Equatorial Guinea - Petroleum Sector Technical Assistance Project

Document of The World Bank FOR OmCIAL USE ONLY Report No. 10724 PROJECT COMPLETION REPORT EQUATORIAL GUINEA PETROLEUM SECTOR TECHNICAL ASSISTANCE PROJECT (CREDIT 1304-EG) JUNE 19, 1992 Industty and Energy Operations Division Country Department I Africa 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.  LIST OF ACRONYMS Bcf Billion cubic feet BOPD Barrels of oil per day CIF Cost, Insurance and Freight DAP Department of Petroleum Affairs DH Directorate of Hydrocarbons DHS Deloitte, Haskins and Sells EEPGE Empresa Estatal Para la Importacion y Commercalizacion de Produtos Petroliferos (State Company for the Importing and Marketing of Petroleum Products) GEPSA Guinea-Espanola de Petroleo S.A. Hispanoil (REPSOL) Spanish National Petroleum Company LDC Less Developed Country MIME Ministry of Industry, Mines and Energy MMbbls Million Barrels MMH Ministry of Mines and Hydrocarbons UNDP United Nations Development Program  THE WORLD BANK FOR 0MCUL USE ONLY Washington, D.C. 20433 U.S.A. Office of Di,ectn.Genetal Operatin Evalution June 19, 1992 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Equatorial Guinea Petroleum Sector Technical Assistance Project (Credit 1304-EG) Attached, for information, is a copy of a report entitled "Project Completion Report on Equatorial Guinea Petroleum Sector Technical Assistance Project (Credit 1304-EG)" prepared by the Africa Regional Office with Part of the report 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 perfiormance Of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.|  PROJECT COMPLETION REPORT FOR OFFICIAL USE ONLY EQUATORIAL GUINEA PETROLEUM SECTOR TECHNICAL ASSISTANCE PROJECT (CREDIT 1304-EC) TABLE OF CONIENTS Pag-e Ng. PREFACE ... ........................................... i EVALUATION SUMMARY ....................................... ii PART I PROJECT REVIEW FROM BANK PERSPECTIVE A. PROJECT IDENTITY ....................................... 1 B. BACKGROUND ....... ..................................... 1 C. UNDP TECHNICAL ASSISTANCE CREDITS .......... ........... 2 D. PROJECT OBJECTIVES AND DESCRIPTION .................... 4 E. PROJECT IMPLEMENTATION ................................ 5 - Exploration Activities of Oil Companies ........... . . 5 - North Bioko Basin ............... 5 - Rio Muni Area ................... 6 - Other Components of the Projects ... ................. 7 - Follow-up to the Project ............................ 8 F. PROJECT RESULTS ...... ................................. 8 G. SUSTAINIBILITY ...... .................................. 9 H. PERFORMANCE OF THE PARTIES INVOLVED .................... 9 I. DOCUMENTATION and DATA ............... . ................. 10 PART II PROJECT REVIEW FROM BORROWER'S PERSPECTIVE A. ROLE OF THE MINISTRY OF MINES AND HYDROCARBONS ........ 11 B. EVALUATION OF WORLD BANK PERFORMANCE ................... 12 C. IMPACT OF MMH/WORLD BANK RELATIONS THROUGHOUT THE PROJECT EXECUTION PERIOD ..... ....... . 12 D. ACHIEVEMENTS DURING THE PROJECT EXECUTION PERIOD ........ 13 PART III STATISTICAL DATA 1. Project Time-table ...... .............................. 14 2. Credit Cumulative Disbursements .... ................... 15 3. Project Implementation . .............................. 15 4. Project Costs ......................................... 16 5. Project Results . ........... ........... .................. . 17 A. Direct Benefits .............. ................... . 17 This document has a restricted distribution and may be used by recipients only in the performance of their offcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  B. Financial Impact ................................. 17 C. Studies .......................................... 18 6. * Status of Covenants ...... ............................. 19 7. * Use of Bank Resources ................................. 20 A. Staff Inputs ..................................... 20 B. Missions ...................................... 20 I  PROJECT COMPLETION REPORT EQUATORIAL GUINEA PETROLEUM SECTOR TECHNICAL ASSISTANCE PROJECT (CREDIT 1304-EG) PREFACE This is the Project Completion Report (PCR) for the Petroleum Sector Assistance Credit in Equatorial Guinea, for which Credit 1304-EG in the amount of SDR 2.3 million was approved on November 30, 1982. The Project was closed three years behind schedule. It was fully disbursed and the date of last disbursement was March 10, 1990. This PCR was prepared by the Technical Department, Industry and Energy Operations Division of the Africa Regional Office (Preface, Evaluation Summary, Parts I and III), and the Borrower (Part II). Preparation of the this PCR was started during the last supervision mission of the project in June 1990, and is based, inter alia, on the Credit and Project Agreements; s_ .rvision reports; correspondence between the Bank and the Borrower; and internal Bank memoranda.  l ~~~~~~~~~~~- ii - PROJECT COMPLETION REPORT EQUATORIAL GUINEA PETROLEUM SECTOR TECHNICAL ASSISTANCE PROJECT (CREDIT 1304-EG) EVALUATION 8MAR Obiectives 1. Credit 1304-EG followed two UNDP Credits, which were executed by the Bank from July 1981 to July 1983, for an aggregate amount of US$0.6 million. Due to the experience acquired by the Bank during these credits, the project under review was thoroughly prepared. Similarly, its various components and objectives were fully understood by all concerned parties. Since the Bank's project was a continuation of the UNDP pr;Djects, this Evaluation Summary--and Part II of the report--includes a synopsis of thp UNDP experience. 2. Both UNDP Credits aimed at rekindling the interest of the oil industry in exploring the country's sedimentary basins by: (a) establishing an appropriate legal and contractual framework for petroleum investment; (b) carrying out a geological study of the basins aimed at outlining exploration targets ("conceptual plays" in petroleum industry terms) suited to attract the interest of oil companies; and (c) training the Ministry of Mines and Hydrocarbon (MMH) staff, to enable it to negotiate with oil companies. The UNDP Credits were broadly successful, because, by the time they reached completion: (a) a Petroleum Code had been prepared and enacted by the Government, (b) a petroleum exploration seminar resulted in two proposals for offshore exploration contracts from groups led by the French companies Elf and Total (the latter already deta.ned an onshore exploration acreage which had been recently attributed in the Rio Muni Province); and (c) some of the MMH staff had received a prelir..nary grounding in a wide range of petroleum matters. 4. Independently from UNDP and IDA activities in the petroleum sector, and within the framework of an assistance agreement between the Governments of Spain and of Equatorial Guinea, a mixed company (GEPSA) was created between the Government and the Spanish national oil company Hispanoil (which was later renamed REPSOL). GEPSA carried out seismic surveys, drilled six exploration wells, and in 1984 discovered the gas artd condensate field, subsequently named Alba. 5. The Credit 1304-EG was granted by the Association in 1983. It was conceived to assist the Government in developing the hydrocarbon resources of the country, and to strengthen the technical capability of MMH staff. 6. The main components of the Project included: (a) expanding technical assistance for promoting exploration activities; (b) strengthening the technical capacity of the Department of Petroleum Affairs, enabling it to interpret exploration data, negotiate with oil companies, and monitor operating companies' activities; and (c) preparing an energy data base, a prerequisite for planning and policy-making in the energy sector. Imolementation Experience 7. During Project implementation, oil companies fulfilled the following program: (a) the petroleum company Total and its partners drilled  - iii - an onshore exploration well, which was dry, carried out an offshore seismic survey, and subsequently relinquished both its exploration contractual areas; and (b) the Elf group implemented a seismic survey, drilled two offshore exploration wells in its initial exploration area. In 1989, it obtained a northward extension of this area, against the commitment to acquire new seismic lines in 1991, and drill a well in 1992; (c) in 1989, the American company Hamilton Oil acquired a majority equity participation in an exploration and production acreage, detained by the promoting company Clarion, and located in the south Rio Muni offshore. Contractual commitments included the acquisition of seismic data, and the drilling of two wells; and (d) REPSOL, fully occupied by development of major oil fields in other countries, reduced exploration activities in Equatorial Guinea, leading to the relinquishment of their exploration and production rights in March 1990. S. After the closure of the Project, and with the Association's assistance, the MMH met with Walter International, of Houston Texas, a new entrant, to develop the Alba field. An exploration/development contract was signed in Mtay 1990. Walter International will: (a) drill two appraisal/ development wells in 1990-1991; (b) develop the Alba field in 1991, with the first production expected in November 1991, at an expected rate of 5,000 barrels of liquid hydrocarbons per day (BOPD); and (c) drill two exploration wells i-n 1992. Results 9. The Government is expected to obtain from the development of the Alba field an initial annual revenue of the order of US$3.0 million, which will increase later in once taxes on the revenue of the contractor (profit oil) are collected, and eventually once the State receives its share of production. Furthermore, training efforts resulted in a unit of qualified geologists and geophysicists within the DH. Sustainibility The Government revenues resulting from the production of the Alba field will last as long as the field itself, and longer if other fields are discovered in the meantime, which is quite posaible. Lessons Learned 10. The Credit was successful, since, at the time of its closure, eighty percent of the surface area of the sedimentary basins of the country were the subject of exploration contracts with three oil companies. The aggregate exploration program for the suDsequent two years comprised the acquisition of new seismic data and the drilling of five exploration wells. And above all, with the development of Alba field, Equatorial Guinea will in all likelihood become an energy exporting country. 11. A major consequence of this success is the urgent need for further technical assistance to the DH to monitor increa3ed petroleum exploration and, soon, production activities. Indeed, more generally, a key finding is that well-designed and implemented TA has a high rate of return and is often required on an ongoing basis. 12. The implementation of the Credit has illustrated the wide range of views that different companies may have towards the same prospect: although the Alba field was a marginal operation for REPSOL (which belongs to the group of oil companies which are unfamiliar with inexpensive field development), it appeared to be an interesting prospect to Walter International (an independent and very cost-effective company with practically no overheads). This specificity of oil companies should be kept in mind whenever the issue of finding an oil company to develop a given prospect or to undertake the exploration of a given area arises.  - iv - 13. The independent company Hamilton Oil was attracted to the exploration of a politically-disputed area of Equatorial Guinea through the efforts of a promoting company. Whatever the conditions of the deal between the two companies, it was beneficial and of no cost to the country. Reputable promoting companies should not be disregarded out of hand. The possible results of their action should be evaluated on an individual basis judging accordingly to the company's reputation and approach.  PROJECT COMPLETION REPORT EQUATORIAL GUINEA PETROLEUM SECTOR TECHNICAL ASSISTANCE PROJECT (CREDIT 1304-EG) PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE A. Prolect Identity Project Name s Petroleum Sector Technical Assistance Project Credit No 1304-EG RVP Unit : Africa Region Country Department I Country s Equatorial Guinea Sector : Energy Subsector Petroleum B. Backaround 1. Equatorial Guinea covers 28,051 km2 and consists of two parts: Insular Guinea and Continental Guinea. Insular Guinea comprises five islands: Bioko, on which is located the capital city, Malabo, and four smaller islands (Corisco, Big Elobey, Little Elobey, and Annobon). Continental Guinea, named Rio Muni, located at approximately 200 km to the south of Bioko, is bordered on the north by Cameroon and on the south and east by Gabon. When the Project started, the offshore frontier with Gabon was disputed. The geographical configuration of Equatorial Guinea result3 in a large offshore area, which comprises: (a) the north Bioko basin, a distal extension of the Nigeria deltaic basin; (b) the offshore area south of Bioko Island which is part of the seaward extension of the Douala basin; and (c) a third basin, lying offshore from Rio Muni, and part of the northern extension of the Gabon basin. 2. The country became independent in 1968. During the next eleven years, the economy of the country, mainly based on agricultural production and which was previously flourishing, was entirely devastated by governmental mismanagement. The following Government, which took power in 1979, attempted to carry out an economic and financial stabilization program. However, lack of local expertise prevented the success of this effort. Furthermore, the 1980 import liberalization program resulted in a deterioration of the balance of payments. In 1981, the GNP per capita was US$175; the annual deficit oi the balance of payments amounted to US$24 million. 3. In 1982, with UNDP assistance, the Government prepared an economic reconstruction and development plan, aimed at revitalizing domestic food production, at stimulating the production of export crops (mainly cocoa) and at providing basic infrastructure. The plan included an investment program for the energy sector, with projects aimed at providing Equatorial Guinea's population centers with electricity, and defining an overall energy policy taking into account the country's hydroelectric resources. The Government also gave high priority to developing the country's oil resources (which presented some promise given the petroleum production in neighboring countries from basins extending into the Equatorial Guinea's national waters). In accordance with the country's energy sector development objectives and policy, the project under review aimed at assisting the Government in this development. 4. At the time of the preparation of the Credit, extremely difficult conditions prevailed concerning travel and hotel availability in Equatorial Guinea. International communications were irregular and infrequent. Internal means of transport were limited. Shortage of hotels and other accommodation was common. There was an extremely limited availability of  food, and no shops of any kind. Oil company officials active in the country lived -n Douala, travelling back and forth to Malabo by rented plane. 5. The administration was rudimentary, overworked and without means. There was in particular no institutional framework for petroleum-related activities, and expertise in the sector was non-existent. The project was prepared under extremely difficult conditions, without any local technical support. 6. In the early 80's, the Presidency held final responsibility for policy decisions affecting the energy sector. The Directorate of Mines and Hydrocarbons (DMH), administratively located in the Ministry of Industry, Mines and Energy (MIME), had the responsibility of monitoring the activities of the oil companies. With only two professional staff with a background in petroleum and with no decision-making power, the Directorate was ill-equipped for this task. The St, - Petroleum Products Importing and Distributing Compary (EEPGE), operated as an autonomous public enterprise. The Ministry of De-'elopment and of Finance and Commerce albo played a role in pricing and investment decisions affecting the energy sector. The main issues r3garding the institutional organization were: (a) dispersed- and sometimes conflicting--Ministerial responsibili_ies for petroleum policy; and (b) the Government's lack of qualified and appropriately trained staff in the petroleum sector. 7. All petroleum products are imported. As a result of the reopening of the country following the establishment of a new regime, petroleum consumption increased significantly (in 1980, consumption was 70% over the preceding year's levels). The aggregate amount of petroleum product imports remained small however (USS5 million in 1980). This amount was expected to increase rapidly. Because of small and irregular shipments, CIF import prices were 30-35 percent above international market prices. 8. In the late 1960s and early 1970s, four groups of oil companies were engaged in exploring the country's sedimentary basins. They spent about US$20 million for the acquisition of 8,000 km of seismic lines and to drill seven wells. Three of these wells had oil shows, in particular a well drilled in 1967 by Mobil on the Alba structure. Exploration activities were interrupted in the mia-1970's because of a deteriorating investment climate. The Government which took power in 1979 indicated ita intention to encourage foreign investment, in particular in the petroleum sector. C. UNDP Technical Assistance Credits 9. The Gover:.zent sought technical assistance in 1980 from both UNDP and the Wor.d Bank to attract the oil industry in the exploration for petroleum of the country's sedimentary basins. Following an agreement between UNDP and the Bank, UNDP granted in July 1981 and July 1983 respectively, two technical assistance Credits to be executed by the Bank for an aggregate amount of US$0.6 million (EQG/80/016/A/01/42). Both Credits were totally disbursed. 10. Under UNDP financing, legal consultants were contracted by the Bank to prepare the legal and contrac:ual framework for hydrocarbon exploration and production activities. They were selected following proposals received from three highly qualified legal firms. As a result, a Hydrocarbon Law was promulgated on June 23, 1981 and a production-sharing model contract was finalized in January 1982. The Law provided for an initial five-year term, and for two renewal periods of one year each. Royalties were set up at 10 percent and income tax at 45 percent. Signature bonuses, work commitments, and the Government's share of production were in each case to be established through bidding. Furthermore, according to a contractual innovation, the Government's share would be increased when the Company's rate-of-return would exceed negotiated thresholds. In August 1982, the Government issued a decree  -3- authorizing competitive bidding for hydrocarbon exploration rights in the offshore areas. 11. An exploration consulting firm (Petroconsultants S.A.--PSA) was contracted following proposals received from three qualified companies. A contract was signed between PSA and IBRD. The scope of ito work included retrieving and reinterpreting past geological and geophysical data. The consultants carried out their task in a very satisfaotory manner. The final report on Equatorial Guinea's hydrocarbon potential was presented to the Government in May 1981. Eventually, six oil companies bought the repo"t. 12. The exploration consultants also assisted in the preparation of bidding documents. The Bank brought together existing technical and legal documents and dispatched them to the oil industry. 13. In the meantime, the Spanish oil company Hispanoil had entered into an exploration contract covering the sedimentary basin north of Bioko Island, as part of the assistance provided by Spain to Equatorial Guinea,. A mixed company, Guinea-Espafiola de Petroleo S.A. (GEPSA), was created, with equal ownership by the Government and Hispanoil. GEPSA, with Hispanoil financing, carried out a seismic survey covering the whole area, and subsequently requested and obtained a contract, dated February 6, 1982, covering four blocks (totalling approximately 1,800 km2) located in the southern portion of the basin. Negotiations with GEPSA were completed within the framework of the newly-enacted Hydrocarbon Law. 14. By that time, many oil companies had indicated, either to the Bank or directly to the Government, their interest in exploring the Equatorial Guinea offshore basins. Oil prices were currently about US$35 per barrel. However, the Bank and UNDP had endeavored to promote a rational, orderly and systematic bidding procedure in order to assure the highest possible competition for acreage and thus maximize the long-term benefits to the country. To that effect, no exploration contract could be negotiated or signed before the bidding deadline. 15. In agreement with the interested oil pompanies, the bidding date was set at March 23, 1983. On December 6 and 7, 1982, promotional seminars for exploration acreage were organized in Geneva by the Government's exploration consultants. The meeting was attended by the representatives of sixteen oil companies. 16. Seven companies, urganized in two groups, presented bide for the five available blocks in the Rio Muni area. Elf, which led a five company group, presented a bid on three blocks, with work commitments including a 3,000 km seismic program, and one well in the third year. Total (which already detained recently acquired onshore exploration acreage as part of an association with Pacten), bid in association with Getty on two offshore blocks under a seismic option proposal. The Government was assisted in their negotiations with the oil companies by a highly qualified legal consultant, provided by Petroconsultants S.A. (PSA). 17. Also under the UNDP-financed and Bank-executed Technical Assistance Credits, six GEPSA employees or Government officials received an introductory presentation in Venezuela about petroleum exploration techniques. 18. As a condition of obtaining the Bank's Credit, a Department of Petroleum Affairs (DAP) was created, to centralize the management of the petroleum sector and to establish the country's petroleum policy. Following a request from the President of the Republic, the DAP was located within the Presidency. The DAP was supposed to incorporate the Directorate of Hydrocarbons (DP). According to the Bank's opinion at that time, the administrative location of the DAP within the Presidency would enhance its effectiveness.  -4- 19. However, the Government, whether in the DAP or the MIME, only had an inexperienced skeleton staff for implementing its task in the petroleum sector. Exploration activities, limited at that time to GEPSA's work program, would soon be increased because of the new contracts. The Government therefore requested, in order to meet its responsibility ~.n the sector, further consulting services and technical staff training programs. 20. At the final stage of the UNDP-financed project, a lingering issue affected the bidding process: Equatorial Guinea and Gabon had not yet agreed on the exact definition of the offshore boundaries separating both countries. The Government had to exclude a potentially prospective area eight kilometers wide along the Gabonese border from the acreage which was put out to tender. D. Prolect Objectives and Description 21. In April 1982, a resident consultant was hired to assist the Government in its project preparation activities, and in facilitating communications among all parties involved. This assistance, which proved very useful, was financed under a Project Preparation Facility (PPF) advance granted by the Association on April 19, 1982. The advance amount was US$150,000 of which US$69,895 was actually disbursed. 22. The experience, acquired by the Bank during the execution of the two successive UNDP grants, resulted in a conceptual foundation for the project which was clear and well-understood by both the Borrower and the Bank 23. The project was designed to expand the petroleum exploration promotional efforts carried out under UNDP financing, and to strengthen the technical capability of the DAP to monitor exploration activities carried out by oil companies. It also was intended to focus on the preparation of an energy data base, which is a prerequisite for planning and policy making in the energy sector. 24. The Project included the following major components: (a) Exploration Monitoring: Consultants to the Government in: (i) evaluating the financial and technical aspects of oil companies' proposals; and (ii) monitoring the oil companies' exploration and production activities; (b) The Establishment of an Enerav-Sector Information System: Consultants to help establish a data base on energy output, imports and demand, and would prepare recommendations on the methodological and technical aspects of energy data collection; (c) Proiect Administration: A resident project administrator for an aggregate period of about 36 man-months; (d) Trainina: On-the-job training of Government staff under agreed terms of reference for all consultants and contractors. In addition, three internships to train Government officials in petroleum exploration and petroleum economics; and  -5- (e) Eruinment: Office units with equipment and supplies; and vehicles for DAP staff and consultants. S. Proiect Imolementation 25. When the project started, GEPSA was already well-advanced in its exploration program. In addition, negotiations with both Elf and Total were expected to start very soon. It was therefore urgent to select, and hire the consultants who would be in charge of assisting the Government in monitoring exploration activities, and in negotiating new exploration and production contracts. 26. On February 15, 1983, the Government made a request to keep the same consultant firm which had already provided assistance for petroleu3m exploration and contract negotiation, because of its satisfactory past service and its staff's knowledge of the country's geology. The Bank agreed with this request, and, until the end of the Credit, Petroconsultants S.A. assisted the Government in all the activities included in the Project, with the exception of the auditing of the Credit account. 27. Negitiations both with Total and Elf were quickly completed. The Minister of Mines and Hydrocarbons signed exploration/p' -duction contracts on November 15, 1983 with the Total group (two offshore biocks, located in the Rio Muni area, in association with Getty) and on December 15, 1983 with the El3 group (three blocks, in association wich Ultramar, Agip, Murphy and Rimrock, also located in the Rio Muni offshore area). 28. Following proposals from five audit companies, the firm DHS of Spain, was awarded a contract to: (a) carry out the annual audit of the Credit account; and (b) train the DAP's accounting staff in maintaining appropriate accounts of the Credit. The contract was signed on October 28, 1985. Since DHS's work was carried out to a satisfactory standard, the firm's contract was renewed until the end of the Credit. ExDloration Activities of Oil Companies North Bioko Basin 29. The Spanish company Hispanoil, on behalf of GEPSA, conducted exploration activities which included the acquisition of 5,019 km of seismic lines, and the drilling of six wells. These exploration efforts led in March 1984 to the discovery of the Alba gas and condensate ficild, where a well drilled by Mobil in 1967 had discovered oil shows. 30. In 1986, the Government' s exploration consultants assessed the recoverable reserves contained in the Alba field. As a result of this study, the consultant estimated the recoverable reserves as follows: Proven Proven Proven & Probable & Probable & Possible Dry Gas (Bcf) 535.0 847.0 1,363.0 Condensate (MMbbls) 27.3 42.5 68.5 31. GEPSA obtained a provisional discovery acreage, largely encompassing the Alba field. However, the disappointing results obtained by  the exploration of the northern area of the basin, and the marginal character of the Alba field, led Hispanoil to relinquish its exploration acreage in 1988, and to delay the appraisal of the discovery even beyond its contractual commitments. 32. Since Hispanoil did not agree to carry out, either the appraisal of the ALBA field discovery or the exploration of adjoining areas in accordance with its contractual obligations, the Government canceled the GEPSA contract on March 15, 1990. 33. In February 1990, (after the closing date of the Credit), during a visit paid to the Bank in Washington, the Director of Hydrocarbons of the Ministry was introduced by the Association to a few independent oil companies which could develop the Alba field. One of them, Walter International of Houston (Texas), signed an exploration/production contract on May 5, 1990, and spudded an appraisal/production well in July 1990. In 1991-1992, the company will: (a) drill two exploration wells; and (b) proceed to the development of the Alba field. According to Walter International projections, gas and condensate are expected to flow in or about November 1991. 34. During the first phase of the development and the production of Alba field, before the full recovery of Walter International's exploration and development costs, the Government will receive an annual revenue corresponding to its 10% overriding royalty on the field revenues, amounting to approximately US$3.0 million (assuming a crude oil price of US$16 per barrel and a production rate of 5,000 BOPD). Following recovery of Walter International's exploration and development expenses (after about three years), the annual share of the Government will be increased by the taxes paid by the Contractor on profit oil. Later on, when the real rate of return of the Contractor reaches 30%, the Government would additionally obtain a 30% share of profit oil. Rio Muni Area 35. In its onshore contractual area, Total carried out a 255 km seismic survey, and drilled an exploration well which was abandoned dry at the depth of 1,145 meters. In its offshore acreage, the company acquired 1,405 km of seismic lines, and did not exercise its option to drill an exploration well. Both contractual areas were relinquished by the end of 1985. 36. Elf acquired 3,058 km of seismic lines (i.e. about 50% over its contractual commitments) in its offshore Rio Muni contract area, and drilled two exploration wells which were both abandoned dry. According to its interpretation of exploration results, Elf estimated that the exploration prospect shifted north within the previous Total acreage. In early 1986, Elf applied for a northward extension of its contract area. This proposal met with legal difficulties, since the Hydrocarbon Law made it obligatory to: (a). award exploration contracts for new areas through a bidding process only; and (b) limit the surface of any new exploration contract area to 2,650 kms, while Elf's request covered an area of 4,540 kms. Following lengthy negotiations, a new exploration contract was signed on April 11, 1989. Technical commitments included: (a) during the first contractual year: seismic reprocessing and reinterpretation; (b) during the second year: acquisition of new seismic data; and (c) during the third year: drilling an exploration well. 37. The American oil exploration promoter Clarion entered into a petroleum exploration contract on July 1, 1989, covering an area located in the offshore zone disputed with the Republic of Gabon. On March 29, 1990,  Hamilton took over a majority equity participation in the project, as well as responsibility for operation. Technical commitments include: (a) a 2,500 km seismic survey which will be carried out in 1991; and (b) two exploration wells which will be drilled whenever the offshore border litigation with the Republic of Gabon is settled. 38. The Government has received an aggregate amount of approximately US$38 million in terms of rentals and bonuses from past oil company activities. 39. The Republic of Gabon's initial grounds for disputing a portion of its border area with Equatorial Guinea stemmed from a previous authorization granted by Spain to France to set up a beacon on the Coqueircs Islands. Gabon has restricted its territorial claim both subsequent to its discussions with the Government of Equatorial Guinea and as a result of the permit granted by the same Government in the disputed area. The Government of Equatorial Guinea hopes to resolve this question to its satisfaction shortly. 40. The Ministry of Mines and Hydrocarbons proposed entering into two contracts in September 1985 with two different parts of the same company which had a poor reputation: (a) under the first contract, the company would provide technical assistance to the Government in all petroleum exploration/production related matters, agairst an overriding royalty on hydrocarbons revenues; and (b) the second contract established a joint venture between the company and the Government, which would grant exclusive exploration rights over the totality of the offshore area south of the latitude of the Bahia de Corriscos (over 30 blocks), against insignificant technical commitments (the drilling of one exploration well over a period of five years). Before promulgating the decrees, the Government asked for the opinion of its exploration consultant. Supported by the Association, the consultant expressed his concern regarding: (a) the misallocation of resources in the country; (b) the probable negative feedback on the Government in the oil industry; and (c) inadequate protection of the Government's interests. Furthermore, the signed contracts included the establishment of a national petroleum company. The final result of the operation was a one year delay in the implementation of the project under review. Following the recommendations of both its consultant and the Association, the Government never promulgated the decrees concerned, and the company involved withdrew from the scene. Other Components of the Proiects 41. The training component of the project was satisfactorily implemented. Training programs included: (a) DH staff attendance at various seminars, such as a conference organized in Rome about petroleum exploration contract negotiation; (b) systematic courses covering all petroleum exploration/production matters organized by the MMH exploration consultant; (c) accounting training provided by the audit company DHS; and (d) on-the-job instruction provided by oil companies operating in the country. DH staff needs further training and continued consultirg services. In the meantime, a small technical unit has been established, able to deal with most petroleum exploration matters. 42. The construction of the office units for the DH was prepared by a Spanish architectural company, selected according to Bank guidelines. The Association participated actively in the elaboration of the building design. Construction work was awarded to the French company Colas, following the assessment of proposals received from two companies. Building construction, performed under the supervision of an architect provided by the DH's exploration consultant, was started in 1986, completed in 1988, and accepted by the DH in 1989. The total cost was about US$680,000. It currently houses the office of the Minister of Mines and Hydrocarbons and all of DH's departments.  43. The Direction of Petroleum Affairs (DAP) had been located, according to the request of the President of the Republic, within the Presidency. However, the Direction of Hydrocarbons (DH) remained within the MMH, and managed both the petroleum activities in the country and the implementation of the Credit effectively. The DAP's role in the petroleum sector progressively decreased and it disappeared in 1986. The preuent institutional set-up and housing arrangements for DH are satisfactory. 44. A Spanish company was selected upon a call for bids to provide the DH with all necessary office furniture, which was carried out satisfactorily. The purchase of five cars, with appropriate spare parts, had been previously financed under the Credit. 45. The DH exploration consultant assessed all available data about the energy sector in Equatorial GLtnea, in order to establish an energy-sector information center. It was found that available information was scarce and scattered. The consultant also recommended collecting information on household energy consumption in the provinces, but this was never done. If Equatorial Guinea becomes an oil-exporting country, the establishment of such an information center will be all the more necessary. Follow-uo to the Proiect 46. As mentioned in the President's Report, during project preparation it was established that CIF import prices of petroleum products were 30-35 percent above international refinery prices. However, the Bank's management had not yet decided at the time to become involved in petroleum supply and distribution matters, and the issue was not initially addressed in the project. 47. Further urgent DH needs for technical and financial assistance were identified, but funds under the Credit were exhausted, the Association agreed to finance the necessary consulting services under the on-going Technical Assistance Credit (Credit 1489-EG). The main issue to be addressed is the high cost of petroleum products in Equatorial Guinea. 48. The supply of petroleum products to the country is under the responsibility of Total Afrique. The operation of the internal distribution system is under monopoly control of a jointly-owned company (Government/Total Afrique). The unloading, storage and distribution facilities are owned by the Government. Several years of neglect have resulted in serious deterioration of all equipment. The French Caisse Centrale has granted a Credit to rehabilitate these facilities. 49. A consultant was hired under the credit to study the supply and distribution of petroleum products in Equatorial Guinea. After having completed the study, he made the following recommendations, with which the Association agrees: (a) provide greater transparency of information on the cost build-up and basis for the CIF price of products to Equatorial Guinea; (b) reduce demurrage costs; (c) organize a governmental body to approve and control the internal price structure: (d) rationalize petroleum products storage capacity by decommissioning part of the storage tanks; and (e) establish a petroleum products retail price structure which would eliminate the current cost-plus arrangement. The Government will seek consultant's asistance to implement these recommendations. F. Proiect Results 50. The Credit was successful since, at the time of its closure, eighty percent of the surface area of the sedimentary basins of the country had been covered under exploration contracts with three oil companies. The aggregate exploration program for the next two years comprises the acquisition of new seismic data and the drilling of three to five wells. And above all, with  -9- the development of the Alba condensate and gas field, the country will become a hydrocarbon-producing country. 51. The expected increase in the Government's petroleum revenues obtained through the project results from the replacement of REPSOL (which had let its exploration and production rights lapse) by the more aggressive and cost effective oil company, Walter International. The Bank played a significant role in having the contractual rights of the Government respected, and in finding the right company to take over the development of the field. The difference in expected revenues deriving from the change of contractor results from: (a) different contractual terms (the Government has no equity participation in the W.I. development contract); and (b) lower development costs. However, since the Government has not provided the Bank with a copy of the contract with W.I., it is not possible to evaluate with any accuracy the actual increase of Government's revenue. 52. The training program implemenced under the Credit resulted in the establishment within the DH of a technical unit able to provide useful assistance to the Government in the field of petroleum exploration. However, the DH still needs assistance for monitoring the increased exploration and production activities in the country, particularly the development of the Alba field. G. Sustainabilitv of above results 53. Production of the Alba field is expected to last about fifteen years, and during the same period, the Government will receive substantial revenues from the sale of petroleum. Moreover, it is quite possible that further exploration efforts will result in new discoveries, which would provide long-term revenues to the Government. 54. The close monitoring of long-term petroleum exploration and production activities will strengthen and maintain DH's expertise in these fields. H. Performance of the Parties Involved 55. The Ministry of Mines and Hydrocarbons (MMH) and its Direction of Hydrocarbons (DH) managed the project in line with Bank guidelines in respect of the hiring of consultants or contractors. They took full advantage of training, in particular in the field of relations with oil companies. However, the DH did not always keep the Bank informed of the different events occurring locally in the petroleum subsector. 56. The Bank monitored project preparation and implementation phases closely, and was particularly successful in advising the Government regarding the different qualifications of different companies. The Bank participated efficiently in negotiations with GEPSA, and when this company had disappeared, played an important role in helping find an appropriate company to develop the Alba field. 57. Following the sound relationship established between the Government and the Bank under the UNDP-financed Bank-executed Credits, a mutual understanding prevailed during most of the implementation of the Credit, and contributed significantly to its success. 58. All the consultants involved in the project played a satisfactory role, in particular the exploration consultant, PSA, which implemented its multiple tasks throughout the life of the project efficiently. This consultant assisted the DH in monitoring the oil companies' activities with efficiency, and in advising the Government when an unqualified company proposed a questionable exploration contract.  - 10 - 59. Furthermore, the training program provided by DHS resulted in the establishment of an appropriate accounting system within the DH. The credit accounts were correctly followed up by the DH throughout the life of the project and regularly audited by DHS. I. DOCUMENTATION AND DATA 60. The project was well-documented in the Bank's files, and the preparation of this PCR was supported by adequate documentation, including complementary information provided by the Borrower. 61. The legal documents were a useful reference during project implementation. The covenants in the Credit Agreement provided useful benchmarks during the implementation of the Project.  - 11 - PROJECT COMPLETION REPORT EQUATORIAL GUINEA PETROLEUM SECTOR TECHNICAL ASSISTANCE PROJECT (CREDIT 1304-EG) PART IIt PROJECT REVIEW FROM BORROWER'S PERSPECTIVE The above-mentioned project began in May 1982 and was concluded on December 31, 1990. This Report describes the performance of both the Ministry of Mines and Hydrocarbons (MMH) and the World Bank during the project execution period and the impact of the relationship between the Ministry and the Bank on the execution process; it also gives the Ministry's opinion on the benefits achieved through the project. A. Role of the Ministry of Mines and Hydrocarbons 1. During execution of the project, the Ministry played a vital role in achieving the objectives set, acting as the real coordinator of all work undertaken by consultants within Equatorial Guinea. 2. For the preliminary and final reports from Petroconsultants S.A. on the country's hydrocarbon potential, the Ministry provided the consultants with all required material support, including full background data. 3. The designation of several members of MMHL technical staff as counterparts to the consultants greatly facilitated the latter's work, and specifically their assembly and selection of a considerable volume of data, much of which MMH staff had put together prior to their arrival, thereby undoubtedly lightening their workload. At the same time, the whole process provided a training occasion for MMH technical staff. 4. Despite the shortage of space in the old MMH building during the first four years of the project execution period, which made it difficult to accommodate technical staff and avoid inconveniencing the consultants, MMH succeeded in having offices available for the consultants at all times. 5. Where World Bank missions were concerned, MMH provided full- scale support for them in the form of information requested, means of transportation, and the general paperwork involved in obtaining entry visas to the Republic and hotel and airplane reservations for mission members. The same services were provided as necessary for staff of Petroconsultants S.A. and Deloitte. 6. As to the training programs for MMH staff, it is the MMH opinion that the goals set for this project component were successfully achieved. 7. The few technicians who were available at the outset of the project benefited from training courses devised by MMH in conjunction with the project consultants. 8. Local personnel were trained both abroad and within the Republic. Generally speaking, training abroad took the form of courses, seminars, symposiums, etc. organized by agencies and private enterprises connected with the petroleum sector, while local training consisted of traineeships on oil platforms operated by companies with drilling rights in the Republic.  - 12 - 9. This training equipped the personnel who took part in it with sufficient experience and practical knowledge to carry out oil exploration activities and implement other strategies forming part of the overall planning for the energy sector as a whole. 10. Although the services of technical consultants were available, MMH itself added appreciably to its own proficiency during the course of the project, to the extent that on several occasions (from 1988 onward) it was able to conduct certain negotiations unaided. In addition, it took the initiative in promoting areas with direct contacts with oil companies, thereby producing significant results of vital importance to the future of Equatorial Guinea. 11. However, despite MMH's solid performance, quarterly progress reports were sometimes late, a consequence of shortcomings in communications and other links between Equatorial Guinea and other countries. The situation has now improved, thanks to the creation of telephone, telex, telegram, express mail, etc. services with the exterior. B. Evaluation of World Bank performance 12. During the period when Credit 1304-EG was being executed, the World Bank played an exceptional role. 13. MMH fully acknowledges the role played by the Bank, and specifically by its officers directly responsible for matters affecting Equatorial Guinea, a team which at all times provided MMH with the technical assistance it needed in selecting consultants as efficiently as possible. 14. One consequence of the careful selection of consultants was that the objectives proposed for the project were actually achieved. 15. MMH is cognizant of the effort and seriousness the Bank put into designing the training program for MMH personnel; all suggestions put forward concerning it were well received within the Bank, a factor which contributed to the successful implementation of training courses. 16. Mention should be made of the Bank's initiative in proposing programs to the Government. A case in point was that of the energy sector reports, as a result of which the methods followed throughout the country for the supply and distribution of petroleum products were scrutinized. 17. It only remains to point out that a high staff turnover rate caused delays in reaching certain decisions, although this difficulty was gradually corrected over the course of the project. 18. In MMH's judgment, the assistance provided by the Bank was excellent, and it sincerely wishes to thank all Bank officers who made implementation of the project possible. C. Is=act of NMHIWorld Bank relations throughout the Droiect execution oeriod 19. Throughout the period when Credit 1304-EG was being implemented, relations between the MMH and the World Bank were excellent. An atmosphere of friendliness and understanding prevailed at all times and doubtless facilitated successful completion of the program as designed. 20. There were almost no instances of friction between the two institutions over the seven years it took to complete the project, and certainly no conflict surfaced during that time. This contributed to the  - 13 - successful culmination of what was in fact a vast program, which it is hoped to complete during the second phase of the project. D. Achievements during the prolect execution oeriod 21. It ma-) be affirmed without hesitation that the Petroleum Sector Technical Assistance Project amply achieved the key goals proposed for it at the appraisal stage, namely. (a) Eighty-five percent of the country's sedimentary basins were covered by three oil companies with an intensive program of exploration and proeaction activities that would have a significant impact on the country's macroeconomic development. (b) Within the MMH institutional structure, a group of technicians was successfully established which will eventually ensure that MMH will be capable of optimum exploration and exploitation of domestic petroleum resources. (c) Local personnel were provided with sufficient practical training and experience to equip them to carry out oil exploration activities and implement other strategies forming part of a coherent plan for the energy sector as a whole. (d) An accounting and administrative system was successfully introduced within the Department of Petroleum Affairs, and the Department's real needs were determined as regards internal cost accounting, contracts, audits and financial data on companies operating in the domestic hydrocarbon sector, and ability to verify oil company exploration and production costs. (e) It was determined what categories of information the oil companies would be required to remit to MMH, and what arrangements for agreeing on external and/or government audits would apply, two steps which made the Government's exercise of control over the oil companies easier.  - 14 - PROJECT COMPLETION REPORT EQUATORIAL GUINEA PETROLEUM SECTOR TECHNICAL ASSISTANCE PROJECT (CREDIT 1304-EG) PART III: STATISTICAL DATA 1. Related Bank Credit Credit Year of Title Purpose Approval Status Comments CR. 1489-EG Macroeconomic 1984 on-going Available funds Technical (will be were used to Assistance closed in finance last March 92) phase of Credit 1304-EG 2. Proiect Time-Table Date: Planned Date:Revised Date:Actual First mention in files 05/04/80 Initial project brief 12/02/81 Issues Paper 12/09/81 Decision meeting 12/17/81 Credit negotiation 09/17/82 (in the field) Board approval 11/30/82 Signing date 01/18/83 Effective date 05/18/83 Credit closing 12/31/86 12/31/89 12/31/89 Credit completion 06/30/86 12/31/89 12/31/89 N.B. No appraisal report was prepared before the project.  - 15 - 3. Credit Cumulative Disbursements US$ millions FY83 FY84 FY85 FY86 FY87 FY88 FY89 Appraisal (cumulative) 0.6 1.5 2.4 2.4 2.4 2.4 2.4 Actual (cumulative) 0.3 0.5 0.8 1.6 2.3 2.7 Actual as % of appraisal 0 20 21 33 67 96 112 SDR millions Appraisal (cumulative) 0.6 1.4 2.3 2.3 2.3 2.3 2.3 Actual (cumulative) 0.2 0.5 0.8 1.5 2.0 2.3 Actual as % of appraisal 0 14 22 35 65 87 100 Comment: Last disbursement was effected on March 10, 1990. 4. Proiect Implementation Appraisal Actual Key Indicators Estimate Estimate ExDloration Monitorinq Selection and Hiring of Consultants 10/06/83 03/84 Assistance in contract negotiation 03/83-12/83 03/83-12/83 Company Monitoring 04/83-06/85 03/84-04/90 Re-evaluation of Hydrocarbon 12/83, 12/84 NOT DONE 1/ Potential and 12/85 1/ Annual re-evaluation of hydrocarbon potential was soon found to be unrealistic. However, hydrocarbon potential evaluation of local areas, in the Rio Muni and Corisco Bay regions, was conducted throughout the project.  - 16 - Appraisal Actual Estimate Estimate Enerav Sector Information Selection and Hiring of Consultants 06/83 03/84 Energy Data Collection and 11/82-03/84 04/84-12/86 Energy Consumption Survey Final Report 09/84 04/87 Scholarohios Studies Abroad 10/83-12/85 04/85-06/88 5. Proiect Costs and Financina A. Proiect Costs (in USS '000) *-----Appraisal Estimate-----* -----Actual----------* Foreign Local Tctal Foreign Local Total Vehicles, 570 0 570 924 0 924 equipment supplies and office units Consultant's 1,080 150 1,230 1,568 150 1,718 services Training 120 0 120 181 0 181 (including travel expenses) Local Staff and 0 155 155 0 155 155 Support Service Baseline costs 1,770 305 2,075 2673 305 2,978 Physical 180 30 210 0 0 0 Contingencies Price 350 60 410 0 0 0 Contingencies TOTAL 2,300 395 2,695 2,673 305 2,978 Comment: - Local costs were met with the maintenance of vehicles, and purchase of (a) corresponding spare parts, and (b) fuel.  - 17 - B. Proiect Financina Planned (President S-ourcfl Report) Final (US$'000) (US$'000) IDA 2,540 2,823 Government 155 155 TOTAL 2,695 2,978 6. Proiect Results A. Direct Benefits Appraisal Estimated at Estimated at Indicators Eatimate Closina Date Full DeveloDment Attracting oil Timid Objective Activities of oil companies expectation fully met companies is expected to be maintained for next decade Discovery of Rated as possible Objective Will have a Hydrocarbons met significant impact on economic development Energy Government to Not met Information undertake System coherent energy planning Development of Government to Objective Expertise expected local expertise conduct partly met to further develop hydrocarbon with prolonged exploration contacts with oil companies. B. Financial Imnact Financial benefits from the project result essentially from the development of ALBA field. The Government will initially receive a 10% annual royalty, amounting approximately to US$3.0 million. When the Contractor has recovered its development costs (after a period of about three years), the Government will additionally receive the corporate tax as paid by the Contractor, which amounts to approximately US$6 million annually. After a period of seven to eight years following the commencement of the production, the Government will add3tionally obtain its share of oil profits, rasulting in a Government aggregate ennual revenue of approximately US$15 million. The above numbers are approximate, since the Government has not provided the Bank with a copy of the contract with Walter International.  - 18 - C. Studies All the studies indicated below were completed, with copies given to the Bank. STUDIES IMPACT OF STUDY Hydrocarbon Resources (PSA) 2/ Three exploration/production Interpretation of the seismic contracts were signed upon data acquired by oil companies presentation of the report (one report was drafted for each to the oil industry survey) (PSA): (i) TOTAL/PECTEN (ii) TOTAL/GETTY (iii)ELF-Aquitaine (Rio Muni offshore) (iv) GEPSA (area of Bioko) (v) GEPSA-CONOCO (Corisco Bay) 3/ Technical Comments on the Alba field development study (PSA) Energy Planning - Volume 1 (The The report includes appropriate Energy Sector in Equatorial Guinea) recommendations which have yet and Volume 2 (Establishment of a to be applied Statistics Unit within the DH) (PSA) ALBA field economics appraisal (PSA) Petroleum Geology of the Bioco Area Good report: it was used to present the ALBA field to oil companies (Ref. Part I - paragraph 49 above), which resulted eventually in the signature of Walter Inter- national's contract 2/ The most important reports are underlined. 3/ The five above mentioned reports regarding seismic interpretation are the local updating of the initial Petroleum evaluation report, as mentioned in Part III - paragraph 3 above.  - 19 - 7. Status of Covenants Covenants Status The Borrower shall: A. employ consultants and Covenant met experts (Section 3.02 (a) of the Development Credit Credit Agreement) B. furnish to the Association Covenant met copies of documents and reports as prepared by consultants (Section 3.02 (c)) C. provide local support to the Covenant met experts and consultants (3.02 (e)) D. furnish to the Association a Covenant met list of the candidates to be trained (3.02 (f)(i)) E. furnish annual reports on the Covenant not met progress made by trained professionals'(3.02 (f) (ii)) F. ensure that such professionals Covenant met remain in its service for at least five years (3,02 (f) (iii)) G. cause all goods and services Covenant met financel under the Credit to be used exclusively for the purposes of the Project (3.03 (b) H. furnish quarterly and annual Covenant met reports on the progress of the Project (3.04 (b) I. forward to the Association Covenant no longer relevant: proposal to upgrade key position prerogatives of the DPA in the DPA (3.05) were transferred to the DH J. advise the Association on the Covenant not met: the measures taken to establish the recommended system is energy sector information system still to be applied (3.06) K. inform the Association promptly Covenant not always met of any condition which interferes or threatens to interfere with the implementation of the project (3.07) L. have the Project's accounts Covenant met audited for each fiscal year (4.01 (B))  ~~~~ * - *muum mum mu - 20 - 8. Use of Bank Resources A. Staff Inputs (in weeks) Stage of Proiect Cycle Actual Comments Monitoring of 15 UNDP-financed Credits Identification 21.7 Since no appraisal through appraisal report was prepared, the Decision Meeting was taken as the reference date Appraisal through 85.2 Signing Date Supervision 90 TOTAL 211.9 B. Missions Month/ No. of persons and Specialization Place Year davs in the field represented Performance vited Monitorina of UNDP-financed Credits 11/79 1 15 ECO. 1 Malabo 03/80 1 14 Fin. A. 1 Malabo 03/80 1 4 LEG 1 Malabo 04/80 1 2 LEG & FIN. A. 1 New-York From Identification to Appraisal 4/ 05/81 3 7 Pe LEG & FIN.A. 1 Malabo 09/81 1 1 FIN. A. 1 Paris 03/82 2 12 Pe & FIN.A. 1 Malabo 03-04/82 2 5 Pe & FIN.A. 1 Malabo 04/82 2 3 Pe & FIN. A. 1 Geneve 12/81 1 1 LEG 1 Geneve 4/ As in the case of the chapter 7. A above, since no appraisal was carried out, the reference date was picked at the Decision Meeting.  - 21 - From AoDraisal to Sianina Date 05/82 1 7 FIN. A. 1 Malabo 07/82 1 7 FIN. A. 1 Malabo 09/82 3 5 Pe LEG & FIN. A. 1 Malabo 11/82 1 7 FIN.A. 1 Malabo 12/82 3 5 Pe LEG & FIN. A. 1 Geneve Supervision 07/83 1 6 FIN. A. 1 Malabo 12/83 1 3 Pe 1 Malabo 01/85 4 5 FIN. A./Pe/EGN 1 Malabo 03/86 2 5 EGN & FIN.A. 1 Geneve 03/87 2 5 EGN & Geo 1 Madrid 06/88 2 5 EGN & Geo 1 Malabo 01/89 1 5 Geo 1 Malabo 05/89 1 5 Geo 1 Malabo 01/90 1 5 Geo 1 Malabo 06/90 1 5 Geo 1 Malabo A. Key for Status 1 - no problem 2 - minor problems 3 - major problems B. Key for specialization ECO. Economist EGN. Engineer FIN. A. Financial Analyst GEO. Geologist/Geophysicist LEG. Lawyer PE. Petroleum Engineer