China - Petroleum and Gas Projects

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 13714 PERFORMANCE AUDIT REPORT CHINA WEIYUAN GAS FIELD TECHNICAL ASSISTANCE PROJECT (LOAN 2580-CHA) LIAODONG BAY PETROLEUM APPRAISAL AND TECHNICAL ASSISTANCE PROJECT (LOAN 2708-CHA) NOVEMBER 14, 1994 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (annual averages) Currency Unit = Yuan (Y) US$1.00 = Y5.8 ABBREVIATIONS AND ACRONYMS BOC - Bohai Oil Company CNOOC - China National Offshore Oil Corporation CNPC - China National Petroleum Corporation CNTIC - China National Technical Import Corporation COD - Country Operations Department GOC - Government of China lOC - International Oil Company MOPI - The Ministry of Petroleum Industries OMS - Operations Manual Statement PCR - The Project Completion Report SPA - Sichuan Petroleum Administration SWMD - South West Mining District FISCAL YEAR January 1, - December 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation November 14, 1994 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on China Weiyuan Field Technical Assistance Project (Loan 2580-CHA) and Liaodong Bay Petroleum Appraisal and Technical Assistance Prolect (Loan 2708 CHA) Attached is the Performance Audit Report on China - Weiyuan Field Technical Assistance Project (Loan 2580-CHA) and Liaodong Bay Petroleum Appraisal and Technical Assistance Project (Loan 2708-CHA) prepared by the Operations Evaluation Department. The outcomes of the technical assistance components were mixed. Completion of the Weiyuan gas field diagnostic study took four years longer than anticipated. The study saved over $150 million in a proposed enhanced recovery effort by showing that the field would not respond as hoped and gas production would be only marginally increased. The diagnostic study of China's academic petroleum engineering institutions led to a revamping and upgrading of their programs, which will help strengthen long-term sector development. Most of the Liaodong Bay project components and studies were implemented on time and within budget. The idea of encouraging private sector participation was scrapped after reservoir tests showed that Liaodong would be insufficiently profitable to attract foreign participation because it produced primarily gas, not oil. The Borrower developed the field without Bank assistance. Other technical assistance studies were less than fully successful. Audit lessons refer to the need for more attention to be paid to potential environmental issues than was the case in the early 1980s, and the need to monitor the implementation of studies more closely. Overall performance of both projects is rated as satisfactory and sustainability as likely. For the Weiyuan project the institutional impact is rated as substantial. For the Liaodong project it is rated as negligible. 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 ONLY PERFORMANCE AUDIT REPORT CHINA WEIYUAN GAS FIELD TECHNICAL ASSISTANCE PROJECT (LOAN 2580-CHA) AND LIAODONG BAY PETROLEUM APPRAISAL AND TECHNICAL ASSISTANCE PROJECT (LOAN 2708-CHA) TABLE OF CONTENTS Page No. PREFACE . BASIC DATA SHEETS ............................................... ii EVALUATION SUMMARY ....... .................................. viii The Sechuan Gas Field Technical Assistance Project ................. viii The Liaodong Bay Project ................................... xi WEIYUAN GAS FIELD TECHNICAL ASSISTANCE PROJECT ......... 1 1. BACKGROUND .......................................... 2. PROJECT DESCRIPTION .................................. 2 3. IMPLEMENTATION AND RESULTS ......................... 2 The Maintenance of Gas Production ............................. 3 Training and Petroleum Education .............................. 4 Findings and Lessons Learned from PCR.......................... 5 4. PROJECT ISSUES ......................................... 5 Slippage in Implementing Studies . .............................. 5 Change in Project Scope ...................................... 6 Unusual Procurement Procedures ................................ 8 Technology Issues ........................................... 9 This report was prepared by Richard L. Berney, Principal Evaluation Officer, with inputs from Fernando Zuniga-Rivero, Petroleum Engineering Consultant and secretarial assistance from Loma Sibblies. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. TABLE OF CONTENTS (Cont'd.) Page No. Training ....... ............................................. 10 Financial Condition of SWMD ...... ............................... 10 The PCR Report .................. ........ ....................... 10 5. PROJECT OUTCOME AND SUSTAINABILITY.................. .11 LIAODONG BAY PETROLEUM APPRAISAL AND TECHNICAL ASSISTANCE PROJECT............................. 13 1. BACKGROUND .......................................... 13 2. PROJECT DESCRIPTION . ................................. 14 3. IMPLEMENTATION AND RESULTS .......................... 15 Studies ....... .............................................. 15 Findings and Lessons Learned from the PCR ........................ .... . 15 4. ISSUES . ................................................ 16 Procurement ............................................... 16 Foreign Participation ......................................... 16 5. PROJECT OUTCOME AND SUSTAINABILITY .................. 21 Annex 1: Comments from China National Petroleum Corporation ............. 22 PERFORMANCE AUDIT REPORT CHINA WEIYUAN GAS FIELD TECHNICAL ASSISTANCE PROJECT (LOAN 2580-CHA) AND LIAODONG BAY PETROLEUM APPRAISAL AND TECHNICAL ASSISTANCE PROJECT (LOAN 2708-CHA) PREFACE This is a Performance Audit Report (PAR) for the Weiyuan Gas Field Technical Assistance Project (Loan 2580-CHA) and the Liaodong Bay Petroleum Appraisal and Technical Assistance Project (Loan 2708-CHA) prepared by the Operations Evaluation Department. Loan 2480-CHA was for US$25.0 million, all of which was disbursed. Loan 2708-CHA was for US$30.0 million, of which US$14.1 was disbursed. These projects were to assist China to evaluate the production potential of a declining onshore gas field and a newly discovered, offshore gas condensate field production from an old gas field. It also supported the transfer of technology, especially in the area of petroleum sciences education. The PAR was written in the Operations Evaluation Department (OED). To prepare it, OED reviewed the Presidents' Reports, PCRs, legal documents, transcripts of Board Proceedings, project files, Bank documents on petroleum lending, and other Bank material. An OED mission visited China in October 1993, where it held discussions with Government officials, officials of the China National Petroleum Company (CNPC), China National Offshore Oil Corporation (CNOOC), Bohai Oil Company (BOC), Sichuan Petroleum Administration (SPA), and the South West Mining District (SWMD). The effective and pleasant cooperation and assistance of all the Chinese authorities, and particularly of CNPC, is gratefully acknowledged. The PCRs, which were of acceptable quality, concluded that, for both projects, the results were satisfactory. This Audit concurred with these conclusions. It emphasizes the best practices employed in the educational component. It looks at the implementation process of consultant studies and makes recommendations for resolving conflicts and delays, and it also discusses the impact that the Guidelines on Petroleum Lending (OMS 3.82) had on Bank lending in China. Following standard procedures, OED invited Borrower comments on the draft PAR. Replies are incorporated into the final PAR as an Annex.  ii PERFORMANCE AUDIT REPORT CHINA WEIYUAN GAS FIELD TECHNICAL ASSISTANCE PROJECT (LOAN 2580-CHA) BASIC DATA SHEET KEY PROJECT DATA Appraisal Expectation Actual Total Project Cost (US$ million) 30.0 32.9 Loan Amount (US$ million) 25.0 25.0 Economic Rate of Return n.a. n.a. CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS Bank FY 1M 19J7 M8 I9 1M. 1991 1992 Appraisal Estimate (US$ million) 2.0 14.0 23.0 25.0 Actual (US$ million) 0.3 3.1 9.3 14.9 16.9 20.2 25.0 Actual/Appraisal, % 15 22 40 60 68 81 100 PROJECT TIMETABLE Original Actual Identification Mission 10/84 Appraisal Mission 2/85 Negotiations 4/29/85 Board Approval 6/11/85 Loan Signature 8/26/85 Loan Effectiveness 1/31/86 Closing Date 6/30/90 6/30/92 Date of Final Disbursement 7/31/92 iii STAFFINPUTS (Staff Weeks) Preparation 7.2 Appraisal 27.1 Negotiations 2.9 Supervision 53.8 PCR 3.5 Total 94.5 MISSION DATA Staiemof oat1 Number of SW in Specialization Performance qEsjens fii represented La Rating Lk Through Appraisal 10/84 2 1 PE, FA 1 Appraisal through 2/85 5 2 G, E, FA, PE 1 Board Approval Post Appraisal 5/85 2 3 ED 1 Supervision 1 9/85 1 1 E 1 2 12/85 3 1 GP, E, FA 1 3 3/86 6 1 G, PE, FA,E 1 4 2/87 3 1 G, PE, PS 1 5 6/88 3 1 PS, FA, PE 1 6 7/89 2 1 PS, PE 1 7 4/90 2 1 PE,G 1 8 7/90 3 3 FA, PE, PE 1 9 11/91 3 0.2 FA, PE,C 1 PCR mission 2/93 2 0.5 FA, C 1 la: PE: Petroleum Engineer G: Geologist GP: Geophysicist ED: Educator PS: Procurement Specialist FA: Financial Analyst E: Economist /b: 1: No significant problem 2: Moderate problem 3: Major problem being addressed 4: Major problem not adequately addressed iv RELATED BANK PROJECTS PurpoSe Year of 5 Comments ApRroval Zhongyuan Wenliu Petroleum Petroleum 1983 Satisfactory Completion date: Project (Ln. 2252-CHA) exploration/ Original: 12/31/86 development, Actual: 12/31/90 TA and training. Daqing Oilfield-Gaotaizi Reservoir 1983 Satisfactory Completion date: Reservoir Development Development, Original: 6/30/86 Project (Ln: 2231-CHA) TA and training. Actual: 6/30/90 Karamay Petroleum Petroleum 1984 Satisfactory Completion date: Project (Ln: 2426-CHA) exploration, Original: 3/31/89 heavy oil Actual: 3/31/91 recovery, TA and training Weiyuan Gas Field Gas field 1985 Satisfactory Completion date: Technical Assistance rehabilitation Original: 6/30/90 Project (Ln: 2580-CHA) TA and training. Actual: 6/30/92 Sichuan Gas Development Support of sector 1994 Completion date: and Conservation Project restructuring, pricing Original: 2001. (Ln: 3716-CHA) rationalization, Loan approved increasing gas 3/94 production and conservation. V PERFORMANCE AUDIT REPORT CHINA LIAODONG BAY PETROLEUM APPRAISAL AND TECHNICAL ASSISTANCE PROJECT (LOAN 2708-CHA) BASIC DATA SHEET KEY PROJECT DATA Appraisal Expectation Actual Total Project Cost (US$ million) 77.5 65.4 Loan Amount (US$ million) 30.0 14.1 Economic Rate of Return n.a. n.a. CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS Bank FY 1987 18 1989 19Q Appraisal Estimate (US$ million) 5.0 15.5 27.5 30.0 Actual (US$ million) 4.7 12.2 14.0 14.1 Actual/Appraisal, % 94% 78% 51% 47% PROJECT TIMETABLE Original Aciua Identification Mission 5/85 Preappraisal Mission 9/85 Appraisal Mission 11/85 Negotiations 4/86 Board Approval 5/29/86 Loan Signature 7/1/86 Loan Effectiveness 9/29/86 Closing Date 12/31/89 12/31/89 Date of Final Disbursement 1/16/90 Vi STAFF INPUTS (Staff Weeks) Through Appraisal 59.5 Appraisal Through Board Approval/effectiveness 18.4 Supervision 60.7 Total 138.6 MISSION DATA Stage of Date Number of SW in Specialties Performance Proiect eons field represented a rating / Through Appraisal Identification 5/85 3 3 PE, G, FA Preappraisal 9/85 5 5 PE, G, FA, E Appraisal 12/85 6 12 PE, G, GP, FA, E Appraisal through Board Approval Postappraisal 2/86 3 2 G, L, C Supervision 1 8/86 3 3 PE, GP, PS 1 2 3/87 2 2 PE, GP 1 3 3/88 4 2 PE, G, FA, PS 1 4 2/89 2 2 G, PS 1 5 9/89 1 0.1 FA 1 /a: PE: Petroleum Engineer G: Geologist GP: Geophysicist PS: Procurement Specialist FA: Financial Analyst E: Economist L: Legal Advisor C: Contract Consultant /b: 1: No significant problem 2: Moderate problem 3. Major problem 4: Major problem not adequately addressed Vii RELATED BANK PROJECTS Purpose Year of Status Comments Aproval Zhongyuan Wenliu Petroleum Petroleum 1983 Satisfactory Completion date: Project (Ln. 2252-CHA) exploration/ Original: 12/31/86 development, Actual: 12/31/90 TA and training. Daqing Oilfield-Gaotaizi Reservoir 1983 Satisfactory Completion date: Reservoir Development Development, Original: 6/30/86 Project (Ln: 2231-CHA) TA and training. Actual: 6/30/90 Karamay Petroleum Petroleum 1984 Satisfactory Completion date: Project (Ln: 2426-CHA) exploration, Original: 3/31/89 heavy oil Actual: 3/31/91 recovery, TA and training Weiyuan Gas Field Gas field 1985 Satisfactory Completion date: Technical Assistance rehabilitation Original: 6/30/90 Project (Ln: 2580-CHA) TA and training. Actual: 6/30/92 Sichuan Gas Development Support of sector 1994 Completion date: and Conservation Project restructuring, pricing Original: 2001. (Ln: 3716-CHA) rationalization, Loan approved increasing gas 3/94 production and conservation. viii PERFORMANCE AUDIT REPORT CHINA WEIYUAN GAS FIELD TECHNICAL ASSISTANCE PROJECT (LOAN 2580-CHA) AND LIAODONG BAY PETROLEUM APPRAISAL AND TECHNICAL ASSISTANCE PROJECT (LOAN 2708-CHA) EVALUATION SUMMARY Project Background consumption and assisting national companies to promote joint ventures for oil exploration and 1. Between 1982 and 1984 the Bank had production. made three loans to support Chinese petroleum enterprises in their efforts to introduce new 3. In line with this shift, the Government technology for the exploration and production of China (GOC) proposed two projects in the of oil. However, with the introduction of the mid-1980s, one for the rehabilitation of a major Operational Manual Statement "Bank gas field in Sechuan province, and the other for Guidelines on Petroleum Lending" of the development of a small offshore November, 1984, (OMS 3.82) the Bank gas-condensate field in the Bohai gulf of effectively stopped lending to national oil northwest China. companies for the exploration and development of their oil reserves. THE SECHUAN GAS FIELD TECHNICAL ASSISTANCE PROJECT 2. OMS 3.82 stated that the Bank would not normally finance exploration and/or 4. In 1984 China's production of natural appraisal drilling for oil when the activity was gas from non-associated gas fields (fields with to be undertaken by a national oil company no significant oil production) was about 14 operating on its own, without a private sector billion cubic meters (approximately 14 million financial partner. The Bank would, however, tons oil equivalent) 80% of which came from support efforts that would enhance the prospects Sichuan Province. Most of the major gas fields for joint venture undertakings between national in Sichuan had reached their peak, and many companies and international oil companies had experienced sharp productivity declines. (IOCs). There was, in addition, still some tolerance to support development of national 5. The project presented by the South gas resources, since it was generally agreed that West Mining District (SWMD) of the Sichuan IOCs were unlikely to consider investing in the Petroleum Administration (SPA) was for a large development of natural gas fields where the gas and comprehensive rehabilitation program for could not be exported. The focus of the Bank's the Weiyuan gas field, which was the largest activity was therefore shifted towards gas field in Sechuan Province, but had developing natural gas resources for domestic experienced a production decline of 75% ix between 1977 and 1984. The foreign exchange economically viable investment program. It cost of this rehabilitation program was US$150- proved that production from the Weiyuan gas 200 million. field could not be significantly increased using modem technology. It therefore saved the 6. The Bank proposed that the investment SWMD the cost of investing US$150-200 program be separated into two phases: first a million and receiving no benefits. It failed, reservoir diagnostic study and the design of an however, to meet its secondary objective of optimum rehabilitation program; and then an providing SPA/SWMD with an advanced investment program for rehabilitation. This reservoir modeling tool that they could use for approach minimized the technical and economic other gas fields, because the hardware needed to risks inherent in any large scale oil or gas field run the model was unavailable. investment program. The technical assistance program supported the first phase. There were The Maintenance of Gas Production no sector policy conditionalities associated with the loan. 11. In an attempt to help limit the decline in gas production, the Bank agreed to a 7. There were three project components: substantially expanded program for production maintenance. The number of gas compressors the diagnostic study for the Weiyuan was increased from 12 to 28. A new category gas field; of activity was added: subsurface water pumping. This activity was not within the the introduction of compressors to scope of the original project, and was approved evacuate gas from low pressure wells, without consideration of the environmental to help maintain gas production while problems that it would cause. (see para. 16-19). the study was implemented; Without the use of subsurface equipment, gas production would have declined to zero before strengthening China's petroleum 1990. The investment successfully limited the sector education and research production declined to 10% per year. However, institutions. the cost of this improvement was a greatly increased water production. Implementation and Results Training and Petroleum Education 8. The Diagnostic Reservoir Study took over six years to complete, four years longer 12. The diagnostic study of the six than anticipated at appraisal. There were delays petroleum engineering institutions led to actions at every stage of the process. for reorganization and strengthening them, including expanding the scope and content of 9. The Reservoir Study concluded that the courses taught and establishing overseas excessive production during the early years of training programs for their staff. Over 400 development had so damaged the field that a students and faculty received overseas training. full scale rehabilitation and resuscitation program was not technically feasible. Instead, Project Issues it recommended a limited investment program to marginally increase production by Slippage in Implementing Studies rehabilitating a few of the existing wells. 13. The Diagnostic Study took four years 10. The study must be judged as successful, longer than expected. There was slippage at since it fulfilled its objective of defining an every stage. Thirty consultants were invited to x bid. It took 11 months to evaluate the bids and brine content. The President's Report had another nine months to negotiate the contract. avoided this ecological issue by insisting that Then the study took 48 months to complete the project was only for technical assistance. instead of the programmed 20. One of the major cause for delay was the expansion of the 18. Recommendation: T.A. projects should study's data gathering requirements to meet not be allowed to ignore environmental SWMD's demand for a level of accuracy far in problems just because they will not directly excess of what was needed to reach major make them worse. If environment problems operational conclusions about the rehabilitation exist the T.A. should include assistance on investment program. finding ways to resolve them. 14. Much of the delay was caused by Training SWMD's lack of experience in working with foreign consultant firms, combined with the 19. The educational institution training Bank's lack of participation in the process to program developed under this project was the help resolve misunderstandings that arose from most important and successful project this lack of experience. component in terms of its anticipated long-term impact on the development of China's 15. Recommendation: Bank should insist petroleum sector. that borrowers follow the guidelines for short lists of qualified candidates. The importance 20. Recommendation: The Bank should of, and reasons for this limit should be made include support for the continued growth of clear to new borrowers. There should be no university educational facilities for all exceptions. The Bank should react quickly petroleum projects, particularly in countries when contract negotiations begin to extend with a large national petroleum sector. The beyond normal limits. It should ask to assist in Bank should also include training in modem the resolution of outstanding issues. Bank economic and financial management practices. technical staff should be more deeply involved in the coordination and implementation of Financial Condition of SWMD studies that are critical to the success of the project. 21. Natural gas prices, which are still very low, need to be increased to their fuel oil parity Environmental Impact level, to allow SWMD to maintain financial viability and to enable SWMD to shift from 16. The purchase of subsurface water making investments to meet production quotas, pumps for stabilizing gas production to making economically justifiable investments. significantly changed the scope of this T.A. project. The original project avoided changing 22. Recommendation: Financial viability down hole production methods, first because was ignored in the oil and gas sector in China there was no evidence that such investments in the 1980s, but is now becoming an important would be economic, and second, because issue. In the future, the Bank should assist increasing production would lead to ecological project management to become trained in problems that would be costly to resolve. western accounting and financial decision making techniques. It must also continue to 17. The water pumps added substantially to work with the Government to bring energy the ecological problems that SWMD was prices in line with opportunity costs, as it has already having with the disposal of the reservoir started to do in the recent Sichuan Gas Project water, which had a high H2S, CO, and salt (Loan 3716-CHA). xi Project Outcome and Sustainability Project Description 23. The Weiyuan Gas Field Diagnostic 29. The project covered the first phase of a Study did determine an optimum investment two-phase program for appraisal and program for the Weiyuan field, even though this development of the Jinzhou field. It included optimum investment program was very small. assistance for appraisal of the reservoir, for detailed design of the development program, 24. It saved over US$150 million that would and for creation of a framework for attracting a have otherwise been invested in a futile effort foreign equity partner. It also provided to increase gas production, and should, technical assistance to improve BOC's therefore, be considered a success. technical, financial and managerial capabilities in offshore petroleum operations which in turn 25. The Audit agrees with the PCR that the would help in strengthening BOC's position as overall project outcome was satisfactory, since a joint venture partner. If the results of the first the stated objectives were met. Benefits are phase warranted it, the Bank would then likely to be sustainable. On the basis of the consider a second project for the development success of the Education component, the Audit of the field. judges the overall institutional development impact as substantial. 30. The appraisal program was structured to maximize the likelihood of finding a foreign 26. All covenants were met. investor by minimizing the development risk. The Bank's presence was expected to minimize THE LIAODONG BAY PROJECT the development risks and maximize the likelihood of finding a foreign investor. 27. Recognizing its technological and financial constraints in offshore petroleum 31. The project had four major components: exploration and development, the Government (i) seismic data processing, drilling and testing of China established, in the late 1970s, a five appraisal wells; (ii) strengthening of BOC's specialized entity, the National Offshore data processing, well testing and core analysis Petroleum Company of China (CNOOC), to capabilities; (iii) facilities to enable long-term take charge of all offshore petroleum activities production testing of the field; and (iv) six and to undertake joint venture exploration studies to assist in the evaluation and future program with international oil companies development of the hydrocarbons reserves of (IOCs). CNOOC also created Bohai Oil Bohai Bay; There was no sector policy Company (BOC) to implement its own conditionality associated with the loan. petroleum exploration program in the Gulf of Bohai, in northeast China and to develop Implementation and Results thereby a national expertise in offshore operations. 32. Most project components were implemented on time and within budget. 28. The Bank was satisfied that China's However, the sea-floor and platform equipment overall sector policy for offshore petroleum required for testing the reservoir was not explorations was well designed, and most of its financed by the Bank. All the studies were offshore acreage had already been opened to implemented, although in a substantially IOC participation. different way than originally proposed. 33. Data from the new wells showed that the reservoir contained natural gas and gas xii liquids, but very little oil, these results Issues substantially reducing the potential profitability of the field, and necessitating changes in the Procurement proposed development program. A major investment in development facilities was needed 38. BOC's autonomous legal structure to capture the natural gas and gas condensate allowed it to implement its own procurement produced during well tests. Long-term rather than go through an independent production testing would reduce the risks of procurement agency. This arrangement led to subsequent field development, but the cost efficient project implementation, even though would be high, because all the gas and BOC was also initially unfamiliar with Bank condensate would have to be flared. procurement procedures. This result demonstrates that procurement can be organized 34. BOC decided that rather than in a simpler, more direct manner than it had accept the resource cost of long-term testing, it been in previous petroleum sector projects. would rely on the open hole test results and the high likelihood of finding additional gas in 39. Recommendation: The Bank should nearby formations. It therefore proposed to work with the GOC to establish simpler combine the testing with the first phase procurement procedures for its projects in development of the field. China. There is no advantage in allowing a specialized agency with no stake in project 35. The Bank declined to assist with success to have ultimate authority over this alternative approach, primarily because the procurement matters. While coordination outside consultant's reserve estimates showed committees can improve procurement that the development would be marginal at best. performance, they can only be a second best The proposals for attracting a foreign joint solution. venture partner for the development phase were never followed-up. Foreign Participation 36. According to BOC, the results to 40. The Bank took a strong position on date suggest that their higher reserves estimate foreign participation. However, the GOC was more realistic than that of the Bank would not allow a foreign operator in the consultants. Furthermore, other reserves in the northern part of Bohai Bay for security reasons. area have been proven, so their investment is BOC therefore agreed to look for a foreign likely to yield a reasonable return. partner who would be willing to take a non-operating, minority holding financial Studies position. But neither CNOOC/BOC nor the Bank seriously believed that an IOC would be 37. The six studies to be carried out interested under the outlined conditions. On with the assistance of foreign consultants were policy grounds, BOC had already established its intended to form the basis for a substantial part willingness to work in joint ventures in the of the transfer technology on modem oilfield southern portion of the Bohai Bay, having institutional practices. They were less than entered into two joint venture agreements with fully successful in fulfilling this goal: two were international petroleum companies to operate in done without the assistance of foreign these areas. consultants and two were canceled when disappointing reservoir results made them 41. When the field turned out to be more unnecessary. gas prone rather than oil prone, its lower potential profitability eliminated the incentive xiii for foreign investors to participate. The Bank's 45. Recommendation: Review of the unwillingness to consider the second phase methodology used in making investment development program without a foreign partner decisions for developing and rehabilitating oil could not be dislodged, even though the new and gas fields should be a central element in an OMS 3.82 approved of supporting national ongoing dialogue between the Bank and efforts to develop gas reserves without foreign Chinese oil enterprises on their methodology for participation. establishing investment priorities in the sector. 42. Recommendation: The Bank needs 46. BOC implemented the Regional to reevaluate its approach to Petroleum lending. Geology Study in-house, instead of using a While it needs to support a policy framework foreign consultant, and got the British that encourages IOC participation, it should not Petroleum Company (BP) to undertake a exclude support for national efforts to develop technical review certain elements. However, national petroleum resources, when the broader BP was not allowed to review the full study, policy framework for inducing foreign because BOC wanted to withhold some of the participation has been established and IOC are basic data. While this approach of holding actively engaged in joint ventures in the back information makes sense for a private oil country. The Bank should be more open to company, which must compete for prospective supporting the transfer of technology and exploration acreage and is interested only in management know-how needed to improve the maximizing its own production, it make little efficiency of their operations, particularly in sense for a national oil company, whose large countries with a long history of objective should be to maximize the country's developing their own petroleum resources. oil output. Studies 47. Recommendation: Since the more information IOCs have, the more successful 43. CNOOC and BOC were reluctant their exploration activities are likely to become, to hire foreign consultants to implement most of the Bank should also encourage the national the studies. These consultants were considered company to make all other technical data to be too expensive, particularly when CNOOC accessible to interested parties. For projects felt that the study was not really necessary or that finance activities of national oil companies, that its own staff could get just as good results. the Bank should require that all data generated This reluctance suggests that the Bank had been by the project be made easily accessible to unable to establish borrower ownership of these other oil companies, both international and studies during the appraisal process. national. 44. The Field Development 48. The Gas Utilization Study was Investment Program study was never intended to introduce modem techniques for implemented, so BOC never did a rigorous establishing economic priorities for gas analysis of the likely economic return from the utilization. It failed to meet these objectives, development of the field based on its reserve primarily because it was implemented by BOC estimates. Nor was any risk analysis staff without the assistance of foreign technical undertaken. The Bank should have asked BOC experts. to analyze the economics of its proposed development investment and should have 49. Recommendation: The fragmentation of reviewed with BOC the assumptions that they responsibilities among independent Government used to demonstrate that the investment was ministries and semi-autonomous institutions economically viable. make it almost impossible for an individual xiv Chinese institution to successfully implement a Project Outcome And Sustainability natural gas planning study that integrates up-stream and down-stream operations. To 52. While the project did not lead to a joint resolve this institutional bottleneck, the Bank venture for the development of an important oil needs to establish a mechanism to allow foreign discovery, it did help to transfer considerable consultants to supervise and coordinate studies technical know-how to BOC. The Jinzhou gas that involve planning at more than one ministry. condensate field is being developed and the geophysical and geochemical work supported 50. The Computerization Study was by the project has helped to demonstrate that implemented by the Shell Oil Company, under there are good prospects for further natural gas a separate technical assistance program. The discoveries in the surrounding structures, which Bank did not review the study's overall findings could provide back-up gas supplies if the and consequent action plan. Jinzhou field proves to be have lower reserves than BOC has estimated. However, while BOC 51. Recommendation: If a study is staff has developed strong capabilities for important enough to be included in the project handling offshore exploration, appraisal and scope, the Bank staff should continue to development operations, the project appears to monitor it and review the subsequent action have had little impact on institutional plan with the implementing agency. strengthening in the areas of regional gas planning and economic evaluation of development prospects. 53. The Audit judges the overall outcome of this technical assistance project as satisfactory, and sustainability as likely, and the overall institutional impact as negligible. All project covenants were met.  PERFORMANCE AUDIT REPORT CHINA WEIYUAN GAS FIELD TECHNICAL ASSISTANCE PROJECT (LOAN 2580-CHA) 1. BACKGROUND 1.1 China's petroleum production increased from 10 million tons per year in 1960 to nearly 110 million tons in 1980, declined during 1981-1982, and then started Increasing again, reaching 114 million tons in 1984.' In 1984 natural gas production from non-associated gas fields (fields with no significant oil production) was about 14 billion cubic meters (approximately 14 million tons oil equivalent), 80% of which came from Sichuan Province. However, production was declining, because most of the major gas fields in Sichuan had reached their peak, and many had experienced sharp productivity declines. 1.2 It was at this critical juncture that the Government of China requested that the Bank expand it's petroleum sector lending program to the natural gas sector. This request fits well with the Bank's shift in operational priorities from oil development to natural gas development, as required by the Petroleum Lending Guidelines established at the end of 1984 (OMS 3.82 of November, 1984). 1.3 The Bank originally proposed a program that would support gas exploration and development for the entire Sichuan Basin, including an integrated basin study to identify exploration prospects and establish a strategy for rehabilitating all the basin's major fields. However, the Ministry of Petroleum Industry (MOPI) and the Sichuan Petroleum Administration (SPA) were more interested in an investment program that would focus on the rehabilitation of the Weiyuan gas field, which had experienced a production decline of 75% between 1977 and 1984, even though only 30% of the original estimated gas in place had been produced. They correctly foresaw that if remedial action were not taken, the field would soon cease production. 1.4 The investment program presented to the Bank's identification mission by the field operator, South West Mining District (SWMD), was designed to recover an additional 10 bcm of gas (equivalent to about 10 million tons of oil) through a field rehabilitation program, using modem enhanced production techniques. It included a foreign exchange component of between US$150 and US$200 million. However, in view of the complex geological conditions of the reservoir, and the difficult operating conditions caused by the presence of CO2 and H,S in the gas stream, the identification mission recommended that a step-by-step approach be taken to rehabilitating the field. This approach was intended to minimize the technical and economic risks associated with the uncertain prospects of the proposed large scale rehabilitation investment project. Production reached 143 million tons in 1993, primarily through the introduction of modem production technology to existing fields, including intensive infill drilling, well workovers and secondary recovery operations. However, the major onshore oilfields have by now reached their peak, and no new substantial oil discoveries have been made in recent years, either onshore or offshore. 2 2. PROJECT DESCRIPTION 2.1 The Bank therefore suggested a two-phase approach: the first phase would be a diagnostic study to determine the behavior of the field and to design an optimum rehabilitation investment program; the second phase would be the implementation of this rehabilitation program. By following this approach, unproductive investments would be avoided. 2.2 In addition, to help SWMD maintain production from the field during the interim period before the diagnostic study was completed, the project also included a US$3 million provision for the purchase of 12 compressors to boost the pressure of the gas taken from the field, so that it could be distributed through the existing regional high pressure distribution line. 2.3 A separate project component supported the strengthening of the long-term capabilities of China's petroleum industry through improving its petroleum related educational and research institutions. It included a diagnostic study of China's six principal petroleum education institutions, plus a training program to help increase the level of excellence of the faculty at these institutions. 2.4 The project was approved by the Board on June 11, 1985 and became effective on June 30, 1986. The loan was closed, after a two-year extension, on December 31, 1990. Project implementation and results were essentially as described in the PCR, and are summarized in the following section. There were no sector policy conditionalities associated with the loan. 3. IMPLEMENTATION AND RESULTS 3.1 The Diagnostic Study of the Weiyuan gas reservoir was the heart of the project. To avoid procurement delays, as had occurred in the three previous Bank financed petroleum projects, both the terms of reference and a detailed implementation and procurement schedule for the study were agreed with SWMD during the appraisal mission. A reasonable schedule was established which would lead to study completion in two and a half years (the end of 1987). However, the implementation of the study proved to be much more difficult and time consuming than anticipated. There were delays at every stage of the process, and, as a result, the final report for the study was not sent to SWMD until January 1992, six and a half years after the project was approved by the Board. The study had taken four years longer than anticipated. 3.2 In spite of the long delays, the diagnostic study did achieve its technical objectives: (a) It built a reservoir model based on historical production matching for 72 wells, and thereby provided a firm understanding of the reservoir production mechanism. (b) It established that the rapid early development of the field and the utilization of uncontrolled hydraulic fracturing techniques to stimulate increases in production had resulted in extensive and irreversible damage to the reservoir; 3 (c) It concluded that full scale rehabilitation and resuscitation of the field, as originally proposed by SWMD, was no longer technically feasible. (d) It confirmed the in-place gas reserves estimated by SWMD, and based on the large volume of the remaining in-situ reserves, it recommended a limited investment program to rehabilitate some existing wells, which was expected to marginally increase production for a limited time.2 3.3 The study accomplished its major objective of minimizing the risk and uncertainty of a large-scale investment in enhanced gas recovery, even though it was unable to reach the result desired by the Borrower and the Bank: a rehabilitation program for the gas field that would allow an additional 10 billion m' of gas to be produced. Instead its results helped SWMD avoid an investment outlay of US$150-200 million for a large rehabilitation program that would have proved unsuccessful. In this sense it saved SPA the US$150-200 million investment outlay that had been originally proposed. No additional wells were drilled on the field after the completion and testing of the wells required for the diagnostic study. SWMD is still exploring new approaches to increasing production from the field, but the study appears to have convinced them that none of the technology currently used in other parts of the world could substantially increase gas production. 3.4 The diagnostic study failed, however, to meet its secondary objective of providing SWMD with a tool which would allow it to utilize advanced reservoir modeling technology for other gas fields. SWMD and SPA specialists were trained in the use of sophisticated reservoir engineering techniques during their involvement with the diagnostic study, including techniques for reservoir modeling, simulation and fracture analysis. However, they do not have a sufficiently large and advanced computer to run the models necessary to undertake this analysis for other fields. Nor have they been able to make arrangements to use a computer belonging to another oilfield enterprise. They have, therefore, been unable to introduce into the operation of other gas fields in Sichuan the more systematic approach to production rehabilitation investments of this advanced modeling technology. The Maintenance of Gas Production 3.5 To forestall the continued decline in gas production from the Weiyuan field of almost 30% per year, the Bank agreed to substantially increase the funding for production maintenance related equipment. The original number of gas compressors was increased from 12 to 28, and a new category of equipment, subsurface water pumps was added. Ten sets of water pumps were purchased (two submersible pump-sets, two hydrojet pump-sets and six plunger pump-sets). These pumps, which were not foreseen under the original project scope, were used to "dewater" some wells, a production enhancing technique that SWMD was anxious to test. 2 Even these recommendations are now unlikely to be viable today, primarily because the existing down-hole equipment has become extensively corroded by the H2S and CO, in the produced gas. In the PCR it was claimed that the study recommended a pilot program to test techniques that might be applied in a large scale field rehabilitation program. While SWMD told the Audit that it would like to continue to experiment with various dewatering techniques, the Audit was unable to find such a recommendation in the study. 4 3.6 Without the use of this equipment, gas production would have declined to zero before 1990. Instead, production declined by about 10% per year, reaching about half it's 1985 level by 1992. SWMD estimates that in the five years -- 1988 through 1992 -- the production maintenance project component was successful in increasing natural gas production by 572 million m' over and above what it would have been if the investment had not been made. However this new technology greatly increased the water-to-gas production ratio. Training and Petroleum Education 3.7 The project's second major objective was to strengthen the structure of China's national program for petroleum related education. It shared a diagnostic study of the six institutions in China which taught petroleum engineering. On the basis of this study, the consultants were to recommend a program to strengthen these institutions, including the establishment of overseas training programs for their staff and a more organized approach to bringing foreign experts from industry and universities to present courses in China. 3.8 The recommendations of the diagnostic study has had a major impact on the operation of these institutions. After evaluating the teaching and academic performance of all Chinese higher education institutions responsible for teaching and research in petroleum exploration and production related fields, the study recommended a substantial realignment in the organization and academic curricula of these institutes. It also recommended a long-term program to enhance the academic preparation of the staff of these institutions and the investment requirements for laboratory equipment and research facilities. 3.9 The Government has followed up on many of these recommendations. It has integrated undergraduate and graduate student facilities and has consolidated them into five petroleum institutes, within the Petroleum University, with campuses in four provinces, including Beijing. The educational programs recommended by the consultant professors has been established in all five petroleum institutes. The scope of the educational programs has been expanded, to give graduates a broader framework within which to work, compared with the previous practice of producing highly specialized graduates with little practical experience, flexibility, or insight into the broader issues related to integrating concepts from several related areas and optimizing petroleum exploration and production activities in the field. 3.10 Over 400 students and faculty received overseas training. The process appears to have been an extremely effective method for improving technical training at the professional and managerial level. By sending professors abroad for advanced studies and inviting distinguished lecturers to China, these petroleum institutions have been able to develop teaching techniques that involve student participation at a much higher level than had been practiced before in China, and more advanced curriculum for the individual courses that are taught. The program has also encouraged and enabled Chinese academic researchers to participate in cooperative research programs at home and abroad and has enabled faculty members to expand their foreign contacts, information sources and data bases. In addition, on the basis of the study recommendations, MOPI and its successor CNPC substantially increased the funds available for capital investments in laboratory equipment and research facilities, doubling the amount of foreign exchange available since 1986, thus ensuring that the program will continue to be sustained. 3.11 The Audit finds this project component to have been highly satisfactory, and likely to be sustained. It also finds that it established a substantial institutional development impact, with a high degree of efficacy. 5 Findings and Lessons Learned from PCR 3.12 The PCR's only major finding was that the project schedule expected at the time of project appraisal was overly optimistic in view of the Borrower's lack of experience in Bank-financed projects. It's major lessons were that to avoid implementation delays, the terms of reference for consultant services should have defined clearly the scope of work, and that internal Chinese procurement procedures should have been streamlined as much as possible to avoid protracted delays. 4. PROJECT ISSUES Slippage in Implementing Studies 4.1 The Diagnostic Study was completed six and a half years after Board approval, and four years after initially scheduled. There was slippage at every stage. First, there were long delays establishing the short list of consultants. Over fifty consultant firms were evaluated, and eventually thirty made the short list and were invited to bid. Then it took over a year to evaluate all of the thirty proposals. Part of the problem was the excessively large number of proposals that had to be reviewed, and part was the continued problem of interagency coordination, with responsibilities divided among SWMD, the Ministry of Petroleum Industries (MOPI) and the China National Technical Import Corporation (CNTIC). 4.2 After the successful bidder was agreed upon, it took another nine months of negotiations before the contract was signed. The central problem was that the SWMD, having never worked with western consultants, had very different ideas about how a technical study should be defined, structured, and monitored, so many differences of approach had to be reconciled. Although the terms of reference used in the bidding documents were prepared covering all technical aspects in fairly detailed fashion, much of the negotiations centered around revising the scope of the study. At the time, SWMD attributed these revisions to insufficient detail and clarity of the original Terms of Reference. However, after reviewing the original and final TOR, the Audit found that most of the revisions were related to reaching agreement on detailed specifications and parameters for such elements as porosity and permeability limits to be used for designing the reservoir model. These negotiations were quite unusual. since most of these specifications are usually discussed and agreed upon within the context of the actual study, when the detailed data is under review. 4.3 Other difficulties were a result of SWMD's concern that the study might not provide its management with a sufficiently flexible set of investment strategies for rehabilitating the field. SWMD management was unfamiliar with the concept of evaluating alternative investment strategies in terms of their rate of return. Instead, it wanted to start with a series of potential physical production targets and determine the investment programs that could meet these targets. As explained to the Audit mission, in addition to defining an "optimum" investment program, the study should also have included an investment program for producing 20% more than this "optimum", so that management could decide which program to follow. Such misunderstanding about what the study could, and could not, do took considerable time to resolve. 6 4.4 The longest delay was in the actual implementation period. It took over twice as long to complete as had been envisaged at appraisal: instead of taking 20 months to complete, it took 48 months. One of the major cause for delay was the expansion of the study's data gathering requirements. The reservoir's geological conditions were quite heterogeneous and complex, and the number of wells drilled, logged and tested increased to twelve, double that of the original program. However, as the study progressed, SWMD pushed for a level of accuracy of model prediction that was far in excess of what was needed to reach major operational conclusions about the level of economically viable field rehabilitation investments. When the initial modeling showed that the damage to the reservoir through water influx was so great that there was little that could be done to recover the reserves that remained, SWMD insisted that the other possibilities might be developed through the history matching of a much greater number of wells than had been planned. The number of history matches increased from the original 20 wells, to the final number of 72, representing more than half the total number of wells drilled on the field. Each additional history matches took considerable time, with the last few adding nothing to the useful results of the study. Lessons 4.5 Much of the delay was caused by SWMD's lack of experience in working with foreign consultant firms, combined with the Bank's lack of participation in the process to help resolve misunderstanding that arose from due to this lack of experience. The Bank staff realized early on that this study was being delayed more than necessary. On two occasions supervision missions suggested that because the study was critical to the success of the project, the Bank should request that its staff participate in the study review meeting to ensure that it stayed on track. Instead Bank management limited its interventions to sending urgent telexes to the participants reminding them of the importance of the study and urging them to hurry up the process. Recommendations 4.6 Bank should insist that borrowers follow the guidelines for short lists of qualified candidate. The importance of, and reasons for this limit should be made clear to new borrowers. There should be no exceptions. 4.7 The Bank should react quickly when consultant study negotiations cannot be completed in one or two sessions and begin to extend beyond normal limits. When the Bank discovers that the contract negotiations are becoming protracted, it should intervene by requesting participation of Bank technical staff, to ensure that the terms of reference remains within the original agreed scope, and that misunderstandings about the consultancy goals are identified and dealt with. 4.8 Bank technical staff should be more deeply involved in the coordination and implementation of studies that are critical to the success of the project. Change in Project Scope 4.9 The decision to use unallocated funds to purchase subsurface water pumps led to the introduction of a new production technology which had not been reviewed in the diagnostic study. This technology had a negative impact on the environment. 7 4.10 The use of unallocated funds to purchase water pumps for stabilizing gas production significantly changed the scope of this Technical Assistance project. The project had been limited to technical assistance and enhancement of surface facilities. It purposely avoided financing any investments that would increase output by changing down hole production methods, first because there was no evidence that such investments would be economic, and second, because increasing production would lead to ecological problems that would be costly to resolve. 4.11 The President's Report had avoided ecological issues by insisting that the project was only for technical assistance. Gas compressors did little to change this situation, since they had no effect on the field production technology. However, water pumps, which were used for "dewatering" were a clear change in technology. As a rehabilitation investment, the water pumps added substantially to the ecological problems that SWMD was already having with the disposal of the reservoir water, which had a high H2S, CO2 and salt brine content. 4.12 Lesson: The appraisal should have identified the environmental problems associated with the continued operation of the Weiyuan gas field, and should have included the resolution of these problems in the terms of reference for the diagnostic study. Environmental problems have been dealt with slightly better in the recent Sichuan Gas Project (Loan 3716-CHA). 4.13 Recommendation: T.A. projects should not be allowed to ignore environmental problems just because they will not directly make them worse. 4.14 Transfer of Technology: During project implementation, SWMD and SPA requested the Bank to make available contingency funds to purchase the computer needed for running the reservoir model developed for the reservoir study (about US$1.0 million). They needed it to run the diagnostic software package provided by the consultant. However, the Bank rejected the request on the grounds that this equipment was beyond the original project scope definition. 4.15 The computer was needed to ensure the effective transfer of modeling technology to SWMD. In the absence of this computer the project goal of transferring this technology failed to be realized and, as a result, SWMD has been unable to introduce modem modeling methods into its gas field development and rehabilitation planning process in other gas fields. The technical skills related to the design and implementation of a reservoir study were effectively transferred to SWMD staff who participated in the study with the consultants. The software package for the reservoir model was also transferred as part of the study agreement. However, neither SWMD nor SPA have the computer facilities needed to run the model. SWMD was unable to update analysis of the Weiyuan field as new production data becomes available and more important. The Audit found that, contrary to the view expressed in the PCR, the borrower is unable to introduce the analytical techniques acquired in this project to the analysis of production programs for other gas fields in the Sichuan basin, where almost two thirds of the fields have similar water influx problems.' The SWMD has plans to purchase the required computer with their own funds in the near future, but even if this is accomplished next year, there will be a four-year delay in the transfer of this technology, which was to be one of the most important long-run benefits from the project. 8 4.16 Lesson: The idea of purchasing computer equipment for SWMD was never considered during project design because SWMD had no previous experience in reservoir simulation and was too small to effectively utilize such equipment. Such a center might have been considered for SPA, but SPA had distanced itself from the project and had requested that project SWMD should be the sole implementing agency. In designing the project the Bank had accepted this restriction, and taken the position that the project would use the equipment and expertise of foreign consultants. Nevertheless, the Audit believes that the installation of the appropriate computer facilities somewhere within Sichuan province would have enhanced the project's development impact through the transfer of technology and the improvement in China's ability to make full use of its limited gas resources. In deciding about how to respond to requests for purchasing equipment that was not included in the original project scope, Bank staff need to look beyond the specific procurement categories, and determine instead whether the requested equipment will be used to reach development goals consistent with the project design. Unusual Procurement Procedures 4.17 The Bank agreed to finance the purchase of a US$2.1 million well logging truck through direct negotiations (without competitive bidding). Negotiations had, apparently, already been completed. The requesting telex of September 11 read: 4.18 "The well logging contract of Weiyuan project has been completed end of April. In order to have further acquisition and processing of logging data, MOPI has decided to buy through direct purchase, the logging unit of Computalog, Gerhart Ltd. Canada, with which Gerhart did the service for the Weiyuan gas field.. .Due to the time constraint your soonest response [to our request for Bank financing of this purchase] is very much appreciated.. .The total price is less than US$2,400,000." 4.19 The Bank then explained that, while Bank procedures do not allow for direct purchase of equipment of this nature and of this price, it could consider including such a purchase under the project "if SWMD can establish that the requirement of the logging unit is critical for its future operations." MOPI's response to the request for determining the critical nature of the equipment was limited to a telex stating that the equipment is urgently needed, without any supporting details, and that any delay would be costly.4 4.20 The Bank appears to have accepted these statements at face value, and went through the formal process of amending the paragraph 2 of Part C, Section 1, of Schedule 4 of the Loan Agreement to allow for the direct purchase of a logging unit costing about US$2,100,000. 4.21 Lesson: Although there had been ample time for the Borrower to inform the Bank of its interest in purchasing this equipment, well before price negotiations had been initiated, the Bank, in response to the time pressure artificially brought to bear by the Borrower, made a rapid decision to agree to unconventional procurement procedures without making any serious attempt to confirm and substantiate that the equipment was critical for completing the approved project. The telex read: "It is very important to purchase this logging equipment after successful service in Sichuan. As the equipment is in Weiyuan right now and is urgently needed for future operation, MOPI still hopes the Bank can consider this particular status and agree to purchase it directly due to the present conditions of Weiyuan. It is true the project only provides for logging services, but it will take quite a long time for another limited international competitive tender." 9 4.22 Recommendation: Justification for purchasing such a large item by direct negotiation, without any competitive bidding, should be based on more than a desire on the part of the Borrower to move quickly to conclude an agreement, particularly when the implementing agency had been negotiating the agreement over many months, without keeping the Bank informed as to its intentions.' Technology Issues 4.23 Three sets of compressors were purchased over the life of the project. The first two sets used a high velocity technology, since they were offered by the lowest evaluated bidder. They proved to be poorly adapted for continuous gas field use, breaking down frequently and using up spare parts far more quickly than expected. The problem of keeping the high velocity compressors operating was, of course, exacerbated under isolated, developing country conditions, when operators have little or no experience in maintaining such equipment and can be expected to have difficulties obtaining additional replacement spare parts in a timely manner. After this experience, SWMD was allowed to modify its bid evaluation procedures to choose low velocity compressor. The utilization rate of these low velocity compressors was 75% compared with the 35% utilization rate of the first set of compressors, clearly demonstrating that the low velocity technology was a better choice. 4.24 The choice of technology for the compressors demonstrates the type of problems that Bank procurement practices can create when technical choices are not evaluated by specialists. The original technical specifications for the compressors failed to limit the bidding to only low velocity equipment or even to acknowledge that there might be differences between high velocity and low velocity technologies. It therefore failed to require that the suppliers provide and guarantee sufficient spare parts to compensate for their higher utilization rate. According to SWMD, after it experienced difficulties with the high velocity compressors, it asked to modify the second set of bid documents to allow only low velocity compressors. The Bank discouraged this request apparently because compressors with these specifications were more expensive and could only be supplied by two manufacturers worldwide. It was only for the third round of compressor purchases, that the Bank relented and allowed SWMD to require low velocity technology. 4.25 Lesson: The petroleum sector usually requires highly specialized equipment, for which there are often a limited number of qualified manufacturers. In some cases, equipment that may appear to a non specialist to be a near substitute, may in fact be unable to do the task required. It is therefore important that procurement guidelines give primary consideration to the technical requirements, and that these requirements should take precedence over more global considerations, such as expanding the number of eligible suppliers. 4.26 Recommendation: When there is a choice between radically different technologies to do the same task, the technologies should be evaluated by independent experts, either before the bidding documents are prepared or after the bids are received. The Bank's position in this issue is that the decision to approve SWMD's request for acquisition of this unit was taken after a supervision mission reviewed the request and agreed that there was a need for continued use of the production logging unit to gather additional critical data for the Weiyuan field. The Bank also feels that alternative arrangements would have delayed continued logging of Weiyuan wells and that without this data input, the study would have been unable to confirm its conclusions about the inadvisability of further investment. [The Audit could find no record of this discussion in supervision mission Back-to-Office Reports.] 10 Training 4.27 The institutional training program developed under this project was the most important and successful project component in terms of its anticipated long-term impact on the development of China's petroleum sector. In addition to supporting a rational restructuring of the institutions themselves and the improvement in the curriculum content, it supported the growth of the intellectual leadership in these institutions by expanding personal contacts with foreign academic and research institutions, and it supported the training of a new academic generation. The program strengthened the capabilities of both the older generation of established researchers and professors, as well as the younger generation. Nevertheless, China continues to face the challenge of developing new teaching and research talent in the younger generation of scholars, to fill the gap left by more than a decade of interrupted academic training during the cultural revolution. 4.28 Recommendation: The Bank should include support for the continued growth of university educational facilities for all petroleum projects, particularly in countries with a large national petroleum sector. Such support is one of the most effective ways to support modernization of the petroleum sector through the introduction of advanced technologies available in other countries. The Banks should also endeavor to include training in modem economic decision-making and financial management practices. Financial Condition of SWMD 4.29 Over the past several years SPA's upstream operations (gas exploration development and production) have been losing money. SWMD does not have the internally generated funds needed to maintain financially and economically non-viable production levels at Weiyuan. But economic considerations appear to have played only a marginal role in investment decision making. Natural gas prices, which are still very low, need to be increased to their fuel oil parity level, to allow SWMD to maintain financial viability. Rational pricing is also needed to shift gas production investments from being driven by production quota considerations to being driven by economic efficiency considerations. 4.30 Recommendation: China is moving rapidly towards the utilization of market forces to determine enterprise viability and investment priorities. Although financial viability was not meaningful or important in China in the mid-1980s, it is becoming so in the mid-1990s. The Bank will need to look closely at the financial condition of the entities that it supports, and should insist that project management is trained in western accounting and financial decision-making techniques. It should also continue to work with the Government to bring energy prices in line with opportunity costs, as it has done in the recent Sichuan Gas Development and Conservation Project (Loan 3716-CHA). The PCR Report 4.31 Part I of the PCR report, prepared by AS2IE, was reasonably comprehensive although its handling of environmental concerns was less than satisfactory. In addition, the Audit found that it was overly optimistic about the project benefits and sustainability. 4.32 The Implementing Agency (SWMD) wrote a complete and comprehensive review of the project from their perspective, as intended under the Guidelines for PCRs. Unfortunately, it was 11 summarized into half a page in Part II of the PCR. Selective editing of the Borrower's viewpoint is inconsistent with Bank guidelines.' 5. PROJECT OUTCOME AND SUSTAINABILITY 5.1 The Weiyuan Gas Field Diagnostic Study, while substantially delayed, was successful in the sense that it did determine an optimum investment program for the Weiyuan field, even though this optimum investment program was very small. 5.2 By showing that the originally proposed large scale rehabilitation investment program was not technically feasible, the study saved over US$150 million that would have otherwise been invested in a futile effort to increase gas production, and should, therefore, be considered a success. 5.3 It showed that currently available techniques are unlikely to recover sufficient gas to justify a large scale resuscitation investment and that further substantial investments in the Weiyuan field would be economically viable, particularly given the need for further environmental investments needed to safely dispose of formation water. The fact that there may still be some 70% of the original 40 billion m3 of gas still within the reservoir is, or should be, irrelevant to future decision making, since the technology is not available to bring it to the surface at a reasonable cost. Furthermore, efforts to increase production marginally by dewatering techniques are likely to increase costs to where they would be substantially greater than the economic value of the gas, even if the gas is valued at international oil equivalent prices. 5.4 The Audit disagrees with the PCR conclusion that, despite the delays in implementation, the project was implemented satisfactorily. The Audit found that the delays significantly reduced the study's usefulness. Furthermore, gas production continued to decline and the environment continued to be degraded throughout the period. Current gas production is less than half of what it was when the loan was made, and is continuing to decline rapidly, while water production is still at an environmentally unacceptable level. The Audit therefore concludes that while the project design was satisfactory, the implementation process was unsatisfactory. 5.5 The project was much less successful in transferring the diagnostic methodology and techniques to SWMD/SPA, since they do not have the computer hardware needed to undertake further studies. Given the nature of the study results, the question of project sustainability is moot. 5.6 The Audit finds that the outcome of the education and training project component was highly satisfactory, and likely to be sustained. It also finds that it established a substantial institutional 6 The COD Guidelines for Preparing PCR Reports (June, 1989), states: "Part II of the PCR, as prepared by the Borrower and submitted to the Country Department Director, should not be modified by the Region except for the addition of explanatory footnotes and disclaimers where needed. In exceptional cases, the Legal Department may suggest minor deletions, which should be flagged by an appropriate footnote. Final presentation of the PCR will clearly identify Part 11 as the Borrower's unedited product, with its contents not attributable to the Bank (para. 10, page 3). 12 development impact, with a high degree of efficacy. Its development benefits are likely to be sustainable. 5.7 The Audit agrees with the PCR that the overall project outcome was satisfactory, since the stated objectives were met: a minimum cost investment program for the Weiyuan gas field was established, and the capability of the sector's educational institutions was improved. Both of these benefits are likely to be sustainable. On the basis of the success of the Education component, the Audit judged the overall institutional development as substantial. 13 LIAODONG BAY PETROLEUM APPRAISAL AND TECHNICAL ASSISTANCE PROJECT (LOAN 2708-CHA) 1. BACKGROUND 1.1 Between 1982 and 1984 the Bank had made three loans to support Chinese petroleum enterprises in their efforts to introduce new technology for the exploration and production of oil.' 1.2 OMS 3.82 stated that the Bank would not normally finance exploration and/or appraisal drilling for oil when the activity was to be undertaken by a national oil company operating on its own, without a private sector financial partner. It would, however, support efforts that would enhance the prospects for joint venture undertakings between national companies and international oil companies (IOCs). There was, in addition, still some leeway to support national development of gas resources, since it was generally agreed that IOCs were unlikely to consider investing in the development of natural gas fields where the gas was unlikely to be exportable. The focus of activity was therefore shifted towards developing natural gas resources for domestic consumption and assisting national companies establish joint ventures for oil exploration and production. 1.3 In line with this shift, the Government of China (GOC) proposed two projects in the mid- 1980s: one for the rehabilitation of a major gas field in Sichuan province, and the other for the development of a small offshore gas-condensate field in the Bohai gulf of northwest China. 1.4 Recognizing its technological and financial constraints in offshore petroleum exploration and development, the GOC established, in the late 1970s, a specialized entity, the National Offshore Petroleum Company of China (CNOOC), to take charge of all offshore petroleum activities and to undertake joint venture exploration program with international oil companies (IOCs). In addition to its joint venture program, CNOOC also established a petroleum exploration program of its own in the Gulf of Bohai, in northeast China, which it used to develop its own expertise. 1.5 When the GOC requested that the Bank assist CNOOC with a project for the appraisal and development of a small offshore oil and gas condensate field in the northern end of the Bohai Bay (the Jinzhou field otherwise know as the JZ-20-2 structure), the Bank's main concern was that the project would be consistent with its new Operational Guidelines embodied in OMS 3.82. 1.6 Since China had already successfully implemented a policy of inducing foreign investment in offshore petroleum exploration, the Bank agreed to support the field appraisal phase of the proposed project, on the condition that the operator, Bohai Oil Corporation (BOC), would seek foreign equity financing for the development phase. These projects are discussed in audit report No. 13694. However, with the introduction of the Operational Manual Statement "Bank Guidelines on Petroleum Lending" of November, 1984, (OMS 3.82) the Bank effectively stopped lending to national oil companies for the exploration and development of their oil reserves. 14 2. PROJECT DESCRIPTION 2.1 The project was structured to support an appraisal program that would maximize the likelihood of finding a foreign investor by minimizing the development risk. The Bank's presence was expected to minimize the development risks and maximize the likelihood of finding a foreign investor. The project would cover the first phase of a two phase program for the field. It included assistance for appraisal of the reservoir, for detailed design of the development program, and for creation of a framework for attracting a foreign equity partner. If the results of the first phase warranted it, the Bank would then consider a second project for the development of the field. 2.2 The objectives for this project were: (a) to undertake the technical and economical appraisal of the JZ-20-2 structure and to establish a field development program including a financial plan that would include obtaining foreign equity participation; and (b) to provide technical assistance to improve BOC's technical, financial and managerial capabilities in offshore petroleum operations which in turn would help in strengthening BOC's position as a joint venture partner in these kind of operations. 2.3 The project consisted of five major components: (a) Strengthening of BOC's data processing facilities, and processing and interpreting about 5,000 line-kilometers of already acquired seismic data; (b) Strengthening BOC's well testing and core analysis capabilities, and drilling and testing five appraisal wells; (c) Construction and installation of sea-floor and platform facilities to enable long-term production testing; (d) Six studies to assist in the evaluation and future development of the hydrocarbons reserves of Bohai Bay; and (e) Training of BOC staff in offshore operations. 2.4 There were no sector policy conditionality associated with the loan. The project was approved by the Board on May 29, 1986 and became effective on September 29, 1986. The loan was closed as scheduled on December 31, 1989. Project implementation and results were essentially as described in the PCR, and are summarized in the following section. 15 3. IMPLEMENTATION AND RESULTS 3.1 Most project components were implemented on time and within budget. The seismic processing facilities were strengthened through the introduction of advanced computers and interpretation programs and the seismic data was processed and used for choosing drilling locations and determining the size of the reservoir. Eight wells were drilled and tested instead of the five originally planned. The additional wells were needed to obtain adequate reservoir engineering data, primarily because the reservoir geology was far more complex than anticipated. However, the sea-floor and platform equipment required for testing the reservoir was excluded from the Bank financed project components. All the studies were implemented, although in a substantially different way than originally proposed, and the training program was implemented as planned. 3.2 Data produced through the wells financed by the project showed that instead of containing oil, reservoir contained natural gas and gas liquids. This discovery made it necessary to substantially modify the follow-up reservoir development program. In the original production design, the produced oil was to be pumped into a floating barge and transferred to shore. In a gas condensate field, the produced natural gas and gas condensate could not be captured without a major investment in development facilities. Thus long-term production testing, which would reduce the geologic and economic risks of subsequent field development had a high opportunity cost, since it could only be accomplished if the produced gas and gas condensate were flared. 3.3 BOC decided that rather than accept the resource cost of long-term testing, it would start developing the field immediately, relying for success on the promising results obtained during the open hole drill stem tests plus the high likelihood of finding additional gas in the already identified formations in surrounding areas. BOC therefore proposed to combine the testing with the first phase development of the field. The Bank declined to assist with this alternative approach, and BOC went on to develop the field without Bank assistance, borrowing US$67 million from other sources. The proposals for attracting a foreign joint venture partner for the development phase were never followed-up. Studies 3.4 The six studies to be carried out with the assistance of foreign consultants were intended to form the basis for a substantial part of the transfer technology on modem oil, gas condensate, and gas field institutional practices. They were less than fully successful in fulfilling this goal: one was completed only half way, two were done without the assistance of foreign consultants and two were canceled when disappointing reservoir results made them unnecessary. Findings and Lessons Learned from the PCR 3.5 Project Scope: The exclusion of the eventual development investments from the scope of a field appraisal project proved to be prudent and appropriates, since the latest estimates of reserves did not justify full field development. 3.6 Studies: In retrospect, it can be seen that Bank supervision of the gas utilization study was inadequate, primarily because supervision mission staffing focused primarily on technical and procurement requirements of the project, rather than on institutional and economic issues. 16 4. ISSUES Procurement 4.1 BOC established a project implementation team to coordinate and monitor procurement activities. Because CNOOC was legally entitled to enter into contracts with foreign entities, it was able to bypass the cumbersome inter-agency procurement procedures that had played such an important role in delaying other Bank petroleum projects. BOC was given full autonomy to undertake directly all procurement activities, which they carried out in a most efficient manner. As noted in the PCR, BOC's autonomy to implement its own procurement directly, rather than go through an independent procurement agency, greatly improved the efficiency of the project, even though BOC was also initially unfamiliar with Bank procurement procedures. 4.2 Lesson: There is no inherent reason for requiring a specialized procurement agency to undertake procurement for project implementing agencies. The inclusion of an additional agency makes it extremely difficult for Bank staff to monitor and assist in the procurement process. Experience suggests that these multi-agency arrangements will invariably lead to significant delays in project implementation. 4.3 Recommendation: The Bank should work with the GOC to establish simpler procurement procedures for its projects in China. It should work closely with the implementing agency early in the project cycle to resolve questions about the Bank's procedures. There is no advantage in allowing a specialized agency with no stake in project success to have ultimate authority over procurement matters. While coordination committees can possibly improve procurement performance, they can only be a second best solution. Foreign Participation 4.4 From the first identification mission for this project, the Bank had opened a dialogue with BOC and it's parent company, CNOOC, on the desirability of obtaining a foreign joint venture partner for the development of oilfields in the northern Bohai Bay. The Bank had taken a strong position on this issue because the new Guidelines for lending in the petroleum sector had sharply curtailed lending to national oil companies unless the project included the participation of a commercial joint venture partner. BOC had explained to the Bank that they had to develop the northern Bohai themselves, because the Government would not let a foreign company operate in this strategically sensitive area. CNOOC supported this position because it wanted BOC to gain experience in implementing an off-shore operation so that it would be better able to work effectively as a joint venture partner in other prospective offshore areas. 4.5 The compromise position was that BOC would look for a joint venture partner to take a non-operating, minority shareholding position as a financial partner. It was agreed that before a search for such a minority partner could begin, a more in depth evaluation of the field potential was required, and the project was designed to undertake this evaluation. 4.6 BOC was never very enthusiastic about the agreement. They were in favor of joint-ventures, but did not believe that the Jinzhou field was a good candidate. They had considerable recent experience in working with foreign partners in offshore joint-venture exploration ventures, and, based 17 on this experience, they believed that it was highly unlikely that a foreign firm would be interested in taking a minority, non-operator share-holder, particularly given the possibility that the field would produce substantial quantities of associated gas, which would not be sold at international prices. 4.7 Furthermore, CNOOC, the parent company of BOC, did not believe that it had anything to gain from allowing all of it's operations to be joint ventures. It had already established joint ventures with foreign companies for most of China's offshore acreage. BOC had also established it willingness to work in joint ventures in the southern portion of the Bohai Bay, and subsequently signed two joint venture agreements with international petroleum companies to operate in these areas. For all these reasons, CNOOC and its subsidiary, BOC, never took very seriously the obligation to look for a foreign partner to help finance the development of the Jinzhou field. 4.8 The Audit believes that CNOOC and BOC had a much more realistic view of the potential of attracting foreign oil companies than did the Bank. No foreign oil company was likely to be interested in becoming a non-operating, minority partner in a relatively small field, where the expected level of financial return was so limited. They had better opportunities elsewhere. But the proposition was never put to the test. When the field turned out to be a gas field rather than an oil field, it was agreed that the profitability of the field would be much lower than if it had been an oil field, essentially eliminating the incentive for foreign investors to participate. The idea of attracting a foreign partner was dropped, and with it the Bank's further participation. 4.9 The Bank's emphasis on foreign partners had become firmly entrenched in its internal decision- making process. Its initial concerns about being drawn into the field development phase without the participation of a foreign joint venture partner could not be dislodged. It was unable to adjust its posture even though the new Guidelines approved of supporting national efforts to develop gas reserves without foreign participation, because they recognized that foreign oil companies would seldom be interested. Without the possibility of foreign participation, the Bank was unwilling to support any developmental activities. 4.10 The Bank also believed that there might be insufficient reserves to justify developing the field. The foreign consultants had arrived at a reserve estimate about 30% below that of the consultant's, which, if no additional reserves had been discovered in nearby structures, would permit production to be maintained for only 10-12 years, rather than the more normally accepted minimum period of 15-18 years. The Bank was, therefore, unwilling to support BOC when BOC decided that it could only implement long-term testing to prove its reserves in the context of a first stage field development; long- term testing to prove the reserves without this investment would require the flaring of large quantities of valuable gas and gas condensate. 4.11 Lesson: The Bank was overly concerned with the issue of foreign participation. After the reorganization, the management of the China Department was more concerned with broader policy issues than with the development of a small and marginal gas field. The second phase development project was therefore dropped as were most new efforts to promote new lending in the petroleum sector in China for many years. There was a gap of nine years between the Board approval of this loan and the next petroleum sector China loan, which was approved in FY94. 4.12 Recommendation: The Bank needs to reevaluate its approach to Petroleum lending. While it needs to support a policy framework that encourages IOC participation, it should not exclude support for national efforts to develop national petroleum resources, when the broader policy framework for 18 inducing foreign participation has been established and IOC are actively engaged in joint ventures in the country. Particularly in large countries with a long history of developing their own petroleum resources, the Bank should be more open to supporting the transfer of technology and management know-how needed to improve the efficiency of their operations. 4.13 The Reservoir Study was intended to determine the reserves of the Jinzhou field and recommend an optimal development program. The reserve estimation portion of the study was implemented by foreign consultants, as was required if the Bank were to consider a Bank lending operation for the development of the field. A parallel reserve evaluation was carried out by BOC staff on their own. The Consultant's reserve estimate was about a third lower than BOC's. 4.14 The PCR stated that the consultant's results were lower (and presumably more accurate) because the consultant integrated seismic data, geologic data, and well log data into its estimates, while BOC used only seismic data, and thereby implying that BOC used an inadequate methodology for their study. This interpretation is unjustified and factually inaccurate. In reality, both groups used all the data available, but came to different conclusions about the thickness distribution and continuity of the reservoir rock. 4.15 These differences in interpretation of the data was critical for the field development program. Because the economics of a gas condensate field are much weaker than that of an oil field, the decision to go forward with field development rested, primarily, on which interpretation was accepted. The Bank took the position that the project could not support foreign participation, because foreign investors would base their judgement on the more conservative reserve estimate. It therefore stopped its efforts to encourage BOC to find a foreign investor, and declined to support further investment in field development. 4.16 The second part of the study, which was to recommend an optimum development program, was never implemented. Neither the consultant nor BOC undertook a rigorous analysis of the likely economic rate of return for development of the field based on BOC's reserve estimates. Nor was any risk analysis undertaken. 4.17 One of the PCR's conclusions is that the exclusion of the development investments from the scope of the project proved to be prudent and appropriates, since the latest estimates of reserves did not justify full field development. While the Audit concurs with the PCR that the decision was prudent, it questions whether it was, in fact, appropriate. BOC developed the field with its own resources, having decided to take the risk based on its own interpretation of the reservoir evaluation. According to BOC, the results to date suggest that their higher reserves estimate was the more realistic than that of the Bank consultants. Furthermore, other reserves in the area have been proven, so their investment is likely to yield reasonable, if not excellent returns. However, all the data is not yet in. 4.18 Lesson: The Bank should have asked BOC to analyze the economics of its proposed development investment and should have reviewed with BOC the assumptions that they used to demonstrate that the investment was economically viable. 4.19 Recommendation: Review of the methodology used in making investment decisions for developing and rehabilitating oil and gas fields should be a central element in an ongoing dialogue between the Bank and Chinese oil enterprises on their methodology for establishing investment priorities in the sector. 19 4.20 The Regional Petroleum Geological Review was originally designed as a regional synthesis of all available data - geochemical, geophysical and geological- covering the entire area of Liaodong basin, so that BOC could develop a more rigorous and unified concept of the basin's hydrocarbon prospectiveness. Subsequently, BOC management decided that the study would cost too much if undertaken by foreign consultants and its own staff could handle it. It also decided that rather than focusing on the entire basin the focus would be on the geology of the Jinzhou field and a nearby structure, SZ-36-1, where BOC had discovered a very heavy and difficult to produce crude oil. 4.21 The study was implemented without the assistance of foreign consultants. The transfer know-how, which was the Bank's main objective in proposing the study for inclusion in the project, was limited to a review of the completed study by the staff of British Petroleum Corporation (BP) covering the study's methodological procedures and some of the study results. On the basis of this review, BP prepared a set of suggestions for how BOC could improve its methodological procedures and geological evaluation techniques, some of which BOC have found useful and have utilized in subsequent work. However, BP was not permitted to review the full study, because BOC considered some of the primary data to be confidential and proprietary. 4.22 Lesson: BOC appears to have accepted the premise, often put forward by private oil companies, that you should never allow other oil companies to have access to your geological/geophysical data, because this information can give the competitor an advantage. While this approach to information sharing makes sense for a private oil company, which must compete for prospective exploration acreage and is interested only in maximizing its own production, it make little sense for a national oil company. The national oil company has control over all its own acreage, and can decide which acreage it will allow foreign companies to compete for. Therefore, if it wants to maximize the amount of oil discovered in both its own acreage and in that of its joint venture partners, it should make available all the technical data it has at its disposal. Therefore, Chinese oil companies have nothing to lose and everything to gain from sharing information with foreign companies. The more information these companies receive, the more successful their exploration activities are likely to become, and the more successful they are, the better off the country is. Furthermore, the national oil company cannot be hurt by providing this information, since it cannot diminish the national oil companies' prospects for making its own new discoveries. 4.23 Recommendation: For projects that finance activities of national oil companies, the Bank should insist that all data generated by the project should be made easily accessible to other oil companies, both international and national. The Bank should also encourage the national company to make all other technical data accessible to interested parties. 4.24 The Gas Utilization Study was intended as a vehicle for strengthening China's regional gas planning capabilities. It was supposed to analyze the alternative potential uses of natural gas produced from Liaodong Bay, and identify a marketing strategy that would maximize the economic benefits from incremental gas discoveries. The study was to be managed by foreign consultants, who would introduce modern techniques for establishing priorities for gas utilization as a function of the economic benefits derived from each potential use (the net-back value in each use). The study failed to meet any of these objectives. 4.25 Both the scope and the focus of the study were greatly modified during project implementation. The Bank had discussed the draft terms of reference for this study with BOC before Board presentation, and believed that agreement had been reached on substance, if not on full detail. However, when it 20 came to implementing the study, BOC management decided that the cost of foreign consultants was too high and that their own staff were fully capable of doing a market study. In revising the study plan, the regional nature of the study was lost when the scope was reduced to cover only the utilization of the gas from Jinzhou field. During implementation, the scope was further reduced to cover only the infrastructure investments to be made by BOC. The final report covered only the financial analysis of the up-stream investments for which BOC would eventually be responsible: natural gas production, processing, treatment, and transmission. It omitted the analysis of the alternative down-stream investments -- fertilizers, petrochemicals, power, and other possible end user investments -- which were the original intended focus of the study. These issues were raised by Bank supervision missions, but without any success. 4.26 As pointed out in the PCR, by neglecting the analysis of the possible uses for natural gas, the study failed to meet its institutional strengthening objective, which was to improve the management of scare gas resources on the basis of an economic evaluation of gas utilization from the national perspective. Instead, BOC has agreed to sell its natural gas to a fertilizer plant, which will be located near to the gas pipeline land fall, at a comparatively low price of 35 Fen per cubic meter (US$1.60 per 1000 cubic feet - or about US$65 per ton fuel oil equivalent), as BOC's contribution to the regional economy. 4.27 Lesson: Since BOC staff had never implemented a study similar to the one proposed, the Bank should have insisted that BOC meet their commitment to hire a foreign consultant to at least develop the terms of reference for the study and provide advice at various stages in study implementation to ensure that the most important methodological issues would be adequately covered. 4.28 Recommendation: The fragmentation of responsibilities among independent Government ministries and semi-autonomous institutions make it almost impossible in China for an individual concerned institution to successfully implement, on its own, a study aimed at strengthening overall natural gas planning for the integration of up-stream and down-stream operations. The Bank needs to establish a mechanism to allow foreign consultants to supervise and coordinate studies that involve planning at more than one ministry. 4.29 The Computerization Study was to be a three-month investigation of the optimum configuration for data processing facilities for BOC. The study was implemented by the Shell Oil Company, as part of the technical assistance provided in their exploration joint venture agreement. The Bank agreed that a second study was unnecessary. In addition, the Bank appears to have decided that because it was no longer financing the study, it no longer needed to review the study's overall findings and consequent action plan. 4.30 Recommendation: If a study is important enough to be included in the project scope, the Bank staff should continue to monitor it and review the subsequent action plan with the implementing agency. 4.31 The generally poor results of the program of studies resulted, primarily from CNOOC and their reluctance to hire foreign consultants to implement them. Consultants were considered to be too expensive, particularly when CNOOC felt that the study was not really necessary or that its own staff could get just as good results. This reluctance suggests that the Bank had been unable to establish borrower ownership of these studies during the appraisal process. The Bank, in turn, showed little concern for the adequate implementation of the studies during its supervision mission, especially when 21 they were no longer financed under the Bank loan. More attention should be paid to reviewing the need for studies proposed under T.A. loans, and only those studies deemed essential should be included. 4.32 Training: The training program included a study tour to gas/condensate fields of four major oil companies in the US and on-the-job training on the use of equipment purchased under the project, primarily at the headquarters of the equipment supplier. These visits gave BOC staff a chance to contact foreign experts directly, where they could discuss the new technologies for project implementation and learn the most recent trends in research in the international petroleum industry. They were considered by BOC to have been a highly successful vehicle for the transfer of know-how and technology. However, the training program organized around short-term academic courses, based on lectures and text book examples, was considered a total waste of time by those that participated; the focus of the courses were much too broad to be of practical use to the participants when they returned to work. 4.33 Lesson: Successful training programs in the petroleum sector need to ensure that participants can work with counterparts who can provide on-the-job training. Isolated and theoretical training programs are unlikely to impart information that can be readily used when the trainee returns. 4.34 Recommendation: Petroleum sector training should concentrate their attention on programs that incorporate the maximum amount of "learning-by-doing", including programs at universities that lead to advanced degrees. 5. PROJECT OUTCOME AND SUSTAINABMITY 5.1 While the project did not lead to a joint venture for the development of an important oil discovery, it did help to transfer considerable technical know-how to BOC. The Jinzhou gas condensate field is being developed and the geophysical and geochemical work supported by the project has helped to demonstrate that there are good prospects for further natural gas discoveries in the surrounding structures, which could provide back-up gas supplies if the Jinzhou field proves to have lower reserves than BOC has estimated. However, while BOC staff has developed strong capabilities for handling offshore exploration, appraisal and development operations, the project appears to have had little impact on institutional strengthening in the areas of regional gas planning and economic evaluation of development prospects. 5.2 The Audit judges the overall the outcome of this technical assistance project as satisfactory, and sustainability as likely, and the overall institutional impact as modest. 22 ANNEX 1 CHINA NATIONAL PETROLEUM CORPORATION Telex 22312 PCPRC CN Liu pu Kang, Beijing, CHINA June 22, 1994 Dear Sirs, We have reviewed your draft Performance Audit Report (PAR), passed by MOF, for four World Bank financed projects in China's oil/gas sector.' As the coordinator of those projects, we would like, on behalf of China National Petroleum Corporation (CNPC), to give our comments as follows: 1) We highly appreciate the Auditor's significant and helpful work on those four projects. 2) We agree to the PAR's conclusion that implementation of all four projects are successful and satisfactory, although Weiyuan T.A. project only partially achieved its original targets. 3) We agree to most basic points of PAR and the lessons and recommendation given by the Auditors for project implementation, particularly to the analysis of implementation and procurement delay which was the common problem in all four projects. We have already taken some measures for the ongoing Sichuan gas project to avoid such delays since we have become aware of the significance of this problem. 4) Internal coordination among four Chinese agencies: We admit that inadequate interagency coordination and cumbersome internal clearance procedures did exist in the project implementation, but the approval procedure among the four agencies were not exactly like that expressed in PAR (See Zhong Yuan project 4.7-4.8). Signed by: Zhou Qingzu China National Petroleum Corporation 1Daqing oilfield-Gaotaizi Reservoir Development Project (Loan 2231-CHA); Zhongyuan-Wenliu Petroleum Project (Loan 2252-CHA); Karamay Petroleum Project (Loan 2426-CHA); and Weiyuan Field Technical Assistance Project (Loan 2580-CHA).    r-- TD ø > c