India - Oil and Gas Sector Development Project

Docunmt of The World Bank FOR OFFIC1AL USE ONLY Report No. 11522 PROJECT COMPLETION REPORT INDIA OIL AND GAS SECTOR DEVELOPMENT LOAN (LOAN 3391-IN) JANUARY 4, 1993 Energy Operations Division Country Department II South 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.  CURRENCYQEOUIVALENTS (As of May 15, 1992) Curreny Unit = Rupees (Rs) Rs 1.00 = US$ 0.037 (approx.) US$1.00 = Rs 26.70 WEII AND MEASURES 1.1 million cubic meters of gas = 37 million cubic feet of gas 1.2 barrels of oil 1.3 ton of oil 7.3 barrels of oil ABBREVIATIONS BCM - billion cubic meters CCFF - Compensatory and Contingency Financing Facility GOI - Government of India GOR - Gas-oil ratio MMCMD - million cubic meters per day MW - megawatt OIL - Oil India Ltd. ONGC - Oil and Natural Gas Commission FISCAL YEAR April 1 to March 31  FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A -fice of Director-General Operations Evaluation January 4, 1993 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on India Oil and Gas Sector Development Loan (Loan 3391-IN) Attached is a copy of the report entitled 'Project Completion Report on India - Oil and Gas Sector Development Loan (Loan 3391-IN)" prepared by the South Asia Regional Office. The Borrower did not contribute to the report. This quick disbursing loan was speedily designed and approved to complement the Gas Flaring Reduction Loan (Loan 3364-IN), approved in June, 1991. The rationale was to help the Government finance oil imports in compensation for reducing oil output of the Bombay High field. The policy objective was to get the Government to permit and encourage the national oil company (ONGC) to enter into joint ventures with international oil companies for the development of existing oil fields. In its letter of development policy, GOI stated that ONGC would take steps to enter into joint ventures and to invite international oil companies to bid for a number of highly prospective exploration areas. This bidding process took place and foreign companies did submit proposals. To date, the Government has failed to act on any of these proposals and therefore the project outcome is rated as unsatisfactory. An audit of the project is planned in conjunction with an audit of the Gas Flaring Reduction Loan. Attachment This document hes a restricted distribution and my be used by recipients only in the perforAmnce otf their officiaL duties. Its contents may not otherwise be disclosed without World Sank authorization.   FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT INDIA OIL AND GAS SECTOR DEVELOPMENT LOAN (LOAN 3391-IN) TABLE OF CONTENTS Preface ........................................... i Evaluation Summary ............................................ ii Background ............................................ ii Objectives ............................................ ii Implementation Experience ............................................ ii Results ............................................. i i Sustainability and Lessons Learnt ........................................... i Part I: Project Review from the Bank's Perspective ............................................ Project Identity ............................................ Background ...................................................... 1 Project Objectives and Description ..........................................3 Project Design and Organization ........................................ . . 3 Project Implementation .............................................. 3 Project Results ............................................. 3 Project Sustainability .............................................4 Bank Performance ............................................ A Borrower Perfonnance ............................................ A Project Relationship ............................................ A Project Documentation and Data ............................................. 5 Part II: Project Review from the Borrower's Perspective ............................................. 6 Part m: Statistical Information ............................................ 7 Related Bank Loans and/or Credits ............................................ 7 Project Timetable ............................................ 9 Loan Disbursements ............................................ 9 Project Implementation .............................................9 Project Costs and Financing ............................................ 9 Project Results ............................................ 9 Status of Covenants ............................................ 10 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   - i - PROJECT COMPLETION REPORT INDIA OIL AND GAS SECTOR DEVELOPMENT LOAN (LOAN 3391-IN) PREFACE This is the Project Completion Report for the (first) Oil and Gas Sector Development Loan for India (Loan 3391-IN) for an amount of US$150 million equivalent. The principal objective of the loan was to reduce the pressure on the Oil and Natural Gas Commission to continue producing oil from high gas-oil ratio wells in contradiction to sound reservoir management practices by providing finance for oil imports. The loan was approved in July 1991. The final disbursement was made in December 20,1991. The loan closes July 30,1992.   - ii - PROJECT COMPLETION REPORT INDIA OIL AND GAS SECTOR DEVELOPMENT LOAN (LOAN 3391-IN) EVALUATION SUMMARY Background The loan complemented the financing provided under the Gas Flaring Reduction project (Ln. 3364-IN). It made it possible for India to meet part of the external financing needs caused by the increase in oil imports resulting from the closure of oil wells with exceedingly high gas-oil ratios (GOR) in the Bombay High oil field. More specifically, it supported the Govemnment's measures to attract private sector companies to participate in the accelerated development of India's oil and gas reserves, and ONGCs ongoing efforts to improve the management of the reservoirs of India's largest oil field, the Bombay High. The Government requested support for this project, at a time when India's foreign exchange reserves had reached an all time low of about two weeks of imports. Without this loan the Oil and Natural Gas Commission would have been under tremendous pressure to increase oil production even from sick oil wells causing additional damage to a field that suffers the effects of overproduction. Objectives The principal objectives of this project were: (a) to provide financing for oil imports in order to reduce the pressure on ONGC to continue producing from high gas-oil ratio wells and (b) to assist ONGC in increasing oil output with the help of direct foreign investments. The main condition of the project was therefore that the Government take a decision to permit ONGC to enter into joint ventures with international oil companies for the development of existing oil fields. Implementation Experience The project was implemented with only minor delays. The loan was fully disbursed within five months from the date of effectiveness, well before the closing date of the project. Results The two main objectives were achieved. ONGC did close about 40 oil wells with gas-oil ratios of above 700 and carried out well-workovers. The assistance provided by the project has also served to initiate a dialogue with GOI about the financing of its high priority oil and gas development programs. In that context the Government took the decision, in principle, to permit the Oil and Natural Gas Commission to enter into joint ventures with international oil companies for the development of existing oil fields.  - iii - Sustainability and Lessons Learnt The project triggered the implementation of a program of well-workovers and other remedial measures to maintain the productive capacity of India's largest oil field. ONGC will continue to implement this program even after this project has been completed. However, the project has yet to achieve one of its longer-term objectives, to encourage foreign direct investment in the Indian oil industry. While the Government took a decision to permit ONGC to enter into joint ventures with intemational oil companies, the Ministry of Petroleum and Natural Gas has not yet acted on several prposals for joint ventures for the development of existing fields.  PROJECT COMPLETION REPORT INDIA OIL AND GAS SECTOR DEVELOPMENT LOAN (LOAN 3391-IN) PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE Project Identity Name: Oil and Gas Sector Development Loan Loan Nunberr 3391-IN RVP Unit: South Asia Region Country: India Sector: Energy Ba3round 1.1 Redressing macroeconomic imbalances and continuing the liberalization and deregulation of the economy have been important priorities for every government in recent years, but political difficulties have slowed progress on both fronts. Despite three successive budgets calling for reductions in the central government's deficit, fiscal imbalances worsened. The Gulf crisis accentuated India's macroeconomic imbalances. World oil price hikes increased India's oil import bill by about $1200 million in 1990/91. Lost remittances, debt repayments, and forgone receipts from exports to the Gulf region, in addition to costs of repatriating Indian nationals working in Iraq and Kuwait cost India another $740 mnillion. The current account deficit reached an estimated $9.9 billion (3.5% of GDP), up from $8A billion (3.2% of GDP) in 1989/90. At the end of 1990/91, foreign exchange reserves had fallen to $23 billion (equivalent to one month of imports). The Gulf crisis, combined with political instability, led to a severe erosion of India's creditworthiness in the international capital markets, a development which has compounded the country's liquidity problems. 1.2 In response to the Gulf crisis, the Government introduced a number of stabilization measures. A surcharge of about 25% was imposed on domestic petroleum product prices (on top of an 11% price increase in March 1990); this surcharge has remained in place despite the fall in international oil prices. In addition, selected taxes were increased and expenditure restraints effected. These measures are estimated to have reduced the fiscal deficit by about 1% of GDP in 1990/91. On the monetary front, interest rates were increased and liquidity requirements tightened several times during the course of 1990/91 and a partial liberalization of interest rates was introduced in September 1990. On the external front, the Government sought to contain imports through an accelerated depredation of the rupee. 1.3 At the time this project was appraised there was a broad consensus emerging in India that future growth depended on a prompt resolution of the liquidity crisis and restoration  -2 - of macroeconomic equilibrium. Stabilization of the economy alone, while essential, would not, however, be sufficient for dealing with the current economic crisis. Broad-based structural reforms to improve the efficiency, productivity and competitiveness of the economy are essential to achieving the export growth required to strengthen India's creditworthiness and to support the future growth and development of the economy. 1.4 Considering the size of its economy and its rapidly growing population, India is only modestly endowed with energy resources. Despite allocating almost a third of its public investment resources to the development of these resources, India depends heavily on oil imports to meet its domestic energy needs. Production has increased dramatically over the past 15 years, primarily due to the discovery of the Bombay High and its satellite fields in the early 1970s. India has been able to reduce its dependence on imported oil from about 80% in the early 1970s to less than 40% in the early 1980s. 1.5 These fields now account for about 60% of indigenous oil production. After increasing at a rate of about 20% a year during the late 1970s and the first half of the 1980s, oil output from the Bombay High fields reached a plateau in 1984/85. Delays in the implementation of measures to maintain reservoir pressures (e.g. through water injection) have led to a sharp increase in the output of associated gas. To avoid permanent damage to the reservoirs ONGC has adopted a program under which oil wells whose output of associated gas exceeds a certain level will be closed. This will reduce oil production from the Bombay High oil field by about 2A. million tons a year. To restore optimum oil production levels and thus reduce the risk of a sharp increase of oil imports, ONGC will need to use capital-intensive enhanced oil recovery technology as well as substantial investments for the development of smaller satellite fields. 1.6 A preliminary report on the prospects of India's oil production, carried out by the Bank, recommended that ONGC close all oil wells with a GOR exceeding 400 v/v (on a volume for volume basis), in order to minimize further damage to the reservoirs of the Bombay High oil field. A report by the Bombay High Review Committee confirmed the basic thrust of the Bank's findings. On the basis of these recommendations ONGC has adopted a program of shutting-in of wells with a high gas-oil ratio. This has resulted in a temporary reduction of ONGC's overall oil production by 3.9 million tons in 1991/92. 1.7 A field-by-field review of oil reserves conduded that indigenous oil production would reach a peak of 42 million tons in 1996/97, and then gradually decline to about 38 million tons in 2000/01 assuming that current exploration efforts yield no rnajor discoveries. Crude oil imports would then increase to 36 million tons (equivalent to US$7.9 billion) in 2000/01. To maintain the present level of self sufficiency, indigenous oil production would have to reach 51 million tons in 1995/96 and 67 million tons in 2000/01. Such an increase would require substantial additional investments in enhanced oil recovery, the accelerated development of undeveloped fields and a major increase in exploration activities. The total cost of the implementation of these measures over the next five years is estimated at about US$10 billion of which about US$7 billion would be in foreign exchange. 1.8 In order to keep the gap between indigenous oil production and demand within manageable limits, the Government designed a medium term program for the oil and gas sector based on significant policy and program changes. The main thrust of this program is directed at improving the operational efficiency of the sectoral entities and market-based resource  mobilzation. Critical first steps include improvement of the management of the Bombay High reservoirs and opening the sector to foreign investment in exploration and development. To this end the Government has adopted a policy which would permit ONGC and OIL to enter into joint ventures with international oil companies for the development of existing oil fields in order to accelerate indigenous oil production. Project Objectives and Description 2.1 The project had two objectives: (a) To assist the Government in defraying the cost of additional oil imports due to production shortfalls in the Bombay High oil field. The shortfalls result from the implementation of the shutting-in of oil wells as in line with the Bank's recommendations (b) to assist ONGC in increasing oil output with the help of direct foreign investments. Project Design and Organization 3.1 The project was designed as a fast-disbursing adjustment operation that would complement the investments and measures taken under the Gas Flaring Reduction Project. The basic aim of both projects was the same, to support the Government's efforts to reduce its dependence on oil imports by expanding domestic production and more efficient use of its hydrocarbon resources. While the Gas Flaring Reduction Project provided finance for the use of gas resources that would otherwise be wasted, this project was more directly concerned with increasing India's oil production. The basic concept of the project was to enable the Government to ease the pressure on ONGC to maximize oil production at a time of a serious foreign exchange crisis. By providing foreign exchange for oil imports ONGC was able to marginally reduce its output without putting further pressure on India's oil supply situation. The loan amnount of US$150 million was released in a single tranche after the Government provided the Bank with the requested Letters of Development Policy. Project Implementation 4.1 The project was implemented by the Indian Oil Corporation, which is the only importer of crude oil and oil products. The loan financed 100% of the CIF cost in foreign currency of crude oil and oil products imports. Retroactive financing was provided in an amount of US$30 million for expenditures incurred after March 31, 1991, that is within four months of the date of loan signing. Only minor delays were encountered in the implementation of the project. The loan was fully disbursed within five months from the date of effectiveness. Project Results 5.1 The loan financed the imports of close to one million tons of crude oil and oil products ONGC did close about 40 oil wells with gas-oil ratios of above 700 and carried out well-workovers. The assistance provided by the project has also served to initiate a dialogue with GOI about the financing of its high priority oil and gas development programs. In that context the Government took the decision, in principle, to permit the Oil and Natural Gas  -4 - Commission to enter into joint ventures with international oil companies for the development of existing oil fields. 5.2 However, the project has yet to achieve one of its longer-term objectives, to encourage foreign direct investment in the Indian oil industry. While the Government took a decision to permit ONGC to enter into joint ventures with international oil companies, the Ministry of Petroleum and Natural Gas has not yet acted on several proposals for joint ventures for the development of existing fields. Project Sustainability 6.1 While the basic concept of the project proved to be sound, the scale of such an operation would need to be increased substantially, if the damage caused to oil fields as a result of overproduction were to be remedied completely. 6.2 India's resource position will most likely remain strained in the years ahead. Further declines of indigenous oil production will force the Government to increase foreign exchange expenditures for oil imports. Other critical imports, in particular, capital goods would be crowded out, and there would be a considerable risk that this would under nine the Government's macro-economic reform efforts. The fastest and most efficient way to boost indigenous oil production would be through joint ventures with international oil companies. However, these companies will only invest in India, if the business environment is condudve to do so. Further assistance to the Government for the development of indigenous energy resources should require strong commitment to reforms of oil and gas sector policies and corresponding up- front action. Bank Performance 7.1 This project was part of a larger intemational effort of assisting the Indian Government in avoiding a worsening of a foreign exchange crisis that was triggered by the Gulf war in 1991. The processing of this project took less than three weeks. While no essential steps in the processing of this project were omitted, all concemed departments in the Bank assisted in the preparation by reducing allotted times for review of project documents. In a way this project provides an example of the Bank's ability to respond to a borrower's needs without compromising quality and essential internal approvals. 7.2 The appraisal of the Gas Flaring Reduction Project provided the necessary inputs for the preparation of this project. Borrower Performance 8.1 The Govemrnment cooperated fully with the Bank's requests for information. Project Relationship 9.1 The Bank's relationship with the Government and the implementing agency, the Indian Oil Corporation, has been good.  -5 - Project Documentation and Data 10.1 The legal documents and the MOP/Staff Appraisal Report were well prepared and sufficient for the purposes of this project. The information and data that have been assembled during the brief period of project implementation made it possible to draft this PCR without recourse to Regional Files.  PROJECT COMPLETION REPORT INDIA OIL AND GAS SECTOR DEVELOPMENT LOAN (LOAN 3391-IN) PART II: PROJECT REVIEW FRON THE BORROWER'S PERSPECTIVE The Bank sent the Borrower Parts I and III vith the request to prepare Part II but no reply was received.  PROJECT COMPLETION REPORT INDIA OIL AND GAS SECTOR DEVELOPMENT LOAN (LOAN 3391-IN) PART III: STATISTICAL INFORMATION Related Bank Loans and/or Credits Purpose Year of Status Approval Gas Flaring Reduction To eliminate the flaring of associated 1991 Under Project (Ln. 3364-N) gas in the Bombay High oilfield; Implementation improve the management of the reservoir in order to arrest decline of oil production and optimize ultimate recovery of hydrocarbons. Also to reduo energy shortages and improve efficieng of energy in India's Western Region and promote involvement of the private sector in the oil and gas industry in India.  - 8 - iNDIA ADJUSTMENT LOAN Loan Data Amounts (US$ million) Original Disbursed Canceled Repaid Outstanding Loan No. 3391-N 150.0 - - 150.0 Original Loan Dates Actual or Re-estimated Initiating Memorandum July 2, 1991 July 2, 1991 Letter of Development Policy July 12,1991 July 12, 1991 Negotiations July 12,1991 July 12, 1991 Board Approval July 23,1991 July 23,1991 Loan Agreement July 24,1991 July 24, 1991 Effectiveness July 29, 1991 July 29, 1991 L oanCosing July 30 1992 July 30 1992 Actual Completion December 31,1991 December 20,1991 CUMULATIVE LOAN DISBURSEMENT FY92 (i) Planned 150.0 (ii) Actual 150.0 (iii) (ii) as % or (i) 150.0 MISSION DATA Month, Year No. of Weeks No. of Persons Staff Weeks Date of Report Preparation) - 3 1 3 07/91 Appraisal 1 01/91 */ 07/91 Supervision I Completion ) O/ Jointly with Appraisal for Gas Flaring Reduction Project (Ln. 3364-1N) O/ No supervision or completion mnission were carried out.  -9- Projec Timetable Item Date Planned Date Revised Data Actual Identification Preparation Preappraisal Appraisal Mission 01/91*/ 1/910/ Loan Negotiations 07/91 07/91 Board Approval 07/91 07/91 Loan Signature 07/91 07/91 Loan Effectiveness 07/91 07/91 Loan aosing 07/92 07/92 Loan Comnpletion 12/91 12/91 */Jointly with appraisal for the Gas Flaring Reduction Project (Ln. 3364-N) Lan inbumenen Disbursements could have been greatly accelerated by the use of a negative list instead of limiting the financing to crude oil and oil product imports. Initially, an amount of US$ 30 million for retro-active financing of oil imports was released in August 1991. The balance of the loan (US$120 million) was disbursed during December, 1991. The final disbursement was nade on December 20,1991. Project Implementalon The project was implemented by the Indian Oil Corporation, which is the only importer of crude oil and oil products. The loan financed 100% of the CIF cost in foreign currency of crude oil and oil products imports. Retroactive financing was provided in an amount of US$30 million for expenditures incurred after March 31, 1991, that is within five months of the date of loan signing. Project Costs and Fiancing The loan of US$150 million financed about 50% of the cost of additional oil imports required to compensate the shortfall in the oil output from the Bombay High oil field in 1991/92. The shortfall in production was to a large extent due to ONGCs decision to shut in oil wells with unacceptably high gas-oil ratios. Project Results The loan financed the imports of dose to one million tons of crude oil and oil products. ONGC did close about 40 oil wells with gas-oil ratios of above 700 and curried out well-workovers. The assistance provided by the project has also served to initiate a dialogue with GOI about the financing of its high priority oil and gas development programs. In that context the Government took the decision, in principle, to permit the Oil and Natural Gas  - 10 - Commission to enter into joint ventures with international oil companies for the development of existing oil fields. However, the project has yet to achieve one of its longer-term objectives, to encourage foreign direct investment in the Indian oil industry. While the Government took a decision to permit ONGC to enter into joint ventures with international oil companies, the Ministry of Petroleum and Natural Gas has not yet acted on several proposals for joint ventures for the development of existing fields. Status of Covenants In its Letters of Development Policy the Government informed the Bank that it had decided to enable the Oil and Natural Gas Commission and Oil India Ltd. to enter into jDint ventures for the development of existing oil fields. The Government has therefore formally met the nain condition for this project.