Philippines - Coal, Petroleum, and Geothermal Exploration Projects

Document of The World Bank FOR OFFICIAL USE ONLY M [ 1O I H Report No. 9667 :ANA11s)NA ~, L7 1490,7/ PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES COAL EXPLORATION PROJECT (LOAN 2181-PH) PETROLEUM EXPLORATION PROMOTION PROJECT (LOANS 2201-PH AND 2202-PH) GEOTHERMAL EXPLORATION PROJECT (LOAN 2203-PH) JUNE 21, 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. COUNTRY EXCANGE RATES Peso (P) Appraisal Estimate US$1.00 - P 8.3 Actual 1983 - 11.1. 1984 - 16.7 1985 - 18.6 1986 - 20.4 1987 - 20.6 1988 - 21.1 1989 - 21.7 ACRONYMS AND ABBREVIATIONS ADB - Asian Development Bank Bb1 - Barrel of 42 US Gallons BED - Bureau of Energy Development BOB - BarreL of Oil Equivalent BOPD - Barrel of Oil per Day GDP - Gross Domestic Product ICB - International Competitive Bidding IOC International Oil Company kCal - Kilocalorie kg - Kiloaram LIB - Limited International Bidding MOE - Ministry of Energy MW - Megawatt n/a - Not available N/A - Not applicable NCA - National Coal Authority NPC - National Power Corporation OEA - Office of Energy Affairs PCIAG - Petrocanada International Assistance Corporation PCR - Project Completion Report PNOC - Philippine National Oil Company PNOC-CC - PNOC Coal Corporation PNOC-EC - PNOC Exploration Corporation PNOC-EDC - PNOC Energy Development Corporation PNOC-EDI - PNOC Energy Drilling, Incorporated PNOC-GTC - PNOC Geothermal Technology Corporation PPAR - Project Performance Audit Report SAL - Structural Adjustment Loan SAR - Staff Appraisal Report UNDP - United Nations Development Program TM( WORLD IANdK- FOR o ia" U ONLY Wash"ton. D.C. 20433 U.S A Office of DiVeCto-General Operatim aValuatoM June 21, 1991 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT h SUBJECT: Project Performance Audit Report on Philippines Coal Exploration Project (Loan 2181-PH); Petroleum Exploration Promotion Project (Loans 2201-PH and 2202-PH) and Geothermal Exploration Project (Loan 2203-PH) Attached, for information, is a copy of a report entitled "Project Performance Audit Report on Philippines - Coal Exploration Project (Loan 2181- PH); Petroleum Exploration Promotion Project (Loans 2201-PH and 2202-PH); and Geothermal Exploration Project (Loan 2203-PH)" prepared by the Operations Evaluation Department. This document ha a restricted distribution and may be used by recipients only in the performance of their official dutws. Its contents may not otherwise be disclosed without World Bank authorization. FOR OFFMAL WE ONLY PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES COAL EXPLORATION PROJECT (Loan 2181-Pu) PETROLEUM EXPLORATION PROMOTION PROJECT (Loans 2201-PH and 2202-PH) GEOTHERMAL EXPLORATION PROJECT (Loan 2203-PH) TABLE OF CONTENTS Page Wio. Preface .........................................................i Basic Data Sheets .............................................. . . 1 Evaluation Summary ............................................. xi PROJECT PERFORMANCE AUDIT MEMORANDUM I. BACKGROUND ......................................... 1 A. The Philippine Energy Sector .................... 1 Historical Perspective ....................... 1 Energy Resources ............................. 2 Energy Production ............................ 3 Energy Demand and Investment Requirements .... 3 Legislative Framework ........................ 4 Institutional Framework and Coordination ..... 4 Energy Pricing ............................... 5 The Bank's Lending Strategy .................. 6 B. Project Environment ............................. 7 International Developments ................... 7 Domestic Developments ........................ 7 C. Project Summaries .............................. 8 Project Objectives ........................... 8 Project Description .......................... 9 Implementation Arrangements .................. 10 Project Issues, Design, and Preparation ...... 12 II. IMPLEMENTATION EXPERIENCE ........................... 15 Coal Exploration Project ..................... 15 Petroleum Exploration Promotion Project ...... 17 Geothermal Exploration Project ............... 18 Procurement .................................. 20 Loan Disbursements ........................... 22 Project Costs ................................ 22 Performance of the Bank ...................... 23 Performance of the Borrower .................. 24 Performance of Contractors and Consultants ... 25 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 (Cont'd) Page No. III. PROJECT RESULTS ...................................... 26 Coal Exploration Project ...................... 26 Petroleum Exploration Promotion Project ...... 27 Geothermal Exploration Project ................ 28 Institutional Development ............ .28 IV. FINDINGS AND ISSUES ................................ 30 Project Concept, Design, and Preparation ..... 30 Achievement of Project Objectives ............ 33 Sustainability ............................... 35 Lessons of Experience ........................ 36 ATTACHMENT 1 Comments from the Office of Energy Affairs ... 38 ATTACHMENT 2 Comments from PN0C ........................... 40 PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES COAL EXPLORATION PROJEf"T (Loan 2181-PH) PETROLEUM EXPLORATION PROMOTION PROJECT (Loans 2201-PH and 2202-PH) GEOTHERMAL EXPLORATION PROJECT (Loan 2203-PA) PREFACE 1. This is a combined Project Performance Audit Report (PPAR) on the Coal Exploration Project, involving IZRD loan 2181-PH in the amount of US$ 17.0 million to the Philippine National Oil Company (PNOC), the Petroleum Exploration Promotion Project, involving IBRD loans 2201-PH and 2202-2H in the amounts of US$ 13.5 million and US$ 24.0 million to the Republic of Philippines and PNOC, respectively, and the Geothermal Exploration Project, involving IBRD loan 2203-PH in the amount of US$ 36.0 million to PNOC, with the objective of assisting coal, petroleum and geothermal exploration in the Philippines and strengthening the exploration capacity and technical capabilities of related national institutions. Loan 2181-PH was approved on June 15, 1982. The Loan Agreement was signed on September 18, 1982, and became effective on May 9, 1983. A total of US$ 10.4 million of the loan was canceled fn December 1984 and June 1986 at the request of the Borrower. The loan was closed on time on June 30, 1986. Final disbursement was made on December 23, 1986. Loan 2201-PH was approved on September 30, 1982. The Loan Agreement was signed on October 28, 1982, and became effective on January 26, 1983. US$ 5.7 million of the loan was canceled in three steps between May 1984 and July 1988 at the request of the Borrower. The closing date of December 31, 1986 was extended to December 31, 1987. Final disbursement was made on July 11, 1988. Loan 2202-PH was approved on September 30, 1982. The Loan Agreement was signed on October 28, 1982, and became effective on January 26, 1983. US$ 16.7 million of the loan was canceled in three steps between June 1985 and June 1989 at the request of the Borrower. The closing date of December 31, 1986 was extended to December 31, 1988. Final disbursement was made on September 28, 1988. Loan 2203-PH was approved on September 30, 1982. The Loan Agreement was signed on October 28, 1982, and became effective on January 19, 1983. US$ 27.8 million of the loan was canceled in three steps between June 1985 and February 1987 at the request of the Borrower. The closing date of December 31, 1986 was extended to December 31, 1987 and ultimately to December 31, 1988. Final disbursement was made on February 6, 1989. 2. The PPAR is based on the Project Completion Reports (PCRs) prepared by the Asia regional office and issued in 1987 and 1990,' the President's Reports, the loan documents, the transcripts of the Executive Directors' meeting at which the projects were considered, on a study of project files, and on discussions with Bank staff. An OED mission visited the Philippines in January 1991 and discussed the effectiveness of the Bank's assistance with the Philippine National Oil Company and the Office of Energy Affairs. Their kind cooperation and valuable assistance in the preparation of this report is gratefully acknowledged. 3. The PCRs provide a good account and assessment of the project experience, and discuss the performances of tne Bank and the project executing agencies. The PPAR elaoorates on particular aspects of project design and implementation and the impact of exploration and promotion efforts. 4. Following standard OED procedures, copies of the draft PPAR were sent to the Government and the Borrower. The comments received are reproduced as Attachments to the PPAR. .1 Project Completion Report, Philippines- Coal Exploration Project (Loan 2181-PH), September 29, 1987, Report No. 6960; Philippines- Petroleum Exploration Promotion Project (Loan No. 2201-P8), June 29,1990, Report No. 8891; Project Completion Report, Philippines- Petroleum Exploration Promotion Project (Loan 2202-PH), June 29, 1990, Report No. 8890; and Project Completion Report, Philippines- Geothermal Exploration Project (Loan 2203-PH), June 29, 1990, Report No. 8889. PROJECT PERFC,1MNCE AUDIT REPORT PHILIPPINES COAL EXPLORATION PROJECT LOAN 2181-PH) KEY PROJECT DATA Appraisal Actual or Actual as % of Item Expectation Current Estimate Appr. Eatimate Total Project Cost (US$ millioa) 25.0 10.0 40.0 Loan Amount (US$ million) 17.0 6.6 38.8 Date Physical Components Completed 12/31/85 12/31/85 - Proportion Completed by this Date 100 100 100 Economic Rate of Return (2) N/A - - Institutional Performance Satisfactory Satisfactory - CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS (US$ million) As of June 30. 1983 1984 1985 1986 3987 (i) Appraisal Estimate 2.0 11.2 14.9 17.0 (ii) Actual - 2.7 4.4 6.1 6.6 (iii) (ii) as % of (i) 0 24.1 29.5 35.9 38.8 Date of Final Disbursement: 12/23/86 PROJECT DATES Original Plan Revised Actual First Mention in Files - - 05/06/81 Negotiations - - 05/00/82 Board Approval 06/15/82 - 06/15/82 Loan Agreement Date - - 09/18/82 Effectiveness Date 12/21/82 05/23/83 05/09/83 Closing Date 06/30/86 - 06/30/86 iv OTHER PROJECT DATA Borrowers Philippine National Oil Company (PNOC) Executing Agency: Philippine National Oil Company Coal Corporation (PNOC-CC) Fiscal Year of Borrower: January 1 - December 31 Follow-on Projects: None STAFF INPUT (Staff-Weeke) Bank FY 1982 1983 1984 1985 1986 1987 1988 Totals Preappraisal 22.0 - - - - - - 22.0 Appraisal 18.6 - - - - - - 18.6 Negotiations 5.3 - - - - - - 5.3 Supervision .3 15.2 12.8 7.3 6.1 7.5 .5 49.7 Totals 46.2 15.2 12.8 7.3 6.1 7.5 .5 95.6 MISSION DATA Date No. of Specialization Performance Type of (mo./yr.) Persons Represented' Ratin, 2 T Problems4 Identification 05/81 1 a N/A N/A Preappraisal 09/81 3 d, e N/A N/A Appraisal 01/82 3 c,d,e N/A N/A Post-appraisal 04/82 1 c N/A N/A Supervision I 08/82 1 c 1 2 Supervision II 05/83 2 b,c 1 2 Supervision III 10/83 1 c 2 2 M Supervision IV 03/84 3 ec,,e 3 2 M, P Supervision V 08/84 1 c 3 2 H, Supervision VI 11/85 1 e 2 2 H Supervision VII 10/86 1 c 2 2 M a/ a: Economist; b: Loan Officer; c: Geologist; d:Financial Analyst; e: Mining Engineer. / 1: Problem-free or minor problems; 2: Moderate problems. 2/ 1: Improving; 2: Stationary; 3: Deteriorating. A/ M: Managerial; P: Peace and Order. 'V PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES PETROLEUM EXPLORATION PROMOTION PROJECT (j9am 2201-PH) KEY PROJECT DATA Appraisal Actual or Actual as % of Item Expectation Current Estimate Appr. Estimate Total Project Cost (US$ million) 16.0 9.5 59.4 Loan Amount (US$ million) 13.5 7.8 57.8 Date Physical Components Completed 06/30/85 09/30/87 184.3 a/ Proportion Completed by this Date 100 90 90 Economic Rate of Return (%) N/A - - Institutional Performance Satisfactory Satisfactory - a/ From loan signing to project completion. CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS (US$ million) As of June 30, 1983 1984 1985 1986 1987 1988 (i) Appraisal Estimate 2.8 10.7 13.5 (ii) Actual 0.2 5.3 6.6 7.3 7.6 7.8 (iii) (it) as 2 of () 7.1 49.5 48.9 54.1 56.3 57.8 Date of Final Disbursement: 07/11/88 PROJECT DATES Ori&inal Plan Revised Actual First Mention in Files - - 05/00/81 Negotiations 07/13/82 - 07/13/82 Board Approval 09/30/82 - 09/30/82 Loan Agreement Date 10/28/82 - 10/28/82 Effectiveness Da-e 12/00/82 - 01/26/83 Closing Date 12/31/86 12/31/87 12/31/87 vri OTHR PROJEvT DATA Borrower Republic of the Philippines Executing Agency: Bureau of Energy Development (BED) Fiscal Year of Borrower: January 1 - December 31 Follov-on Projects: None STAFF INPUT (Staff-Weeks) Bank FY 1982 1983 1984 1985 1986 1987 1988 1989 Totals Preappraisal 1.1 - - - - - - - 1.1 Appraisal 46.2 .1 - - - - - - 46.3 Negotiations .2 14.1 - - - - - - 14.4 Supervision - 20.1 23.0 25.3 15.3 20.2 4.6 3.4 111.9 Other .7 - .1 - - - - - .8 Totals 48.2 34.4 23.1 25.3 15.3 20.2 4.6 3.4 174.5 MISSION DATA Date No. of Specialization Performance Type of (mo.Ivr.) Persons Represented' Rating 2 Trend3 Problems' Identification 06/81 2 d N/A N/A Preparation II 11/81 4 a.e.d N/A N/A Appraisal 02/82 5 a,b,c,d,f N/A N/A Supervision 1 09/82 2 a,d 1 2 Supervision II 02/83 3 a,b,e 2 3 F Supervision III 10/83 3 a,b,c 1 2 Supervision IV C5/84 3 a,b,c 1 2 Supervision V 11/84 3 a,b,c 1 2 Supervision VI 05/85 3 a,b,c 1 2 Supervision VII 05/86 3 a,c 1 2 Supervision VIII 03/87 1 b 1 2 j/ a: Economist; b: Geophysicist; c: Geologist; d:Financial Analyst; e: Procurement Specialist; f: Petroleum Engineer. / 1: Problem-free or minor problems; 2: Moderate problem. 2/ 1: improving; 2: Stationary; 3: Deteriorating. &/ F: Financial. vii PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES PETROLEUM EXPLORATION PROMOTION PROJECT (LOAN 2202-PH) KEY PROJECT DATA Appraisal Actual or Actual as % of item Expectation Current Estimate Apor. Estimate Total Project Cost (US$ million) 54.0 20.0 37.0 Loan Amount (US$ million) 24.0 7.3 30.4 Date Physical Components Completed 06/30/86 09/30/87 134.0 Proportion Completed by this Date 100% 66% 66 a/ Economic Rate of Return (2) N/A - - Institutional Performance S&tisfactory Satisfactory - a/ Exploration drilling corresponding to 34% of estimated project costs was not undertaken (PPAR, para. 68). CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS (US$ million) As of June 30, 1983 1984 1985 1986 1987 1988 1989 (i) Appraisal Estimate 2.6 9.6 17.1 22.6 24.0 (ii) Actual 1.2 4.3 6.4 7.1 7.2 7.2 7.3 (iii) (ii) as % of (1) 46.2 44.8 37.4 31.4 30.0 30.0 30.4 Date of Final Disbursement: 09/28/88 PROJECT DATES Orisinal Plan Revised Actual First Mention in Files - 05/00/81 Negotiations 07/13/82 - 07/13/82 Board Approval 09/30/82 - 09/30/82 Loan Agreement Date 10/28/82 - 10/28/82 Effectiveness Date 12/00/82 - 01/26/83 Closing Date 12/31/86 12/31/88 12/31/88 viii OTHER PROJECT DATA Borrovert Philippine National Oil Company (PNOC) Executing Agency: PROC Exploration Corporation (PNOC-EC) Fiscal Year of Porrower: January 1 - December 31 Follow-on Projects: None STAFF INPUT (Staff-Weeks) W Bank FY 1982 1983 184 1985 1986 1987 1988 1989 Totals Preappraisal 1.1 - - - - - - - 1.1 Appratsal 46.2 .1 - - - - - - 46.3 Negociations .2 14.1 - - - - - - 14.4 Supervision - 20.1 23.0 25.3 15.3 20.2 4.6 3.4 111.9 Other .7 - .1 - - - - - .8 Totals 48.2 34.4 23.1 25.3 15.3 20.2 4.6 3.4 174.5 g/ As both Loans 2201-PH and 2202-PH were prepared and supervised by the same Bank teams, this table is the same as the Staff Input Table for Loan 2201-PH (page vi) and does not represent additional staff input. MISSION DATA Date No. of Specialization Performance Type of (mo./yr.) Persons Represented' Rating 2 Trend3 Problems' Identification 06/81 2 d N/A N/A Preparation II 11/81 4 a,c.d N/A N/A Appraisal 02/82 5 a.b.c.d,f N/A N/A Supervision I 09/82 2 a,d 1 2 Supervision II 02/83 3 a,b,e 1 2 Supervision III 10/83 3 a,b,c 1 2 Supervision IV 05/84 3 a.b,c 1 2 Supervision V 11/84 3 a0b,c 2 2 F Supervision VI 05/85 3 a.b,c 2 2 F Supervision VII 05/86 3 a,c 2 2 F,M Supervision VIII 03/87 1 b 2 2 F Supervision IX 08/87 1 b 1 1 Supervision X 02/88 4 a.d.f 1 1 a: Economist; b: Geophysicist; c: Geologist; d:Financial Analyst; e: Procurement Specialist; f: Petroleum Engineer. / 1: Problem-free or minor problems; 2: Moderate problems. 3/ 1: Improving; 2: Stationary; 3: Deteriorating. f/ F: Financial; M: Management. PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES GEOTHERMAL EXPLORATION PROJECT (LOAN 2203-PH) KEY PROJECT DATA Appraisal Actual or Actual as % of Item Expectation Current Estimate Appr. Estimate Total Project Cost (US$ million) 71.50 58.75 82.1 Loan Amount (US$ million) 36.0 8.23 22.9 Date Physical Components Completed 06/30/86 07/00/88 156.8 a/ Proportion Completed by this Date 100% 78% 78.0 Economic Rate of Return (%) N/A - - Institutional Performance Satisfactory Satisfactory - #/ From loan sgning to completion. CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS (US$ million) As of June 30, 1983 1984 1985 1986 1987 1988 1989 (i) Appraisal Estimate 8.0 17.0 26.0 34.0 36.0 (ii) Actual 3.4 4.9 6.8 6.9 7.2 8.1 8.2 (iii) (ii) as 2 of (i) 42.5 28.8 26.2 20.3 20.0 22.5 22.9 Date of Final Disbursement: 02/06/89 PROJECT DATES Original Plan Revised Actual First Mention in Files - - 02/17/81 Negotiations 08/00/82 - 08/19/82 Board Approval 09/00/82 - 09/30/82 Loan Agreement Date 10/00/82 - 10/28/82 Effr,tiveness Date 12/00/82 01/28/83 01/19/83 Closiug Date 12/31/86 12/31/88 12/31/88 OTHER PROJECT DATA Borrower: Philippine National Oil Company (PNOC) Executing Agency: PNOC Energy Development Corporation (PNOC-EDC) Fiscal Year of Borrower: January 1 - December 31 Follow-on Projects: Bacon Manito Geothermal Power Project approved in FY88 (Loan 2969-PH) STAFF INPUT (Staff-Weeks) Bank FY 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Totals Preappraisal 2.7 .4 18.3 50.3 - - - - - - - 71.7 Appraisal - - .8 49.1 3.8 - - - - - - 53.7 Negotiations - - - - 12.1 - - - - - - 12.1 Supervision - - - - 21.9 28.8 21.6 12.6 16.7 7.6 3.2 112.4 Other - .9 1.8 .3 .1 - - - - - 3.1 Totals 2.7 .4 20.0 101.2 38.1 28.9 21.6 12.6 16.7 7.6 3.2 253.0 MISSION DATA Date No. of Specialization Performance Type of (mo./yr.) Persons Represented Rating 2 Trend3 Problems4 Preparation 06/81 3 a.b.d N/A N/A Appraisal 11/81 4 a.bod,f*g N/A N/A Post-appraisal 02/82 6 a,d N/A N/A Supervision I 09/82 2 a,d 1 2 Supervision II 02/83 5 a,b,dge 1 2 Supervision III 07/83 5 a,b,d,e 1 2 Supervision IV 02/84 4 a,b.d,e 1 2 Supervision V 08/84 6 a,b,d,e,h 1 2 Supervision VI 05/85 3 a,b.d 2 2 F Supervision VII 05/86 2 a.d.h 2 2 F Supervision VIII 11/86 3 a.c.d 2 2 F Supervision IX 01/88 2 c,d 2 1 F Supervision X 11/88 1 c - - I/ a: Economist; b: Geothermal Specialist; c: Petroleum Engineer; d:Financial Analyst; e: Procurement Specialist; f: Lawyer; g: Geologist; h: Energy Specialist. i/ 1: Problem-free or minor problems; 2: Moderate problems. 2/ 1: Improving; 2: Stationary; 3: Deteriorating. ./ F: Financial; H: Management. PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES COAL EXPLORATION PROJECT (Loan 2181-PH) PETROLEUM EXPLORATION PROMOTION PROJECT (Loans 2201-PH and 2202-PH) GEOTHERMAL EXPLORATION PROJECT (Loan 2203-PH) Evaluation Summary Introduction 1. Following the 1973 oil crisis, petroleum prices were satisfactory. the Government of the Philippines However, power tariffs were too low moved promptly to reduce the and there existed no systematic country's dependence on imports by procedure to determine the price of increasing the efficiency of energy geothermal steam (paras. 8-10, 13- use, by initiating investment 15, and 16-21). initiatives to stimulate the discovery and development of 3. Given the expected increase in domestic energy resources, and by energy demand, the first priority strengthening and improving for the 1980s was to accelerate the coordination among national energy development of domestic energy agencies. This strategy has been resources. In view of the country's successful in reducing oil resource and implementation consumption per unit of output, constraints, increased reliance had improving the knowledge of the to be placed on the private sector country's petroleum potential, and and foreign risk capital for the developing alternatives to imported development of indigenous energy oil. Nevertheless, the country resources. However, after an active remained highly dependent on oil involvement during 1973-1981, the imports (paras. 2-3). interest of international oil companies in the Philippines 2. The Philippines have abundant declined rapidly, due to the meager geothermal steam resources, some of results obtained. The lack of basic which have been developed for power geological information was a generation, large reserves of low- constraining factor for the grade coal, presenting difficult development of the coal industry. mining conditions, and relatively The lack of a systematic approach to modest petroleum prospects (paras. geothermal steam pricing and of a 4-7). At the time the three Bank- well-defined long-term geothermal financed exploration projects were power development program inhibited prepared, the legislative and private sector investments in institutional framework and xi geothermal exploration (paras. 8-12, exploration promotion campaign, and and 21). (4) training (paras. 31 and 35-38). 4. Between June 1982 and 7. The objectives of the September 1982, the Board of Geothermal galoration ProJIct were Executive Directors approved three (i) to improve the national strategy loans to the Philippine National Oil for geothermal exploration and the Company (PNOC) and one loan to the Government's geothermal development Government to finance coal and policy, (ii) to utrengthen national geothermal exploration and petroleum institutions in charge of geothermal exploration promotion activities. steam development, and (iii) to These were the first Bank operations facilitate the involvement of the directed towards the exploration and private sector in geothermal development of indigenous energy exploration and development, through resources in the Philippines (paras. (1) geoscientific and policy 1 and 23). studies, (2) drilling of exploration and appraisal wells, and (3) Obiectives technical assistance (paras. 32 and 39-40). 5. The objectives of the Coal Exploration Proiect were to mglementation EXRerience contribute to the acceleration of the development of domestic coal 8. The implementation of the supply and to strengthen the three projects reviewed in this technical capabilities of PNOC Coal report took place between 1982 and Corporation (PNOC-CC), through (1) 1989 and were strongly influenced regional and detailed coal with the adverse developments in exploration, (2) feasibility both the national and international studies, and (3) technical stages. In response to the erosion assistance in coal exploration and of energy prices since the early mine development and operations 1980s, international energy (paras. 30 and 33-34). companies have retrenched, rather than expanded, during the 1980s, and 6. The objectives of the have concentrated their exploration Petroleum Exploration Promotion budgets in OECD countries. The Project were: (i) to rekindle the decline of energy prices has also interest of private oil companies in reduced the attractiveness of coal petroleum exploration in the and geothermal exploration and Philippines and to extend development (para. 26). exploration activities to relatively unexplored onshore areas; and (ii) 9. In the Philippines, budget to strengthen the exploration deficits tended to grow. A large capacity and technical capabilities part of this deficit was financed of the two loan beneficiaries, with foreign borrowing, which namely, the Bureau of Energy eventually led to a debt crisis in Development (BED) and the PNOC 1983, and the adoption of a Exploration Corporation stabilization program marked by (PNOC-EC), through (1) geological fiscal restraint. Both investments and geophysical surveys and studies, and operational and maintenance (2) exploratory well drilling, (3) expenditures were sharply reduced. technical assistance for an These economic difficulties were accentuated by political xiii difficulties which arose in the until a more propitious time, in first half of the 1980s. The order to maximize its returns in political instability also prevented terms of private investment in the the Government from tackling the Philippine oil exploration. The worsening economic situation promotion campaign was held in the effectively till after February third quarter of 1987 and benefitted 1986, wien a democratically elected substantially from a renewed government assumed power (paras. 27- confidence in Philippine politics 29). and a mild upsurge in overseas exploration activities. Primarily 10. The implementation of the Coal due to the economic crisis faced by Exploration Proect was disrupted by the Government and the consequent the deterioration of the law-and- budgetary constraints, PNOC-EC order situation in project areas. decided to actively promote some of However, PNOC-CC did not confine its its exploration permit areas and activities to the areas specified in attract partners to participate in the project description, but also the drilling operations, instead of undertook reconnaissance and drilling exploratory wells on its geological work in parts of western own (paras. 66-73). Mindanao. At the request of PNOC, the Bank agreed to expand the 12. With the exception of the two project scope to cover the coal policy studies, the implementation survey program in the latter areas. of the Geothermal EXploration But it was impossible to predict Project proceeded rather smoothly. the likely trends in the-law-and Drilling of the project wells order situation and decisions on started even before loan signing to those areas where work could be take advantage of the rig undertaken were in a state of availability in areas to be continual review. This uncertainty explored. However, the exploration on the work environment seriously work slowed down during 1986 due to jeopardized the completion of the budgetary constraints, security project as originally planned problems at drilling sites, lack of (paras. 60-64). progress in achieving a satisfactory agreement with the end user of the 11. The implementation of the geothermal steam, and the Petroleum Exploration Promotion uncertainty created by the issue of Project was generally uneventful. privatization. Due to budgetary However, important delays were constraints, the non-power steam experienced in the completion of development program was suspended individual project activities. As a after drilling one low-enthalpy result, the completion of the basin well, except for a UNDP study on evaluation study was delayed by non-power uses of steam. about two years. It would appear that part of the implementation 13. The implementation of the two delays could have been prevented policy studies suffered initially through careful planning at the from difficulties over the studies' preparation stage. However, even if terms of reference and the procedure the activities leading to the for evaluating consultants' petroleum exploration promotion proposals and, later, from budgetary campaign had been completed constraints. In the end, the study according to the original schedule, on the prioritization of steam the campaign would have been delayed propects was dropped and the xiv geothermal steam pricing study was objectives of the project have been completed with a long delay (paras. largely achieved. At project 74-80). completion, a comprehensive assessment of the coal resource 14. PNOC managed procurement potential of all Mindanao and Samar activities in accordance with Bank and a detailed exploration program guidelines. Bank staff were at Lalat was completed. In extremely helpful in assisting PNOC addition, a number of geologists and to cope with the preparation of mining engineers have been trained. bidding documents and the resolution of procedural issues. Nevertheless, 18. Although the objectives of the long procurement delays were project were achieved to a large experienced due to inadequate extent, the imprecise definition of procurement preparation, which left the project precludes any attempt to items to be procured largely quantify the degree of success in undetermined at appraisal, rigid and inoreasing the geological and time-consuming local procurement engineering knowledge about the regulations, slow decision making of selected exploration areas. Project certain loan beneficiaries, and activities have not located frequent changes in the scope of the commercial coal deposits, but this projects and/or PNOC's attitude is not considered a failure, because toward replenishing its stocks (i) most exploration efforts do not (paras. 80-84). result in new mine development, particularly in the short term, and 15. Actual project costs were (ii) the unexpected collapse of the considerably below appraisal world energy prices during project estimates for all three projects. implementation detracted However, the comparison of the significantly from the economic appraisal cost estimates and actual viability of marginal coal deposits costs is not meaningful because of (paras. 102-103 and 129-131). the drastic changes in the scopes of all three projects (paras.87-88). 19. The Petroleum ExRloration Promotion Proiect led to a promotion 16. Disbursements under the four campaign, which has been very loans were slow because of successful in re-kindling petroleum implementation delays, project scope exploration interest in the changes, and the low volume of Bank- Philippines. The exploration financed procurement. Large activities of private oil companies portions of the loans were canceled in the Philippines, which had come at the request of the Borrowers. to a virtual standstill during 1985- Total loan cancellations amounted to 86, increased significantly in the 67 percent of the total original years following the 1987 promotion amount of the four loans reviewed campaign. Petroleum exploration (paras. 85-86). investments generated during 1988-90 alone amounted to nearly six times Results the total project cost (paras. 104- 109 and 132-135). 17. Coal Exploration Project. Despite continuing law-and-order 20. Although some planned drilling problems in some project areas, and studies were not undertaken, the which led to modifications of the Geothermal Exploration Project project scope, the technical succeeded in proving commercial xv steam at Palinpinon II (southern undertaken. At present, the Negros) and Bacon Manito (Southern Philippine coal industry is being Luzon). However, the commercial restructured to rely more heavily on development of these fields was the private sector. Therefore, the delayed because of political sustainability of the progress uncertainty in the country and the achieved in coal exploration and late resolution of steam price and mining will depend to a large degree inter-institutional issues. on the outcome of the ongoing privatization efforts (para. 140). 21. The project achieved its stated policy objectives only to a 24. Petroleum Exploration limited extent. The project's Promotion Project. Regardless of contribution to a meaningful the initial success of the improvement of the national exploration promotion campaign, the geothermal exploration and sustainability of the renewed development strategy was thwarted by private sector interest in the the cancellation of the study on the Philippines will be determined by prioritization of geothermal sites. the success of the ongoing Although a pricing study was exploration. On the basis of completed and introduced a new encouraging initial results of approach to determine the price of exploration, the sophistication of geothermal steam, the price issue both PNOC and OEA, and the remained unresolved long after Governent's continuing commitment project completion (paras. 110 and to the policy of relying on private 136-138). risk capital for petroleum exploration, the audit rates the 22. The projects contributed sustainability of the project significantly to institution benefits as likely (para. 141). building at tLe sector institution level. However, the abolition of 25. Geothermal ExRloration MOE in 1986 led to the weakening of Project. The major economic coordination in the energy sector. contribution of the project was the This, in turn, allowed critical delineation of two important issues, such as the dispute between geothermal steam sources at PNOC and NPC over geothermal steam Palinpinon and Bacon Manito. Given pricing, to remain unresolved for their economic viability and PNOC- relatively long periods, with EDC's demonstrated ability to consequent and deleterious effects develop geothermal steam resources, on sector development (paras. 111- the sustainability of the economic 116).benefits of the project appears assured (para. 142). Sustainability Findines and Lessons 23. Coal Exploration Project. The main benefits of the project were 26. The Bank's efforts to ensure the increased knowledge about the orderly implementation of the Coal country's coal resources and the Exploration Project were thwarted exposure of PNOC-CC staff to initially by the deteriorating law- advanced coal exploration and mining and-order situation and, later, by techniques. These benefits are financial constraints imposed on likely to become outdated if no PNOC and its various subsidiaries further exploration and training are within the context of the contry's xvi austerity program. As a result, implemented, this type of operation project implementation became can be very effective in attracting haphazard. In retrospect, the Bank private risk capital to explore for can be faulted for failing to a country's natural resources and adequately assess the security that the Bank has a comparative problems in the project areas and advantage in assisting its borrowers embarking on a project which proved to achieve this goal, thanks to its to be impossible to implement in an accumulated experience and staff orderly fashion (paras. 63-64). with wide international experience (paras. 91-92 and 132-135). 27. Despite the importance attached by the Bank to the two 30. Although there have been policy studies included in the scope significant reductions in the scope of the Geothermal Exploration of all three projects, due to Project, one of the studies was budgetary constraints and the dropped and the other was completed Government's austerity program, the with a substantial delay, due mainly training and technical assistance to inadequate project preparation. components were not curtailed, This has limited success in because of the Borrower's strong achieving the project's stated commitment to institutional objectives (paras. 74-79 and 136- development (paras. 110-116). 138). 31. In the Coal Exploration 28. The Coal Exploration and the Project, the consultant's personnel Petroleum Exploration Promotion appear to have tended to displace Projects have shown that the scope PNOC-CC's line managers, instead of and the character of an exploration teaching them to perform their jobs project is highly likely to change better, thus detracting from the as the initial stages of the project future benefits of the technical progresses (paras. 60 and 67-69). assistance provided (para. 99). The changes in project scope have introduced inefficiencies and delays 32. Project experience points to a in project implementation, have need to: increased the cost of project supervision by the Bank, and have 0 design exploration projects in resulted in the cancellation of well-defined stages, the important portions of the Bank loan. implementation of each Project experience suggests that the successive stage being adverse effects on project conditioned upon clearly implementation and supervision of defined criteria regarding the uncertainties inherent in any results of the previous stage, exploration program can be moderated in order to avoid expenditures by using an expanded Project that are no longer warranted Preparation Facility to generate as (para. 145); much data as possible, to constitute a sound basis to define the scope of generate strong borrower the exploration project to be commitment to institution- financed by the Bank. building to ensure the achievement of the Bank's 29. The Petroleum Exploration institutional objectives Promotion Project has demonstrated (para. 146); that, when properly designed and xvii * clearly define the role of * reach agreement with the expatriate consultants vis-a- borrower on the terms of vis their local counterparts reference and implementation and the way in which the procedures of critical studies technical assistance will be included in the project scope provided, in order to ensure at least by negotiations, in the sustainability ofthe order to ensure their timely institutional development completion (para. 148). achieved (para. 147); and PROJEC PERORMANCE AUDIT REPORT PHILIPPINES COAL EXPLORATION PROJECT (Loan 2181-PH) PETROLEUM EXPLORATION PROMOTION PROJECT (Loans 2201-PH and 2202-PH) GEOTHERMAL EXPLORATION PROJECT (Loan 2203-PH) I. BACKGROUND 1. Pursuant to the request of the Government, a joint World Bank/Asian Development Bank (ADB) mission visited the Philippines in April-May 1980 to conduct an independent review of the country's energy prospects. The result was an energy survey, which formed the basis of the Bank assistance to the Philippines in exploring for indigenous energy resources.' The sutsectors chosen for assistance were coal, petroleum, and geothermal energy, where prospects appeared to be relatively good for decreasing the country's strong dependence on imported oil. Between June 1982 and September 1982, the Board of Executive Directors approved four loans to finance one coal exploration project (Loan 2181-PH), one petroleum exploration promotion project (Loans 2201-PH and 2202-PH), and one geothermal energy exploration project (Loan 2103-PH). A. THE PHILIPPINE ENERGY SECTOR Historical Perspective 2. For many years prior to the oil crives of the 1970n, the Philippine energy situation was characterized by a heavy dependence on imported oil and limited activity in exploration and development of indigenous energy resources. At the same time, its per capita energy consumption grew at a rapid pace in line with urbanization and industrialization. In the wake of the 1973 oil crisis, the Government moved promptly to reduce the country's dependence on imports by increasing the efficaency of energy use, by initiating measures such as investment initiatives to stimulate the discovery and development of domestic energy resources, and by strengthening and improving coordination among national energy agencies. 3. This strategy has been successful in reducing oil consumption per unit of output, improving the knowledge of the country's petroleum potential, and developing alternatives to imported oil. Nevertheless, oil imports in ~/ Philippines Energy Sector Survey, February 12, 1982, IBRD Report No. 3199a-PH. 2 1981 (US$2.4 billion) still consumed about 30 percent of total foreign exchange earnings. Ener&3 Resources 4. PetroleM. The geology of the Philippines is extiemely complicated. Sedimentary rocks in the basins are frequently sirongly folded and faulted so that, while they may contain small accumulations of oil and gas, the chance of finding large deposits is, in most cases, rather poor. Exploration work on land is hindered and rendered slow and costly by generally rugged and swampy terrain, with thick vegetation cover. As a result, much of the exploration activity by private companies has been offshore in the vicinity of Palawan and Mindoro islands, and onshore exploration has been conducted mainly by the Philippine National Oil Company (PNOC). 5. After a long history of sporadic oil exploration, dating from the turn of the century, an upsurge of exploration took place in the early seventies. Most of the offshore areas quickly became covered by geophysical or service contracts awarded to foreign and domestic oil companies. A total of 89 operating contracts have been awarded in the Philippines during 1973-81, 125,000 line kilometers of seismic shot, and 112 wells drilled. As a result of these activities, oil was discovered in 1976 at the Nido structure off the northwest coast of Palawan. Seven offshore discoveries in the same area followed suite, with total recoverable reserves on the order of 100 million barrels (Bbls).2 However, international oil company (IOC) interest in Philippine oil exploration interest declined rapidly, due to the meager results obtained. 6. Geothermal. The Philippines' location in the so-called Pacific Fire Ring provides it with a rich source of geothermal energy. The estimated ultimate production potential which would be adequate for about 8,000 MW of electricity generating capacity.3 In 1982, four fields (Tivi and MakBan on Luzon and Tongonan and Palin.inon in the Visayas) were under development. In addition to the Philippine National Oil Company Energy Development Corporation (PNOC-EDC), three overseas companies veie active in the subsector and two other overseas companies were showing strong interest. 7. Coal resources in the Philippines are abundant and reserves have been variously estimated at between 150 million and 1,000 million tons. This wide range reflects both the lack of adequate technical data and the variety of definitions used for the classification of reserves. The coal is, however, generally of a poor quality and often requires physical upgrading prior to use. Moreover, coal occurrences are scattered throughout the islands, impeding coal exploration and development efforts. The lack of basic 2/ President's Report, Philippines: Petroleum Exploration Promotion Project, September 8, 1982, Report No. P-3297-PH, paras. 43-45. / Proven reserves in 1982 were much smaller --about 1000 NW-- mainly reflecting the relatively early stage of the exploration and development effort. 3 geological information has been an inhibiting factor for the development of the coal industry.' Energy Production 8. Petroleum. Crude oil production in the Philippines started in 1979. After achieving a peak production level of 40,000 barrels per day (BOPD) in late 1979, production had to be cut back to 14,000 BOPD in early 1980, due to excessive water influx. In 1981 total crude production had declined to 4,000 BOPD. This experience strengthened the belief that under the geological conditions prevailing in the country, any oil fields discovered would be relatively productive but small and, therefore, short-lived. 9. Geothermal. The first large-scale units to become operational were at Tiwi and Mak-Ban in southern Luzon, both operated by the local subsidiary of an international oil company, under a contract with the National Power Corporation (NPC). In mid-1982, the total installed geothermal power capacity in the Philippines was about 559 MW, accounting for approximately 10 percent of the total electricity generating capacity, and placing the country second only after the United States in geothermal power generation.5 10. goal. In the early seventies, annual production was between 105- 125,000 tons. The sharp increase in the oil prices in 1974 stimulated increased interest in coal among industries and private utilities. In 1977 the industry reached its historical peak output of 284,000 tons. However, the industry remained small, highly fragmented, and devoid of advanced technology. Energy Demand and Investment Requirements 11. The Philippines Energy Sector Survey forecast energy consumption to increase to 100.5 million barrels oil equivalent (boe) of petroleum products and 6.8 million tons of coal in 1989 from 79.0 million boe and 239,000 tons, respectively, in 1979. Domestic c.rude oil production was expected to increase to 25 million bbls in 1989. About one-half of the increase in coal consumption was to come from indijenous production. 12. Given the expected increase in energy demnnd, the first priority for the 1980s was to accelerate the development of domestic energy resources. This would require substantial investments which would claim a considerable proportion of the country's financial resources.' In view of the country's Project Completion Report, Philippinest Coal Exploration Project, September 29, 1987, Report No. 6960, par&. 2. President's Report, Philippines: Geothermal Exploration Project, Report No. P-3360-PH, September 8, 1982, pares. 41-42, and 45-46. According to Government plans for 1982-87, investments for the development of indigenous energy resources would require P 17.42 billion (approximately US$ 2 billion) of which about two-thirds would be in foreign exchange (President's Report, Philippines: Second Structural Adjustment Loan, April 1, 1983, Report No. P-3389-PH, paras. 95-97; and Annex IV, Attachment III, Table 1). 4 resource and implementation constraints, increased reliance had to be placed on the private sector and foreign risk capital for the development of indigenous energy resources. Legislative Framework 13. Following the promulgation of the Oil Exploration and Development Act (Presidential Decree No. 87), the Philippine Government had pursued with success an imaginative and flexible "open door" policy in attracting private sector investments to explore for petroleum. International oil companies generally considered the contractual arrangements t6 be very satisfactory. Their relations with the Government and national institutions in the subsector were good. In addition, an incentive package incorporating still improved fiscal and contractual terms applying to service contracts was under consideration by the Government. 14. Geothermal exploration and development was governed by Presidential Decree No. 1442 (The Geothermal Exploration and Development Act, 1978). The terms of the Decree applied equally to foreign and local contractors and joint ventures. Foreign companies contemplating geothermal operations in the Philippines generally considered the contractual arrangements to be satisfactory, with the exception of geothermal steam pricing procedures. 15. In order to promote coal production, the Government introduced through the Coal Development Act of 1976, a scheme of coal service contracts, to induce the private sector, both local and foreign, to play a more active role in the coal industry. Although the scheme was fairly successful, especially during 1980-81 when the larger private local mining companies became interested in coal, there remained a significant gap between demand and domestic supply of coal.7 Institutional Framework and C,rvdination 16. One of the Government's major responses to the altered international energy situation of the 1970s has been to strengthen and consolidate the institutional and organizational framework of the energy sector. In 1973, it established PNOC to ensure reliable oil supply and distribution and to facilitate investment in energy exploration and development. 17. In 1977, a full-fledged Ministry of Energy (MOE) was formed to plan, supervise, and coordinate sectoral activities. Deputy Ministers were appointed to head the two key agencies in the sector, PNOC and NPC. Line responsibilities in the Ministry were assigned to two major bureaus: the Bureau oi Xnergy Development (BED), which was given the task of supervising the development of indigenous energy resources (except hydro and non- 7/ President's Report, Philippines: Coal Exploration Project, Hay 27, 1982, Report No. P- 3343-PB, pars. 45. 5 conventional); and the Bureau of Energy Utilization, which was made responsible for overseeing and implementing the energy conservation program, regulating the distribution of oil and petroleum products, and forecasting overall energy demand and supply. In addition, several boards, commissions, and centers were established under MOE to regulate petroleum, coal, and electricity prices, to promote the development of renewable and non- conventional energy sources, and to r-nage rural electrification.' Energy Pricing 18. As an oil importing country, the Philippines had not only adjusted the domestic prices of petroleum products quickly to cover changing world prices; it had gone further and imposed selective taxes to further discourage consumption. Despite some important anomalies in relative product prices, the structure of prices was broadly satisfactory. This was however not the case for the power sector where the level and structure of both wholesale and retail tariffs urgently needed revision. 19. Sales of petroleum products had traditionally been an important source of revenue for the national exchequer; in 1980 they contributed nearly 20 percent of total tax revenues. In 1974 an Oil Industry Special Fund was introduced among the various levies charged on product prices. The revenues from this fund, which were generated primarily through gasoline sales, were used for other energ;-related projects. The Special Fund had provided the Government with a valuable and growing source of revenues for its energy development program. It had been used to provide equity capital for PNOC and its subsidiaries and to finance specific projects undertaken by them, as well as to finance the purchase by NPC of power plants previously owned by the private sector. 20. Coal Pricing. The National Coal Autt rity (NCA), the central government entity with both regulatory and executiva powers in the coal subsector, had established a pricing policy for coa . with a floor price based on the largest contract for domestic supplies, and ceiling price linked to the import parity price of coal, allowing producers and consumers to negotiate freely within this range. However, the ceiling price for the cement industry had been maintained at the level established in a presidential decree mandating and regulating the conversion from oil to coal (US$ 97/ton for 5,600 kcal/kg coal), although the 1981 ceiling --ice for the same grade of coal was around US$ 75-80 per ton delivered to consumers. The Bank felt that having two levels of ceiling price was a potential source of problems. However, it A high proportion of the MOE staff were in fact PNOC staff seconded to the Ministry (Many of the senior professionals were originally employees of an international oil corporation, which was sold to the Governmentl they had became the original core of the PROC staff). Thus, PROC enjoyed a privileged position within the oil industry as a result of the absence of an arm's length" relationship between MOE and PNOC. (Philippines Eneriy Sector Surviy, par&. 4.05). 6 preferred to raise the issue as part of the general discussions on energy pricing in the context of the proposed second structural adjustment loan.9 21. Geothermal Steam Pricing. The Government's practice was to pay for steam at the power plant fence on a cost related approach, with a firm contract price derived from estimated costs and a target rate of return. This principle seemed acceptable to the international companies, although they continued to press for linkages to the price of fuel oil. Difficulties in further geothermal development arose through the need perceived by many companies to agree on a steam price with NPC in advance of commencing exploration, a situation dictated both by the lack of major alternative uses for steam in most locations and the relatively low initial risk of failing to find a commercial resource. Two IOCs had gone ahead with basic geothermal exploration in advance of a steam contract, and a third was proceeding on the basis set out in its existing geothermal license, but other interested companies had taken an extremely cautious line and had not been prepared to undertake even basic exploration in advance of an agreed steam selling price. PNOC-EDC was undertaking exploration in advance of a steam contract, in the interests of national energy development objectives. The Bank's Lending Strategy 22. Previous Bank lending in the energy sector had focused extensively on the power subsector through eight loans for power generation and transmission and rural electrification. However, consistent with the findings of the joint Bank/ADB Energy Sector Survey, the Bank now sought to support a broader range of initiatives in the sector, including the exploration for and development of indigenous resources, the provision of supporting infrastructure, the strengthening of new and existing institutions, and the formulation of policies to restrain energy demand. 23. The Coal Exploration Project was the Bank's first lending operation in support of the Government's efforts to reduce its dependence on imported oil through the development of domestic energy resources. It was followed in quick succession by the Petroleum Exploration Promotion and Geothermal Exploration Projects. Under these projects, in addition to enhancing the exploration efforts of the national organizations, the Bank sought to stimulate the interest of private sector companies for exploring energy resources in the Philippines. The geological information obtained through the proposed pL.jects was expected to assist in attracting private sector and foreign interest in carrying out detailed exploration and development in already identified prospective areas. 24. The Bank's involvement in petroleum exploration was perceived as a catalyst to attract private sector participation through joint ventures with the national oil company to continue exploration begun under the project. President's Report, Coal Exploration Project, para. 43. Although the President's Report for the Second Structural Adjustment Loan (pars. 104) refers to a review of the pricing policies for coal, the Government's Policy Statement for the Energy Sector (Annex IV, Attachment III, page 7) indicated that dual ceiling prices for coal were to continue. 7 Through its involvement in the geothermal subsectdr, the Bank aimed at improving both the country's exploration strategy, including private sector involvement, and the national program conducted by PNOC-EDC. It also aimed at making some progress with NPC's geothermal power development planning. B. PROJECT ENVIRONMENT 25. The implementation of the three projects reviewed in this report took place between 1982 and 1989 and were strongly influenced with the adverse developments in both the national and international stages. International Developments 26. Much of the petroleum exploration and development in developing countries has been carried out by major international companies. A number of these companies have retrenched, rather than expanded, during the 1980s, and have concentrated their exploration budgets in OECD countries. The erosion of oil prices since the early 1980s has led to lower investment in hydrocarbon exploration and development. The impact was particularly severe in 1986 and 1988, the years of oil price decline. Oil exploration investments by six major oil companies (BP, Exxon, Chevron/Gulf Oil, Mobil, Shell and Texaco) fell by half, from US$ 9.2 billion in 1982 to US$ 4.9 billion in 1986.10 In parallel to the decline of oil prices, the prices of alternative energy resources, such as coal and geothermal steam also declined, making exploration and development investments for such resources less attractive to international energy companies. Domestic Developments 27. Among the more significant factors acting as incentives or disincentives for investment in developing countries' extractive industries are technical risk, contractual arrangements, and the perception of political risk. Among these, Philippines had a fortuitous position only with regard to the contractual arrangements, which were generally considered to be satisfactory (paras. 13-15). Previous exploration had indicated the high technical risk (paras. 4 and 8); and the political risk, which can be defined as the probability that the goals of a project will be affected by changes in the political environment, increased during the early 1980s. 28. The lack of domestic oil resources compounded the country's economic difficulties in the 1970s. Budget deficits tended to grow. A large part of this deficit was financed with foreign borrowing, which eventually led to a debt crisis in 1983, and the adoption of a stabilization program marked by fiscal restraint. As a result, investment expenditures in 1985 were reduced to one-half of their 1983 level in real terms, and operatinns and Aid Delivery in the Oil and Gas Sector, Petro-Canada International Assistance Corporation, December 1989, Volume 1, p. 79. 8 maintenance expenditures to about two-thirds." Moreover, the country's relations with foreign oil companies became clouded in the course of 1984, because the Government would not provide foreign exchange for the companies' share of cost oil and profit oil. 29. These economic difficulties were accentuated by political difficulties which arose in the first half of the 1980s. The political instability also prevented the Government from tackling the worsening economic situation effectively till after February 1986, when a democratically elected government assumed power. To deal with the economic situation, the new government undertook, with the support of the International Monetary Fund (IMF) and the Bank, a series of reforms after 1986 to revive the economy. These measures led to a positive GDP growth in 1986 after two years of decline, a reduction in the inflation rate, and a positive balance of international trade account. However, the country's foreign exchange situation still remained critical, mainly owing to the large external debt service costs.u C. PROJECT SUMMARIES Proiect Obiectives 30. The objectives of the Coal Exploration Project were: (i) to provide the Government with geological data for two coal-bearing areas with development potential, and thus to contribute to the expansion of domestic coal supply within the shortest possible time frame through private sector development of promising coal fields; (ii) to contribute to the acceleration of the development of coal supply through detailed exploration of a known coal field; and (iii) to strengthen the technical capabilities of PNOC-CC in its coal operations. 31. The objectives of the Petroleum Exploration Promotion Project were: (i) to rekindle the interest of private oil companies in petroleum exploration in the Philippines and to extend exploration activities to relatively unexplored onshore areas; and (ii) to strengthen the exploration capacity and technical capabilities of the two loan beneficiaries, namely, BED and the PNOC Exploration Corporation (PNOC-EC). 32. The primary objectives of the Geothermal Exploration Project were (i) to improve the national strategy for geothermal exploration, with particular emphasis on exploring new areas close to the Manila market; (ii) to help strengthen PNOC and NPC and to improve the geothermal development policy 11J The Philippines. Selected Issues in Public Resource Management, April 15, 1988, Report No. 6887-PH, para. 1.1. The new Government has also abolished HOE and assigned part of its functions to the Office of Energy Affairs (OEA) attached to the Office of the President. 9 of the Government; and (iii) to facilitate the involvement of the private sector in geothermal exploration and development. Project Description 33. Coal Exploration Project. The project consisted of three components: (1) regional coal exploration in Samar and eastern Mindanao, identified as the most prospective areas not under lease to the private sector; (2) detailed coal exploration in the Lalat area of southwestern Mindanao; and (3) technical assistance to the PNOC Coal Corporation (PNOC-CC). 34. The regional exploration in Samar and eastern Mindanao was primarily aimed at locating coal deposits suitable for open-pit mining methods. The detailed exploration at Lalat was aimed at establishing measured coal reserves and completing a conceptual feasibility study for the exploitation of a previously identified prospective coal area. The technical assistance to PNOC-CC was designed to strengthen the technical capabilities of this entity in all aspects of coal exploration, mine development, and mine operation. 35. Petroleum Exploration Promotion Project. The project had two distinct components. The first, to be implemented by BED and supported by IBRD Loan 2201-PH, was a standard petroleum exploration promotion operation. The second component, which was to be implemented by PNOC-EC and supported by IBRD Loan 2202-PH, implied Bank assistance to the petroleum exploration program of PNOC. 36. The BED component was designed to encourage oil companies to step up exploration activities in the Philippines. It would entail a critical evaluation of all available exploration data, complemented by the acquisition of new data where needed. These data would form the basis of a comprehensive compilation, providing the first countrywide qualitative and quantitative assessment of petroleum prospects. The results of this compilation would highlight areas where immediate exploration was warranted, and would be assembled in the form of a promotional package available to any interested oil company. The agreed program comprised: (1) geophysical surveys (168,522 line-km of aeromagnetic and 8,400 line-km of offshore seismic surveys); (2) regional basin evaluation comprising 15 offshcre and onshore areas; and (3) the preparation of a promotional package. 37. The PNOC component comprised a step-wise exploration program in each of the three or more onshore areas held by PNOC-EC (initially Mindoro, Cotaboto in Mindanao, and Cebu) and included: (1) geophysical surveys and seismic data processing (unspecified amount of gravimetric and 4,400 line-km of onshore seismic surveys); (2) geological studies; (3) drilling of up to six exploration wells; (4) technical assistance; and (5) training of technical staff in short courses. 38. Although there was no discrete petroleum exploration promotion component included in the PNOC-EC project, it was expected that PNOC-EC would 10 seek private sector participation at appropriate points in the course of implementing its exploration program, by inviting oil companies to form joint ventures (para. 50). 39. Geothermal Eloration Project. The project consisted of (1) geoscientific studies to determine potential drilling locations; (2) drilling of about 25 wells (4 wells at Palinpinon in southern Negros and 11 wells at Bacon-Manito (south Luzon) to prove sufficient reserves for a 110 MW power generating unit at each location; two shallow wells for low-enthalpy steam at Bacon-Manito; and 8 wells in other prospective areas in Luzon); (3) four studies, including two geothermal exploration/development policy studies and engineering studies to determine the extent of reserves at Palinpinon and Bacon-Manito; and (4) technical assistance. 40. The policy studies were to address two essential issues: the first on how to prioritize various prospects for further work and the second on principles for fixing the price of steam. The latter was considered by the Bank particularly relevant for attracting private company interest in geothermal exploration." Implementation Arrangements 41. Coal Exploration Project. While the Government did not wish PNOC- CC to become the major coal company in the Philippines, it realized that the private sector would never undertake the regional geological assessment required to evaluate the indigenous coal potential. Therefore, the responsibility for project implementation was given to PNOC-CC. 42. For the purposes of the project, and consistent with PNOC's normal practices, a Project Unit would be established within PNOC-CC, headed by a Project Manager reporting directly to the General Manager, and with staffing and functions satisfactory to the Bank.s The Project Unit would be organized into three regional exploration groups (Samar, eastern Mindanao, and Lalat). The preparation of preliminary mine designs and prefeasibility studies would be carried out by PNOC-CC's Mining Engineering Department in cooperation with a team of consultants. 43. PNOC-CC had a good management team, a core group of geologists and mining engineers specialized in coal, and the logistic support of PNOC and its other subsidiaries. PNOC-CC's operational personnel, while technically qualified, were relatively inexperienced in the coal sector. They had limited exploration experience and little exposure to feasibility studies and the subsequent implementation of mine development. For these reasons, the PNOC-CC staff would be strengthened by internationally recruited geology and mining 13Y Project Completion Report, Philippines: Geothermal Exploration Project (Loan 2203-PH), Report No. 8889, June 29, 1990, Evaluation Summary. Project Completion Report, Philippines: Coal Exploration Project, para. 4. Project Agreement, Coal Exploration Project, Section 2.01(b). 11 consultants.16 The consultants would report to the Project Manager and would be responsible for assisting in planning and supervising the execution of the exploratory program and for advising PNOC-CC on its overall technical operations. The execution of a contract for consultant services acceptable to the Bank was a condition of loan effectiveness." 44. Petroleum Emloration Promotion Proiect. BED was concerned with all offshore areas and a few unlicensed onshore areas, while PNOC, together with PNOC-EC, was concerned with most other onshore areas. Therefore, BED and PNOC-EC were chosen as the agencies which would implement the project. BED would be responsible for country-wide petroleum exploration promotion and PNOC-EC would carry out exploration in areas covered by its exploration permits. 45. Few of BED exploration staff had extensive direct exposure to petroleum exploration operations, and several of the more senior positions were filled by staff with rather limited experience. To remedy this weakness, the basin evaluation teams would be assisted by an experienced senior consultant who would not only supervise the overall effort on a full-time basis, but would participate actively in selected aspects of the evaluation and play a major role in the preparation of the promotional package. Provision was also made for hiring additional consultants for short-term specialized assignments during the implementation of the project. 46. PNOC-EC would execute the proposed program in each project area in a stepwise manner, deciding at each stage whether to seek joint venture participation, to proceed directly to the next step, or to abandon the area altogether. These decisions would be based on the results of the step completed and would be discussed with the Bank before proceeding. Given PNOC- EC's in-house capabilities, the project required the engagement of a geological consulting company, two seismic data acquisition companies for field surveys, and a data processing company for the processing of the acquired seismic data. 47. Geothermal Exploration Project. PNOC would carry out the policy studies and PNOC-EDC would be responsible for the geothermal exploration and technical assistance components. The twenty-five wells included in the project scope would be drilled by PNOC Energy Drilling Incorporated (PNOC- EDI). PNOC Geothermal Technology Corporation (PNOC-GTC) would provide technical assistance to PNOC-EDC. Given the satisfactory past performance of PNOC-EDC and PNOC-EDI and PNOC-EDC's existing technical assistance contract with a reputable foreign concern, expatriate consultants would be used only for the execution of the geothermal and policy studies. 1J/ Project Agreement, Coal Exploration Project, Section 2.02. 1J Loan Agreement, Coal Exploration Project, Section 7.01(a). 12 Proiect Issues. Desian and Preparation 48. Role of the Private Sector. Given the critical need to maximize private sector investments for the exploration and development of indigenous energy resources (para. 12), the Bank placed special emphasis on the role of the private sector in designing the three projects. 49. Petroleum. BED and Bank staff agreed that a systematic regional basin evaluation was needed to reverse the decline in oil exploration activity in the Philippines. This would not oanly result in a substantially improved understanding of the petroleum potential of the Philippine basins, but it would also be a valuable basis for developing new exploration strategies. While it was not possible to quantify possible rewards, chances were considered good that discoveries on the order of 10-15 million Bbls could be made. Although no large oil company would commence exploration for such small fields per se, they might become interested once they could focus on well defined prospective areas without a prior regional evaluation effort, which would be too manpower-intensive for them. 50. BED agreed to develop, in consultation with the Bank, no later than December 31, 1983, and to periodically update thereafter and ultimately implement, a detailed plan and schedule for a promotional campaign based on the results of the basin evaluation program.1 It was also agreed that PNOC- EC would seek private sector participation at appropriate points in the course of implementing the agreed exploration program, by inviting private oil companies to form joint ventures to continue more intensive exploration in one or more of these areas. In the event of a successful promotion leading to a joint venture in which the other partner was to cover only a portion of the foreign exchange cost, PNOC-EC's exploration expenditures under the joint venture could be financed from the loan, subject to the Bank's approval of the contract, operator, and proposed exploration program, as well as various aspects, such as procurement procedures.1 51. Coal. One of the major inhibiting factors for the development of the coal industry in the Philippines has been the scarcity of basic geological information which has limited the interest of the private sector in allocating financial resources to coal exploration. The Coal Exploration Project would address this issue by financing basic geological surveys in two prospective regions, where coal-bearing areas amenable to open pit mining was recently discovered. It was expected that the geological information obtained through the project would stimulate private sector participation in coal development. 52. In order to further stimulate private sector participation in coal production, the Government has also indicated its interest in principle in Bank support for a future project to provide financing to the private sector 1 Loan Agreement (Loan 2201-PB), Section 3.06. 19/ Project Agreement (Loan 2202-PB), Section 2.09 and Schedule, par&. 3. 13 for carrying detailed coal Axploration. The Government has agreed to carry out a study, by December 31, 1983, to evaluate the potential financing needs of the sector and to define possible schemes to channel financial resources to coal exploration as part of the initial preparation activities for such a project (Guarantee Agreement, Section 3.04).20 In addition, the Guarantee Agreement (Section 3.02(c)) stipulated that the prospective coal areas identified through the proposed project would be offered by the Government to private or other duly qualified companies under contracts consistent with the Coal Development Act. 53. Geothermal. The Decision Meeting concurred with the post- appraisal mission recommendation that PNOC should be encouraged to cooperate with the private sector in joint ventures for exploration and development, and that the Government/PNOC should be requested to provide the Bank with a policy statement to this effect. It was agreed that the most appropriate vehicle for such a policy statement would be the proposed Second Structural Adjustment Loan (SAL II), which would address, among other things, the Government's overall energy policy.21 Instead, two policy studies were included within the scope of the Geothermal Exploration Project to address the issues of geothormal steam pricing and the prioritization of geothermal sites (para. 40). In connection with SAL II, the Government's policy statement for the energy sector confirmed its commitment to "encourage both public and private sectors separately and in joint ventures to explore and develop onshore energy resources." 54. Security Risk. A potential risk could be posed by anti-Government activist groups in the Samar region where 50% of the Coal Exploration Project activities would be carried out. However, at the time of project appraisal in January 1982 exploration and mining activities were reportedly being conducted in Samar without any problems. For this reason, and because of the development potential of the area, it was decided that the risk was acceptable. Should, in the worst case, the need arise to cease work in this area, the regional work could continue in another region of the country selected in consultation with the Bank. 55. Geological Risk. There was a risk, normally associated with this kind of operation, that the exploration activities under the Coal Exploration Project would not result in the location of economically and technically viable coal deposits in the project areas. In this event, the project L.V On December 23, 1983, BED sent to the Bank a report entitled "Development Plans and Projected Five-Year Financial Requirements of Philippine Private-Owned Coal Mines." The Bank staff thought that this report did not correspond to the requirements of Section 3.04 of the Guarantee Agreement, since it addressed only the likely amount of financing to be required and did not discuss the availability or likely sources of financing. 21/ Geothermal Exploration Project Decision Nemorandum, April 29, 1982, para. 5. President's Report, Philippines: Second Structural Adjustment Loan, April 1, 1983, Report No. P-3389-Pf, Annex IV, Attachment III, section III (C). L3J Loan Agreement, Schedule 2, Part A, para. 2(c). 14 provided for redefining the scope of the regional exploration component to allow for exploration in alternative areas. To minimize the risk of ill- advised expenditures, the various phases of the regional exploration component of the Coal Exploration Project would only be undertaken following a careful appraisal of the results of the preceding phases. Through this approach, a minimum amount of funds would be exposed at any one time in the more risky part of the project. This approach, however, resulted in a fuzzy project definition (para. 120). 56. Financial Issues. At the time the Bank was preparing the three Philippine energy exploration projects, some parts of which were to be implemented by the subsidiaries of PNOC, and for which all or part of each loan would be made directly to PNOC with the Government's guarantee, internal discussions had been going on as to the extent to which the Bank should be analyzing the financial situation of PVOC and/or imposing financial covenants on PNOC. Prior to the start of formal negotiations for the Coal Exploration Project, it was made very clear to the Bank that the Government would not be prepared to consider the inclusion in the legal documents of financial covenants of any kind on POC. The Government's position was that PNOC was an extremely large corporation with total assets of US$2.1 billion and total revenues of US$2.8 billion and with many diverse activities, including not only commercial operations, but also actions in pursuit of overall governmental policy in the energy sector. As such, PNOC had to carry out its operations in a responsive and flexible manner. Furthermore, it would be unreasonable for the Bank to impose financial restrictions on the corporation as a whole when its projects would only concern three of PNOC's many activities and, in financial terms, would have little impact. However, the Government acknowledged the necessity for specific financial, managerial, and technical covenants, governing the operations of the PNOC subsidiaries involved. 57. After a number of staff meetings and internal consultations, the Bank agreed that it would be reasonable to request a general financial reporting covenant with PNOC, combined with specific financial covenants on its subsidiaries in the case of all three energy exploration projects. 58. PNOC would provide PNOC-CC with the necessary local funds, and with any additional financing which might be required to cover any possible cost overruns, both in local or foreign currency, for timely completion of the project. PNOC and PNOC-CC would be required to submit to the Bank yearly financial statements, audited by an auditor acceptable to the Bank. PNOC-CC would maintain a special project account to record expenditures made under the proposed project.n Agreement was also reached that PNOC-EC, with the assistance of PNOC, would increase its equity, by calling in sufficient subscribed capital or other means as appropriate, to cover all accumulated exploration costs effective January 1, 1983, and that any future exploration L4/ Coal Exploration Project Loan Agreement, Sections 3.01(b) and 5.021 and Project Agreement, Sections 4.01 and 4.02. 15 costs, until the completion of the project, would be financed through equity. Since PNOC-EDC's operations were expected to be financially sound due to its existing steam supply agreements with NPC, only debt-equity and current ratio covenants were imposed on it." 59. Environmental. Environmental issues related only to the Geothermal Exploration Project. PNOC-EDC had its own environmental control section and also made use of local universities to assess and monitor the environmental impact of its activities. Both at Palinpinon and Bacon-Manito maximum use would be made of directional drilling to minimise the amount of land to be levelled. Flow testing operations would be planned so as to restrict the temporary discharge of geothermal fluids to the amount capable of being carried by local streams without permanent harm, and testing would be deferred, rather than permitting fluid discharge to exceed that level. If necessary, trees would be replanted. Operational effluents would be reinjected. PNOC-EDC has also agreed to make adequate safety provisions, including the immediate acquisition of any specialized services required to mitigate the consequences of a steam well blowout." II. IMPLEMENTATION EXPERIENCE Coal Exploration Project 60. Changes in Project Scope. During project appraisal it had been anticipated that the exploration program in Mindanao and Samar would locate several mine prospects which would warrant detailed drilling programs and subsequent prefeasibility studies. For this purpose, funds for the procurement of twenty drills and associated support equipment valued at US$ 6.0 million, exclusive of contingencies, were provided in the budget. However, as the regional exploration progressed, it became apparent that the prospects for the discovery of major coal deposits of economic and financial viability were far less than originally expected, in part due to the unexpected secular decline in world energy and coal prices. Therefore, the drilling programs were dropped from the project scope and the ICB tenders issued for major equipment, such as drilling rigs and heavy trucks, were canceled. 61. Project Implementation. It took eight months to fulfill the two conditions of effectiveness, namely, appointment of consultants and the execution of a satisfactory exploration agreement between the Government and L5J Petroleum Exploration Promotion Project, Project Agreement, Section 4.03(a) ;and Loan Agreement (Loan 2202-PR), Section 5.05. S26 Project Agreement (Loan 2203-PH), Sections 4.03 and 4.04. 17/ Project Agreement, Geothermal Exploration Project, Section 3.04. LJ PCR, Coal Exploration Project, Righlights and par&. 11. 16 PNOC-CC.29 Section 3.02(a) of the Guarantee Agreement required that exploration agreements be entered into between BED and PNOC-CC on terms and conditions satisfactory to the Bank. These permits were issued on June 2, 1982, but had not been satisfactorily amended to meet the requirements of PNOC-CC and the Bank. Furthermore, in order to accelerate coal development and participation of private sector, BED was considering granting new coal operating contracts within the PNOC-CC permit areas. This would be clearly contradictory to the understandings reached between PNOC-CC and the Bank during appraisal and at negotiations, because PNOC-CC would be unable to plan its exploratory program as the area to be explored would constantly change; the need for consultants and equipment would be unpredictable; and all incentive to PNOC-CC staff would disappear if every prospect found was immediately turned over to other companies.0 62. It was, however, pointed out that one of the principal objectives of the Bank involvement was to stimulate private sector coal activity. Therefore, the prohibition of private activities for three years in the total permit area was difficult to justify. As a compromise, BED agreed to make the permits exclusive to PNOC-CC for three years. However, at the end of the first year, PNOC-CC would surrender one-third of the permit area and, at the end of the second year, it would surrender a further one-half of the area still under permit. These areas would be available to the private sector with all geological data obtained by PNOC-CC. The Bank accepted these revisions to the permits and the loan was made effective on May 9, 1983, with a delay of six months. 63. The exploration carried out in Mindanao and Samar was the major activity funded from the proceeds of the loan. Although work commenced on both islands in 1982, the deteriorating law-and-order situation in the project areas caused the immediate suspension of activities in Samar until 1985. Security problems in Mindanao restricted access and drilling in some regions. 3 In Marh 1984. dzilling rigs were pulled out of the San Miguel prospect, again due to the deteriorating law-and-order situation, after completing only five of the seventy holes programmed. 64. PNOC-CC, however, did not confine its activities to the areas specified in the project description, but also undertook reconnaissance and geological work in parts of western Mindanao. At the request of PNOC, the Bank agreed to expand the project scope to cover the coal survey program in the latter areas, on grounds that this was justified in an exploration project and that the Bank should be flexible in redefining the project scope when warranted. However, it was impossible to predict the likely trends in the law-and-order situation and decisions on those areas where work could be undertaken were in a state of continual review. This uncertainty on the work 29J PCR, Coal Exploration Project, par&. 7. JOQ A British and a Philippine company had applied to the Minister for permits to explore within certain pafts of the PNOC-CC permit area. 1 PCR, Coal Exploration Project, paras. 8 and 9. 17 environment seriously jeopardized the completion of the project as originally planned. Petroleum Exploration Promotion Project 65. Changes in Project Scope. Subsequent to project appraisal, PNOC proposed to establish a seismic data processing center and to process in-house the major portion of the data acquired under the project, instead of using the services of seismic data processing companies. The Bank gave its approval to the proposal and to the utilization of part of the allocation for seismic and other surveys for the installation of the data processing center. Computer hardware and software were purchased using the proceeds of three Bank loans (2201-PH, 2202-PH, and 2203-PH). The center began operations in May 1984. 66. During the implementation of the project the Bank and BED agreed to expand the scope of the aeromagnetic survey to include other offshore areas. The basin evaluation studies were also expanded to include certain areas which were recently relinquished by service contractors. 67. Primarily due to the economic crisis faced by the Government and the consequent budgetary constraints, the seismic program in Cotabato was canceled. Furthermore, instead of drilling exploratory wells on its own, PNOC-EC decided to actively promote Mindoro and Cebu and attract partners to 32 participate in the drilling operations. 68. The following table compares the amount of exploration work done with the appraisal estimates: Item Appraisal Estimate Actual Difference Aeromagnetic Surveys, lah 168,522 215,844 47,322 Onshore Seismic Surveys, line-km 4,400 2,340 (2.060) Offchore Seismic Surveys, line-lan 8,400 9,104 3 704 Exploration Well Drilling up to 6 0 (6) Gravimetric Surveys. sq km unspecified 4.500 - Source: BED and PNOC-EC 69. Project Implementation was generally uneventful. However, important delays were experienced in the completion of individual project activities. As a result, the basin evaluation study was completed in early 1987, instead of end-1984 as originally planned. Project Completion Report, Philippines-Petroleum Exploration Promotion Project (Loan 2202- PH), June 29, 1990, Report No. 8890, Part II, page 11. 13J Offshore seismic data coverage was augmented by 4770 line-km of infill seismic data gathered by PCIAC on a grant basis to BED over selected offshore areas (PCR-Loan 2201-PB, Part II Section III-A-2). 18 70. The major reasons for the delays were: (1) delays in finalizing contracts for the aeromagnetic and offshore seismic surveys due to BED's belated request for budget appropriations for 1983 and the Government's budgetary constraints; (ii) technical difficulties, such as seismic shot hole drilling and accessibility problems, which reduced the productivity of land seismic crews, and weather and equipment problems, which delayed the completion of the aeromagnetic survey;3' and (iii) the ten-month delay in the start of PNOC's seismic data processing center, due to late Government clearance of the negotiated equipment supply contract (para. 82)." 71. It would appear that part of the implementation delays could have been prevented through careful planning at the preparation stage. However, it is doubtful whether this would contribute significantly to the achievement of the main project objective, which was the promotion of the Philippine basins to the international petroleum industry. Clearly, early 1985, the original date for petroleum exploration promotion campaign, was an inappropriate time for promoting the Philippines to the petroleum industry: the level of worldwide petroleum exploration experienced a steep downturn in 1985 and 1986 as a result of the collapse of the oil prices (para. 26); at the same time, the domestic economic and political situation was marked by uncertainties (paras. 27-29); and the country's relations with foreign oil companies became clouded in the course of 1984 as a result of the Government's inability to provide foreign exchange to repatriate the oil companies' investments and profits (para. 28). 72. Thus, even if the activities leading to the petroleum exploration promotion campaign had been completed according to the original schedule, the campaign would have been delayed until a more propitious time in order to maximize its returns in terms of private investment in the Philippine oil exploration. Actually, prospects for improved stability became discernible only with the change -f the government after February 1986, coupled with the ratification of a new constitution in early February 1987 and the holding of congressional electioas in May 1987. There was also a marked improvement and stabilization of oil prices towards the end of 1986. The promotion campaign was finally programmed for the third quarter of 1987 and benefitted substantially from a renewed confidence in Philippine politics and a mild upsurge in overseas exploration activities. Geothermal Exloration Project 73. Project Implementation. With the exception of the two policy studies, the implementation of the project proceeded rather smoothly. Drilling of the project wells started even before loan signing to take 324 PCR, Loan 2202-PH, Part II, pages 12-13; and PCR, Loan 2201-PH, Part II, section III-A-1. The start-up of the data processing center was delayed from August 1983 to Nay 1984. By running the center seven days a week and 24 hours a day, the delay in the processing of marine seismic data was made up. However, due to the time consuming nature of land seismic data processing, the backlog took a long time to clear. 19 advantage of the rig availability in areas to be explored.3 However, the exploration work slowed down during 1986 due to budgetary constraints, security problems at drilling sites, lack of progress in achieving a satisfactory agreement with the end user of the geothermal steam, and the uncertainty created by the issue of privatization. Due to budgetary constraints, the non-power steam development program vas suspended after drilling one low-enthalpy well, except for a UNDP study on non-power uses of steam, which focused on evaporation of sea water for salt production and on rice drying.'7 Overall 23 wells were drilled under the project, instead of the 25 planned." 74. Policy Studies,. Initially, the implementation of the policy studies were entrusted to PNOC (para. 47). However, in order to ensure the independence of the studies, the Bank agreed to transferring their control and coordination to MOE. This change, and the need to take into account the Luzon Power Study ordered by the Minister, prevented adequate discussion of the terms of reference during the Bank's first supervision mission in September 1982. 75. Although the policy studies were to be completed by December 1983, the Bank and MOE spent the time between Novembei 1982, when MOE submitted the first draft of the terms of reference for the study on the prioritization of geothermal sites, and November 1983, when invitations to bid were sent to the short-listed consultants, arguing over the terms of reference and the advisability of including cost as a bid evaluation parameter. During that period a total of 24 messages were exchanged. 76. The audit tends to fault the Bank staff involved with the project for this unfortunate episode for two reasons: (I) the terms of reference and bidding procedures for the policy studies, to which the Bank attached so much importance, should have been agreed with the Borrower during project appraisal or loan negotiations; and (ii) because of lack of in-house expertise on geothermal expertise in the Bank, projects staff were not prompt and clear in responding to MOE's proposals and queries and missed the opportunity of making clear from the beginning to the Philippine authorities the importance the Bank attached to the policy studies. 77. Following price discussions with the top-ranking consultant in March 1984, MOE requested the Bank to agree to indefinite deferment of the geothermal policy studies, because of the country's strained financial situation and the resulting contraction of its geothermal energy development program. In response, the Bank reiterated the importance of the policy studies to power development in the Philippines and insisted that at least the most important aspects of the study should be undertaken immediately, with PCR, Geothermal Exploration Project, Part 11, page 15. Prij>ect Completion Report, Philippines: Geothermal Exploration Project, para. 5.03. J8 The detpils of the wells drilled under the project are given in the PCR (Geothermal Explorazion Project), Part 11, Annex 4. 20 other parts being left to a second stage. In the wrap-up meeting of the Country Implementation Review with the Prime Minister held during May 7-9, 1985, it was agreed that the steam pricing issue, particularly rationalizing the price/tax structure of fuels, would be addressed with some urgency. 78. An ad-hoc inter-agency committee was finally set up in mid-1985 to address the steam pricing issue, and an interim solution for existing fields was presented for cousideration by the Prime Minister. In addition, ADB agreed to grant finance a steam pricing study sc-eduled for completion by mid- 1986. However, no action was taken on the interm solution pending the completion of the ADB study. 79. The final study report was delivered in September 1987, with a delay of about fifteen months with respect to the revised schedule. Based on the recommendation of the study, OEA, NPC and PNOC-EDC reached an agreement on the steam price for Bacon-Manito. This set a precedent for steam prices from other fields to be produced in the future. The study concerning the prioritization of geothermal prospects was never undertaken. The UNDP- financed study of the non-power use of steam commenced in August 1986 and was completed in July 1988, identifying Palinpinon and southern Negros as the most promising areas for non-power use of geothermal energy. A development plan for the area was also completed under the study. Procurement 80. Procurement related to all three projects was managed by the Foreign Purchasing Department of PNOC. With the exception of the initial difficulties under Loan 2181-PH, PNOC managed procurement activities in accordance with the Bank guidelines. The Bank staff were extremely helpful in assisting PNOC to cope with the preparation of bidding documents and the resolution of procedural issues. A Bank procurement specialist was present on several supervision missions. Nevertheless, long procurement delays were experienced due to inadequate procurement preparations, which left items to be procured largely undetermined at appraisal, rigid and time-consuming local procurement regulations, slow decision making of certain loan beneficiaries, frequent changes in the scope of the projects, and PNOC's reluctance to replenish its stocks in view of political and economic uncertainties. 81. Coal Exploration Project. Procurement under this project was hampered by frequent revisions of the work program (paras. 63-64). The purchase of major items such as drills, bulldozers, etc., was delayed pending the re-evaluation of the program. Throughout project implementation, procurement progress was unsatisfactory, because PNOC-CC acted very slowly in making decisions to purchase budgeted equipment. In the end, the bids for the drills and supporting equipment were canceled, because PNOC-CC was unable to locate prospects which warranted their use. Furthermore, contracts amounting Project Completion Report, Philippines: Geothermal Exploration Project, Part I, para. 5.05, and Part II, page 20. Currently PNOC-EDC is preparing a pilot crop drying project in Negros. 21 to US$3.5 million to be awarded through international competitive bidding (ICB) for seismic services which were provided for in the project budget were not requested, because the technology proved to be unsuitable in the Philippine geological environment. As a result of changes in the project scope, it became necessary to raise the ceiling for procurement of goods and services through limited international bidding (LIB) procedures from US$ 1.2 million to US$ 4.5 million.40 Most of this procarement was directed towards small items and consumables for the support of the reconnaissance geology and drilling. 82. Petroleum Exploration Promotion Project. Both Beneficiaries initiated procurement action soon after appraisal. The Bank cleared bidding documents for onshore seismic and aeromagnetic surveys on April 13 and 19, 1982, respectively, without waiting for the Board approval of the loans. However, there were long dela3s in obtaining the required Government approvals and finalizing the contracts. For example, the Bank's "no objection" to the selection of the offshore seismic contractor was given on January 3, 1983, but the negotiated contract was not approved by the MinistLy of Energy until July 7, 1983. Again, although the Bank had approved the draft contract for the seismic processing center equipment supply on April 23, 1983, this contract was still awaiting presidential approval as of December 5, 1983. 83. Given the straight forward nature of the procurement involved, these delays, which reached six to eight months between the clearance of contract award by the Bank and the finalization of the contract, cannot be considered normal. They appear to have been due entirely to the local procurement regulations, which necessitated the approval of these contracts by the highest governmental authorities. Fortunately, the impact of procurement delays on project execution was alleviated to a certain extent by the willingness of the winning bidders to mobilize, even to start work, before the contracts came in force. Nevertheless, this experience reinforces the now trite lesson regarding the need to carefully assess local procurement regulations during project preparation to arrive at realistic project implementation schedules. 84. Geothermal Exploration Project. The first supervision mission in September 1982 examined and cleared contracts for goods and services covered by the retroactive financing provisions of the Loan Agreement. In addition to clearing contracts for retroactivity, the mission discussed the procedural and contractual requirements for future procurement and commented on a number of proposed contracts at the draft stage. The Bank has commented on rNOC's bid documents starting March 16, 1983 and cleared bidding documents for all packages for advertising by October 14, 1983. However, PNOC-EDC's overall drilling program has been sharply curtailed (from an annual average of about 30 wells to six wells in 1984 and three in 1985), because of economic difficulties, and procurement of new drilling supplies has been deferred until existing stocks were reduced. Thus, the procurement-related efforts of the Bank under the project did not produce tangible results. A.0J PCR, Coal Exploration Project, para 11. 22 Loan Disbursements 85. While overall implementation of Bank-financed projects in the Philippines had been satisfactory, disbursements had been slower than anticipated. Disbursement performance was somewhat below the average for the region and had shown a slowly deterioratiig trend over the past few years. Disbursements under the four loans reviewed conformed to this general trend. The main reasons for slow disbursement were implementation delays, project scope changes, and the low volume of Bank-financed procurement. 86. In addition to disbursement delays, large portions of the loans were canceled at the request of the Borrower, because of drastic reductions in project scopes and/or the Beneficiaries' reluctance to purchase budgeted equipment and supplies (paras. 60, 67, and 84). As the table below shows, total cancellations amounted to 67 percent of the total original amount of the four loans reviewed: Loan Canctllations (US$ million) Loan No. Original Amount Disbursed Canceled 2181-PH 17.0 6.6 10.4 2201-PH 13.5 7.8 5.7 2202-PH 24.0 7.3 16.7 2203-PH 36.0 8.2 27.8 Total 90.5 29.9 60.6 Project Costs 87. As shown in the following table which summarizes project cost data, actual project costs were considerably below appraisal estimates: 23 Project Costs (US$ million) Project Appraisal Estimate Actual Difference, % Coal Exploration 25.0 10.0 (60.0) Pet. Expl. Promotion. BED Component 16.0 9.5 (40.6) PNOC Component 54.0 20.0 (62.9) Geothermal Exploration 71.5 58.8 (17.8) 88. It must be pointed out immediately that the comparison of the appraisal cost estimates and actual costs is not meaningful because of the drastic changes in the scopes of all three projects (paras. 60, 65-67, and 73). Another factor contributing to lower project costs in the case of the Petroleum Exploration Promotion Project was the lower-than-expected costs of geophysical surveys due to the slowdown of worldwide petroleum exploration after 1982. Actual contract prices were 60 and 35 percent of the appraisal estimates for the aeromagnetic and seismic surveys, respectively. Howe' r, the cost of consultants and specialized services for basin evaluation program and geological reports were higher, due to project completion delays which necessitated additional man-months of consultancy.1 Performance of the Bank 89. Coal Exploration Project. As the record of the first supervision mission which took place before loan signature shows, the Bank has done all within its power to ensure a sound project start-up. During the mission, the terms of reference for consultants, letters of invitation, short lists, technical specifications for ICB items, and evaluation criteria were approved in the field and draft bidding documents brought back to headquarters for further review. 90. However, the Bank's efforts to ensure an orderly project implementation were thwarted initially by the deteriorating law-and-order situation and, later, by financial constraints imposed on PNOC and its various subsidiaries within the context of the country's austerity program. As a result, project implementation became haphazard. In retrospect, the Bank can be faulted for failing to adequately assess the security problems in the project areas and embarking on a project which proved to be impossible to implement in an orderly fashion. 91. Petroleum Exploration Promotion Project. The Bank has brought considerable technical expertise and knowledge about the functioning of the &I/ Project Completion Report (Loan 2201-PH), Part II, Section III-C. 24 international petroleum industry during the preparation and implementation of the project. Bank supervision of the project was intense: the Bank staff closely followed the works of various contractors and contributed their advice on technical issues; they were also heavily involved in the review and clearance of the reports prepared by consultants.' 92. The Bank projects staff were successful in ,atablishing a cordial working relationship with the personnel of both Beneficiaries. As a result, no hard feelings or frictions were generated by the Bank's very close project supervision. Despite the intensity of the Bank supervision, the total staff- weeks spent on supervision (54.5 staff-weeks from effectiveness to loan closing, or 11 staff-week per implementation year) was not significantly above the average for project lending (10.5 staff-weeks per year). 93. Geothermal Exploration Project. Notwithstanding their questionable performance in the preparation of the two policy studies (paras. 127-128), the Bank staff have made a positive contribution to project implementation. Geothermal consultants of international repute who were included in Bank missions have helped review in detail the strategy for exploration, the interpretation of the results of surveys and well drilling, and the reports and comments of PNOC-EDC's technical consultants. They also made recommendations for improvements of power equipment designs. Performance of the Borrower 94. Coal Exploration Project. Despite the establishment of an independent project unit (para. 42), PNOC-CC's performance on this project left much to be desired. On several occasions the Bank stressed the need to define more clearly the responsibilities and authority of the PNOC-CC Project Manager, to improve project implementation, and suggested revised terms of reference for the Project Manager. The Bank has even recommended that his performance be carefully monitored and, should he fail to make a more positive contribution to the project, he should be replaced. Although PNOC-CC's senior management was aware of the deficiency in his managerial skills, they gave higher priority to his technical qualifications. 95. Petroleum Exploration Promotion Project. Despite institutional upheavals caused by changing political and economic conditions, the Borrowers and the Beneficiaries succeeded in bringing the project to a satisfactory conclusion and fulfilling their obligations under the loan and project agreements. Both Beneficiaries gave due consideration to the Bank's comments on issues affecting project implementation, with the exception of the decision to curtail the PNOC-EC program (para. 96). AJ2 One supervision report reads: "After some nodifications, the mission agreed to the prepared layout for the executive sumaries for exploration promotion on Mindoro and Cebu. The text layout for the main report and two of the montage sheets will be sent to the Bank for review." (Petroleum Exploration Promotion Project Supervision Report dated April 9, 1987, Implementation Sumary, Section 4; and Aide Memoire, paras. 3 and 7). 25 96. In June 1985 PNOC management indicated to the Bank supervision mission that, because of the country's constrained financial situation, it was considering reducing the scope of the Bank-financed exploration project. While the mission agreed that it was probably an appropriate time for PNOC to begin to reassess its longer-term role in petroleum exploration, it also stressed that it was important for PNOC-EC to maintain the momentum in exploration by initiating geophysical operations in one to two promising new areas and, at the same time, to continue making all efforts to attract private participation to minimize its risk. On this basis the mission recommended that the decision to curtail PNOC-EC's operations and reduce the scope of the Bank-financed program should be postponed until after the forthcoming promotions. Regardless of the arguments advanced by the Bank, PNOC has substantially reduced the scope of its exploration activities, apparently without noticeable harm to the attainment of the exploration promotion objective of the project. 97. Geothermal Exploration Project. As expected at appraisal, the Beneficiary demonstrated excellent project implementation capacity. However, its relations with NPC left much to be desired. This has affected its long- term planning, since it had no assurance that commercial finds of steam would lead to utilization by NPC in due course. PNOC-EDC complied with the strict environmental regulations stipulated by the Philippine authorities. A separate division of PNOC monitored the project to ensure that adequate safety precautions were taken. In Palinpinon and Bacon-Manito, PNOC-EDC maximized the use of directional drilling in order to reduce the amount of land disturbances." Performance of Contractors and Consultants 98. Coal Exploration Project. The training program provided to the exploration group was of a high standard and has enabled PNOC-CC's staff to continue exploration activities in a professional manner, without technical assistance. The assistance provided to mine management and operations was not entirely satisfactory, due to the consulting firm's lack of ift-house expertise and the recruitment of inappropriate personnel. Nevertheless some limited improvements were introduced into PNOC-CC's mine planning, engineering, and operations.4 99. The primary achievement of the consultants was to introduce major improvements in the standards of PNOC-CC's day-to-day operations. These improvements have been achieved by the active involvement of the consultant's personnel in the line management and administration of PNOC-CC operations. A3/ PCR, Geothermal Exploration Project, paras. 9.01 and 10.01. A4 Project Completion Report, Philippines: Geothermal Exploration Project, para. 5.06. Currently, PNOC's Environmental Department employs 150 staff engaged in activities ranging from environmental planning and control to extension services. PNOCE.DC estimates that about 20 percent of its operating costs arise from environmental protection efforts. A.5 Borrower's Project Completion Report, Philippines: Coal Exploration Project, para. 2.3.2. 26 While this has immediately benefitted PNOC-CC's mining activities, the future benefits to PNOC-CC are somewhat less certain. Supervision reports and interviews with Bank staff suggest that at times the middle-level managers of PNOC-CC have been displaced by the consultant's personnel, because the latter were assertive "doers" rather than "teachers" and the PNOC-CC middle managers tended to be satisfied to take a subsidiary role, essentially as observers. The Borrower does not agree with this view (Attachment 2, Part A, Section 2.c). The audit is not in a position to arbitrate between these two contrasting points of view. Nevertheless, the mere existence of doubt on the effectiveness of PNOC-CC's consultants in building up an experienced aud well- trained middle management at PNOC-CC points to a useful lesson regarding the use of consultants (para. 147). 100. Petroleum Exploration Promotion Project. All of the contractors and consultants performed efficiently and committed competent personnel to the work. A most satisfactory feature was that all contractors associated Beneficiaries' staff in their work, thus helping the transfer of up-to-date technology. The selection of exploration promotion consultants was in part influenced by their previous experience in a similar Bank project in Papua New Guinea. Their familiarity with the mechanics of petroleum exploration promotion facilitated the planning and i lementation of the Philippine petroleum exploration promotion campaign. 101. Geothermal Exploration Project. All of the consultants involved in this project have performed satisfactorily. III. PROJECT RESULTS Coal Exploration Project 102. Despite continuing law-and-order problems in some project areas which led to modifications of the project scope, the technical objectives of the project have been largely achieved. At project comp.etion, a comprehensive assessment of the coal resource potential of all Mindanao and Samar and a detailed exploration program at Lalat was completed. Moreover, a number of geologists and mining engineers have been trained." 103. Although some detailed exploration was undertaken in selecced areas, no major minable coal deposits rere identified outside the Lalat area. However, the program has helped PNOC to start four small-scale mines in eastern Mindanao. Prefeasibility reports were also prepared for several coal deposits. The detailed exploration program at Lalat was completed in 1984, PCR (Loan 2201-PB), Part II, Section III-D-iii-b; and PCR (Loan 2202-PB), Part I, para. 11.01. A7Z/ Project Completion Report, Philippines: Coal Exploration Project, Highlights. 27 and the results of the prefeasibility study were reviewed jointly by the Bank and the Government. The Bank concluded that, based on financial and economic analyses, no further work in Lalat area was warranted. Nevertheless, the Philippine Government continued to classify the development of the area as a priority project. Further geotechnical studies in the area were completed with assistance from the Asian Development Bank (ADB)." In 1988, PNOC-CC completed a feasibility study. However, no mine development was undertaken, due to marginal economic viability. Petroleum Exploration Promotion Project 104. Instead of drilling exploratory wells under the project, PNOC-EC decided to invite joint venture partners to join in exploration drilling operations and joined the Office of Energy Affairs (OEA), successor to BED, in a worldwide promotional campaign in September 1987. The campaign was ably assisted by the exploration consultants who had prepared the basin evaluation studies and turned out to be a very sophisticated marketing effort (paras. 106-107). 105. The preparation of the regional basin evaluation studies entailed a multi-disciplinary synthesis of all available exploration data, including the newly acquired information under the project. The result was a comprehensive geological analysis of fifteen onshore and offshore sedimentary basins and sub-basins. The petroleum potential for each sedimentary basin was evaluated and the basins were ranked in order of prospectivity. The final product was contained in a comprehensive promotional package or report of 12 volumes, which was made available to interested oil companies at $25,000 per complete copy. 106. Individual invitations, 350 in total, accompanied by an executive summary of the study, were mailed to international petroleum companies. Prior to formal promotion seminars, preliminary presentations were made before the representatives of the international petroleum industry in Houston, Singapore, Brisbane, Tokyo, Calgary, Denver, Dallas, Houston, and Los Angeles between August 1986 and June 1987. Brief presentations were also given bef-re special gatherings of oil explorationists in these cities. A promotional team consisting of BED officials and consultants gave two-day presentations in Manila, Houston, Calgary, and London. 107. The formal promotional seminars, which took place in Manila, Houston, Alberta, and London between September 14 and 30, 1987 were well attended. A total of 77 companies were represented and 34 orders for the purchase of the report were placed.4 108. The table below summarizes certain data concerning the petroleum exploration activities of private oil companies in the Philippines: PCR, Coal Exploration Project, para. 9 and Annex 1, page 2. 9/ PCR (Loan 2201-PB), Part II, Section III-A-5, and Annexes C, C-1 through G-4 and R. 28 Exploration Activity 1982 1983 1984 1985 1986 1987 1988 1989 1990 Seismic Surveys (Line-la) Onshore 803 1,131 620 310 0 94 56 0 116 Offshore 4,860 21,756 2,723 229 2,524 2,700 2,862 504 2,618 Exploration Wells Drilled Onshore 2 3 1 0 0 1 3 2 3 Offshore 11 2 1 0 0 3 4 4 2 Exploration Expenditures (US$ million)' 71 48 15 3 19 25 66 65 39 A/ 1986-1990 expenditures are actual. 1982-1986 expenditures were estimated using the following average costs: onshore seismic at US$ 9,000/line-lm; offshore seismic at US$ 1.000/line-km; onshore well at US$ 2 million/vell;and offshore well at US$ 5 million/well. Source: OEA 109. On the basis of the 1988-1990 data representing the developments following the promotion campaign, it can be concluded that the promotion as a whole has been very successful in re-kindling petroleum exploration interest in the Philippines. The effectiveness of the project's exploration promotion component is discussed in paras. 132-135. Geothermal Exploration Project 110. Although some planned drilling and studies were not undertaken, the project succeeded in proving commercial steam at Palinpinon II in southern Negros (112.5 MV) and at Bacon Manito in Southern Luzon (110 MW). However, the commercial development of these fields was delayed because of lack of power demand in the Negros grid and financing difficulties experienced by NPC in the case of Bacon Manito. Institutional Development 111. Extensive training, both academic and practical, was conducted under all three projects, thus strengthening the staff resources of the beneficiary institutions. Under the Coal Exploration Project, a total of 22 geologists and 17 mining engineers of different disciplines participated in various training programs. In addition, training for computer application in coal exploration and mining were provided for six months' duration. Operational assistance at an operating mine has improved the skill of 29 personnel in both mine management and in the practical aspects of operating semi-mechanized longwall faces.50 112. The formal training component of the Petroleum Exploration Promotion Project was implemented through the development of a joint training module for both BED and PNOC staff. Ten short-term courses of one-week duration each was given in Manila by an international human resource development consultant. ' Much more important was the practical impact of the on-the-job training received by the technical staff of both Beneficiaries. The close working relationship between consultants/experts and the local staff was an effective means of transferring technology. The actual and direct involvement of Philippine nationals in all aspects of the project under the guidance of the consultants/experts have enabled the former to gain the necessary experience and confidence to continue further basin evaluation studies. A most successful training was in computer system operations and seismic data processing conducted by the computer hardware/software supplier. The trainees, together with the experienced contractor personnel, were assigned to the newly opened center for one year, and processed the bulk of the seismic data for the Bank assisted surveys. 113. Under the Geothermal Exploration Project, the skills and expertise of Filipino geologists, engineers and technicians were upgraded through on- the-job training and academic training in the field of geothermal exploration, drilling and development. The training program consisted of 2 doctorate, 17 master's, 53 diploma and 95 short-term training on specialized subjects. 114. However, the downturn of exploration in the Philippines, the significant reduction of PNOC-EC's exploration program and the Government's decision to privatize PNOC-CC resulted in the Beneficiaries' losing some o- their trained staff. Three BED technicians have taken jobs abroad. Of the original PNOC-EC personnel who benefitted from the training program, at least five geologists and geophysicists, two engineers, and three computer center personnel have left the company.53 Pending the transfer of its assets to the private sector, PNOC-CC started a personnel reduction program. PNOC-EDC, particularly in respect of geothermal and drilling activities, has also suffered in the interim period of uncertainties. Serious erosion of personnel and of painstakingly acquired skills was experienced. Of the people trained under the project, 28 later resigned from PNOC-EDC. It is now being rehabilitated, but a greater resort to expatriate assistance has been found necessary. JQ/ Project Completion Report, Philippines: Coal Exploration Project, paras. 7 and 10. 511 PCR (Loan 2201-PS), Part II, Annex D. .2/ PCR (Loan 2202-PH), Part II, pages 15-16. 13/ PCR (Loan 2202-PH), Part II, page 16. 14/ PCR, Geothermal Exploration Project, Part II, Annex 1. 30 115. Given the mobility of medium-level technical staff in the petroleum industry, personnel losses of PNOC-EC and BED do not appear excessive. Moreover, the majority of the staff who have left PNOC-CC and PNOC-EDC appear to have taken jobs in the country, minimizing the adverse effects for the country of loss of trained staff. 116. Overall, the three projects contributed significantly to institution building at the sector institution level. However, the abolition of MOE in 1986 led to the weakening of the coordination of the energy sector, because of OEA's lack of authority to carry out the coordination and decision- making functions for the sector. This, in turn, allowed critical issues, such as the dispute between PNOC and NPC over geothermal steam pricing, to remain unresolved for relatively long periods, wich consequent and deleterious effects on sector development. IV. FINDINGS AND ISSUES Project Concept. Design and Preparation 117. Coal Exploration Project. Prior to the Bank project, little detailed geological mapping and investigatory field work of coal had been undertaken in the Philippines. There were no comprehensive geological maps for the coal regions showing boreholes, shafts, test pits, etc. The absence of a firm data base of relatively up-to-date geological maps was a major inhibiting factor in evaluating Philippines' coal resource and utilization potential. Under the circumstances, the updating of the geological data for the country's coal-bearing areas was a matter of high priority. Consequently, the project was conceived and designed to concentrate on the geological evaluation of a few regions where coal-bearing areas with open-pit mining potential were known to exist, and where there was good potential for additional commercial deposits. Considering the limited exploration resources that could be mobilized, this was a sound exploration strategy. 118. The regional exploration component was designed to be implemented in three sequential phases, in order to ensure that the studies and exploratory work were carried out only after previous results had been evaluated and the desirability of proceeding further had been established: (i) geological reconnaissance mapping and scout drilling to narrow down a large prospective area into one or more areas containing possible coal deposits and to select areas where more detailed work is warranted; (ii) detailed investigation, usually by detailed drilling, to determine areas which merit a feasibility study; and (iii) feasibility study phase to determine whether or not the coal deposit can support a financially and economically viable mining project. Because of this phasing, it was not possible to define the project 55, Staff Appraisal Report, Philippines: Energy Sector Project, November 22, 1989, Report No. 8049-PE, par&s. 1.08-1.09, and 1.12. As a result of Bank recomendations, a new Energy Coordination Committee, chaired by the Executive Secretary to the President, has now been set up. 31 in its entirety during appraisal, since the number of prospective areas and, therefore, the amount of work to be done could only be guessed at the start. 119. The situation vas further complicated by the security problems in Samar. The security issue was discussed at length in the Bank and it was decided to change the original project description so as to provide for alternative exploration areas and to permit the utilization of loan proceeds for exploration in different areas, in the event that (a) security problems became detrimental to the successful Implementation of the proposed exploration program in Samar, or (b) it was found that a particular area was not worth pursuing for technical reasons. 120. These efforts to account for the geological and security risks resulted in an imprecise definition of the project. Given that each phase depended on the unforeseeable results of the earlier phases and that the project area was defined in an extremely loose fashion (para. 124), the project amounted essentially to a line of credit for coal exploration in such areas of the Philippines as the Borrower and the Bank may from time to time agree. 121. Early during project implementation, the deterioration of the law- and-order situation caused the suspension of exploration on Samar. The imprecise definition of the project made it possible to continue with the project without continuously amending the Loan Agreement. However, it also precluded a meaningful comparison of the achievements of the project with clearly defined appraisal targets (para. 129). 122. Petroleum Exploration Promotion Project. In undertaking its petroleum exploration promotion program in 1980, the Bank aimed at playing an important catalytic role in stimulating the search for hydrocarbon resources. To achieve this end, the Bank supported a series of petroleum exploration promotion projects designed to: (i) assist in setting the legal and financial framework required to attract IOCs; (ii) improve the geological information available and thereby increase the attractiveness of the area; and (iii) train nationals in the skills needed to promote attractive areas in the country to the international petroleum industry and to monitor the activities of IOCs. 123. The Philippines Petroleum Exploration Promotion Project did not include assistance in overhauling the legal and financial framework applying to IOCs, because Bank staff interviews with the representatives of the oil companies, which were active in the Philippines, had made it clear that the general concern of the foreign oil companies was the small size of petroleum prospects and that there was no concern over relations with the Government, PNOC, or with the petroleum legislation. 124. The emphasis in the Philippines projEct was on enhancing the country's geological data base and developing new exploration leads through a nationwide basin evaluation program. This program was expected to give oil companies a quick understanding of the petroleum geology of the country, as well as tG assist them to identify the more attractive areas, thus saving time 32 and effort. This strategy was targeted primarily toward small- to medium- sized petroleum companies, which were expected to be still interested in the apparently modest Philippine prospects. With the benefit of the hindsight, the audit considers this approach highly successful, since the majority of oil companies which have taken exploration acreage in the Philippines after the promotion campaign belong to the targeted group of companies. 125. During project preparation, the Bank made it sure that the project was not going to transgress on the operations of private oil companies nor supplant them: the preparation mission discussed the overall program with the representatives of principal oil companies then active in the country and ascertained that there was no significant interest on their part in any of the areas which PNOC was seeking, and which was being considered as part of the proposed project. The Bank also made it a condition of negotiations that the oil companies holdinU geophysical or service contracts over the areas to be included in the basin evaluation program consent to BED's use of their regularly submitted data in carrying out the evaluation and the inclusion of their areas in the resulting geological compilations. This presented no difficulty to BED. 126. Geothermal Exploration Project. In view of the urgent need to increase the use of abundant geothermal steam resources to reduce Philippines' dependence on imported energy, the project emphasized the delineation of two known geothermal areas (Palinpinon in southern Negros and Bacon-Manito in southern Luzon). Only eight of the 25 geothermal wells planned would be drilled outside these two areas. The locations and drilling programs of these exploratory wells, which would be located in areas where little work had been done previously, remained undefined pending the completion of geoscientific studies. As in the case of the Coal Exploration Project, the loan documents contained provisions to adjust the number of exploration wells and/or change areas in which they would be drilled, depending on the results of the geoscientific studies to be undertaken within the scope of the project.56 Overall, the project definition represented a good balance between high-risk and low-risk exploration and, at the same time, accounted for the unpredictability inherent in any exploration for natural resources. 127. However, the same care was not devoted to the preparation of the Part C (policy studies) of the project. The Bank attached great importance to the resolution of the geothermal steam pricing issue as a fundamental step to increase the involvement of the private sector in geothermal exploration and development. The pricing study would form the foundation of a new steam pricing regime which would be acceptaule to both private geothermal developers and NPC, the monopoly user. The study on the prioritization of the geothermal sites in the Philippines would put on a sound basis NPC's geothermal power development program and, in view of the virtual absence of alternative uses of geothermal steam outside power generation, would also contribute to increasing and channeling private sector interest. 16/ Geothermal Exploration Project Loan Agreement, Schedule 2, Part A, paras. 3 and 5. 33 128. The first oversight was to entrust PNOC, which through one of its subsidiaries (PNOC-EDC) had a vested interest in geothermal steam pricing, to carry out the study. This conflict-of-interest situation was resolved by the Government decision to charge MOE with the control and coordination of the two policy studies (para. 74). Despite the Bank's speedy agreement to this change in implementation arrangements, the prioritization study was aborted and the completion of the pricing study was delayed by almost four years beyond the originally agreed completion date of end-1983 (paras. 74-79). Given MOE's initial enthusiasm in finalizing the terms of reference and the short list of consultants, the audit concludes that these would not have happened if the terms of reference and the mode of selecting consultants had been discussed and agreed upon during project preparation. Achievement of Proiect Obiectives 129. Coal Exnloration Project. The main objectives of the project were to increase the geological and engineering knowledge about the most important coal bearing aveas in the Philippine, to contribute to the acceleration of domestic coal development, and to strengthen PNOC-CC's technical capabilities (para. 30). Project results show that the objectives of the project were achieved to a large extent, despite severe economic and law-and-order difficulties experienced during implementation (paras. 63-64 and 119-121). However, the imprecise definition of the project (para. 720) precludes any attempt to quantify the degree of success in increasing the geological and engineering knowledge about the selected exploration areas. 130. Coal production in the Philippines increased from 331,000 tons in 1981 to 1,169,000 tons in 1987. However, the contribution of the project to this development appears marginal, since 78 percent (654,000 tons) of the increase came from areas not included in the project scope.57 131. As the PCR (para. 14) rightly points out, the success of the project should be measured not by whether or not it located coal deposits which could lead to economically viable projects at the prevailing environment, but by whether prospects were accurately evaluated, feasibility studies of high standard were completed, and technical standards raised. As most exploration efforts do not result in new mine development, particularly in the short-term, and as world energy and coal prices unexpectedly collapsed during project implementation, the project's not leading to new mine development should not be considered a failure. Indeed, since it is at least possible that the project itself may have prevented a premature rush to initiate mine development, the project may have saved many times its cost through avoidance of wasted expenditure. 132. Petroleum Exploration Promotion Project. The response of IOCs to an exploration promotion campaign is beyond the control of the project 17J Philippines: EnerAy Sector Study, September 15, 1988, Report No. 7269-PE, Annex 3.2. IV Project Completion Report, Philippines: Coal Exploration Project, para. 14. 34 entities, and depend on many external factors, such as availability of investment funds for exploration ventures, oil market conditions, and the companies' perception of political and technical risks. Therefore, the success of an exploration promotion project should be measured in terms of satisfactorily completing the exploration promotion program, rather than the results of the promotion campaign. On this basis, the project was clearly satisfactory: a comprehensive basin evaluation study was prepared, a sophisticated promotion campaign was undertaken, and adequate staff training was achieved (paras. 104-108 and 112). 133. The measurement of the effectiveness of the promotional effort presents a most difficult methodological issue. A recent study compared the problem to measuring the effectiveness of advertising and promotion in a consumer or industrial marketing setting." Given the traditional reluctance of oil companies to admit that their exploration decisions were influenced by outside actors, it is difficult to obtain anecdotal evidence regarding the effectiveness of the Philippine promotion efforts. Under these circumstances, a possible approach appears to be to count the number of investments (geophysical surveys, well drilling, etc.), which the promotion activities have generated, to judge the effectiveness of a particular promotion activity. 134. The data given above (para. 108) show that the exploration activities of IOCs in the Philippines, which had come to a virtual standstill during 1985-86, increased significantly in the years following the 1987 promotion campaign. Petroleum exploration investments generated during 1988- 90 alone amounts to US$ 170 million, nearly six times the total project cost of US$ 29.5 million (para. 87). 135. Attributing all of this increase in petroleum exploration investments to the exploration promotion program supported by the Bank loans can be questioned, since other factors (e.g., petroleum prices and political factors) have also favored the re-kindling of the,IOC interest in the Philippines (para. 29). Nevertheless, given that four of the five foreign oil companies active during 1988-90 were relatively small companies with little previous involvement in the Philippines, the audit tends to conclude that the exploration promotion campaign supported under the project contributed substantially to the surge in exploration. 136. Geothermal Exploration Project. The project achieved its stated policy objectives (para. 32) only to a limited extent. It is difficult to visualize any project contribution to a meaningful improvement in the national strategy for geothermal exploration in the absence of the study on the 19/ Lmis T. Wells, Jr. and Alvin G. Wint, Karketiag a Country: Promotion as a Tool for Attractnag Foreign Investment, Foreign Investment Advisory Service, Occasional Paper 1, IMC/MICA, A,%rLl 1990, pp. 41-42. 35 prioritization of geothermal sites (para. 79).60 Although a steam pricing study was completed, the issue of geothermal steam pricing remained unresolved long after project completion. In fact, the Staff Appraisal Report for the Philippines Energy Sector Project (paras. 1.10(b) and 1.10(d)) notes that, in November 1989, the structure of energy prices needed substantial improvement in the power, geothermal, and coal subsectors. 137. Currently, the principle of "avoided costs" is applied to determine the price of geothermal steam sold to NPC by PNOC-EDC. However, the application of this principle is complicated by differences of opinion between PNOC-EDC and NPC regarding the calculation of the avoided investment and operating costs. Although private companies are now allowed to build power plants on the "build-operate-transfer (BOT)" principle, thus precluding the need to accommodate NPC, prevailing low power tariffs drastically reduce the attractiveness of this option.'1 138. Outside of one established operator (Union Oil Company), which operates under a license providing for development to be on a cost- reimbursable basis to be met from future earning, but without formal limitations on the contractor's take, the involvement of the private sector in geothermal exploration and development remained static at the 1982 level.'2 139. Notwithstanding shortcomings in the achievement of certain objectives, the Bank's assistance for the exploration of indigenous energy resour-.. ..i the Philippines has been generally successful. It has increased knowledge about the country's energy resources, contributed to institutional development, re-kindled private sector interest in petroleum exploration and development, and laid the groundwork for accelerated development of geothermal steam reserves. Sustainability 140. Coal Exploration Project. The main benefits of the project were the increased knowledge about the country's coal resources and the exposure of PNOC-CC staff to advanced coal exploration and mining techniques. These benefits arc likely to become outdated if no further exploration and training i2/j Some Bank staff (who were not involved in project preparation) question the importance attached to the study on the prioritization of geothermal sites on grounds that (a) the necessary geological, seismic, and drilling data were not available; and (b) there were no plans to have all of the work done by the national company alone. However, the majority of Bank staff interviewed concurs with the emphasis plac ad on the prioritization study by the original project design. In view of the abundance of geothermal steam occurrences in the Philippines and the scarcity of exploration funds, both public and private, the a-%dit agrees with the latter assessment. J1/ Currently a new bill regulating geothermal steam exploration and development in the Philippines is under consideration by the legislature. The draft bill provides royalty holidays or deferment and 15-18 percent real return on investments on the basis of average field development costs, thus rewarding efficient producers. §2/ Staff Appraisal Report, Philippines: Bacon Manito Geothermal Power Project, Kay 31, 1988, Report No. 6999-PH, para. 1.17. 36 are undertaken. At present, the Philippine coal industry is being restructured to increase the role of the private sector. Therefore, the sustainability of the progress achieved in coal exploration and mining will depend to a large degree on the outcome of the ongoing privatization of the industry. 141. etrgleum Exploration Promotion Project. Regardless of the initial success of the exploration promotion campaign, the sustainability of the renewed IOC interest in the Philippines will be determined by the success of the ongoing exploration. During 1988-1989, foreign oil companies have drilled 13 exploration vells in the country and made three oil and two gas discoveries.' This represents a discovery ratio of about four in ten wells and compares favorably with the worldwide average of one discovery in ten wells. On the basis of these initial results, the sophistication of both PNOC and OEA, and the Government's continuing commitment to the policy of relying on private risk capital for petroleum exploration, the audit rates the sustainability of the project benefits as likely. 142. Geothermal Exploration Project. The major economic contribution of the project was the delineation of two important geothermal steam sources at Palinpinon and Bacon Manito. A Bank study completed in September 1988 concluded that the levelized cost of electricity generation using Bacon Manito steam was 16 percent below that of imported coal, the closest alternative. Both of these areas are currently under development for additional power generation with Bank assistance. Given their economic viability and PNOC- EDC's demonstrated ability to develop geothermal steam resources, the sustainability of the economic benefits of the project appears assured. Lessons of Experience 143. The Coal Exploration and the Petroleum Exploration Promotion Projects demonstrate that the scope and the character of an exploration project is highly likely to change as the initial stages of the project progresses (paras. 60 and 65-67). In addition to the need to continually amend the agreed project description, this introduces inefficiencies and delays in project implementation, increases the cost of project supervision by the Bank, and may result in the cancellation of important portions of the Bank loan (para. 86). Under the worst-case scenario, the reluctance to cancel part of the Bank loan may lead to undertaking exploration activities that would not be normally justified, as in the Morocco Petroleum Exploration and Appraisal Project (Loan 2271-MOR)." 144. As suggested in the PCR for the Coal Exploration Project (para. 15). the adverse effects on project implementation and supervision of uncertainties inherent in any exploration can be moderated by using an 3 tAsia Petroleam News, January 1989, pp. 38-41, and January 1990, pp. 46-47. §4f Project Performance Audit Report, orocco: Petroleum Exploration and Appraisal Project (Loan 2271-HOR), May 4, 1990, Report No. 8640, paras. 30, 44, and 49. 37 expanded Project Preparation Facility to generate as much data as possible, to constitute a sound basis to define the scope of the exploration project to be financed by the Bank. However, the need still remains to design exploration projects in well-defined stages, the implementation of each successive stage being conditioned upon clearly defined criteria regarding the results of the previous stage, in order to avoid expenditures that are no longer warranted. 145. The Petroleum Exploration Promotion Project demonstrates that, when properly designed and implemented, this type of operation can be very effective in attracting private risk capital to explore a country's natural resources and that the Bank has a comparative advantage in assisting its borrowers to achieve this goal, thanks to its accumulated experience and staff with wide international experience (paras. 91-92 and 134). 146. Although there have been significant reductions in the scope of all three projects, due to budgetary constraints and the Government's austerity program, the training and technical assistance components were not curtailed, because of the Borrower's strong commitment to institutional development (paras. 111-116). This points to the importance of generating strong borrower commitment to institution-building to ensure the achievement of the Bank's institutional objectives. 147. In the Coal Exploration Project, the consultant's personnel appear to have tended to displace PNOC-CC's line managers, instead of teaching them to perform their jobs better, thus detracting from the future benefits of the technical assistance provided (para. 99). This experience points to the need to clearly define the role of expatriate consultav':s vis-a-vis their local counterparts and the way in which the technical assistance will be provided, in order to ensure the sustainability of the institutional development achieved. 148. Despite the importance attached by the Bank to the two policy studies included in the scope of the Geothermal Exploration Project and the Borrower's sincere efforts to have the studies completed on time, one of the studies was dropped and the other was completed with a huge delay, due mainly to inadequate project preparation. The result was limited success in achieving the project's stated objectives (paras. 74-79 and 136-138). This experience points to the need to reach agreement with the borrower on the terms of reference and implementation procedures of critical studies included in the project scope at least by negotiations, in order to ensure their timely completion. 38 ATTACHMENT 1 COMMENTS FROM THE OFFICE OF ENERGY AFFAIRS T-91029.: ATTN: JOZSEF B. BUKY ACTING CHIEF POLICY-BASED LENDING INDUSTRY, PUBLIC UTILITIES AND URBAN SECTORS DIV.,OPERATIONS-EVALUATION DEPT. WITH REFERENCE TO THE DRAFT PROJECT PERFORMANCE AUDIT REPORT (PPAR) FOR LOANS 2201-PH, 2201-PH AND 2181-PH AND 2203-PH, WE WISH TO INFORM YOU THAT BY AND LARGE, WE AGREE WITH THE CONTENTS THEREOF. FOR GREATER ACCURACY, HOWEVER, WE WISH TO POINT THE FOLLOWING: 1. DELAY IN PROJECT COMPLETION (REF. P. XV PARA. 11, AND P. 26 PARA. 69) WE BELIEVE THAT DELAYS IN THE PETROLEUM PROJECT COMPLETION WERE DUE TO THE REASONS CITED IN P. 26 PARA. 70 (I.E. DELAYS IN FINALIZING CONTRACTS FOR THE AEROMAGNETIC AND OFFSHORE SEISMIC SURVEYS, ACCESSIBILITY PROBLEMS IN THE LAND SEISMIC PROGRAMME, WEATHER AND EQUIPMENT PROBLEMS, ETC) AND NOT BECAUSE OF COORDINATION DIFFICULTIES BETWEEN PNOC AND OEA AFTER THE ABO- LITION OF MOE AS MENTIONED IN THE REPORT. 2. PROMOTIONAL PACKAGE (REF. P. 41 PARA. 105) THE DATA PACKAGE CONSISTED OF 12 COLUMES (INCLUDING ATLASES) INSTEAD OF 12 VOLUMES AND 5 ATLASES AS MENTIONED IN THE REPORT. 3. STEAM PRICING (REF. P. XVI PARA. 13-) WE BELIEVE THAT THE STEAM PRICING POLICY ISSUE HAS ALREADY BEEN RESOLVED INASMUCH AS BOTH NPC AND PNOC HAVE ACCEPTED THE RESULTS OF THE STUDY. IN FACT, NPC AND PNOC HAS UTILIZED THE PRICING MODEL OF THE STUDY IN THE DETERMINATION OF AND IN REACHING AN AGREEMENT ON THE PRICE OF STEAM FOR BACON-MANITO. OVERALL7 WE AGREE WITH THE FINDINGS AND ISSUES MENTIONED IN THE REPORT AND IT INCORPORATES OUR OBSERVATIONS AND COMMENTS BROUGHT UP DURING OUR MEETING WITH YOUR MR. MICHAEL YUKSEL LAST JANUARY 1991. THANK YOU AND BEST REGARDS. W.R. DE LA PAZ 248423 ORLDBANK 22666 EDC PH 39 OED potes on Comments from the Office of Ener&y Affairs 1. Evaluation Summary para. 11 and PPAR para. 69 amended. 2. PPAR para. 105 amended. 3. Evaluation Summary para. 13 refers to the study on steam pricing. The current geothermal steam pricing policy in application in the Philippines is explained in PPAR para. 137. 40 ATTACHMENT 2 Page 1 of 4 COMMNNTS FROM PNOC PKOC PHILIPPINE NATIONAL OIL COMPANY PNOC umg 7901 MakAw Avon". Maken. M.tro Manf. Phi ns P 0. 8o 10.M. MCPO. Marat T4 No. W6g4 23 April 1991 Mr. JOZSEF B. UKY Acting Chief Policy-Based Lending, Industry, Public Utilities and Urban Sectors Division Operations Evaluation Department International Bank for Reconstruction and Development 1818 H Street, N.W., Washington D.C., U.S.A. Dear Mr. Buky: Thank you for sending us a copy of the Bank's draft Performance Audit Report for Loan Nos. 2201-PH, 2202-PH1, 2203-PH, and 2181-PH. We are pleased to note that despite some problems and difficulties encountered, the Bank has rated the institutional performance of the different PNOC subsidiaries involved as satisfactory. We are also pleased with the audit team's finding that the objectives set for the loans were achieved to a great extent. The concerned PNOC subsidiaries have prepared the attached comments on some of the conclusions and issues forwarded in the Bank's Report. We hope that these will be useful in the final assessment of the experiences and lessons learned by the Bank and the project executing agencies from the planning and implemen- tation of the different loans and projects covered in the Report. Very truly yours, CORAZON R. ESTRELLA Vice President for Planning and Development 41 AMTACHMENT 2 Page 2 of 4 AakUrat Comments on the Draft Program Performance Audit Report - Philippines A. Coal Exploration Project (Loan 21l1-N) 1. On the changes in project scope and definition necessitated by the deLerioration of the law and order situation in project areas and which in turn made it epoinible to implement the project in an orderly fash- ion, precluded a acaningul comparison of the achievements of the project with clearly defined appraisal results, and introduced ineffl- ciencies and delays in project implementation (Reference: Paragraph mos. 10, 26, and 28 of the preface and Paragraph uu. 50, 90, 117, 118, 120, 121 and 144 or the main report): a. Thp original qcopel tif thp project was Lhe exploration of Lost Mindanao and Samur to est,ab,lish a comprehensive geological coal daLa base (Par. 117) to attract private inventur to develop potential areas. However, its view of peace and order problems in %aear during the early part of the project, exploration work was shitted to West Mindanao. Work in the Samar area was resumpri and coapleted Subseqiuewitly although it was con* .ined Lu the cent.ral arca of the island instead of the whole island. h. Rcuause or discouraging results of exploration, the staged approach wax usied and the succeeding activities that followed were governed by the findings of the complet.ed stage (i.e., rennaissance). This shift in appruuah was approved by the Bank. PNOC-CC senior management felL Lhat with this approval sufficient flexibilhty wnuld be provided by the Bank in the implementatin of the project. The change in approach necessarily resulted in ineviLuble changes in the program and the detailed revised programs were alon mubmitted for approval by the bank. From PNOC-CC's perspective, Lherefore, it had submitted sufficient. data regarding project implementatitin which the Bank could have utilized as spasures againsL whicla achii-viments could have been gauged. P'OC-CC st.ricLly followed the staged approach in the conduct of the exploratinn work specifically in Fast Kindanao, West Mindanao and Samar by doina recnanuis4ance first, due Lo lack of comprehensive coal data base as indicated in Par. 117. DeLailed exploration (Stage 2) were undertaken in area believed to be with potential baand on the recon- naissatie (Stage 1) work. Several areas were in fact identified to have good restenLial but dut to their being underground and having low quaity coal, a well as thr prevailing market condition (Par. 8 of PCR, Oct. 19R7, further %ork in these areas was not ptrsucd. Consequently, it was prcisely rine3 to tho staged approauh in exploration that unnecessary expnd1itutr. UP? mintaized (Par. 5.5, audit repurt anti Par. 14, PCR Oct. 1987). I* 42 ATTACHMENT 2 Page 3 of 4 2. On the weakness in project management and the "too active" role of consultants in operations (Reference: Paragraph no. 31 of the preface, and Paragraph now. 94 and 99 of the main report): a. In 1983. PNOC Coal w.%s a fledgling coal company. Available personnel consisted of a group of mining engineers and geologists With management provided by people frum t.he PNOC's oil ousidiary. The choice of project manager largely depended on the toohical expertise of the person. PNOC-CC'w senior maniagemenut realized the dt:ficieny in thu managerial wkills of Llt- Project. Manager but gave higher prority to the technical qualirications sircve, the managerial skills were to be supplesented by FROC-CC' support groups. That the object.ives of the project wvre achieved despiLe the Hank's observation of project management weakness would seem to point out. that thit was not. am major a problem as present- ed in the report. PNOC-CC vitwR the major problems as atemming from poor geological findigw in the areas explortd. The observatiun thut "no improvement was recorded" in the perforance of the Project. Manager wu based on the supervision reporLS fnr 1983, the first year of the project.. This neems to be an itadequate ba-qs for such a sweeping conclusionl. PNUC-CC tiL. that. thc eunsultonts only served as advisert, whose recon- mendations were ipplemented only as seen fit by the PNOC-CC management. The observation that. PNOC middle managers were relegated to take a suhsidi&ry role svemA to be-unfounded. As the Bank repcrt obervod, and to which PtoC-tC agreo, the conqulting firm laeked the in-house exper- tise and recruitcd inappropriate personnl. These inadequacies were reasonR enough to prevent PRW0' from allowing the connultants to have a complete rein on day-to-day uperations. While it is admitted that there were differenc;es it opinion between the Consultant Project Leader and the PNOC-CC Project Manager during the early part, iL is believed that theRe differences did not result in PNOC-CC management handing over control to the consultant. As a matter of fact, these were subsequently reconciled lending I. oa improved project. management, as borne out by the audit Leam's overall aSessenL that. project objectives were largely attained. 3. On procurement procesR being unsatisfactory bceause PROC-(C acted very alowly in making deciaions to purchase budgeLed equipwaet (Beference: Paragraph no. Ai of the main report): Revifions in procuremetL and in the availvent of the budget had to he made since PNcC-Cr did not find any sizable openeuttable depomits that will warrant extruetive drilling. Thus. it was necesary to reduce drill- ing rig requirement from that originally budgeted, uS recognized by the Hank in par. 11 Pr Oct. 1987. Goal in identified areas with potential wre mainly of low quality and further work .4n these areas were unwar- * ranted because of the then prevailing coal srket condition, budgetary counitraints, and compurly throst. 43 Page 4 of 4 B. Geothermal Exploration Project (Loan 2203-PH) 1. Key Project Data (Reference: p. ix) Total Project Cost under the Actual/Current Estimate column should be US$48.65 million instead of US$88.75 million to be consistent with the Project Completion Report. Actual as percentage of Appraisal Estimate should then be 68.0 instead of 82.1. 2. Steam Pricing Policy (Reference: Paragraph nos. 21 and 22, p. xix and Paragraph 115, p. 45) The steam pricing issue has been addressed satisfactorily with the acceptance by both NPC and PNOC of the results of the pricing study. In the case of Bacman T, NPC and PNOC utilized the new approach and the pricing model introduced in the study in reaching agreement on the price of steam. 3. Project Results (Roference: Paragraph no. 110 of the main report) The delayed commercial development of Palinpinon II was a foregone conclusion because of the lack cf a power market in the Negros grid. By the end of 1987, even Palinpinon 1, the existing geothermal power plant in the grid commissioned in 198J, was operating at only 37% of rated capacity. In the case of Bacman 1, the delay in the commissioning was not due to the late resolution of the steam price since there was al- ready au agreement on the price between NPC and PNOC in 1987. The delay could later be traced to problems encountered by the National Power Corporatioi with the foreign financing of the power plant. C. Petroleum Exploration Promotion Project (Loans 2201-PH and 2202-PR) 1. Project Implementation (Reference: Paragraph nos. 11 and 69 of the main report) The coordination difficulty between PNOC and the Office of Energy Af- fairs after the abolition of MOF was not serious enough to contribute to delas in implement.ation of project components such as the basin evalua- t.ion study. The delays were due largely to the reasons cited irt Para- graph 70, p. 26. 2. Procurement (Paragraph no. 14 of the preface and Paragraph no. 80 of the main report) As in the IBRD loans for geotherma. and coal, PNOC's attitude toward replenis,hing its stocks was influenced by the sharp curtailments in its work programs because of the economic and political difficulties then obtaining at that t.imr. With so many uncertainties, procurement-related decision- took more time or were deferred. 44 0ED Notes on Comments from PNOC A. Coal Exploration Project (Loan 2181-PH) 1. The information supplied by PNOC does not affect the audit's conclusion that the imprecise definition of the Coal Exploration Project precludes a meaningful comparison of the achievements of the project with clearly defined &puraisal objectives (PPAR para. 121). 2(a). PPAR para. 94 amended. 2(b). PPAR para. 94 amended. 2(c). PPAR paras. 99 and 147 amended. 3. PPAR para. 81 amended. B. Geothermal Exploration Proiect (Loan 2203-PH) 1. The Project Completion Report prepared by the Borrower (Annex 4) gives the total cost of the project as US$58.75 million equivalent, including computer services, geoscientific studies, and front-end fee on the Bank loan. The audit does not have any data supporting a total project cost of US$48.65 million equivalent. The difference is likely due to changes in the allocation of certain costs. 2. Evaluation Summary paras. 21 and 22 refer to the situation at the completion of the project. Later developments are treated in PPAR para. 137. PPAR para. 115 does not deal with geothermal steam pricing. 3. PPAR para. 110 amended. C. Petroleum Exploration Promotion Project (Loans 2201-PH and 2202-PH) 1. Evaluation Summary para. 11 and PPAR para. 69 amended. 2. Evaluation Summary para. 14 and PPAR para. 80 amended.