China - Daqing Oilfield Gaotaizi Reservoir Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 9493 PROJECT COMPLETION REPORT CHINA DAQING OILFIELD-GAOTAIZA RESERVOIR DEVELOPMENT PROJECT (LOAN 2231-CH) APRIL 12, 1991 Industry and Energy Operationo Division Country Department III Asia Regional Office 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.  CURRENCY EQUIVALENTS Currency Name - Reniminbi (RMB) Currency Unit - Yuan (Y) Appraisal (February 1982) $1.00 = Y 1.8 Actual 1982-84 = Y 2.8 1985 = Y 3.2 1986 = Y 3.6 1987-89 = Y 3.73 1990 (August 1990) = Y 4.72 FISCAL YEAR January 1 to December 31 WEIGHTS AKD MEASURES 1 cubic meter (m3) = 35.3 cubic feet (CF) 1 thousand cubic meters (MCM) = 35.3 thousand cubic feet (MCF) 1 million cubic meters (MMCM) = 35.3 million cubic feet (MMCF) 1 billion cubic meters (BCM) = 35.3 billion cubic feet (BCF) 1 thousar.d cubic meters of natural gas = 9.31 million kilocalories 1 ton oil equivalent (TOE) = 10.2 million kilocalories = 1,000 kilograms oil equivalent (kgoe) 1 barrel (bbl) of 0.85 specific gravity crude oil = 0.135 ten 1 barrel (bbl) = 42 TJS gallons = 0.159 ms 1 meter (m) = 3.28 feet 1 kilometer (km) 0.62 mile 1 square kilometer (km2) = 0.39 square mile ABBREVIATIONS AND ACRONYMS CNPC - China National Petroleum Corpor -ion DPAB - Daqing Petroleum Administrative Bureau EOR - Enhanced Oil Recovery GOC - Government of China MOPI - Ministry of Petroleum Industry PCN.1 - Production Company No. 1  FOR OMCIAL UBI ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Olket d OitiSColwaI Opwatmw Ivalutjin April 12, 1991 MEHORANDMH TO THE EXECUTIVE iIRECTORS ANM THE PRESIDENT SUBJECT: Project Completion Report on China Daqing Oilfield-Gaotaizi Reservoir Development Project (Loan 2231-CH) Attached, for information, is a copy of a report entitled "Project Completion Report on China - Daqing Oilfield-Gaotaizi Reservoir Development Project (Loan 2231-CH)" prepared by the Asia Regional Office with Part II of the rsport contributed by the Borrower. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment 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.  FOR OFFICIAL USE ONLk CHINA DAQING OILFIELD-GAOTAIZI RESERVOIR DEVELOPMENT PROJECT (LOAN 2231-CHA) PROJECT COMPLETION REPORT TABLE OF CONTENTS Page No. Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i Evaluation Summary .... . . . . . . . . . . . . . . . . . . . ii PART I PROJECT REVIEW FROM THE BANK'S PERSPECTIVE . . . . . . . . 1 Project Identity .... . . . . . . . . . . . . .... . 1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Project Objectives and Description .... . . . . . .... . 2 Project Design and Organization .... . . . . . . . . . . ..... 2 Project Implementation .... . . . . . . . . . .... . 3 Project Results .... . . . . . . . . . . . . . .... . 5 Project Sustainability . . . . . . . . . . . . . . . . . . . . . . 10 Bank Performance .... . . . . . . . . . . . .... ..... . 10 Borrower Performance .... . . . ...... . . . . . . . . . . 10 Project Relationship .... . . . . . . . . . . ........ . 10 Consultant Services .... . . . . . . . . . . . ........ . 11 Project Documentation and Data .... . . . . . . ....... . 11 PART II PROJECT REVIEW FROM BORROIWER'S PERSPECTIVE . . . . . . . . 11 Project Achievements .... . . . . . . . . . . ........ . 11 Suggestions for Future Improvements .... . . . . ....... . 12 Evaluation of the Roles of the World Bank and DPAB . . . . . . . . 12 PART III STATISTICAL INFORMATION .... . . . . . . . . . . . . . 13 Related Bank Loans . . . . . . . . . . . . . . . . . . . . . . . . 13 Project Timetable . . . . . . . . . . . . . . . . . . . . . . . . . 13 Loan Disbursements .... . . . . . . . . . . . ........ . 14 Project Implementation .... . . . . . . . . . ........ . 15 Project Costs and Financing . . . . . . . . . . . . . . . . . . . . 16 Project Results . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Status of Covenants . . . . . . . . . . . . . . . . . . . . . . . . 19 Use of Bank Resources . . . . . . . . . . . . . . . . . . . . . . . 21 ANNEXES 1. Economic Analysis ....................22 2. Key Financial Indicators ..................23 This document has a restricted distribution and may be used by recipients only in the performance ot their offikial duties. Its contents may not otherwise be disclosed without World Bank authorization.  - i - CHINA DAQING OILFIELD-GAOTAIZI RESERVOIR DEVELOPMENT PROJECT (LOAN 2231-CHA) PROJECT COMPLETION REPORT PREFACE This is the Project Completion Report (PCR) for the Daqing Oilfield-Gaotaizi Reservoir Project in China, for which Loan 2231-CHA in the amount of US$162.4 million was approved on January 25, 1983. The loan was closed, after four eytensions, on June 30, 1990. The last disbursement was made on August 8, 1990. The undisbursed amount, $523,955.38, was cancelled. The PCR was jointly prepared by the Energy and Industry Division of Country Department III of the Asian Regional Office (Preface, Evaluation Summary, Parts I and III), and the Borrower (Part II). Preparation of this PCR was started during the Bank's PCR mission i.n July 1990, and is based, inter alia, on the Staff Appraisal Report; the Loan and Project Agreements; supervision reports; correspondence between the Bank and the Borrower; and internal Bank memoranda.  - ii - CHINA DAQING OILFIELD-GAOTAIZI RESFRVOIR DEVELOPMENT PROJECT (LOAN 2231-CHA) PROJECT COMPLETICN REPORT EVALUATION SUMMARY Oblectives 1. The objectives of the project weres (a) to augment oil production through the development of the Gaotaizi (G) reservoir and to assist in identi- fying new reservoirs by the provision of seismic equipment; (b) to transfer modern technology which would in turn enhance efficiency in both exploration and production; and (c) to strengthen the institutional capabilities of the Daqing Petroleum Administrative Bureau (DPAB) through training (Part I, para. 3). Implementation Experience 2. The project was implemented successfully with a considerable cost underrun. This was mainly due to conservative project cost estimates and exemption of import taxes and duties. Most of the physical components were completed largely on schedule. However, the initial delays in procurement (about two years) have, in turn, led to significant delays in the implementa- tion of various technical assistance and training components. These delays could be attributed to a number of reasons, including 1Rt- of experience with Bank procedures, fragmentation of responsibilities amoi., arious Chinese agen- cies, and cumbersome internal clearance procedures. In retrospect, the imple- mentation schedule envisaged at the time of project appraisal for certain components was overly optimistic. 3. The enhanced oil recovery (EOR) pilots are the only project compo- nent which were not completed by the closing date. The extended delays (about seven years) from the original schedule are attributable to the delays in the consultant's study and in procurement of equipment and construction, for which both DPAB and the suppliers were responsible (Part I, para. 5). Results 4. The project objectives have been substantially met. Specifically, the G reservoir was successfully developed. Bank-financed equipment for seis- mic survey and interpretation contributed to improvements in the success ratio for exploration. The objectives of transfer of specialized technology and institution building were largely achieved through on-the-job training by international consultants and contractors for the various studies and well services, by importation of modern erquipment and related training by the sup- pliers, as well as by local and overseas training. However, the timing of the above technology transfer was delayed as a result of delays in procurement. Nevertheless, the results of technical assistance and training were largely positive in enhancing DPAB's capability in critical facets of petroleum exploration and development activities (Part 1, para. 6).  - iii - Sustainability 5. Estimates of oil reserves and production from the G reservoir have been revised upward from the appraisal estimates. DPAB has taken steps to carefully monitor the reservoir performance and apply appropriate measures including infill drilling, modified water flooding and EOR techniques to help achieve the production targets. In view of the foregoing, it is reasonable to expect that the potential economic benefits of field development would be sustained (Part I, para. 7). Findings and Lessons Learned 6. This was the first Bank-financed petroleum project in China. The project entity's lack of experience with Bank procedures contributed to sig- nificant initial delays in procurement. These delays were exacerbated by inadequate interagency coordination and cumbersome internal clearance proce- dures. Unlike the offshore,petroleum companies, DPAB did not have the author- ity to procure Bank-financed goods/services directly nor was it allowed to process Bank loan disbursement applications directly. As in the case of other onshore petroleum bureaus, DPAB had to procure through an auithorized agent and disburspment applications were centrallv processed by the China National Petroleum Corporation (CNPC), fomerly the Ministry of Petroleum Industry (MOPI). The above institutional arrangements were not conducive to efficiency and contributed to delays in procurement and disbursements (Part I, para. 4). 7. The Bank played a significant catalytic role in technology transfer and institution building. In general, the Bank performed well, assisting the borrower at all stages of project preparation and implementation. During project supervision, Bank staff assisted DPAB with procurement activities and mobilization of consultants, and exchanged views with DPAB in the review of various technical studies. However, in retrospect, the Bank could have helped reduce the delays in consultancy studies by assisting the prcject entity in drafting a better focused scope of work in the terms of reference for consul- tants. Further, the draft terms of reference should have been prepared before project field appraisal rather than during project supervision (Part I, para. 8).  CHINA LA2ING OILFIELD-GAOTAIZI RESERVOIR DEVELOPMENT PROJECT (Loan 2231-CHA) PROJECT COMPLETION PROJECT PART I. PROJECT REVIEW FROM BANK'S PERSPECTIVE 1. Project Identity Project Name: Daqing Oilfield-Gaotaizi Reservoir Development Project Loan Number : ?231-CHA RVP Unit X Asia Region Country : China Sector : Energy Subsector : Petroleum 2. Background 2.1 China has been remarkably successful in the development of its petroleum resources. However, during the last decade, technological problems have been increasingly encountered as the petroleum sector expands the scope of activities to cover more difficult areas. Mainly due to an extended period of isolation prior to the eighties, certain Chinese techniques, equipment and practices in a broad spectrum of activities in petroleum exploration and pro- duction have become outmoded, and less efficient/effective than modern indus- try standards. Moreover, sophisticated state-of-the-art technology in enhanced oil recovery, which is crizical for increasing oil production from aging fields, is lacking in the country. 2.2 The Government of China (GOC) first requested for Bank assistance in the petroleum sector in the early eighties at a critical juncture when China's oil and gas production started to decline from its peak level in 1979. Thus, the Bank's participation was driven by the urgent need to assist the Govern- ment in the formulation and !-mplementation of remedial measures to arrest oil production decline, focusing in particular on technology transfer and institu- tion building. This operation was the first of a series of five Bank-financed petroleum projects in the country. As Daqing is by far the largest oilfield in China, successful completion of this project had a significant impact on the petroleum industry in the country. However, in accordance with current Petroleum Lending Guidelines (OMS 3.82), the Bank generally will not in future participate in similar oil development projects without cofinancing or the participation of the private sector.  - 2 3. Project Objectives and Description 3.1 The objectives of the project weret (a) to augment oil production through the development of the Gaotaizi (G) reservoir and to assist in identi- fying new reservoirs through the use of modern seismic equipment; (b) to transfer modern technology which would in turn enhance efficiency in both exploration and production; and (c) to strengthen DPAB's institutional capa- bilities through training. 3.2 The project comprised the following components: (a) G reservoir development--drilling and completing about 615 oil wells and about 206 water injection wells; installation of facilities for oil/gas production and trans- portation as well as for water injection; and installation of general utili- ties; (b; training--establishment of two training centers, for skilled workers and professionals respectively; (c) establishment of a computer center and laboratories for operationa;ly-oriented research, enhanced oil recovery (EOR) and oil/gas/water gathering, treatment and transportation; (d) provision of seismic equipment; (e) technical assistance--provision of six technical stud- ies; and (f) 3-D seismic survey and preinvestment study for Zhongyuan Oilfield as part of the preparation for the second Bank-financed petroleum project in China. 4. Project Design and Organization 4.1 The project was designed to develop the G reservoir with the least cost method. It was elso designed to be a vehicle for transferring modern petroleum technology and institution building at Daqing. The project adopted a building block approach in the design of technical assistance and training components which was appropriate. In particular, completion of the relevant pre-investment studies were conditions of disbursement for the EOR pilots and prototype station components. 4.2 The project was nmainly implemented by the Daqing Petroleum Adminis- trative Bureau (DPAB), with the assistance of local and foreign consultants/ contractors. Production Company No.1 (PCN1), a subunit of DPAB, is responsi- ble for the development of G reservoir. Most of the physical components were largely implemented on schedule, thanks to the special project team which was set up in PCN1 to facilitate coordination and monitoring of project implemen- tation. 4.3 However, considerable delays in procurement were initially encoun- tered in part due to lack of experience with Bank procedures, fragmentation of responsibilities among various Chinese agencies, and cumbersome internal clearance procedures. Unlike the offshore petroleum companies, DPAB did not have the authority to procure directly Bank-financed goods/services, nor was it allowed to ?rocess Bank loan disbursement applications directly. As in the case of other onshore petroleum bureaus, DPAB had to procure through an autho- rized agent (International Tendering Corporation) and disbursement applica- tions were centrally processed by the China National Petroleum Corporation (CNPC), formerly the Ministry of Petroleum Industry (MOPI). The above insti- tutional arrangements were not conducive to efficiency and corLtributed to  -3- delays in procurement and disbursements. These delays were exacerbated by inadequate coordination among the concerned agencies. 5. Project Implementation 5.1 The project was implemented successfully with a considerable cost underrun. Most of the physical components were completed largely on schedule. However, the initial delays in procurement (about two years) have, in turn, led to significant delays in various technical assistance and training compo- nents. These delays could be attributed to a number of reasons, including: (a) a slow process in soliciting and evaluation of bids, in part due to the lack of experience and inadequate interagency coordination; (b) protracted contract negotiations; (c) frequent revision in the scope of certain consult- ancy studies, and lack of clear understanding between the project entity and the consultants; (d) the large number of contracts (325) covering a broad spectrum of oilfield activities even though the contract packaging was appro- pLiate; (e) certain suppliers delayed performance of their contracts; (f) the consultants for the safety study went bankrupt and had to be replaced; and (g) export restrictions under tle Coordination Committee for Multilateral Export Control (COCOM) led to time lost in awaiting for export license and subsequent downgrading of the computers for seismic data processing. In retrospect, the implementation schedule envisaged at the time of project appraisal for certain components was overly optimistic. 5.2 G Reservoir Development. This component was successfully completed on schedule and within budget. 5.3 Surface Facilities. Except for a prototype station, the surface facilities were completed about one year behind the appraisal schedule. The delays were mainly due to construction difficulties encountered during the severe winter periods which extend over four months. 5.4 The construction of a prototype station was completed about three years behind the appraisal schedule as a result of the delays in consultants' study. Due to problems related to computerized instrumentation, which have not been resolved by the supplier, this station has not yet been commissioned. It is expected to be commissioned shortly, about four years behind the origi- nal schedule. EOR Pilots 5.5 Based on the consultants' study and screening of various EOR pro- cesses, DPAB selected two processes (CO2 and polymer flooding) for installing three pilot projects in the depleted sands in Putohau reservoir. DPAB has drilled all the wells for the pilots and has completed the surface facilities for the C02 pilot. Facilities for polymer flooding are expected to be com- pleted shortly. These pilots and an evaluation of their performance will be completed by end-1992. 5.6 The EOR pilots are the only project component which were not com- pleted by the closing date. The extended delays (about seven years) from the original schedule are attributable to the delays in consultants' study and in  _4- procurement of equipment and construction, for which both DPAB and the suppli- ers were responsible. Studies 5.7 All six studies provided under the project were completed satisfac- torily by foreign consultants, albeit delayed by about three years from the original schedule. Discussions on the results of these studies are in para. 6.8. 5.8 Three-D seiep-c survey and preinvestment study for Zhongyuan Oilfield were implemented satisfactorily by the Zhongyuan Petroleum Explora- tion Bureau. Discussions on this component will be included in the PCR for the Zhongyuan-Wenliu Petroleum Project (Loan 2252-CHA). Project Costs 5.9 The total financing required (including front-end fee of $2.4 mil- lion) amounted to $332 million equivalent, as compared against the appraisal estimate of $674.3 million equivalent (Table 5A in Part III). The cost under- run amounted to 49 percent in US dollar terms and 14 percent in RMB terms, reflecting a significant devaluation of RMB against the US dollar.l/ The above cost underrun could be attributed to a number of reasons, including: (i) the appraisal estimate for physical contingency (15 percent) was conse- ative, even though it was prudent since this was the first Bank-financed operation in the country; (ii) local inflation rates were considerably lower than antici- pated; (iii) exemption of import duties and taxes which were included in the appraisal estimate ($28 million); and (iv) the scope of gas treatment facili- ties was reduced from the original plan as a result of the installation of a gas processing planit for overall Daqing which was beyond the scope of this project. Project Financing 5.10 A comparison of actual project financing with appraisal estimates is set out in Table 5A, Part III. Possible cofinancing with export credits did not materialize. Instead, tubular goods were centrally procured by MOPI and resold to various oilfields in local currency. The financing requirements for all th'- local currency components were met by DPAB's own resources. Disbursements 5.11 A comparison of actual disbursements with appraisal estimates is presented in Table 3, Part III. As noted above, procurement and related dis- bursements were delayed considerably and the closing date was extended by four years. Actual costs of imported goods and services financed by the Bank were close to the appraisal estimate; the Bank loan was 99.7 percent disbursed and $0.5 million of the loan canceled. 1/ The exchange rates for US$1 at project appraisal and completion were Y 1.8 and Y 4.72, respectively.  -5- Loan Allocation 5.12 The original and actual loan allocation is shown in Table 5, Part III. Unallacated amounts ($32.5 million) were largely reallocated to equipment auid materials for production. 6. Project Results Project Objectives 6.1 The project objectives have been substantially met. Specifically, the G reservoir was successfully developed. Bank-financed equipment for seis- mic survey and interpretation contributed to improvements in the success ratio for exploration. The objectives of transfer of specialized technology and institution building were l4rgely achieved through on-the-job training by international consultants and contractors for the various studies and well services, through importation of modern equipment lad related training by the suppliers, as well as through local and overseas training. However, the tim- ing of the above technology transfer was delayed as a result of delays in pro- curement. In sum, the results of technical assistance and training were largely positive in enhancing DPAB's capability in critical facets of petro- leum exploration and deve]opment activities. Petroleum Reserves and Production 6.2 At the .;me of project appraisal, recoverable oil reserves from G reservoir were rougi..y estimated by DPAB and Bank staff/consultant at 51 mil- lion tons and 32 million tons, respectively, with projected annual production peaking at 3.8 million tons. Based on the latest reservoir study and well results obtained since project appraisal, the latest reserves and production estimates entail a considerably higher areal extent of the G reservoir, and require a significant increase in well drilling and related surface facilities over a longer period than originally envisaged (eight years instead of four years). In essence, this project was the first phase of the G reservoir development, which was confined to the areal extent of the reservoir and pro- ject period (1982-85) as defined at the time of appraisal. Under this first phase of development, the recoverable reserves are now estimated at some 56 million tons. Together with the second phase development (1986-89), which is beyond the scope of this project, the total recoverable oil reserves have been revised upward to 76 million tons, with annual production peaking at some five million tons in 1988/89. 6.3 The higher than expected reserves and production estimates were attributable to the following: (a) the appraisal estimates by Bank staff/ consultant were conservative, though prudent since this was the first Bank- financed petroleum project in the country; (b) implementation of various rec- ommendations emerged from the reservoir engineering and drilling/well comple- tion studies, including improvements in well spacing, drilling and well com- pletion practices, and water injection techniques; and (c) fracturing of the reservoir. The average daily production peaked at 26 tons per well in 1985 as compared with the appraisal estimate of 19 tons per well. In sum, the reser- voir condition was considerably more favorable than originally anticipated.  - 6 - 6.4 The significant variances between appraisal and latest estimates of petroleum reserves demonstrate the geological uncertainties inherent in petro- leum operations. Further, given the heterogeneous nature of the G reservoir and the discontinuity of individual oil sands, it is not surprising that there are considerable variations in estimates of recovery and production rates. Seismic Survey and Interpretation 6.5 DPAB's technical capability and efficiency in undertaking seismic sur-rey and interpretation were enhanced under the project. Sixteen staff from the bureau -were trained overseas by the stipplier of seismic survey equipment. The imported specialized equipment allowed DPAB to survey dlfficult areas which were previously inaccessible, and efficiency in seismic survey was improved by 50 percent. In addition, two high speed computers are now oper- ating at full capacity and process some 25,000 line-km in 2-D and 200 km in 3-D se'smic data each year.. The modern equipment for seismic survey, along with the computers for seismic processing and interpretation, assisted DPAB in the selection of well locations. This has, in turn, contributed to a marked improvement in DPAB's success ratio for exploration from 32 percent to 48 per- cent. Computer Center 6.6 The computer facilities at Daqing were upgraded under the project, covering mainly the following areas: (a) seismic processing and interpreta- tion; (b) reservoir engineering; (c) data base management for oilfield opera- tions; (d) economic evaluation of field develepment plans based on reservoir simulation and risk analyses; and (e) computer aided design for surface facil- ities. Eighty-six staff from DPAB were trained overseas by the suppliers for computer operations. After an initial period of training by suppliers at Daqing, the comrputer center has been operated entirely by Chinese staff and is presently util.'zed at over 90 percent of its capacity. Laboratories 6.7 DPAB has set up modern laboratories for reservoir rock and fluid analysis to support reservoir management at Daqing. In addition, based on the recommendations of the consultants for EOR study and pilot design, DPAB has set up state-of-the-art laboratories appropriately equipped to support EOR activities. About 40 staff were trained overseas and over 80 technicians were trained locally by foreign consultants. As eavisaged during project apprai- sal, these laboratories have contributed to the enh_ncement of reservoir man- agement, including close monitoring and analyzing of the wells and fluid data. Technical Assistance and Training 6.8 Studies: (a) Reservoir Engineering Study. The results of this study indicated that oil-in-place reserves in G reservoir are considerably higher than the appraisal estimate (para. 6.2). DPAB considers the results of the study satisf