUATION SUMMARY Introduction 1. The loan under review was appraised in December 1981 and approved by the Board in March 1982. The loan provided US$ 5.3 million to finance the expected foreign cost of the project, out of a total cost of US4% 7.3 million. The balance was to be financed by PETROPERU. Final total cost probably totalled TJS$7.3 million. For this purpose, US$ 4.6 million were disbursed from the loan, and US$ 0.7 was cancelled. Qkbjctives 2. The project was designed to complement the Bank's efforts under the Petroleum Production Rehabilitation Project (Loan 1806-PE) to strengthen PETROPERU's petroleum production operations, with the objective of providing consultant and technical services and training to improve overall efficiency of PETROPERU's refinery operations, as well as its other industrial plants, with particular attention to maintenance, organization and management. The project also represented the first effort by the Government to plan for energy conservation in its largest energy-intensive industry-- oil refining. Implementation ExDerience and Results 3. After some initial delays which caused disbursements to be slower than planned, implementation of the project progressed satisfactorily. The project's main objectives were achieved. All components were completed as planned and implementation of the consultants' recommendations have been implemented as far as PETROPERU's financial limitations have permitted. This is a notable accomplishment taking into account that Peru went through serious economic difficulties during project implementation. Consultants' performance was satisfactory and PETROPERU's staff benefitted greatly "rom its involvement ir the development of the studies and implementation of the results. The main benefits from the project arise from improvements in operatiuns efficiency, upgrading of technical and managerial skills through a training program, and environmental benefits arising from pollution control measures. 4. Peru stopped making service payments to the Bank in early 1987, and the Bank suspended disbursements on all loans to Peru on May 5, 1987. This decision partially affected the project as some equipment could not be procured. As a result, and because of lower than expected cost of studies, some US$ 0.7 million was eventually cancelled when the loan was closed.  iMi Sustainability 5. The sustainability of benefits from training staff requires reasonable staff continuity. This has been undermined, however, since key personnal have been removed from their positions since project completion. Further, salaries were not allowed to increase as expected, which also contributed to staff turnover. However, benelits from pollution control and energy conservation measures and systems implemented are expected to continue to be derived. Findings and Lessons 6. Lessons learned from this project are: (i) that an engineering project can greatly serve to strengthen an oil company when its own staff is actively involved in the consultants' studies and operation; (ii) project initiation and implementation can be seriously delayed by Government's cumbersome -pproval and bidding procedures; and (iii) sustainability of gains derived from training is undermined if incentives to retain staff are not offered.  1 PROJECT COMPLETION REPORT PETRCLEUM REFINERIES ENGINEERING PROJECT PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE A. Prolect Identity Project Name : Petroleum Refineries Engineering Project Loan No. : Loan 2117-PE RVP Unit Latin America and the Caribbean Regional Office Country Peru Sector Energy Subsector Oil and Gas B. Bakgkround 1. Petroleum Sector: Petroleum is the dominant source of energy in Peru, supplying about 80 percent of the country's commercial energy requirements, and will supply the major part of Peru's energy requirement for the rest of the century. Peru's first oil wells were drilled in 1863. making it one of the oldest oil-producing countries in the Western Hemisphere. The country rapidly became a net exporter of petroleum. However, during the late 1940s and 1950s, when gasoline and fuel oil prices were among the lowest commodity prices in the world, producers' profits margins were reduced and growth in domestic consumption outstripped that of production so that the country became a net importer in 1958. In 1968. the Peruvian G)vernment entrusted Empresa Petrolera Fiscal (EPF) to take over the assets of the International Petroleum Company (IPC) and several other privately owned oil firms. EPF later became Petroleos del Peru (PETROPERU). the producer of 90 percent of Peru's crude output. While production from the traditional coastal and offshore fields in northern Peru rose slowly throughout the 1960s, consumption continued to grow rapidly and Peru became increasingly dependent on crude oil imports to meet its own domestic requirements. 2. As a result of petroleum exploration and development in Peru's northern jungle, which began in the early 1970s, the country had become self- sufficient by mid-1978. Total oil production in 1981 -- primarily from Occidental and PETROPERU -- reached 70 million barrels, of which about 27 percent was exported. Nevertheless, because of low levels of petroleum exploration and F development in the second half of the seventies, and growing domestic demand, Peru faced the possible need to import petroleum in the late 1980s. As a consequence, the Government's strategy since 1980 has been aimed at increasing petroleum production through accelerated exploration and development, while attempting to restrain domestic demand and encourage efficient use of petroleum products, mainly through pricing policy. The government adopted legislative and policy measures designed to attract foreign oil companies. The liberalized  2 petroleum law encouraged a considerable amount of interest in oil exploration. Several foreign oil companies signed production-sharing contracts with PETROFERU, both offshore and in the Amazon rogion, and a number of additional firms are investigating exploration opportunities in Peru. In 1989 some corrections were made to the existing legislation, to allow for more incentives and flexibility to private investors. PETROPERU's Refinery Operations. At the time of appraisal of this Project, PETROPERU had six refineries, with a total capacity of 178,400 bpd. Two of these-- the La Pampilla Refinery, near Lima, with a capacity of 100,000 bpd and the Refinery at Talara, 1,000 km northwest of Lima, with a capacity of 65,000 bpd, together accounted for approximately 92 p.-cent of the total refining capacity in Peru. The remaining four refineries are small--with an average capacity of 3,350 bpd. Although the two major refineries were operating at an average rate of 90 percent of capacity, this was achieved by operating them continuously, without allowing for reasonable maintenance. The refineries therefore, were facing the risk of breakdown and consequent stoppage of production over long periods. In general, the maintenance system in the refineries was weak, as inadequate attention was given to forward planning of maintenance needs and to carrying out preventive maintenance on a systematic basis. Moreover, energy consumption in the refineries was high, since they were built at a time when energy was cneap, and the main emphasis was on keeping capital costs low. As a result, inadequate attention was paid to energy savings. The present loan was aimed at helping PETROPE'IU carry out studies and develop programs for overhauling the maintenance system, achieving energy savings and improving the operational efficiency of the refineries. 4. SuARly/Demand Balance for Refinery Products. Consumptionofpetroleum products grew at an annual average rate of 6.2 percent during 1960-75, reaching 1.78 billion gallons in 1975. During 1975-80, however, consumption grew at only 2.3 percent a year, mainly because of the economic crisis and increases in petroleum prices. The consumption of light and middle distillates -- such as gasoline, diesel, kerosene and jet fuel -- accounted for nearly 70 percent of total consumption. 5. Although Peru had a surplus of some petroleum products in 1980, imports of most refined products (except gasoline) were forecasted, unless the country's refinery capacity was expanded. The size and configuration of additional facilities required would depend largely on the demand for individual products which, in turn, would depend on overall energy demand growth and the success of conservation and inter-fuel substitution efforts. It was therefore important that future refinery investments be based on careful planning and on analysis of alternatives using the planning assistance included in this project. 6. The maintenance system of PETROPERU was considered weak at the time of appraisal, particularly in Talara, where maintenance services were centralized for refineries and related chemical plants, as well as for oil exploration and production, creating serious problems with respect to scheduling urgent maintenance work. This also hindered adequate specialization of staff to meet the maintenance needs of different units. Lack of an adequate preventive maintenance, and an effective system of spare parts inventory control, aggravated the problem in both refineries. These aspects were to be considered under the  3 project with a view to reorganizing the maintenance system and developing a modern maintenance program. C. Project Objectives and Description 7. The project was designed to complement the Bank's efforts under the Petroleum Production Rehabilitation Project (Loan 1806-PE). aiming at: (i) improving energy and operatiouial efficiency at La Pampilla and Talara refineries and chemical plants of PETROPERU; (ii) improving operational efficiencies at Talara chemical plants (fertilizers, IPAC, Acetone and Carbon black); (iii) improving industrial planning capability at the above-mentioned chemical plants; (v) training for operating, maintenance, supervisory and management personnel; and, (vi) improving production operations and qualities of lubes and greases at the Talara plant. The project represented the first effort by the Government to plan for energy conservation in its largest energy-intensive industry-- oil refining-- and to improve the overall efficiency of PETROPERU's refinery operations, as well as its other industrial plants. 8. The project consisted of the following four components: (a) consulting services and procurement of related laboratory equipment and instruments to carry out studies of energy savings, efficiency improvement and corrosion and pollution control, new investments for the La Pampilla and Talara refineries and other PETROPERU industrial plants; (b) consulting services to develop a maintenance program and reorganization, within the framework of such program, of the maintenance system for the La Pampilla and Talara refineries and other PETROPERU industrial plants; (c) consulting services to develop and implement a training program for PETROPERU's industrial staff, including specialized overseas training for about 40 staff members; and. (d) consulting services to strengthen PETROPERU's Technical Department to carry out industrial project planning, studies of possible improvements in PETROPERU's chemical plants, and to develop a program to improve product quality in its grease and lubricating plants. D. Project Design. Organization and ImRlementation 9. PETROPERU considered the technical scope of thir loan essential to upgrading its operations. Substantial institutional buildin, Was a major feature of the projects. whili sector policy issues were being addressed under the other ongoing project. The project was designed having in mind that for the engineering studies to be effective, PETROPERU's staff should be actively involved with the development of the consultants' studies and operations.  4 lO. The project's initial pace was very slow. After the project was approved b;y the Board, it took about six months for the formalities involved in government review if the legal documents to be completed befcre the loan could be signed. It took another four months to register the Loan and Guarantee Agreements with the Ministry of Economy, Finance and Commerce before the loan couid become effective. There were further delays in inviting and evaluating bids for the studies to be included under the project, partly due. to the Government's bidding procedures. As a result of the above delays, the project completion was delayed for about one year, and disbursements were slower than anticipated. However, implementation of the project progressed satisfactor'ly thereafter. 11. Energy Savings. Process Ogtimization and Pollution and Corrosion Control Program: The study to investigate energy conservation and process optimization possibilities at the La Pampilla and Talara refineries was contracted out to an American firm. The program was envisaged in two phases. It was intended that Phase I of the study would recommend specific subproject investments for improvements and would also bring out preliminary techno-economic justifications. PETROPERU, in consultation with the Bank, would select appropriate subprojects for which basic engineering would be carried out by the consultant as Phase II of the study. The program included installation of instrumentation and laboratory equipment necessary to carry out the study and prepare program implementation. 12. The consultant satisfactorily completed the main study in October 1985 (Phase I). after some delays due to difficulties for the release of materials and instruments by the suppliers, and to obstacles in transportation to the construction site caused by strikes of Peruvian Port and Customs personnel. However, extensions to the contract did not cause any additional cost to the program. 13. Two Energy Surveys, required as preparation for initiating the program, were completed under this program at La Pampilla and Talara refineries, and at the industrial plants, after the required instrumentation, which suffered procurement delays, was installed. Since the surveys allowed a more accurate technical control for process optimization and energy conservation, and based on the experience gained by PETROPERU'S staff involved in the development of the surveys, periodic surveys were programmed making use of the acquired instrumentation, in order to be able to detect new prcblems in the future. 14. Under the Energy Savings portion of Phase I of this program, the main energy consuming plants were involved. Different studies were carried out such as& steam and condensate systems, fuel gas heat recovery for heaters or boilers. fuel conversion for gas turbines and boilers. cogeneration of electric power, etc. The results proved the existance of great potential for improvemont in processes and in energy savings. Inclusion of the main recommendations into a program of energy conservation and savings, as part of Phase II, have resulted in reductions of energy consumption per unit of production of between one percent and ten pp.-cent in refineries and chemical plants, since early program implementation in 1983.  5 15. The main purpose of tho Process ORtimization part of the program was intended to achieve fuller capacity utilization of the two refineries through. inter XUAl. removal of equipment and systems bottlenecks, and improved operational and control methods. The baeic engineering for Talara refinery atmospheric and vacuum unit debottlenecking would increase its nominal capacity from 65.000 bpd to 75,000 bpd. 16. The final report of the study made major recommendations for La Pampilla and Tal%ra refineries, and for cogeneratlon at the Malacas power plant. After techno-economic review of the recommendations, PETROPERU in consultation with the Bank, concluded that some of the options (fuel gas recovery, fuel conversion in heaters and boilers at Talara, and modifications to overflash liquid control at La Pampilla) were economically unattractive (economic rates of return were less than 25 percent). 17. The following studies were selected as economically attractive, and basic designs were carried out by consultants as Phase II of the program and completed between January 1986 and June 1987: (a) Increase in process capacity of the catalytic cracking unit and of the primary and vacuunm distillation units in the Talara refinery. (b) Firing of vacuum residtuals in boilers and furnaces at La Pampilla refinery 18. The following studies were done by the consultants and implemented by PETROPERU's staff: (a) Technical Department staff carried out the basic design for the new tempered water system for fuel oil at La Pampilla based on the consultant's analysis of the system. A chilled water system for diesel was implemented by the La Pampilla engineering staff. No economic evaluation was done for these systems since its necessity resulted from safety and operating considerations, and (b) PETROPERU's staff also handled the fuel gas recovery scheme proposed by the consultant for La Pampilla, involving recommissioning of the existing off-gas compressor and routing the compressed gas to the suction of the gas compressor in the gas recovery unit. 19. Under the Pollution and Corrosion Control part of the program, a general revision of the pollution levels in the air and fluid effluents from chimneys and furnaces, effluent leaks, residual waters, etc., in refineries and plants was carried out. Recommendations from the studies are gradually being implemented according to PETROPERU's priorities and financial resources. 20. Data processing was significantly upgraded through the acquisition of microcomputers and software under this program. Following some studies carried out by consultants hired by PETROPERU to evaluate its financial information systems, the Bank approved the financing of a database management system. Acquisition of 12 additional personal computers, software and related supplies, also approved in October 1985 to be used in the Industrial Production  6 Department, was immediately facilitating faster solution to operative problems such as optimization of propylene production and optimization of cooling and heat exchange in the refineries, and giving support to quality control, projects. research and training activities. 21. Maintenance Program. The study on improvements in maintenance systems was carried out by a French firm. Ten engineers from PETROPERU were involved in the study which permitted the expected technological transfer. Recommendations were related to management of maintenance parts and materials. The results were evaluated by PETROPERU and by the Bank and approved for implementation. Action was taken in relation to the recommendations on improvement of internal communications and information systems, reorganization of the maintenance department, improvements of systems for preventive maintenance, documentation, materials inventory and control, and training of selected personnel. In general, relative progress has been made in relation to maintenance effectiveness. However, some recommendations requiring replacement of equipment or infrastructure work could not be implemented due to lack of financing, such as improvement programs for the shops. The most significant improvements were accomplishee in Talara where decentralization and training programs were implemented. 22. Techno-Economic Studies. An American consulting firm was contracted to develop this three-part-program. 23. The first part involved the determination of the viability of continuing operations of certain chemical plants in Talara. through technical analysis of operations at each of the three chemical facilities. It focused on the situation of international prices and marketing (including the definition of target markets a"d exports), and on the optimum use of installed capacity in three areas: Solvent Plant, Fertilizers and Carbon Black. The study was completed in March 1985. Regarding the recommendations concerning the solvents and carbon black plants, PETROPERU reevaluated the recommendations taking into account changed market and price situation and continued producing acetone for domestic demand, and IPA also for exports. 24. Under the second part of this program, the consulting firm developed the PETROPERU PROJECT IMPLEMENTATION MANUALS, a set of four procedures manuals with new guidelines to improve implementation and control of industrial projects for new and for existing refineries and chemical plants. The specific areas covered under each manual are: (i) Planning Phase Manual; (ii) Manual for Engineering Contractor Selection; (iii) Commissioning Phase Manual; and, (iv) Engineering and Construction Phase Manual. The final report was received by PETROPERU in April 1984. The procedures manuals were reviewed and approved by different departments in PETROPERU. 25. The third task under this program was to improve the existing refineries mathematical model, more in line with the various stages of project evaluation for new projects and new process of refining units. The new model resulting from the study was completed in October, 1984 and implemented for immediate use.  7 26. As agreed by PETROPERU and the consultant, selected personnel from PETROPERU took part in the development of the program. The plants carried out the low cost energy and operational efficiency improvements recommended by the studies. In addition to the efficiency improvement recommendations pertaining to the fertilizer plant. PETROPERU had a separate study done by a Japanese consultant with the intention to carry out a portion of the recommendation aimed at improving the operating service factor of the fertilizer plant (from the current 65-70 percent to close to 100 percent of design capacity) without any increase in the plant's overall capacity. The Bank agreed with PETROPERU on this approach. 27. Training and DeveloDment Program. The contract to carry out this program was awarded to a French consulting firm who satisfactorily completed its objectives. The types and extent of training needs of all levels of PETROPERU personnel were identified under the study. With the assistance of the consultant, PETROPERU carried out the major part of the training and acquisition of training aids as recommended in the study. It developed a core training group, as well as a structural training program. Acquisition of some audio and video equipment was not possible, as it was not available at the time the order was placed and later on Bank disbursements were suspended. 28. The program resulted in one manager, 27 junior engineers, 37 supervisors and 78 technical operators being trained, during an 18-month period in relevant areas of interest to each group. The experience with the initial core group helped to identify other training needs, and to develop the structural training program for skills improvement that was to be gradually implemented across all personnel at operating, supervising, and management levels. 29. Grease and Lube Oualitv ImRrovement Study. Initiationofthisprogram was delayed for three years, after implementation of the initial recommendations made by a consultant in 1981 was completed. By the time of contract award, the Bank had suspended disbursements to Peru (para. 32). PETROPERU considered it very important to carry out the proposed study and proceeded independently to appoint a domestic consultant to carry out part of this study. The main recommendations of the study were on operational improvements, cost reduction, quality control, and training. Use of part of the funds allocated to this component was approved by the Bank to finance acquisition of laboratory and other quality inspection instrumentation, not contemplated under the initial plan, for the Grease and Lubricants Plants at Talara. * 30. Upgrading the Talara grease plant has helped to obtain increased productive capacity, lower costs, and better quality products. As far as training is concerned, two engineers from PETROPERU were trained in the USA, at * grease and lube plants and laboratories, and a seminar on grease production was undertaken by the consultant for 20 engineers of PETROPERU. Technicians were trained to formulate greases and were able to experiment with variations of ingredie:.XL to obtain new and more sophisticated grease products. 31. Translation of studies into projects, although not part of the project, was slow, due to changes in PETROPERU's management.  8 32. The Bank suspended disbursements on all loans to Peru on May 5, 1987 following a decision from the Peruvian government to stop making service payments to the Bank. The measure partially affected acquisition of some complementary equipment contemplated under the Energy Conservation component. E. Project Results 33. Overall, the objectives of the project were essentially accomplished. There were some delays at the start, caused by obstacles in government procedures. All the components were successfully completed, except for acquisition of some laboratory equipment, due to suspension of Bank disbursements. 34. Benefits from the project are difficull: to quantify, such as significant strengthening of PETROPERU's technical capabilities, reduction in air pollution and corrosion, and improved management due to upgrading of information systems. The major objectives accomplished and benefits obtained were as follows: (a) More accurate technical control for process optimization and energy conservation, through energy surveys using instrumentation acquired under the project; (b) Reduction in energy consumption per unit of production, reaching between one percent and ten percent in refineries and chemical plants, since implementation of the consultant's recommendations in 1983; (c) Preparation of basic designs for economically attractive refinery capacity increases. Their implementation, however, will depend on future availability of financing; (d) Implementation of recommendations on efficiency improvements in refineries, such as new water systems for fuel-oil and diesel, and fuel-gas recovery at La Pampilla; (e) Implementation of pollution control measures have already resulted in reduced air pollution and corrosion in plants; (f) Improvements in maintenance organization and management. 35. Through technical assistance and training, and the experience gained by the involvement of PETROPERU's professional and technical staff under the project, PETROPERU significantly upgraded its technical skills, and by the end of the project was in a better position than before to undertake expansion projects of its refineries operations. Direct participation of staff with the consultants in their studies and implementation, resulted in overall improvement of process and operations engineering practiLes, corrosion and contamination control, and project implementation. These benefits, however, have been undermined somewhat by lack of staff continuity (para. 37).  9 F. Bank and Borrower Performance 36. The performance of the Bank from project identification to completion should be considered satisfactory. It ldentified the right issues at appraisal, provided appropriate covenants to ensure proper action and maintained a constructive relationship with PETROPERU. The Bank was flexible in dealing with the Borrower as evidenced by its handling of PETROPERU's requests for acquiring additional equipment and instrumentation items for the natural gas plant, and at the Pucalpa and Iquitos refineries, and by extending the Closing Date of Loan as requested by the Borrower. 37. PETROPERU's refinery operations have been considerably strengthened, and its technical staff has greatly upgraded its skills in many areas of refinery technology. PETROPERU had a capable project team to supervise, coordinate and get involved with the work being done by consultants under the project. Sustainability of the benefits of the project were dependent on PETROPERU's being able to ensure reasonable continuity of its staff through a competitive salary structure. Unfortunately, after the change in Peru's central government in 1985. key personnel from PETROPERU were removed from their positions and salaries were not allowed to increase. Vacant positions were filled by promoting lower level staff with insufficient training to perform satisfactorily. 38. So far as PETROPERU's operational performance is concerned, delays in contracting of consultants and the resultant delay in disbursements are worth mentioning. The initial delays suffered by the project were exclusively caused by complicated Government approval and bidding procedures. Initially, t'ie project was delayed over one year. However, matters improved subsequently and overall Lmplementation of the project could be considered satisfactory. G. Financial Performance 39. PETROPERU had a very disappointing financial performance during late 1985 through 1987, partly caused by depressed international oil prices, but also by the freeze of domestic petroleum product prices at a time of very high !Ma*egti' inflntAnn Tnuring that nvnriA PRTRnPRR1J's a narati4^na r?niiltad in not losses exceeding US$450 million on an inflation adjusted basis. It would appear that during those years PETROPERU lost close to half of its equity capital. The huge 1986 loss of US$200 million caused serious operational difficulties, such as late payments to suppliers, suspension of debt service to the Central Bank, and to a reduction of PETROPERU's capital expenditure program. 40. Under Loan 1806-PE, consultants studied the pricing issue and recommended rationalization of domestic petroleum product prices. These were followed only partially at the time of the study. Later, worsening economic conditions in Peru led to a decision in April 1989 to tie petroleum prices to international levels. This action will definitely help PETROPERU to obtain a more adequate income to cover its operating costs and, hopefully, to generate enough cash to invest in the implementation of those recommendations under this project that require additional funding.  10 H. Consulting Services 41. Overall performance of the consultants could be considered satisfactory. Their performance contributed significantly towards the training of PETROPERU's technical and supervisory staff. All contracts were executed in a timely and satisfactorily manner. I. Lessons to be learned 42. Lessons to be learned from this project are: (i) that an engineering project can be a very effective means to strengthen an oil company when its own staff is actively involved with the development of the consultants' studies and operations, and with implementation of the recommendations; (ii) even when staff gets involved in development of consultant activities, and intensive training programs are implemented, the sustainability of gains is in danger if incentives to retain its personnel are not offered by the company; (iii) that project successes could be jeopardized by government's cumbersome approval and bidding procedures.  11 PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE 1. Following old procedures for preparation of Projecr Completion Reports (PCR). the Borrower prepared a summary report of the work undertaken by consultants, including information on equipment procured, recommendations made, chronological progress, and allocation of loan funds. The observations of the report were essentially summarized in Part I of this report, and the original version in Spanish is in files at the LAC Information Center. 2. Subsequently, this PCR was sent to the Borrower for preparation of Part Ii. The Borrower responded by authorizing the release of the report without Part II.  12 PART III: STATISTICAL INFORMATION Related Bank Loans and Credits Year of LoanCredit pyrose Approval SitatuAs Comments a. Petroleum Production Rehabilitate existing 1980 Completed Rehabilitation Project wells, reactivate August 31, (Loan 1806-PE) abandoned wells, 1985. develop new production potential, and preparat- ion of a secondary recovery project. b. Petroleum Production Increase production 1982 Disbursements Enhancement (Loan 2195-PE) through more efficient suspended exploitation of Laguna May 5, 1987. and Zapotal fields, and Project closed to further strengthen effective June PETROPERU's operating 30. 1987. capacity. U S $3 1 . 8 m i I i o n undisbursed. Proiect Timetable Date Date Date Ltm Plae Revised tual - Identification 5.00.81 - Preparation 0.00.81 - Appraisal Mission 9.00.81 - Loan Negotiations 2.00.82 - Board Approval 3.25.82 - Loan Signature 9.17.82 - Loan Effectiveness 12.20.82 1.20.83 - Loan Closing 6.30.85 12.31.86 6.30.87 - Project Completion 12.31.84 6.30.87 8.12.88  13 Loan Diaburgements Cumulative Estimated and Actual Disbursements (US$ millions) FY82 FY83 FY84 FY85 FY86 FY87 Appraisal Estimate 0.3 2.3 4.1 5.3 - - Revised - 0.4 4.7 5.3 - - Actual - 0.1 2.1 3.3 4.1 4.6 Actual as percent of Appraisal Estimate 4 51 62 - Date of Final Disbursement : 6.15.87 1 Petro I eum Ref i nery Eng i neeer I ng Proj ect Figure 1 reflects the onene*- year delay in start-up caused by the government 4- cumbersome administrative 4 procedures, and a rate of disbursements slower than . a anticipated at appraisal. Bank disbursements were 2 suspended on Kay S, 1987. An undisbursed balance of US$720,962.39 was cancelled. ~~~~~~~~~~Y.ef Yew o D*-.t.I , VI~vId A wlt*a Figure 1: Cumulative estimated and actual disbursements Project Imnlementation This was a technical assistance project focusing on improving the overall efficiency of PETROPERU's operations. Appraisal did not establish specific indicators such as physical annual targets. I Disbursements against certain ongoing technical assistance commitments were exempted from the Kay 5, 1987 general suspension of disbursements.  14 Project Costs and Financing A. Project Costs (*) (US$ millions) Anoraisal Estimate Actual Local Freign Total 2/ Studies ar.d Programs (i) Energy Savings, 0.8 2.1 2.9 2.5 efficiency improvements & pollution and corrosion control, including testing equipment. (ii) Maintenance Program 0.2 0.6 0.8 0.4 (iii) Training Program 0.4 1.2 1.6 1.2 (iv) Technical Studies 0.3 0.4 0.7 0.5 ( v) Greases and Lubes - 0.2 0.2 0.1 Study Base Cost 1.7 4.5 6.2 4.6 Contingencies 0.3 0.8 1.1 - (*) No actual cost could be obtained. Total Cost 2.0 5.3 7.3 4.6 B. PROJECT FINANCING (US$ million) ADoraisal Estimate Actual Local Foreign Total Total Source PETROPERU 2.0 - 2.0 0.11 IBRD - 5.3 5.3 4.6 TOTAL 2.0 5.3 7.3 4.7 2 Does not include local costs  15 Project Results An a technical assistance loan, no measurable indicators were used to quantify direct benefits. Status of Loan Covenants Loan Deadline for Agre2Ment Dencriation Compliance Statua 3.02 (a) PETROPERU to hire, on terms Complied with and conditions satisfactory to the Bank, specialized firms to carry out the Project and additional studies. 3.02 (b) PETROPERU to hire, on terms and 7.01.82 Complied with conditions satisfactory to the Bank, the services of no less than 7 experts t4 inerease additional in-line positions at the Technical Department of its Industrial Production Area. 4.04 PETROPERU to carry out additional 12.31.84 Complied with studies expanding Part C III(a) of the Project in order to review management and organization, and to furnish to the Bank the corresponding findings and conclusions. 5.01 PETROPERU to maintain records adequate to Complied with reflect, in accordance with consistently maintained approp'rate accounting practices, its operations and financial condition. 5.02 PETROPERU to have (i) its financial statements Complied with for each fiscal year audited by independent auditors acceptable to the Bank; (ii) furnish to the Bank these audited statements no later than five months after the end of such year.  16 Use of Bank Resources A. St&frgeW.ks Stage of Project Cycl Final Preparation 14.2 Appraisal 3.9 Negotiations 2.5 Supervision 15.4 TOTAL 36.0 B. Hisgions Performance Stage of No. of Days in Specialization Rating Type of Project Cyclef Month/Yeat Persons i-E.iJAL. Reference 1 Status Problem_aL Identification 2.81 1 2 MA 1 Preparation 9.81 2 3 EC, 1 Appraisal 12.81 2 5 EC, PET.EGR 1 Supervision 3.84 2 3 EC, FNA 2 H Supervision 2.86 2 11 EC, PET.EGR I Supervision 1.87 3 9 FNA,PET.EGR, 1 REF.EGR Supervision 11.87 3 2 FNA, REF.EGR 2 H I/ MA - Management EC - Economist FNA - Financial Analyst 1 PET.EGR - Petroleum Engineer REF.EGR - Refinery Engineer 2/ 1. - Problem-free or minor problems 2. - Moderate problems 3. - Major problems 3/ M - Managerial T - Technical  T/E * 76 Iqoitos0 n7/|2 ,-4 Aa&w S P E R U A *'%. j 4. Petroleum Refineries Engineering Project Pma6a ' 5 // Bogua` oyobnamba \ { ~ -.- Cornchrai 5\__ f LSAW7./rA;$'ffOu - Tarapaog B R A Z I L 8 ~~~~~~~~~Trujiilii urJI Chimbote5 i' j uaara 9t i -'A 5I> -o 4 HuachrvHn C \ 2 oOr~~~~~oyr? N,-/' t12 LMi 12 Q- Callaov i 5 < X >,~~~~~~ ~ ~ ~~~~~~~ Puerto 1- Maldonasdo HL!?cv uelicoAyocechi - L - _ kI a /AVAYCifirC%l O,\. j& Petroleum refineries _' - Asphalt roaJds k * y -/ ~ ^ > ~ ~ ,gh _e,eoeeeeom Asphclt roads under construction -- All-wecther roads 1,luoncane". -s---t--- Roilways Julia Ferries Rivers - - .- Deportment boundaries W .-.-*Internotional boundaries re_ _/a < 4, ~~~~~~DesraudF MoaltendoM4 Moqueg.o KILOMETERS 0 100 200 300 > M d e MILES 0 tOO 200 lbo This msp has been prepared by the Wold Books staffetclusmver the oorve enrce Tactcr ) -> of the readers. of die report to which to at tached The dsoe,omarnons used and thetr 8 +,z b-edase. shorm os this sap do ort mpiy, on tha penr of the World Ban Dnd 1t1 affilates, any p,dgrsest son the Sepal status Of any tertrp oor eOr so edoroereent or .e-. .i- Ocept-nse en sioh b-odais72 CHiLE 68