Romania - Petroleum Sector Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 12026-RO STAFF APPRAISAL REPORT ROMANIA PETROLELM SECTOR REHABILITATION PROJECT MARCH 14, 1994 -l i, a l Industry, Trade and Finance Operations Division Country Department I Europe and Central Asia Region This document has a restricted distribution and ma! be used by recipients onlv in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unilt - Roman1a L' (1,' US1.00 = lei 450 00 on Janudry 1. !99' US$1.00 - lei 735.00 on July 1, 1993 US$1.00 - lei 1075 on Dar.mlk'r 1, 19q0 USSl 0I - lei 12"4 or DecermrbDer 22, ldJi UNITS AND I ASURES 1 Kilowatt tkW) - 1000 Watts (l0' W) 1 Megawatt *iMW) 1,000 Kilowatts (10' kW) 1 Gigawatt (GW) . 1,000,000 Kilowatts (10' kW) 1 Kilowatt-hour (kWh) - 1.000 watt hoturs (10 I Wh) 1 Gigawatt-hour (GWh) - 1,000,000 kilowatt-hours (10' kr4h) 1 barrel (bbl) 0 159 cubic meters 1 metric ton of oil (0.85 specific gravity) - 7.4 bhl 1 MCF - 1,000 cubic ft 1 MMCF = ,000,00 ctubic ft. 1 BCF = 1 billion ribic ft.. 1 TCF I l t: 1L; .Jt cjubtc ft. 1 ton crule col equivalent (toe) 1 ton cf cruie *il - 4! 2 MCF cf rl-Atviral gas = I 1Ih cubic eotecs .^f ratural gas 1 cubic meter (crm, iS3 cuc-c ft. B fCM =liilCI:n cub.. meters Cc C, mmner,: 1 Ccmp-ny C,F C' purat- Deveo',j(mqnt 1>ir P rftm CMEA i rl for M :.: nrai E-or.uM:c Assls is'-:s' CONPET Commercial nrterpriFp tM-r Cruide0 C. ras1ss DG Director Genera: OPIS Pr.eSt:c Cruide C; PFireie System EA Env:roncnuntal Assessmenit EFRD European F,arik tor Re, ons ruct ion and Devel lxnent Elr European InvestmenTt bar-k ECR Fnhanced Oil Recovery FS'J Former Soviet Unicn GM General Manager GOR Government of RumaT:ia ,CFT Institute f-r Research at. Te nhiclogy IDC Interest Diiting Constructi n IM Irternatiorial Monie' rrv Funi IOC International Oil Company IPLS Impcrted Crude Cil. Pipeline System MO., Ministry of In:dustries MOF Ministry of Finance NAMR National Agency for M,neral Resources PETROM RA for Fetrolern FPElS Prcject Engineering Managerenet & Superv4siun PROSPECTIUNI Coxmercial Enterprise for Seismic Data Acquisitioni and Processing PSRS Petroleum Sector Restruc turing Strategy PA Reg4a Autonome - Stat.e-owned Enterprises not intended to be privatized RA I XCr RA for Radio Communicat lor. RAB RA for Coal RAL RA for Lignite RAFTROM Hdolding company for refineries RENEL RA for Electricity ROMGAZ RA for Natural Gas RoMTELECaM Romania Telecormrunication SAL Stru tural Adjustment Loan SBU Subsidiiary Business Unit SOE Statemernt ,f Expendituies USAID United Stateas Agency foi International Development. USTDA United States Trad1e and Development Agency ROMANIAN F7SCAL YEAR January 1 - December 31  FOR OPPKCAL USE ONLY ROMANIA PEIRMOLEIM sECTlOR REHABILITATION PROIFECT Lon and troject Summary BORROWER: Romania BENEFICIAREES: Ministry of Industries (MO1); PETROM, ROMGAZ, and CONPET LOAN AMOUNT. US$175.6 million equivalent TERMS: Twenty years including five yeas grace period at the Bank's standard variable rate. RELENDING TERMS: The interest rate on onlent funds to the beneficiaries (except MOI) would have a mark-up of one-tenth of the Bank's standard variable interest rate to GOR. Repayment terms would be the same as those of the Bank Loan to GOR. Foreign exchange and interest risks would be borne by the entities. PROJECT OBJECTIVES: The objectives of the Project are to: (a) assist GOR in achieving the objectives of its petroleum sector strategy to promote private sector investments in the petroleum sector, strengthen institutional capabilities and establish a suitable regulatory framework to facilitate the development of an efficient and commercially-oriented petroleum sector; (b) assist each of PETROM, ROMGAZ and CONPET in improving its operational eiYciency and financial management; and (c) assist in irr.piementing abatement measures to address environmental pollution in the sector. PROJECT DESCRIPTION: The Project consists of: (a) for GOR/MOI: (l) implementation of a program to strengthen the policy making functions of MOI, including: (a) the development and implementation of: (i) a fuel policy; (ii) a pricing policy for oil and gas transmission and distribution; (iii) a strategy for restructuring and optimizing the refinery subsector operations; (iv) establishment of a regulatory framework for the petroleum sector; and (v) a strategy for upgrading the operations of the oil services subsector; and (b) the establishment and operation of an independent agency (the National Agency for Minera5 Resources, NAMR) to function as the Borrower's regulatory authority for the petroleum sector. 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.  -ii (2) implementing, through NAMR, a petroleum exploration promotion program to facilitate the participation by international oil companies in oil and gas exploration and development and production investments, including the preparation of model exploration and production contracts for such participation; (b) for PETROM: (1) development and implementation of a corporate resructurng and development program with the objective of improving PETROM's organization, streamlining its operations and improving its finar.cial condition and management; (2) upgrading selected production facilities, introducing modern production te,chnology and workover of wells to improve their productivity; (3) implementing enhanced oil recovery techniques for the production of oi! and gas on selected fields through cooperative arrangements between PETROM and international oil companies; (4) carrying out of an environmental action plan for upgrading the waste water treatment plant at Suplacu and the environmental laboratory at Cimpina; and (5) provision of technical assistance, staff training, equipment, spare parts, materials and chemicals; (c) for ROMGAZ: (1) Uievelopment and implementation of a corporate restructuring and development program with the objective of improving ROMGAZ's crganization, streamlining its operations and improving its financial condition and management; (2) upgrading existing production facilities and introduce modern production technology; (3) implementing enhanced recovery techniques in selected gas reservoirs through joint ventures between ROMGAZ and international oil companies; (4) rehabilitation of the gas distribution system through the replacement of about 1,000 km of severely corroded pipelines; (5) installation of a supervisory control and data acquisition system (SCADA) and telecommunication system to be utilized .n monitoring, analyzing and determining the optimized operational mode of gas flow in the gas transmission system; (6) carrying out of an environmental action plan to introduce environmental abatement measures in gas production fields and in the transmission and distribution systems; and (7) provision of technical assistance, staff training, equipment spare parts and materials; and (d) for CONPET: (1) development and implementation of a corporate development program with the objective of improving CONPET's organization and streamlining its operations  -ffl- as a common carrier of crude oil; (2) rehabilitation modernization and automation of the crude oil transmission systems, including the replacement of about 300 km of corroded pipelines and the installation of a SCADA and telecommunication system; (3) carrying out of an environmental action plan to introduce environmental abatement measures in the management of sludge in the oil transportation sysrums; and (4) provision of technical assistance, staff traing, oqwpment spare parts and mrials. BENEFITS: The estimated internal economic rate of return is 40% based on measurable costs and benefits. Furthermore, the project would make a significant contribution towards achieving macroeconomic stability and structural adjustment of the economy through: (a) increases in the domestic production of oil and gas to be achieved under the proposed project which would reduce the level of oil and gas imports by about US$395 million between 1995 and 2000; (b) contribution during 1995-2000 of about US$1.& billion to the national budget from revenues obtained from royalties (about US$579 million) on domestically produced oil and gas and corporate income taxes (about US$2.1 billion); (c) maintaining the momentum of price liberalization in the energy sector and in particular the petroleum sector through increasing both the producer and consumer prices of oil and gas to international levels; (d) opening up the petroleum sector to international/private investment through the promotion of explotation acreage for oil and gas; and (e) prepare the entities in the sector for privatization and enhance their level of competitiveness through the proposed corporate restructuring and enterprise reforms. In addition, the rehabilitation of the existing transmission networks will improve the efficiency of oil and gas transmission, reduce losses, help reduce environmental degradation and provide opportunity for the substitution of gas for high value petroleum products. RISKS: The proposed Project faces the following possible risks: (a) implementation risks; (b) technical risks; (c) financial risks; and (d) market risks. Measures to mitigate and/or minimize these risks are discussed as follows: (a) Implementation Risks: These can be categorized into absence of appropriate legal, regulatory and pricing framework for the success of the project; lack of know-how on the part of the Romanian implementing agencies; and the ability to comply with the Bank's procurement and disbursement procedures. To mitigate the risks arising from the absence of appropriate legal, regulatory and pricing framework, the Bank asked for, and obtained, prior to negotiations of the proposed Project, a decree which has established the appropriate legal, regulatory and pricing framework. To minimize the risks arising from the lack of know-how on the part of the Romanian implementing agencies, appropriate consulting assistance (technical, engineering, management consulting) has been included and terms of reference for all of the consulting assignments have been agreed. To enable compliance with the Bank's procurement and disbursement procedures, the standard bidding documents to be used by the implementing agencies have been agreed to. Furthermore, a procurement seminar was held in Bucharest, Romania, in Januarv 1994, to help the Romanian authorities understand the Bank's requirements. In addition, the above-referred consulting assignments in technical and engineering areas will also include assisitance in preparation of documentation that would meet the Bank's requirements; (b) Technical Risks: The primary technical risk that the proposed Project could encounter is that the actual  - iv - production levels of oil and gas could be lower than forecast. To minimize ths risk, the production estimates used are very conservative and only producing wells/fields which are currendy shut in will be rejuvenated using international contractor services; (c) Eia aIRiak: The major financial risk faced by the proposed Project is that of mobilizing required finances in a timely manner for implementation of the project. To minimnize this risk, approprite pricing reforms have been imple_med which, together with the increased production of oil and gas and improved corporate efficiency (as a consequence of corporate restructuring and development), will enable PETROM, ROMGAZ and CONPET to gente sufficient revenues froi their internal sources to cover all of the local costs of the proposed Project. Purthermore, GOR wkh the Bank's assistance has ensured that there is no foreign cost financing gap; and (d) Mgl Riskm: In view of the fact that Romania would contine to be an importer of petroleum and petroleum products in the medium to long term, the ability of PETROM ar-d ROM3AZ to sell the incremental production as a consequence of the proposed Project is not an issue. However, there is a risk of failure to attract private sector investments to increase the exploration production of oil and gas To minimize this risk, the incentive regime has been enhanced (producer pricing linked to border prices, no restrictions on the limitation of depth'/), more acreages are being made available, a well-prepared petroleum exploration promotion will be carried out and a transparent regulatory framework for award of concessions has been created. PROJECT FINANCING: Financing ]lan Financing Required Sources of Funds (US$ Million) (USS Million) <-Foreign -> <-Local- > Beneficiaries L Foreign IQ| mm IB _ .r Entities |Total MOI 1.9 9.2 | 11.1 7.2 2.0b 1.9 11.1 PETROM 32.5 35.0 67.5 35.0 32.5 67.5 ROMGAZ 32.7 121.5 154.2 70.3 51.2c 32.7 154.2 CONPET 49.7 63.1 112.8 63.1 - 49./ 112.8 TOTAL 116.8 228.8 345.6 175.6 53.2 116.8 345.6 a/ The proposed Bank Loan of US$175.6 million includes about US$5 million of Technical Assistance for which grant funds are being sought from USAiD and other bilateral donors. b/ Technical Assistance from EC-PHARE. f/ Amount of cofinancing from EIB. Presently the IOCs are allowed to explore only at depths greater then 3,500 metres.  DISBURSEMENTS: Estimad Disbursement Sdhedule _ FY95 FY96 FY97 FY98 FY99 I mi i 35 58 44 28 10.6 Cumulative 3S 93 137 165 175.6  Tableof Contens 1. MACROECONOMIC AND SECTORAL SETnNG ........................... 1 A. Macroeconomic Setting ........................................ I B. hMe Energy Sector ............................................ 3 11. PETROLEUM SUBSECTOR ...................... 8 A. Institutional Framework . ...................................... 8 B. Historical Trend in Petroleum Supply and Demand ....................... 9 C. Government Strategy for the Petroleum Sector ........................ 14 III. THE PROJECT ............................. 17 A. Project Objectives .... ...... ............. 17 B. Project Component ....................... 17 C. Project Description ,.......... .............. 18 D. Project Cost .......... ............. 23 E. Financing Plan ............................................ 23 F. Project Implementation ....................................... 25 G. Project Monitoring ....... ............. ...................... 26 H. Procurement .. 26 I. Disbursement .............................................. 28 J. Environmental Aspects ........................................ 29 IV. BENEFICIARIES . . . 29 A. Introduction .............................................. 29 B. National Agency for Mineral Resources ............................. 30 C. PETROM R.A ............................................. 31 D. ROMGAZ R.A. ........................................... 34 E. CONPET ................................................ 40 This report has been prepared on the basis of an appraisal mission to Romania in March-April 1993. The appraisal mission comprised Messrs./Mmes Akin Oduolowu 'Task Manager and Principal Energy Specialist), Raghuveer Sharma (Sr. Financial Analyst), Mohsen Shirazi (Sr. Gas Specialist), Bernard Baratz (Sr. Environmental Specialist), Yolaine Joseph-Lucas (Operations Analyst), Seyoum Solomon (Economist, Consultant), Arabela Aprahamian (Project Officer, Resident Mission, Romania), Gbolahan Lasaki (Petroleum Engineer, Consultant). The Project is managed by ECI IT. Mr. Franco Batzella is the Division Chief of ECI IT. Messrs. Thomas O'Connor and Mohammad Farhandi were Peer Reviewers. Mr. Michael H. Wiehen is the Director of the ECI Department where the Project has been processed. Mmes. Anne Haldar and Erlinda Inglis provided assistance in the preparation of the report. h This document has a restricted distribution and may be used by recipients only in the performance of their office duties. Its contents may not otherwise be disclosed without World Bank authorization.  V. PROJECT JUSTIFICATION ........................................ 45 A. Rationale for Bank Involvement ........... ....................... 45 B. Forecast Sales ............................................. 45 C. Least-Cost Analysis . ........................................ 46 D. Project Benefits ............................................ 46 E. Macroeconomic and Structural Adjustment Linkages ..................... 47 F. Project and Other Risks ........................................ 48 G. Sustainability ............................................ 49 VI. AGREEMENTS REACHED AND RECOMMENDATIONS .................... 50 ANNE. Annex 1.1 Energy Sector Organization Chart Annex 1.2 Primary Energy Sources and Uses Annex 1.3 Energy Price Movements and Comparisons With Import Parity Prices Annex 2.1 Overview of Romania Geology and the Potential for Oil and Gas Annex 2.2 Projections of Oil and Gas Production Annex 2.3 Government Strategy for the Petroleum Sector Annex 2.4 Forecast of Sectoral Gas Consumption Annex 3.1 Project Cost Estimate and Financing Plan Annex 3.2 Technical Assistance Matrix Annex 3.3 implementation Schedule Annex 3.4 Procurement Plan and Schedules Annex 3.5 Disbursement Schedule Annex 3.6 Bank Supervision Input into Key Activities Annex 4.1 Organization Structure of NAMR Annex 4.2 PETROM: Cash Flow Actual and Fore,ast Statement Annex 4.3 ROMGAZ: Cash Flow Actual and Forecast Statement Annex 4.4 CONPET: Cash Flow Actual and Forecast Statement Annex 5.1 Internal Economic Rates of Return Calculation Annex 5.2 Resource Mobilization Annex 6.1 Selected Documents in Project Files MAPS: IBRD - 24875 IBRD - 24876 IBRD - 24877 IBRD - 24962  ROMANIA PE.OLE3UM SECTOR REHABILITATION PRO0JE!CT 1. MACROECONOMIC AND SECTORAL SEING A. MaeC Setting 1.01 Romania is one of the largest of the former centrally-planned economies in the Central and East European Region with a land area of 237 thousand square kilometers and an estimated population of 23 million. Per capita income in 1990 was about US$1640 but decreased to US$1080 in 1992. The Communist Party which seized power in 1947, installed central planning as thc system of economic management, and nationalized most privately-held property. In the early fifties, it instituted a strategy of self-sufficient industrialization. Building on its significant endowment of domestic hydrocarbon resources, estimated at that time at about 800 million tons of oil equivalent (TOE), the country invested heavily in export-oriented industries including, refining and downstream chemical plants and established a very large machine-building industry. Despite a lack of attention to consumer goods industries and the service sector, and a development pattern highly intensive in the use of energy and raw materials, the strategy was reasonably successful in attaining rates of growth averaging between 6-8 percent per annum until the late seventies. However, since prices played little role in restraining demand and energy supply was determined by the needs of industry (the primary consumer) to satisfy production targets, there was little incentive for industry to use energy efficiently. The result has been a highly energy intensive production sector. Romania's gross primary energy intensity of about 1.9 TOE per US$1,000 GDP, is among tive highest in Central and Eastern Europe, and is about three times that of the OECD Europe average. 1.02 In the aftermath of the second oil shock (1979), Romania had difficulty servicing its external debt. The sudden withdrawal of short-term foreign credits prompted a decision to prepay all foreign debt, a process completed in 1989. The resulting import compression had deep negative economic and social consequences for the nation. The importation of modern machinery and equipment was almost completely halted, leaving a technologically obsolete and depreciated capital stock which was energy inefficient. Little room was allowed for imports of raw materials, and industrial growth slowed substantially. While investment remained high during the eighties, by far the greater part was channelled towards existing, inefficient industries. Electricity and heat, as well as the oil and gas produced, were diverted away from households to supply energy for the industrial export drive. The end of the decade witnessed an increasingly demoralized and weary population, profoundly isolated both politically and socially from the rest of the world, and with declining industrial production. 1.03 Following the overthrow of the Ceaucescu regime in December 1989, a new Government was sworn in May 1990, which immediately initiated a sweeping reform program aimed at moving Romania into a market economy. The reform program included the initiation of several stages of price liberalization to progressively reduce the scope and role of government in setting commodity producer and consumer prices in the economy; redefinition of the role of government to give enterprises more autonomy; the initiation of commercial orientation in the enterprises by reclassifying the enterprises into "regies autonomes" (RAs) and "commercial companies" (CCs) with the intent that the latter be privatized; and the development of a national social safety net program that would include unemployment compensation, family assistance and pensions. 1.04 In addition to these reform programs, and in order to address macroeconomic imbalances, the Government of Romania (GOR) adopted a stabilization program in early 1991 which was supported  - 2 - by a Standby Arrangement with the IMF. Furthermore, specific structural adjustment measures were agreed to with the Bank and for which the Bank provided assistance under the Structural Adjustment Loan (SAL)(Loan No. 3481-RO) for financing balance of payments requirements; and under the Technical Assistance Critical Imports Loan (Ln. 3363-RO), for the importation of critical items such as crude oil, petroleum products, equipment and materials. As part of the agreed stabilization program, a stringent fiscal target was set, with a revised deficit not to exceed 2.4% of GDP (in 1991). 1.05 The stabilization efforts have, however, been undermined by the large enterprise arrears, which rose to about 85% of GDP at the end of 1991, and were caused by, inter alia, the fast pace of price liberalization, a tight credit program which failed to provide for the huge increases in requirements for working capital, lack of clear arrangements for interest on arars, etc. As a result, in late 1991, Parliament passed the Law on Settlement of Outstanding Payments (Law 80) instructing the National Bank of Romania to address the arrears problem and clear the "blockage" of payments. The implementation of this law has been slow and inter enterprise arrears stiil exist, and are currently estimated at 20% of GDP. 1.06 The costs of stabilization and reform over the last three years have been high, greatly exacerbated by th! collapse of the Council for Mutual Economic Assistance (CMEA) trading block, the Gulf crisis and the turmoil in Yugoslavia have severely disrupted external trade. Overall GDP declined by an estimated 15% in 1992, following a decline of 14% in 1991. Industrial output fell by over 40% through 1991 and continued to fall in 1992. Exports and imports have roughly halved in value since 1989, and the economy faces serious difficulties in financing its energy, raw material and food requirements. Consumption declined by 26% in reai terms in 1991 and investment by 30%, bringing the overall decline in investment for the last two years to over 60%. Since the process of price liberalization began in October 1990, prices had, by September 1992, increased by a factor of nine. Furthermore, the large and growing fiscal and quasi-fiscal expenditures that have emanated from the state enterprises and banks, which have been financed off budget, have contributed to inflationary pressures'/. Inflation has averaged 200% in 1991-92 and approaching 300% in 1993; the exchange rate has depreciated over 7400% since early 1990; unemployment has risen to 9% of the labor force; while real wages have fallen by about 30%. 1.07 The continued declines in known reserves of oil and gas, lower production of coal and lignite resulting from deteriorated mining equipment and obsolete technology, declines in electricity production due to outdated and rundown conditions of the power generating plants, and the unavailability of foreign exchange to finance energy imports, have all contributed to supply shortages to meet demand even in the depressed state of the economy. Therefore, the success of the reform process will be highly dependent upon the rate at which the country mcves towards a better rationalization of energy consumption and more reliable and efficient ei.ergy supplies in both the near and medium-term. In addition, Romania's past industrialization policy poses a constraint to achieving rapid transformation of the economy in that it was based on the development of large energy intensive and inefficient industries that depended fundamentally on the relatively abundant domestic energy resources, cheap imports of gas from the former USSR, and bilate.al barter deals with other members of the former CMEA. This policy would need to be changed and the industrial sector restructured to reflect efficient utilization of energy resources. I/ Economic Review, Prepared for the HMeting of tho G-24 and World Bank Consultative Group on Romania, May 10-11, 1993,  -3 - B. The Enery Sector Energ Re 1.08 Romania's commercially exploitable domestic energy resources estimated at about 1,697 million TOE, consist of natura! gas, estimated at 517 billion cubic meters (443 million TOE) of proven reserves and 28 billion cubic meters (24 million TOE) of probable reserves; lignite, 3 billion tons (600 million TOE); hard coal, S00 million tons (330 million TOL); oil, 200 million tons of proven reserves and an estimated 100 million tons of probable reserves2/, and a total hydropower potential of about 40 Terawatt-hours per year, with only 12 terawatt-hours per year developed. Oil shale reserves are known to exist, but because of technological constraints, their commercial exploitation would remain uneconomic for the foreseeable future. Renewable energy resources in bio-mass and fuel wood are abundant, v%hile geothermal, wind and solar energy are of relatively less significance. Uranium exists in Romania, but the level of reserves are not published. However, the Government's nuclear program is based on using this resource as the main source of fuel. Institutional Setting 1.09 The Ministry of Industries (MOI) has the overall responsibility for the energy sector. Operational responsib.lity rests with the sector RAs and CCs. The RAs and CCs have been formed out of the erstwhile "Centrals" which were essentially departments of the various ministries. RAs are state corporations for the subsectors considered strategic by GOR, such as power, oil, natural gas, lignite, coal, etc. The CCs are joint stock companies which have been established under the commercial law. GOR's economic liberalization initiative includes the privatization of most of the approximately 6,000 CCs and partial privatization of RAs by spinning off their auxiliary functions. 1.10 There are five RAs in the energy sector which are: (a) RENEL dealing with power generation, transmission and distribution in addition to heat energy production (as a byproduct of thermal power generation) and distribution (mostly through regional distributors); (b) PETROM responsible for the production of oil, as well as associated gas, both offshore and onshore, in addition to promotion of private investment in selected oil-prone blocks; (c) ROMGAZ, which is responsible for the exploration, production, transmission and distribution of non-associated gas in addition to the transmission and distribution of associated gas (from PETROM operation); (d) RAL, responsible for the mining and distribution of lignite; and (e) RAH, responsible for the mining and distribution of hard coal. Complementing the work of the five RAs are about 45 CCs in the sector, including RAFIROM, which coordinates the operation of Romania's 10 refineries, ROMPETROL which deals with Romania's international operations in oil and gas in foreign countries; CONPET which transports and stores all domestic and imported crude oil, as well as refined products, gas condensate and ethane; PROSPECTIUNI which does seismic acquisition, processing and some interpretation work for PETROM and ROMGAZ; PETROSTAR which does engineering design of surface facilities and offshore platforms, design of pipeline and surveying of routes; ROMELECTRO which deals with the importation of power, as well as the engineering of power plants; and GEOMIN which deals with the importation of minerals such as coal and lignite. The organization structure of the Energy Sector is given in Annex 1.1. 1.11 All of the above agencies suffer from common systemic problems which include, inter alia: (a) government micro management of the agencies ranging from controls over prices and profits, to day-to-day affairs; (b) inefficiencies in operations resulting from the lack of commercial orientation; j/ Based on Romanian estimates. There is an ongoing Bank-financed study under Loan 3363-RO to verify these estimates.  (c) lack of financial accountability and the absence of sound investment decision-making procedures; (d) overlapping responsibilities of agencies and departments within agencies; (e) over-employment; and (f) the absence of a competitive environment that would foster operational efficiency and flexibility. There is, therefore, a need to restructure the sector and the entities in order to achieve efficiency and improve management capabilities as well as promote and encourage private sector investments which are essential to supplement public sector investment in the efficient development of the sector. In line with these objectives, the Government with the assistance of the Banlk has developed an overall strategy for the energy sector. Specific issues relating to the petroleum subsector are discussed in para. 2.21. The proposed Petroleum Sector Rehabilitation Project would provide assistance to the Government and the entities for resolving these issues in the context of the agreed strategy (para. 3.01). 1yaior Trends in the ConsuMption A Suppl of Ener 1.12 Energy conamption in Romania has been dictated by the past industrial policy that focussed mainly on export-oriented high energy intensive industries. As a result, the industrial sector which accounts for about 55% of GDP, has remained the dominant consumer of energy resources. In 1990, it accounted for about 76% of total energy consumed followed by households at 13.4%, transportation at 5.5, agriculture at 4 5% and others including construction activities at 0.6%. In 1989, total net energy consumed peaked at 76.4 million TOE and has been on a steady state of decline since then. The trend of primary energy sources and uses during the period 1980-1990 are summarized in Annex 1.2. 1.13 Domestic energy production in the form of oil and natural gas has accounted for a major portion of the country's primary energy supply. In 1980, oil and gas accounted for 22% and 56%, respectively, of domestic production of energy resources. Their level of contribution declined slightly to 18.5% for oil and 55% for gas in 1990 due to the decline in exploration and production activities and the inefficiencies in oil and gas transmission and distribution. 1.14 Total losses in transformation, transmission and distribution amounted to about 25% of primary energy supply in 1985, declining to about 20% in 1989 (attributable to increases in capacity utilization), but increased again to within 25% in 1990, due primarily to disruption in economic activity and capacity underutilization in industry and oil refining. Compared to OECD countries, energy transformation losses in Romania are about 3-5 tim:.s higher, mainly due to inefficient technologies and inadequate maintenance of capital stock. Romania which was an energy exporter in the 1970s, has now become dependent on imports to satisfy demand. The energy imports mainly in form of crude oil and gas which amounted to 8.3 million TOE (or 15% of total consumption) in 1980 steadily increased to 15.8 million TOE (or 30% of total consumption) in 1989. Projected Demand/Supply Balances 1.15 Growth in energy demand in Romania would depend on the developments in the major economic sectors, especially in the industrial sector. Bank estimates that economic recovery would begin in 1996, with the economy bottoming out in 1994, and growing at about I % in 1995, reaching an annual average of 2.8% in the period 1997-2001 3/. Energy demand would, therefore, be influenced by: (a) the extent and duration of the decline in GDP associated with industrial restructuring and the pace of GDP growth; 3/ Country Assistance Strategy Review 1994.  - s - (b) shifts in the structure of the economy brought by the reform process, especially a shift from energy intensive to lighter, and consumer-oriented produ(cts; (c) efficiency improvements in energy utilization; and (d) economic pricing for energy resources. 1.16 Based on these factors, total final energy consumption is forecast to decline from 63.6 million TOE in 1990 to 49.3 million TOE by 1995 and increase to 51.6 million TOE by the year 2000. The share of energy consumption of the industrial sector will decline by four percentage points from 72% in 1990 to 68% by the year 2000. The share of the services sector will increase from 6.19% in 1990 to 12% by 2000. The share of the agricultural sector will increase modestly from 4.5% in 1990 to 5.5% by 2000. The share of the household sectoL will remain unchanged at 13.4%. Table 1. 1 summarizes the forecasts of relative shares of sectoral consumption of energy. Tanbb 1.1: Forecast of Demwnd Ud SuDOV of Prlmarv Fuels l ________________ __________ (milN on TOE) Sources 1989 1990 1996 2000 Domesilc OUIDUt Crude Oil 9.2 8.3 6.9 6.2 Natural Gms 27.3 23.5 15.3 12.0 UgnIe and Coal 12.8 7.7 5.2 5.2 Eb0eCc HydropoWer 3.3 9 2.9 2.9 Toal 52.6 42.4 29.9 26.0 Domeslc ConsumDtlon Induslry 59.9 47.5 35.5 37.0 Agrlculture 3.0 2.9 3.0 3.1 Houshols 7.4 8.6 6.0 6.3 SeAce Sector 4.1 4.6 4.8 5.2 Toal 74.4 63.6 49.3 51.6 Net Imports Crude ON 8.8 7.7 7.9 10.3 Nturl Go 6.0 6.0 4.0 4.8 Coal and Coke 5.0 5.0 5.0 5.0 Eldrecfty 2.0 2.5 2.5 2.5 Total 21.8 21.2 19.4 25.6 Source: Ministry of Induslrle wid MIsson Estmae. 1.17 Forecasts of the expected contributions of various primary fuels to supply were based on historical shares of total primary energy supply (Annex 1.2)4/. Romania is anticipated to continue to be a net importer of na.ural gas and crude oil in the foreseeable future. However, the level of net imports would be dependent on possibilities of discovery of new economically productive oil and natural gas fields and increased production from enhanced recovery techniques currently under consideration. Hard coal imports would increase to substitute for domestic production, which is expected to decline gradually in line with the strategy to phase out hard coal mining over time, as most of the deposits are uneconomic. j/ The expected contributions of primary fuels do not take into account cross substitutions among various fuels made possible mainly by industrial restructuring, especially the substitution of natural gas for heavy fuel oil and lignite for power generation.  Hydropower contribution to energy supply has been projected at the level of average production over the last decade on the assumption that the uncertainties in hydrological inflows in the last decade would be about the same over the next decade. The relative roles of domestic production and imports in meeting future primary energy supply will, therefore, depend on the level of demand dictated by the extent to which industrial restructuring takes place, and the economic merits of domestic production versus imports. Nevertheless, even in a best case scenario for energy conservation whereby unit demand for energy is reduced by half, Romania would continue be an importer of energy, particularly petroleum. Energy Pricing and Taxation of Energy Products 1.18 Structure and Level of Energy Prices. Before the revolution in 1989, energy prices in Romania were maintained at low levels and below economic costs and international prices. This was partly due to the barter trade and cheap energy imports from the CMEA countries and partly to subsidize energy input to the industrial sector. These factors have led to several serious consequences. Firstly, energy resources utilization was inefficient and domestic resources, particularly, the oil and natural gas resources, were being steadily depleted and the country's dependence on imports increased considerably. Secondly, as lignite production increased to fill the gap, lower quality of lignite was being used more and more resulting in adverse effects on the environment as well as the efficiency of electricity generation. The attempt to save energy for industry and exports has also led to the deprivation to the households sector of its needs for energy. 1.19 After the revolution, the Government attempted to adopt a pricing policy that would liberalize most energy prices to all consumers except households and reduce subsidies. In November 1991, the Government promulgated the pricing decree (Decree 776) which stipulated that prices are to reflect international equivalents. As a result, between 1991 and 1992, there were significant increases in energy prices although these were obscured by the rapid devaluation of the lei. In order to ensure that proper level of pricing was maintained, the Government agreed with the Bank under the SAL and with IMF under the Standby Arrangements to: (a) increase the consumer prices of crude oil (to the refineries), electricity, coal, and lignite to world market levels; (b) continue to maintain these prices at approximate parity with world market prices; (c) raise the consumer price of gas to 55% of the price of imported gas from the former Soviet Union (FSU); and (d) increase the price of gas at 10% per quarter in real terms until parity with international prices is reached. As (a) and (c) were conditions of release of the first tranche of the SAL, the Government complied. However, very little was done until May 1, 1993, when the Government again reviewed its energy pricing policy with the Bank with a view to meet the conditions for the release of the second tranche of SAL and agreed on a review mechanism for modifying its pricing and taxation policies. As a result of this review, on May 1, 1993, the Government drastically reduced its subsidies on most energy products as a means of reflecting the true cost of energy resources to consumers. Furthermore, the Government increased the energy prices (other than natural gas) to full parity with the border price levels as of May 1, 1993; and agree to adjust them automatically every month to reflect changes in world prices at the market exchange rate. For natural gas, the Government agreed to initially increase the consumer price of gas to the Lei equivalent of $50 in June 1993, and thereafter, to increase it monthly by $4/1000 cu.m. until full parity with the border price of heavy fuel oil of 1% sulphur conent on a heat equivalent basis is achieved. As of November 1993, the obligations on petroleum products pricing and on natural gas price adjnstments have been met. Annex 1.3 summarizes the movements and timetables of price adjustments from November 1990 through December 1, 1993. 1.20 Taxation of Energy Resources. The taxation system for energy products had created further distortions in the structure and level of energy pricing both at the consumer and producer levels. Firstly, petroleum products, except natural gas and crude oil, which were major inputs to industry and power plants, and also those used primarily by households were tax exempt. Secondly, for domestic crude oil, a turnover tax of about 110% was levied on the production cost in order to raise its price to  - 7 - the refineries to parity with the imported equivalent, while for domestically produced gas the turn over tax was about 60%. Thirdly, an exchange rate lower than the market exchange rats was used for calculating the final producer price to domestic producers of these resources. As a result, the producer price of crude oil paid to PETROM and for natural gas paid to ROMGAZ remained well below international prices. For example, in 1992, the producer price for crude oil was US$91/ton using an average exchange rate of 308 Lei/USS as compared to the import parity price of US$133/per ton. For gas it was US$40.0/1000 cubic meters as compared to the import price of US$76/1000 cubic meters. This has contributed to the inability of PETROM and ROMGAZ to generate enough funds to implement exploration for new reserves or maintain their production levels. As part of the dialogue with the Bank, the Government has modified its taxation and producer pricing policy to eliminate these distortions. The producer price for domestic crude has been increased to the FOB price of similar quality crude in the Mediterranean Region; and for gas the producer price has been increased to parity with the FOB price of fuel oil (thermal equivalent) in the Mediterranean Region at the market exchange rate. In addition, the variable excise tax on oil and gas production has been replaced by a fixed royalty on gross production (para. 2.23). These actions are considered necessary to improve the capability of the entities to generate funds for investments and maintenance. 1.21 Bank Assistance Strategy. After the renewal of Romania's relationship with the Bank, the Bank has played a catalytic role by providing policy advice. economic work and continuing technical assistance in almost every aspect of the reform program. Several strategic objectives are now being pursued by the Bank in support of Romania's reform and adjustment programs: first, the Bank is supporting the stabilization effort, particularly in the areas of price liberalization, achieving budgetary stability, and helping mobilize international financial support; second, it supports systemic reforms, particularly in creating the institutions fundamental to the operation of the market economy: this includes establishing property rights, privatization, tax and tariff reforms, establishing a modern financial system, strengthening the social safety net, developing legal institutions, and improving public administration; third, the Bank is helping with the process of sectoral restructuring and adjustment, particularly in securing the required structural changes in the industrial, agricultural and energy sectors; and fourth, the Bank is assisting Romania in instituting overall management improvements and measures to address environmental issues by ensuring that specifically designed environmental components (pollution reduction, technical assistance/institution building) are incorporated in each of the planned sector operations. Finally, the Bank is providing assistance in education, social welfare, and infrastructure which is being pursued to further long-term growth and development prospects. 1.22 Within the framework of such overall assistance strategy, the Bank's assistance to the energy sector will be geared to support the Government's reform and rehabilitation efforts in the energy sector. The proposed Petroleum Sector Rehabilitation Project is the first lending operation directed wholly towards the energy sector in general and the petroleum subsector, in particular. Although major problems exist throughout the petroleum subsector (which includes exploration, production, transportation, purification of gas, refining of crude and distribution of liquid and gaseous hydrocarbons and their derivative products), the proposed Project is aimed at the upstream end of the petroleum subsector, i.e., at all subsector activities except refining and retail distribution of gas and petroleum products. This is because: (a) the import of petroleum resources is the major contributor to the balance of payment deficit and, in spite of the significant domestic hydrocarbon potential, the unavailability of foreign exchange to acquire modern technology and equipment hinders the realization of this potential; hence, any assistance to reduce the rate of decline and realize even a part of such potential will have immediate beneficial impact on the economy through the reduction of dependence on imports; and (b) inclusion of the downstream activities would render the proposed Project an excessively complex operation, posing a significant risk to its implementation. However, in addition to the proposed Project the Bank has completed several subsector reviews addressing the issues in the other energy subsectors (e.g. power). The implementation of an overall energy sector strategy will require external financial  resources. Accordingly, planned Bank lending includes a Power Sector Rehabilitation and Modernization Project (FY96) which is aimed at improving the output and efficiency of the existing thermal power stations, corporate restructuring of the power utility (RENEL) and at addressing environmental issues in the power subsector; a "downstream' petroleum subsector project (FY96), which will involve rehabilitation and expansion of the gas distribution system, and restructuring and rehabilitation of the refinery industry; and an offshore petroleum development operation and a coal sector rehabilitation/restructuring operation tentatively planned for FY97/98. 11. PEMOLEUM S&SECMI A. Institutional Fnmewok 2.01 The Ministry of Industries (MOI), created in 1990, is now responsible for all policy- making and regulatory functions of the former Ministry of Petroleum, Geology and Mines. MOI is divided into 11 divisions each headed by a Secretary of State, reporting to the Minister of Industries. The Secretary of State for the Energy Sector (who has the responsibility for power, among other things) will have the principal role in setting the policies for the sector, while the Secretaries of State for Restructuring, Strategy and Reform; and for Management, Legislation, Human Resources and Administration will make sporadic interventions, particularly during the sector restructuring phase5/. The Secretary of State for energy has several departments under him, each headed by a director. One such department is for oil and gas, which will be responsible for policy recommendation and for monitoring the effectiveness of adopted policies. Most of the exploration, production and transportation activities (formerly conducted directly under the Ministry) have now been assigned to RAs or to commercial companies. These companies now employ many of the same people who formerly worked directly under the old Ministry, and they perform most of the same functions, albeit under different organizational structures. 2.02 Other GOR Ministries involved in the petroleum sector are: (a) the Ministry of Economy and Finance (MOI-) which, through its Pricing Office, sets prices of all petroleum products in Romania and is represented on the Administrative Councils of each of the RAs in the petroleum sector; (b) the Ministry of Commerce and Tourism which is also represented on RAs Administrative Councils; (c) the Ministry of Environment, which has an embryonic but growing role in controlling environmental pollution in the country; and (d) the Ministry of Labor and Social Protection, which is concerned with worker health and safety issues, and with the social impact of any significant staff reductions resulting from reorganizations. Opetional Entities Involved in the Petroleum Sector 2.03 Operational responsibility in the upstream end of the petroleum sector is vested in a number of entities. Principal entities and their main activities are described briefly in the following paragraphs, and details are given in Chapter IV. 2.04 PETROM R.A.(Bucharest). This is the main oil exploration and production (E&P) company in Romania. PETROM is horizontally integrated and it currently has a staff of about 64,000. In addition to crude oil exploration and production onshore and offshore, PETROM used to perform its own drilling, work over activities and civil engineering, pipeline laying and several other oil field / The remaining 8 Secretaries of Stato deal with tho various industrial subsectore such an smtallurgy, textiles, machine building, electronics, etc.  - 9 - activities. However, as of 1992 PETROM's departments responsible for these activities have been spun off as local service companies which now operate as independent contractors to PETROM. Exploration geology and geophysical interpretation are still performed by PETROM's own geological staff and through contracts with the Institute for Research and Technology (ICPT) at Cimpina which is a subsidiary of PETROM. Geophysical data acquisition and processing is contracted to PROSPECTIUNI. 2.05 ROMGAZ R.A. (Medias). This is the other RA responsible for E&P in gas prone areas. It is vertically integrated and currently has a staff of about 21,500. Its responsibilities include: exploration and production of non-associated gas, mnostly in the Transylvanian basin; drilling and work over activities; transportation and distribution of all domestically produced and imported natural gas from FSU; transportation of imported gas to Turkey and Bulgaria from FSU; transportation of foreign gas purchased directly by certain end-users; and operation of a Gas Research Center, which does, amcng other things, studies of the gas-use efficiency of existing and prospective industrial users. 2.06 CONPET S.A. (Ploiesti). Transports and stores all domestic and imported crude oil, as well as, natural gas liquids and ethane. It operates a 4500-km pipeline system and rail tank cars. 2.07 PROSPECTIJNI S.A. (Bucharest). This is a domestic Geophysical Prospecting contractor, which does seismic acquisition, processing and some interpretation work for PETROM, ROMGAZ and the Directorate General of Geology. Also has gravity and magnetic capabilities, as well as a separate mining exploration group. 2.08 ROMPETROL S.A. (Bucharest). Now a commercial company, this is the former State Oil Company which explored outside Romania. It has done work in Iraq and Syria and is still active in Libya. Until now, GOR had designated ROMPETROL to handle negotiations with foreign companies seeking exploration contracts in Romania. It may also be GOR's nominee if GOR exercises its 20% participation option in the four contracts which had been initialled with foreign oil companies in 1992. 2.09 PETROSTAR S.A. (Ploiesti). Engineering design firm which does contract feasibility studies, both in and outside Romania; design of surface facilities, including offshore platforms; design of pipelines and surveyiiig of routes; and economic analysis of large petroleum-related projects. 2.10 Foreign Petroleum Companies. GOR has negotiated and initialled agreements for E&P activities with four international oil companies (IOCs) and these companies have started data acquisition and analysis in their respective concessions. The companies are: Shell Oil Company; Enterprise Oil Company; AMOCO; and Canadian Occidental. Their contracts stipulate exploration for structures in the deep horizon (at depths greater than 3,500 meters). They are the first foreign companies to enter into risk contracts in the upstream sector in Romania since the expropriation in 1948 of Shell's assets in Romania. B. Historical Trend in Petroleum Supplv and Demand 2.11 Oil was first discovered in Romania in 1857, and since then, the petroleum industry has become the major source of domestic energy. Domestic oil and gas production accounted for about 11 % and 30%, respectively, of total consumption of primary energy estimated at 63.6 million TOE in 1990. Annual production of oil which peaked in 1976 at about 14.7 million tons of oil declined by 46% to 6.8 million tons in 1991, while gas production that peaked at 39.6 billion cubic meters (BCM) or (33.9 million TOE) in 1986, declined by 41% to 23.2 BCM (or 19.9 million TOE) in 1991. The steepest declines in oil (26%) and gas (30%) production have occurred since the 1989 revolution.  - 10- 2.12 Romanian estimates of the original proven oil reserves in place was about 800 million tons (about 6 hillion harrels) with probable reserves of about 100 million tons (750 million barrels). For gas, the estimates of proven original reserves in place were about 1500 billion cubic meters (BCM) or 128.5 million TOE, with probable reserves estimated at about 200 BCM or 170 million TOE. As of 1991, the cumulative production of oil was about 600 million tons and about 900 BCM of gas, which implies that about 200 million tons of oil and 600 BCM (or 510 million TOE) of gas (based on Romanian estimates) of proven reserves could still remain to be recovered in both the shallow and deep horizons. Assuming that these estimates are confirmed (para. 1.08), the lack of modern technology and equipment, particularly good quality and reliable subsurface production equipment would limit the capability of the national E&P companies to increase production or to produce these remaining reserves efficiently and economically. The current average recovery factor is about 25% but PETROM believes that with the application of modern technology and high quality equipment, the recovery factor can be increased to 31 %. The annual production rate declined at an average of 10% per year from 1989 to 1992 from 9.2 million tons per year in 1989 to about 6.8 million tons per year in 1992. The rate of decline was reduced to about 3% between 1992 and 1993 and production in 1993 has stabilized at 6.7 million tons for crude oil and 22 BCM for natural gas. Since 1975, addition to reserves has not kept pace with the depletion due to the limitation of the national E&P companies to explore deeper and more geologically complex horizons for which the application of modern exploration and extraction technology is required. Moreover, the bulk of Romanian oil and gas production are from old shallow fields (at depth less than 3500 meters) developed in the sixties and are now undergoing extensive secondary recovery operations, such as water and gas injection, which have also passed their peaks. About 4 million tons per year, or 67%, of current domestic oil production is attributed to secondary and tertiary enhanced oil recovery (EOR) processes being applied in almost all the fields. In addition, most of the fields suffer from corrosion and sand problems that have inhibited any increase in production. PETROM and ROMGAZ have initiated several measures to address these problems including using the services of reputable contractor companies. However, the lack of foreign exchange has limited the number of such contractual services. 2.13 The pattern of petroleum supply and consumption over the past 20 years in Romania is summarized in Table 2. 1. The growth rate of oil consumption during the seventies, although sporadic, averaged nearly 8% per year for 1971-1978, and generally exceeded that of the overall energy consumption. In the eighties, stringent restrictions were put on oil consumption for public and private use, so as to ensure adequate supply to power and the industrial sectors. During this period, the oil consumption was held relatively steady at about 25 million tons per year, equivalent to about 42% of total energy use. After the revolution in 1989, and the continued reduction in industrial productivity, consumption declined to about 16 million tons in 1990, equivalent to 40% of energy use. 2.14 The rapidly growing demand in the seventies, combined with the decline in production, led to Romania becoming a net oil importer in 1976. In 1980, net oil imports reached 7.3 million tons or about 38% of domestic consumption and peaked by 1989 at about 9.8 million tons or about 48% of domestic consumption. In 1989, the transport sector was the main consumer of oil in the form of diesel oil and gasoline, at about 36.2% of total consumption, followed by the industrial sector at 27.2%; power sector at about 21.2% mostly in the form of fuel oil and diesel oil; agriculture at 12.2 % and residential at 3.2%, respectively.  - I1 - Tabee 2.1: Pvmrwy Supply and Consumption of Petroleum 1esources (1970- 1990) 1970 1975 1990 1986 199 190 | Oil (millon metric tons) DostIk Production Crude ONl 13.4 14.7 11.5 10.71 9.2 7.90 Natural Gas- Uquls 0.4 0.4 0.4 0A 0.4 Subtotal 13.8 15.1 11.9 11.11 9.6 8.3 Imports - Crude ON 2.3 5.1 16.2 14.6 21.8 16.1 Exports - Petroleum Products 5.4 _2 811 9.1 12.0 J84 Net Domestic Consumption 10.7 13.9 19.2 16.6 19.6 16.0 8. Natural Gas (billon cubic meter (bcm)) Domestic Production Non Associated Gss 20.0 27.0 25.5 31.9 26.3 22.1 Associated Gas 5.3 6.3 7.0 7.0 7.0 5.3 Subtotal (BCM) 25.3 31.6 32.5 38.9 32.8 27.4 Imports . . 1.6 1.8 7.0 5.8 Expots 0.2 0.2 0.2 0.0 0.0 0.0 Net Domestic Consumpti0n(BCM) 25.1 31.4 36.6 40.92 39.8 26.6 (million TOE) 20.9 26.2 30.5 34.1 33.2 23.8 TOTAL (A+ B)(n m_on TOE) 31.6 40.1 49.7 50.5 52.7 39.8 Source: World Bank Erwgy Secor Stratgy PevIew and Robmaan Ministry of Irdustry (MOI). / 1 bcm of natural gas Is equivaent to 1.2 million TOE. 2.15 Natural gas has been the largest single energy source in the Romanian economy since the mid-sixties. Following a period of rapid growth between 1970-1980, domestic consumption fluctuated around 34 to 41 BCM4 (equivalent to 29 to 35 Million TOE). Romania is presently one of the largest users of natural gas in Eastern Europe. Prior to 1980, Romania was self sufficient in the domestic supply of gas. However, the lack of modern technology for increasing exploration and production led to a decline in domestic production and increased dependence on imports particularly from FSU countries. The recent political and social problems in FSU have adversely affected the reliability of future imports, although FSU still remains the main supplier of gas to Romania. Currently, domestic production accounts for about 80% of total consumption. In 1989, the main consumer of gas was the industrial sector (mainly for fertilizer and petrochemicals) at 59% of total consumption, followed by power at 29.5%; residential at 7% and agriculture and others at 4.5%, respectively. Table 2.2 below summarizes the sectoral consumption patterns for oil and gas in 1989.  - 12 - Table 2.2: Sectoral Consumption of Oil and Gas in 1989 l _________________ (Thousand Toe) Oil % Gas __% Sectors Power 4144 21.2 9510 29.5 Industry 5330 27.2 19110 59.0 Transport 7084 36.2 - Residential 628 3.2 2170 7.0 Agriculture and Others 2394 12.2 1470 4.5 TOTAL 19580 100 32260 100 Forecast for Oil and Gas Demand and Suppily 2.16 About 80% of the oil is consumed in the form of fuel oil, diesel oil (in the power, agriculture and the industrial sectors) and the rest in form of gasoline (for transport) and kerosene in households. However, these components form only 60 to 70% of the virgin crude. Because of the high API gravity of the domestically produced oil, and hence a lower percentage of fuel oil and diesel oil content, Romania has to import crude oil of lower API gravity to produce the needed fuel oil and diesel. The resulting surplus light distillates are exported. The implication of this is that expensive crude oil is imported to meet the domestic demand for low value fuel oil. The refining capacity, at about 34 million tons per year is substantially above Romania's domestic requirements and the refineries technical configuration precludes a match of production with domestic demand resulting in inefficient uti ization of refining capacity'/. In addition, because most of Romania's ten (10) refineries are old, they are inefficient and some should be mothballed while others need to be modernized. The Government intends to undertake a Refinery Sector Restructuring Study to recommend measures for addressing the issues in the refinery sector (para. 3.03). In forecasting the demand for oil, the following factors are considered pertinent: the availability of foreign exchange to import the required type of crude oil or petroleum products; the efficiency improvements in the refinery subsector; the ability to substitute other energy resources such as coal and natural gas in the power, industrial, and household sectors. Also important to demand of oil are &U'' rate and success in the implementation of the following activities: (a) the planned rehabilitation of the power generating capabilities as a means of improving the efficiency of production; (b) the restructuring of the industrial sector aimed at eliminating inefficient and energy intensive industries, and initiating energy conservation measures; (c) modernization and rehabilitation of the gas transmission and distribution systems in order to increase the substitution of gas for high value petroleum products particularly in the residential sector; and (d) the modification of the structure of pricing of energy resources as a means of rationalizing consumption and generating resources for the sector. Some of these activities are included in the actions to be initiated under the proposed Project. 2.17 On the basis of anticipated continued decline in industrial production and efficiency, the demand for crude oil is forecasted to decline from the level of about 16 million tons in 1990 to 14.8 million tons in 1995, after which it would increase by about 2.2% from 1995 to 2000 and 5% thereafter. A similar rationale has been used for forecasting demand for gas since the main users are power and the industrial sectors. However, for natural gas, the annual gas consumption would decline from 33.2 BCM (or 28.7 Million TOE) in 1990 to 25.8 BCM (or 22.5 Million TOE) in 1995, and slightly increase by 1.5% annually from 1995 to 2000, to 27.8 BCM (or 23.8 Million TOE); and then steadily increase 6/ Soma of tho excess refining capacity was used for toll processing.  - 13 - annually by 5% thereafter to 30.0 BCM (or 25.3 Million TOE) in 2005 and 38.3 BCM (or 32.8 Million TOE) in 2010, respectively. Although consumption of gas by the residential sector can be expected to increase, it is envisaged that this increase will be minimal by 1995, in that it would depend on the rate at which ROMGAZ is able to rehabilitate its systems and also connect residential consumers. This increase becomes significant from 2000 onwards in anticipation that more gas will be found and substituted in the overall economy to replace high value petroleum products which are imported. The forecast of sector gas demand is given in Annex 2.4, while the forecast of demand for oil and gas is summarized in Table 2.3 below. Table 2.3: roceW Purolum Demand/Supply Balance (19910 - 2010) (MIlbn TOE) l 1990 1995 2000 2006 2010 Domestlc Consumption 16.0 14.8 16.5 21.1 26.9 Domestic Suppty 8.3 6.3 6.2 6.0 6.0 Net Imponts 7.7 8.5 10.3 15.1 20.9 Gas ConsumptlIon 28.7 (33.2) 22.1 (25.8) 23.8 (27.8) 25.3 (30.0) 32.8 (38.3) Oomestic Supply 22.9 (27.4) 14.9 (17.4) 11.5 (13.4) 9.3 (10.9) 7.4 (8.6) Imports 5.8 (7.0) 7.2 (8.4) 12.3 (15.4) 16.0 (20.0) 25.4 (29.7) TOTAL DEMANO (Million TOE) 44.7 36.9 40.3 46.4 59.7 (I Values In ACM SuDDly of Oil and Gas 2.18 The potential areas meeting geological criteria favorable for oil and gas generation and accumulation covers about 125,000 square kilometers onshore and 16,000 square kilometers offshore on the Black Sea continental shelf. The prospective areas can be divided into six main geological zones, comprising: Transylvanian depression, Panomian Basin, East Carpathian Basin, South Carpathian depression, Moesan platform and offshore Continental shelf of the Black sea. The geological characteristics of each of these basins are summarized in Annex 2.1. 2.19 Since 1857, when oil was discovered in Romania, the shallow horizons (at depths less than 3500 meters) and areas which are not geologically complex, have been extensively explored and produced by the Romanians. Due to the limitation in the quality of equipment being used, PETROM and ROMGAZ are facing technical and operational problems that hinder maximum production from these horizons. PETROM and ROMGAZ would require the application of modern technology, equipment and materials if the rate of production is to be increased. From the results of few deep wells of up to 5000 metres drilled onshore and the exploration activities done offshore, prospective deeper horizons are known to exist with recoverable hydrocarbon reserves. Although PETROM has initiated several actions towards exploiting these reserves, the lack of foreign exchange to acquire modern technology and equipment (which are not available to the Romanian national companies, but which can be readily obtained from international oil companies and specialized oil services contractors), have limited the capability to exploit these reserves adequately and efficiently. The chances of increasing domestic production of oil and gas are therefore promising provided: (a) an incentive regime is implemented to encourage private sector companies, particularly International oil companies (lOCs), to undertake exploration activities, and to form joint-ventures with the domestic oil companies to facilitate the application of modern technology and technology transfer in the implementation of enhanced oil recovery in some of the geologically complex fields; and (b) foreign financing assistance is made available to the  - 14 - domestic oil companies to acquire equipment and materials for resolving the technical problems faced in the exploration and production of oil and gas. 2.20 The forecast of supply summarized in Table 2.3, with details in Annex 2.2, does not include addition to production from new fields, but is based on the assumptions that through the assistance to be provided under the proposed Project, PETROM and ROMGAZ would be able to reduce the rate of decline in production by implementing measures that would enhance production from the existing fields through the application of modern technology for enhanced oil recovery; improvements in the well completion practices, and procurement of high quality equipment and materials such as pumps, compressors, chemicals and tubulars for implementation of work over services on good producing wells, some of which are currently shut in. The level of production could be further increased through accelerated exploration activities, particularly in new areas and deep horizons (both onshore and offshore) with the assistance of IOCs. Currently, four lOCs (Shell, Amoco, Canadian Occidental and Enterprise Oil companies) have already signed three onshore and one offshore concession agreements for exploration for oil and gas at deeD horizons. Under the proposed Project, assistance would be provided in implementing an explornttion promotion program (para. 3.03), the results of which could lead to a higher increase than that forecist above, in the production of oil and gas as from 1997 onwards. C. Government Strategv for the Petroleum Sector 2.21 The main issues in the petroleum subsector include: (a) the critical need for capital investment in the sector to address the decline in exploration activities and production of oil and gas; and the poor maintenance of the infrastructure; (b) high level of inefficiency of the sector entities caused hy Government involvement at several levels of decision making; lack of autonomy and commercial orientation of the sector entities; and ineffective and outmoded decision making practices by the entities; and (c) the serious impediments to private sector investment due to the absence of a suitable legal framework; inappropriate model contracts and terms; and inappropriate producer pricing policies. 2.22 GOR, together with the entities in the Petroleum Sector, has formulated a comprehensive strategy, the Petroleum Sector Restructuring Strategy (PSRS), aimed at addressing the above issues. The PSRS was developed on the basis of the recommendations of a study which was undertaken by the Government with the help of consultants (a consortium of Bechtel, Arthur Andersen, Gaffney Cline, Wasteneys and Associates), under financing by USAID. The Terms of Reference for the study were approved by the Bank, and the Bank has been intimately involved in the development of this strategy. Details of the PSRS are given in Annex 2.3. The PSRS comprises the implementation of a set of integrated sectoral reforms. These reforms, which have been agreed with the Bank, call for: (a) institutional reforms of the sector aimed at limiting the role and function of the Government in the sector and to enhance the effectiveness of oil and gas exploration and production, especially by facilitating the entry of foreign investors; (b) adoption of appropriate legislation to implement above reforms including the creation of a regulatory agency (National Agency for Mineral Resources (NAMR)) independent of the Romanian companies operating in the sector, to be responsible for granting  - 15 - concessions, regulating corporate activities in the sector and enforcing the pricing policies; (c) restructuring of the main entities in the sector (including refining, petrochemicals and petroleum distribution) as a means of ensuring efficient management, corporate planning and commercial orientation; (d) development of a Safety Net program to cater for "surplus staff" that may occur as a result of the corporate restructuring of the entities; (e) rehabilitation and modernization of the oil and gas transmission and distribution pipeline networks as a means of enhancing the capability and efficiency of the systems; (f) instituting within the entities acceptable accounting principle's to ensure financial accountability by setting up financial criteria to which the entities can be held accountable; (g) development of a fuel policy for the rationalization of supply and demand of energy resources, including modification of producer and consumer pricing policies of energy resources as a means of resource mobilization for the development of the sector; (h) development of a comprehensive program for addressing environmental issues; and (i) undertaking a program for the promotion of oil and gas exploration and/or enhanced oil recovery (EOR), and establishing model production sharing agreements/contracts with foreign oil companies, either alone or in joint ventures with PETROM and ROMGAZ, the national oil and gas companies. Given the substantial technical assistance and investments required for the successful implementation of the above strategy, the Government will need to mobilize resources both from the private sector and from external donors. The proposed Petroleum Sector Rehabilitation Project is a aimed at assisting the Government and the sector entities in achieving the objectives of the strategy. Progress Towards Implementation of the Strategy 2.23 The Government and the sectoral entities have already taken the following important actions towards implementing the strategy. Firstly, the Government has issued a decree which: (a) modifies the producer pricing regimes for oil and gas for production from new concessions for all producers in Romania. For crude oil, the petroleum price will be set at the FOB price of similar quality crude in the Mediterranean Region using market exchange rates; and for natural gas, the producer price will he set at the border price of fuel oil using market exchange rates. Meanwhile, GOR has maintained the consumer prices of oil and gas at a level that satisfies the requirements under SAL (Loan 3481- RO); (b) modifies the taxation required on oil and gas production. The erstwhile variable (excise) tax on oil and gas production will be replaced by a fixed royalty tax on gross production, or gross production at market exchange rates; and  - 16 - (c) establishes the National Agency for Mineral Resources (NAMR), as an independent regulatory agency for regulating oil and gas exploration and production, transmission of crude oil, petroleum products and natural gas, petroleum refining, as well as distribution of gas and petroleum products. NAMR will report directly to the Cabinet. As a first and an important step towards making NAMR operational, GOR has qppointed the Chairman (Chief Executive) of NAMR. 2.24 Secondly, the Government has submitted to the Parliament for approval, a comprehensive Petroleum Law in order to codify and render permanent the provisions of the above decree's provision. Thirdly, the Government has undertaken, under the Technical Assistance Critical Imports Loan (Loan 3363-RO) and with assistance of consultants from the geological engineering firms of INTERRA and Harms & Brady, two studies for: (i) evaluation of oil and gas reserves (INTERRA); and (ii) evaluation of the hydrocarbon potential of the Romanian sedinentary basins (by Harms & Brady) On the basis of the recommendations of these studies, NAMR would develop a concession map that identifies areas to be demarcated as new exploration areas, which would be promoted to international oil companies. In addition, the Government has instructed ROMGAZ and PETROM to relinquish areas not being explored or currently produced and to provide this data to NAMR to be included in the areas to be promoted (para. 3.08). 2.25 In parallel, PETROM and ROMGAZ have already initiated their own corporate restructuring. To enable PETROM to focus on its core activity of exploration and production of oil and gas, PETROM has hived off its auxiliary oil field service activities such as drilling, well-logging and cementing, etc; which have been converted to independent contractor commercial enterprises. Similar actions have been taken by ROMGAZ which has also converted four of its subsidiaries for construction of pipelines and compressor stations, manufacture of gas meters, supply warehouse and technology and transportation to independent commercial enterprises. 2.26 To ensure that the implementation of the petroleum sector restructuring strategy is on track, the Government has agreed to: (a) maintain the producer prices for: (i) crude oil at levels eguivalent to the average FOB price of similar guality crude oil: and (ii) naturl gas at levels equivalent to at least the average FOB pDice of thermally eauivalent imported fuel oil (Dara. 6.01(a)): and (b) by December I of each year to: (i) prenare and furnish to the Bank for review and comments. a report. in form and substance satisfactory to the Bank, on the progress achieved in implementing the strategy based on the result.s of the monitoring and evaluation of activities performed and the recommended measures undertaken (para. 6.01(a)): and (ii) based on the conclusions and recommendations of the report. after incorporating the Bank's comments. update the strategy and subsequently implement the measures reguired to ensure the achievement of its objectives (para. 6.01(b)).  - 17 - 111. THE PROECT A. Poet OWjctlies 3.01 The proposed Project would: (a) assist the Borrower in achieving the objectives of its Petroleum Sector Restructuring Strategy to promote private sector investments in the petroleum sector, strengthen institutional capabilities and estzblish a suitable regulatory framework to facilitate the development of an efficient and commercially-oriented petroleum sector; (b) assist PETROM, ROMGAZ and CONPET in improving their operational efficiency, financial malhagement; and (c) assist in implementing abatement measures to address environmental pollution in the sector. B. Projc Compoen 3.02 The proposed Project components comprise: (a) for GOR/MOI: (1) Carrying out of a program to strengthen the policy making functions of MOI, including: (a) the development and implementation of: (i) a fuel policy; (ii) a pricing policy for oil and gas transmission and distribution; (iii) a strategy for restructuring and optimizing the refinery subsector operations; (iv) establishment of a regulatory framework for the petroleum sector; and (v) a strategy for upgrading the operations of the oil services subsector; and (b) the establishment and operation of an independent agency (the National Agency for Mineral Resources, NAMR) to function as the Borrower's regulatory authority for the petroleum sector; (2) Carrying out, through NAMR a petroleum exploration promotion program to facilitate the participation by international oil companies in oil and gas exploration and development and production investments, including the preparation of model exploration and production contracts for such participation; (b) for PETROM: (1) development and implementation of a corporate restructuring and development program with the objective of improving PETROM's organization, streamlining its operations and improving its financial condition and management; (2) upgrading selected production facilities, introducing modern production technology and workover of wells to improve their productivity; (3) implementing enhanced oil recovery techniques for the production of oil and gas on selected fields through cooperative arrangements between PETROM and international oil companies; (4) carrying out an environmental pollution abatement action plan for upgrading the waste water treatment plant at Suplacu and the environmental laboratory at Cimpina; and (5) provision of technical assistance, staff training, equipment, spare parts, materials and chemicals; (c) for ROMGAZ: (1) development and implementation of a corporate restructuring and development program with the objective of improving ROMGAZ's organization, streamlining its operations and improving its financial condition and management; (2) upgrading selected production facilities and introducing modern production technology; (3) implementing enhanced recovery techniques in selected gas fields through joint ventures between ROMGAZ and international oil companies; (4) carrying out a program for the rehabilitation of the gas distribution system through the replacement of about 1,000 km of severely corroded pipelines; (5) installation of a supervisory control and data acquisition system (SCADA) and telecommunications system to be utilized in monitoring, analyzing and determining the optimized operational mode of gas flow in the  18- gas transmission system; (6) carrying cut an environmental action plan to introduce environmental abatement measures in gas production fields and in the transmission and distribution systems; and (7) provision of technical assistance, staff training, equipment spare parts and materials; and (d) for CONPET: (1) development and implementation of a corporate development program with the objective of improving CONPET's organization and streamlining its operations as a common carrier of crude oil; (2) rehabilitation, modernization and automation of the crude oil transmission systems, including the replacement of about 300 kms of corroded pipelines and the installation of a SCADA system and of a telecommunications system; (3) carrying out an environmental action plan to introduce environment and abatement measures in the management of sludge in the oil transportation systems; and (4) provision of technical assistance, staff training, equipment spare parts and materials. C. Project DescriRtion 3.03 Detailed description of the proposed Project components, which are described in the Project File, are summarized below: A. GOR/MOI Component: This comprises financing several technical assistance programs for: (a) strengthening MOI's policy making functions; and (b) making NAMR operational. The MOI strengthening activities will focus on the ministry's State Secretariat for energy in general and the Department of Oil and Gas in particular. The two areas in which MOI has to take immediate actions are: (i) the establishment of a fuel policy for the country; and (ii) the preparation of a policy, institutional and development framework for the petroleum subsector. Financing for MOI to undertake these policy actions is included under the proposed Project. To ensure that the policy actions are undertaken in a timely manner, GOR/MOI have aereed to: a) with the help of consultants. whose qualifications and terms of reference are satisfactory to the Bank. recruited by November 1. 1994. complete the series of studies required for the establishment of a fuel policy for Romania by December 31. 1995: b) and immediately thereafter. review the studies and their recommendations with the Bank. and implement the recommendations. taking into account the Bank's views, in accordance with a timetable satisfactory to the Bank (para. 6.01(c)). In addition, GOR/MOI have agreed to: i) initiate by November 1. 1994. a Refinery Subsector Restructuring Study. with the help of consultants whose qualifications and terms of reference are satisfactory to the Bank: and by December 31. 1995, ensure that the said study is completed and a copy thereof furnished to the Bank for its review and comments: and thereafter take all measures required to implement a strategy for restructuring and optimizing the refinery subsector operations based on the recommendations of the study and Bank's comments (para. 6.01(d)). As regards making NAMR operational, the President of NAMR has already been appointed (para 2.23). Details of NAMR's staffing, functions, duties, etc., are discussed in Chapter 4. The next steps are to implement staffing and training programs to acquire the necessary skills in the legal, economic, financial and technical (geoscientific, petroleum engineering, etc.). In view of the critical role that NAMR needs to play in the future functioning of the petroleum sector, as part of the conditions of effectiveness of the proposed Loan. GOR has agreed to fully staff NAMR in order to make it operational (para. 6.08(a)).  - 19- NAMR needs to undertake several actions which are critical for the sector's development. These actions include: adoption of Petroleum Regulations and Model Contracts, establishing oil and gas transmission tariff regimes for common-carrier pipelines of ROMGAZ and CONPET, undertaking Petroleum Exploration Promotion Programs. Accordingly, GOR would take all measures to ensure that NAMR would: (a) adopt Petroleum Regulations and model concession contracts satisfactory to the Bank; (b) demarcate the areas to be promoted including those to be relinquished by PETROM and ROMGAZ, into exploration acreages to be provided to the private sector on a competitive basis; and (c) with the help of consultants, desigo and undertake a Petroleum Exploration Promotion Program (paras. 3.08 and 6.01(e)). In addition. GOR has agreed that in order to establish a pricins olicy to cover oil and gas transmission and distribution. NAMR would appoint consultants by November 1. 1994. to carry out and comnlete by July 31. 1995. a rate and tariff study under terms of reference satisfactory to the Bank. which will recommend appropriate rates to be charged by common carrier pipelines and the tariffs to be paid by final consumers of 2as (para. 6.01(f)). B. PETROM Component comprises: (a) Corporate Restructuring and Development Program. The Corporate Restructuring and Development Program will focus on streamlining the activities of PETROM with the aim of making it more efficient and financially viable through: (i) establishing monitorable financial criteria; (ii) reducing the number of the production subsidiary units "schellas" into a more manageable number with well defined responsibilities; and (iii) developing a framework for initiating the privatization of PETROM as an E&P company. The proposed restructuring program will complement the activities already initiated by PETROM under a loan financed by EBRD for efficiency improvement in three (3) of the twenty five (25) schellas (para. 4.26). (b) Enhancement of Oil and Gas Production. This will involve providing assistance to PETROM for addressing the decline in domestic production through the application of modern production technology; upgrading of the current -roduction facilities and the involvement of reputable private sector oil and gas companies in the application of appropriate enhanced oil recovery techniques for the production of oil and gas through joint ventures. Assistance will also be provided for improving the well completion practices of PETROM; workover of several wells to improve their productivity; and the procurement of essential chemicals, equipment, spare parts for compressors, and materials such as pumps, tubulars and sand control equipment for the efficient completion of producing wells, some of which are currently shut in. In regard to the development of offshore reserves, PETROM is to undertake a feasibility study, to identify the required investments for the efficient development of these reserves including recommending measures for addressing offshore environmental problems7/. Upon completion of this study, assistance would be provided to PETROM under this project for developing a comprehensive investment program for the offshore to complement its current activities. Cofinancing assistance will be sought particularly from Japan Exim Bank since this institution has expressed interest, in principle, to assist in the development of the offshore reserves. Meanwhile, PETROM has initiated a program for forming joint ventures with IOC's for the implementation of Enhanced Oil Recovery techniques in some of the geologically complex fields. During the implementation of this project, technical assistance would be provided to monitor and supervise PETROM's performance in 7/ Grant financing for this study in being sought from the Norwegian Government.  - 20 - forming joint ventures or cooperative arrangements with lOCs in order to ensure the success of these arrangements. (c) Reduction of Environmental Pollution. Pollution problems include crude oil and brine contamination of agricultural lands and drinking water aquifers. In order to address this on a priority basis, an overall Sector Environmental Assessment Study has already been initiated under grant financing by EBRD to recommend the necessary abatement measures to be implemented. Results of this study will be a priority-based environmental action plan for the gas/petroleum sector that is consistent with the overall restructuring program for this sector. For implementation of immediate abatement measures, assistance would be provided under this project for upgrading the waste water treatment plant at Suplacu in the Videle-Barleria producing area; upgrading the capability of the environmental laboratory at Cimpina and training of the staff of PETROM on environmental management; and for setting up and staffing an Environmental Monitoring Unit responsible for ensuring that strict environmental standards in line with industry practices are maintained in all its operations. C. ROMGAZ Component comprises: (a) Rehabilitation of the Distribution and Transmission System consisting of: (i) Pipeline Replacement for the Distribution System. This would consist of engineering, design and supply of materials for the construction of 1000 km of pipeline using poly-ethylene linepipes to replace the existing 1000 km severely corroded pipelines, ranging from 25 mm to 217 mm diameter. This would be done in phases. The first 600 kms will be done under the proposed Project using the services of an internationally reputable company for project management, engineering and supervision. The remaining 400 kms will be implemented by ROMGAZ on the basis of experience gained through technology transfer during the implementation of the first phase. (ii) Rehabilitation of the Transmission System. ROMGAZ has already initiated the physical replacement of the 600 km of corroded pipelines and revamping of the compressors through funding made available to ROMGAZ by GOR (Lei 5 billion), and also from the proceeds of the World Bank Technical Assistance/Critical Imports Loan (US$9 million), of which US$4 million is being used for the compressors' modernization and revamping project. Assistance would be provided for the installation of a SCADA and Telecommunication system to enable ROMGAZ to automate its ability to continuously monitor gas flow data from the major nodes of the gas gathering and transmission systems, analyze the data through computerized models, and determine the optimized operational mode to achieve operational efficiency. The proposed SCADA will provide for installation of computerized regional dispatching centers and national dispatching centers, which together will replace the existing 13 regional and the national dispatching centers. The telecommunication system will be designed and installed in order to provide for data teletransmission from the system nodes to the regional dispatching centers and from thereafter the regional analysis to the national dispatching centers for final analysis for the entire system. To the extent possible, the system to be designed will have the capability of system sharing with CONPET, ROMTELECOM, RADIOCOM and RENEL's systems. This component of the project is to be cofinanced by EIB (para. 3.05). In order to ensure proper operation and management of the system, assistance would be  - 21 - provided for the training of technical staff of ROMGAZ in the management and maintenance of the systems. (b) Enhancing Gas Production. The investments for this component are to address the decline in gas production by: (i) application of modern production technology, better quality equipment and materials for well completion, water encroachment control, and sand production problems for which ROMGAZ would procure one coiled tubing unit, and a wireline logging unit; (ii) procurement of the services of international oil field service companies and consultants for sand control, hydraulic fracturing, training and supervision of its staff, particularly in the design and implementation of hydraulic fracturing in tight sand reservoirs in Filitelnic, Ernei, Dumbravioara, Paingeni and Taunni fields. Services will also be required for drilling and supervising directional wells in Tirgu Mures field, where a large portion of the gas reserves in this field is located under the city of Tirgu Mures, where it is not environmentally safe to locate a drilling rig in the city for vertical wells; (iii) procuring equipment and materials for upgrading ROMGAZ gas research laboratory to conduct fluid and reservoir property measurements and monitor environmental pollutants for which ROMGAZ would procure modern laboratory equipment for PVT, rock property and relative permeability measurements; and (iv) by promoting joint ventures with international oil companies for implementation of EOR techniques in appropriate gas fields. (c) Corporate Restructuring and Development Program. The restructuring of ROMGAZ is designed to deal with the reorganization of its main activities into four main business units (i.e. Exploration and Production (E&P) for Gil and gas in areas assigned to it by NAMR; Transmission of gas as a common carrier to all producers; and two distribution units for gas. In addition, assistance would be provided to ROMGAZ for improving its accounting and management information systems (para. 4.25). D. CONPET Component comprises: (a) Rehabilitation of the Crude Oil Transmission System (i) Pipeline Rehabilitation. Procurement, installation and cathodic protection of 250 km of linepipes to replace the badly corroded pipeline of the domestic crude oil pipeline system and 65 km linepipes for the imported crude oil pipeline. (ii) Modernization and Automation of Imported Crude Pipeline System (IPLS). This will consist of: a) automating and optimizing of the operations of the pumping station through the installation of modern instrumentation control and monitoring devices; programmable logic controls and provision of interface to the SCADA systems; b) installation of valve operators, programmable logic controls and provisions for interface with the SCADA system on ten pipeline river crossings over the Danube River; and c) installation of meter runs equipped with turbine meters, strainers, flowrate computers and meter at the refineries and inlets into the pipeline systems. All meter runs will be equipped with necessary provisions for interface with the SCADA systems. (iii) Modernization and Automation of Domestic Crude Pipeline System (DPLS). This will consist of: a) replacement of the outdated pumps at the 12 pumping stations (what type of pumps, specifications, number); b) procurement and installations of meter runs equipment with turbine meters, strainers, flow computers and other necessary services for interface with the SCADA systems;  - 22 - c) procurement and installations of modern instrumentations, control devices, programmable logic controls and SCADA interface at 12 pumping stations; d) procurement and installations of automation devices at five rail loading ramps; and e) procurement and installations of automatic tank gauging systems installed on the storage tanks at the above pumping stations. (iv) Installation of Communication System. As part of the modernization program to be carried out under the proposed Project, a telecommunication system would be installed. This system would consist of: a) installation of telecommunication syslem based on system sharing compatible with ROMGAZ, ROMTELECOM and RADIOCOM systems (para. 3.03 C(a)(ii)); b) installation of the subscriber radio system and switchboard facilities; c) communication to over 100 facilities operated by CONPET; and d) voice and data communication demands to the facilities. (v) Installation of SCADA. In order to optimize the system operation and maximize its efficiency, two SCADA systems, one for each of the DPLS and IPLS, with one common control center located at Ploiesti would be installed. CONPET would appoint consultants satisfactory to the Bank for the design and installation of the two systems. (vi) Environmental Component. Investment to address environmental issues in the oil transportation system of CONPET would be for appropriate handling of sludge that is recovered from crude oil storage tanks. Sludge amounts are small (several hundred tons/year), but the points where they are generated are relatively far apart. The management of these sludges is unacceptable from an environmental viewpoint. CONPET has agreed to consider a mobile unit to either incinerate this sludge or recover oil to be sent to the refineries. In addition, assistance would be provided to CONPET for training its environmental specialist in modern techniques of remediation and monitoring of land polluted by oil spills. (b) Corporate Development Program. CONPET's Corporate Development Program is primarily aimed at privatizing the company. In accordance with the strategy of GOR, CONPET will be confirmed as a common carrier of crude oil in Romania, which will be regulated by NAMR. CONPET does not need any restructuring but would need an internal reorganization. In the context of privatization, CONPET's Corporate Development Program will also address the problem of tariffs and institutional efficiency (paras. 4.39 and 4.42). (c) Technical Assistance and Training. In order to ensure efficient and timely implementation of the System Rehabilitation component, CONPET would require the services of a reputable international engineering firm for Project Engineering, Management and Supervision (PEMS). The PEMS consultant would assist CONPET in: (i) preparation of tender documents for the procurement of the equipment and materials; (ii) preparation of appropriate specifications for the materials and equipment; (iii) evaluation of bids; (iv) supervision of detailed engineering, construction and commissioning, and exercising overall project control; (v) development of appropriate training programs for CONPET staff to ensure transfer of technology; and (vi) development of appropriate Terms of Reference (TOR) for the selection of specialized firms to conduct diagnostic inspections, including the use of 'intelligent pigs' and assessment of the level of cathodic protection on the remaining portions of the  - 23 - pipeline systems, and to recommend corrective measures, including development of maintenance program and pipeline replacement program. In order to provide assistance for the design and implementation of its Corporate Development Program and provide a framework for its privatization, CONPET will recruit an experienced firm of Management Consultant/Investment Bankers (para. 4.41). D. Project Cost 3.04 The total cost of the proposed Project is estimated at US$346 million equivalent, including physical contingencies of US$41.4 m..:ion, price contingencies of about US$28.2 million, and taxes and duties of about US$6.6 million. The project includes US$19.0 million for technical assistance, training and studies. Details of the project cost estimates are given in Annexes 3.1 and 3.2 and are summarized in Table 3.1 below. Direct and indirect foreign exchange costs are estimated at US$228.8 million (66% of total project cost). The costs of goods are based on the prevailing costs in 1992 for similar goods and equipment imported to Romania. Cost estimates for consultants services are based on current prevailing costs for similar consultancy services and include the cost of local and international travel, where appropriate, and p diem. Price contingencies are based on the following expected annual international inflation rates of 1.2% in 1994, 2.4% in 1995, 3.2% in 1996, 3.4% in 1997 and 3.2% in 1998 and 3.3% in 1999. For local costs, in the absence of reliable domestic inflation rates, these costs have been shown in dollars. Accordingly, the price contingencies are calculated with international inflation rates for both local and foreign costs. It should be noted that this could imply understating the total local costs requirements. Table 3.1: Proled Cost Summary US$ Million------ Cost Item Local Foreign Total A ROMGAZ 25.9 96.1 122.0 B CONPET 39.6 50 1 89.8 C. PETROM 26.5 28.5 55.0 D. MOI 1.6 7.6 9.2 Total Base Cost 93.7 182.3 276.0 Physa Contingencies 14.1 27.3 41.4 Price Conttngencles 9.0 19.2 28.2 Total Prowec Cost 116.8 228.8 345.6 Including US$6.6 million for taxes and duties. L/ Figures may not add to totWs due to rounding. E. Financini! Plan 3.05 The financing plan for the proposed Project, for each entity is summarized in Table 3.2 and details on an annual basis are provided in Annex 3. 1. The local costs of about 34% of the total project cost (or US$116.8 million equivalent) would be borne by the entities. Including contingencies, PETROM would finance US$32.5 million in local costs out of the total investments of US$67.5 million for its production enhancement, joint ventures for enhanced oil recovery and for its restructuring pirogram from internal sources. Ahout 21% (or US$32.7 million) of the US$154.2 million investment related to production enhancement, joint ventures for enhanced recovery of gas fields, infrastructure development and for its restructuring program would be financed by ROMGAZ out of its own resources. CONPET  - 24 - would finance about 44% (or US$49.7 million equivalent) of the total cost of US$112.8 million for its infrastructure development, the installation of the communication system and the local costs for consultancy services out of its own funds. The Ministry of Industries (MOI) would finance out of its budget, about 21 % (or US$1.9 million) of the total cost for the establishment of the regulatory body (NAMR), implementation of the Petroleum Exploration Promotion Program and for undertaking several studies. Coflnancing of about US$51.2 million in foreign exchange is expected to be secured from EIB for the installation of the SCADA and Telecommunication System of ROMGAZ. GOR and ROMGAZ have agreed that by no later than December 31. 1994. to: either enter into a Loan Agreement with EIB for the requisite amount and make it effective: or establish to the satisfaction of the Bank. that the requisite funds for the implementation of SCADA and Telecommunication portion of ROMGAZ's component are available on terms and conditions satisfactory to the Bank (para. 6.03). Table 3.2: Financing Plan Financing Required Sources of Funds (USS Million) (US$ Million) <- Foreign -> <- Local -> Beneficiaries Local Foreign Total IBRD iv Others Entities Total MOI 1.9 9.2 11.1 7.2 2.0b 1.9 11.1 PETROM 32.5 35.0 67.5 35.0 32.5 67.5 ROMGAZ 32.7 121.5 154.2 70.3 51.2_ 32.7 154.2 CONPET 49.7 63.1 112.8 63.1 - 49.7 112.8 TOTAL 116.8 228.8 345.6 175.6 53.2 116.8 345.6 a/ The proposed Bank Loan of US$175.6 million includes about US$5.0 million of Technical Assistance to MOI for which grant funds are being sought from USAID, USTDA and other bilateral donors. b/ Technical Assistance from EC-PHARE. c/ Amount of cofinancing from EIB. Bank Financing 3.06 A Bank Loan of US$175.6 million would represent about 51% of total financing requirements and about 77% of the foreign exchange requirement of the proposed Project. The Loan would finance: the foreign exchange cost of: (a) the corporate restructuring for ROMGAZ, PETROM and CONPET (US$11.5 million); (b) production enhancement for ROMGAZ and PETROM (US$37.2 m ilion); (c) rehabilitation and modernization of CONPET's oil transmission system including the SCADA and telecommunication systems (US$52.4 million); (d) rehabilitation of ROMGAZ's national gas distribution system (US$45.9 million); (e) promotion of joint ventures for EOR by ROMGAZ (US$1 million); (f) implementation by MOI of the petroleum exploration promotion program (US$2.3 million); (g) equipment for environmental degradation abatement (US$2.8 million); and (h) technical assistance to all beneficiaries in the form of consultancy services, studies and training totalling about US$22.5 million, of which US$5 million is for MOI for undertaking the refinery study, rate and tariff study and for establishing the NAMR. 3.07 The proposed Bank Loan would be made to Romania out of which about US$7.2 million would be used by MOI to implement the Petroleum Exploration Promotion Program, establish the regulatory body (NAMR) and for consultancy services to undertake relevant studies. EC-PHARE would provide about US$2 million as part of the Technical Assistance required for establishing the Fuel Policy. USAID has expressed interest, in principle, to provide some grant funds that may replace some of the Bank's  - 25 - funds for Technical Assistance which could then be reallocated or cancealed. A list of the required Technical Assistance is given in Annex 3.2. The balance of the Loan would be onlent to the other beneficiaries. GOR would onlend to: PETROM (US$35 million); ROMGAZ (US$70.3 million) of which US$1 million would be for promoting joint ventures with international companies; and to CONPET (US$63.1 million) on repayment terms which are the same as that of the Bank loan to the GOR. The onlending interest rate would be the Bank's variable interest rate to GOR, plus a mark-up of one-tenth of the Bank's interest rate. The foreign exchange and the interest rate risks will be borne by the beneficiaries. F. Project Implementation 3.08 The detailed project implementation schedule agreed to during negotiations, is attached as Annex 3.3, and shows the implementation timetables for each of the proposed Project's components. MOI, and all of the beneficiary agencies including NAMR, will be responsible for implementing the project and the implementation of the Petroleum Sector Restructuring Strategy. However, there are specific actions that CONPET, ROMGAZ and PETROM will need to take to ensure project implementation is on schedule. During negotiations, PETROM and ROMGAZ agreed to: (a) relinquish all areas not currently being produced or explored by October 1. 1994: and (b) bv. the same date. make available to NAMR all data relating to petroleum exploration and production (para. 6.04(a)). In addition, during negotiations, MOI agreed to: (a) appoint by December 30. 1994. consultants under terms of reference and in accordance with a timetable satisfactory to the Bank. to assist NAMR in designing the framework for implementing the Petroleum Exploration Promotion Program; (b) demarcate. by no later than November 1. 1994 for the puMose of 2romoting on a competitive basis to private sector companies (including IOCs). the areas relinguished by PETROM and ROMGAZ and areas currently not ex2lored; and (c) adopt by no later than November 1. 1994. model concession contracts and petroleum regulation. satisfactory to the Bank and launch with the assistance of consultants appointed by December 30. 1994. the Petroleum Exploration Program by March 31. 1995 (para. 6.01(e)). CONPET will be responsible for the implementation of the improvement to the crude oil transmission system. The implementation of CONPET's investments would require the assistance of foreign consultants and experts to assist CONPET in the engineering, design and implementation. During negotiations, CONPET agreed to appoint consultants. with gualifications, under terms of reference and in accordance with a timetable satisfactory to the Bank. to assist in the implementation of the rehabilitation and modernization program and other activities to be implemented under the proiect (para. 6.07(a)). 3.09 PETROM and ROMGAZ will be responsible for the implementation of the enhancement of oil and gas production facilities. In order to ensure the success of the program, assistance from internationally reputable companies and oiil services contractors will be required, particularly in improving the well drilling and completion programs, in the application of modern technology for enhanced oil recovery, installation of production enhancement equipment and implementation of horizontal drilling and hydrocarbon fracturing of gas reservoirs to improve production. During negotiations, ROMGAZ and PETROM agreed to contract the services of internationally reputable companies and oil services contractors as necessary to assist in the implementation and supervision of the enhancement program (para. 6.04(b)). In regard to the implementation of EOR techniques in some of the partially depleted oil and gas fields, PETROM is currently negotiating with international oil companies for the formation of joint ventures for implementing EOR in about 10 of its fields. During negotiations PETROM agreed to review with the Bank on a yearly basis the success of such ventures (para. 6.05 (a)). Assistance would be provided to ROMGAZ under the project in promoting joint venture or cooperative arrangements with international oil companies for the implementation of Enhanced Oil Recovery techniques in some of the partially depleted gas fields. In order to ensure the success of such arrangements ROMGAZ azreed to select and submit to the Bank by December 31. 1994. on the basis of criteria to be agreed to with the Bank. lists of prospective fields to be promoted to lOCs for the implementation of enhanced oil recovery techniques under cooperative or joint venture arrangements (para. 6.06(a)). Furthermore, ROMGAZ will  -26 - be responsible for the implementation of the rehabilitation and modernization of the Gas Distribution System and the installation of the SCADA and Communication system. In order to ensure efficiency and timely implementation of the rehabilitation system, ROMGAZ would need the assistance of a reputable foreign engineering company for the design and supervision of the rehabilitation program. During negotiations ROMGAZ agreed to anpoint a reputable engineering firm satisfactory to the Bank for the design and supervision of the rehabilitation of the gas distribution and transmission networks and for the implementation of the SCADA and telecommunication system and other activities to be implemented under the project (para. 6.06(b)). G. Project Monitoring 3.10 The proposed Project would require close monitoring by the executing agencies, GOR and the Bank, particularly in view of the multiple components with critical interlinkages. This includes the timely implementation of the procurement of equipment and services and in the implementation of the restructuring programs. In order to facilitate the procurement program, realising that some of the entities are new to Bank procurement procedures, further assistance will be provided during the early stages of project implementation to assist the entities in the application of Bank procurement procedures. This assistance would take the form of procurement and disbursement workshops to be organized in Bucharest for all the entities. Bank staff input for supervision would be higher than the overall average for investment operations due to the fact that the beneficiaries are new to the application of Bank procurement procedures. Such input therefore would involve semi-annual supervision missions, review of procurement, including consultant selection and performance and disbursements. The staff inputs required for supervision are estimated at about 30 staff weeks for each of the first two years and an average of 12 staff weeks for each of the subsequent years. Details of the staff inputs required are presented in Annex 3.6. To facilitate the Bank's monitoring of the proposed Project, the beneficiaries agreed to: (a) furnish Ouarterly Progress Reports in a manner satisfactory to the Bank: and (b) submit to the Bank consultant reprts as and when they are furnished to the beneficiaries by the consultants (para. 6.02(a)). During appraisal, assistance was provided for developing standard bidding documents under Bank Guidelines for the Procurement of Goods, Services, Civil Works and Consultants. In addition, the Bank's bidding process was reviewed with the entities during negotiations. A procurement timetable was agreed upon for the procurement of all items to be financed under the Bank Loan (Annex 3.4). H. Procurement 3.11 The project elements, estimated costs and the procurement arrangements for those elements financed by the Bank are summarized in Table 3.3. Goods and services to be financed through cofinancing from EIB and by CONPET from its own funds are shown under the non-Bank Financed (NBF) column. 3.12 All equipment and materials to be financed from the Bank loan proceeds would be procured in accordance with the Bank's Guidelines for Procurement. Romanian suppliers competing for contracts for the supply of goods procured under ICB procedures would receive a preference in bid evaluation of 15% of the CIF price or the prevailing customs duty applicable to non-exempt importers, whichever is less, provided it can be proved that the value added to the product in Romania exceeds 20% of the ex-factory bid price. Contracts for goods, which the Bank agrees are proprietary, may be awarded after direct negotiations with suppliers, in accordance with procedures acceptable to the Bank. 3.13 Procurement of consultant and technical assistance services financed under the proposed Project (totalling US$35.6 million) will be selected in accordance with the 'Guidelines for the Use of Consultants by the World Bank Borrowers and by the World Bank as Executing Agency' (August 1981), and by using Bank's Standard Contract Form for Employment of Consultants.  - 27 - 3.14 For procurement of Bank-financed items, country-specific standard bidding documents, for Romania will be used. Tlese documents have been discussed and agreed with the Romanian authorities during negotiations. Among these Country Standard Documents, the documents relevant for the project include those for procurement of goods through International Competitive Bidding (ICB), procurement of goods through Limited International Bidding (LIB) and consultant services. 3.15 LIB procedures would be used for procurement (totalling US$16.7 million) covering procurement of the field services such as well-logging, testing and stimulation, as well as specialized materials, equipment and spare parts for well completion, and also for procurement of equipment for enviromental pollution abatement. 3.16 All bidding packages for goods and associated services estimated to cost US$250,000 equivalent or more would be subject to the Bank's prior review of procurement documentation. Other contracts would be subject to ex-post review after contract award. All documents relating to procurement of consulting services to be financed from the Bank loan proceeds above US$50,000 would be subject to the Bank's prior review and approval, including the qualifications, experience, terms of reference and selection criteria of the proposed consultant(s). Only the terms of reference for consultants below US$50,000 would be pre-reviewed by the Bank. Table 3.3: Summary of Procurement Arangements A/ ICe Others NBF D/ Total 1. EQUIPMENT AND MATERIALS Equlpment & Materials for Production Enhancement 43.6 43.6 (25.0) (25.0) Oil Pipeline RehabIliaton - (Equip. & Materials) 50.2 27.4 77.6 (41.7) (41.9) Te"communctlon & SCADA 22.6 22.5 (10.7) (10.7) Gas Distributlon Rehab.: - Unepipes and Materlals 52.4 52.4 (45.9) (45.9) - Teicommunicatlons & SCADA 71.6 71.6 2. SPECIALIZED TECHNICAL SERVICES 16.6 J/ 16.6 (12.2) (12.2) Well Workover Servs, Matei and Equipment Environmental Abatmwent 8.1J/ 8.1 (4.5) (4.5) 3. CONSULTANTS and SERVICES Pet. Exp. Promotion Program 2.9J/ 2.9 (2.3) (2.3) Corporate Restructuring 16.4dJ 16.4 (11.5) (11.5) Techni Assistance and Trainin 33.3dJ 33.3 (20.8) (20.8) Promotion of Joint Ventures for Enhanced 1.0dJ 1.0 Oil Recovery (1.0) (1.0) TOTAL 168.7 78.3 99.0 346.0 (123.3) (52.3) (175.6) Note Figures In parenthess are fne respective amounts financed by IBRD. M Flgures may not add to totals due to rounding. ki Non-Bank Flnanced, include equipment and materIas to be financed through connancing (EIB) and those to be financed by the entiles using their respectfve procurement gudelines J LIB - to be procured under Bank's Standard LIB Procurement Procedures. g/ Cmuon t PicOund uan fllsa Standard GUb_al br Conaunt.  - 28 - 3.17 As can be seen in Table 3.3, contracts with an estimated value of about US$168.7 million (about 49% of the total project cost) would be financed under the Bank's ICB procedures, of which the Bank's share would be about US$123.3 million. About US$78.3 million (under 'Other' column) would be procured using the Bank's LIB procedures of which US$52.3 million would be financed by the Bank (mainly for equipment and specialized technical services). It is expected that about 50 contracts will be let out (comprising 30 contracts by ICB and 20 contracts by LIB) to implement Bank's component of the proposed Project. The balance of US$99.0 million under 'NBF" (not to be financed by the Bank) would be for goods and services to be procured by CONPET (US$27.4 million) under its own procurement guidelines and the investments for the installation of the SCADA system for ROMGAZ (about US$71.6 million) which are to be financed by EIB and ROMGAZ under their own procurement procedures. 3.18 Procurement information would be collected and recorded as follows: (a) prompt report of contract award information by the Borrower; and (b) comprehensive quarterly reports to the Bank by the Borrower (assisted by consultants) indicating: (i) revised cost estimates for individual contracts and the total project, including best estimates of allowances for physical and price contingencies; (ii) revised timing of procurement actions, including advertising, bidding, contract award, and completion time for individual contracts; and (iii) compliance with aggregate limits on specified methods of procurement. Procurement plan and schedule are presented in Annex 3.4. I. Disbursement 3.19 The Bank funds would be disbursed against: (a) 100% of CIF cost of imported goods or ex-factory cost of domestically manufactured goods subject to ICB; (b) 85% of the cost of the supply of goods, associated works and services with respect to turnkey contracts; (c) 100% of the cost for training and technical assistance; and (d) 100% of CIF cost of goods and services procured through LIB. Expenditures amounting to a maximum of 10% of the Loan amount which would be incurred within the 12-month period prior to loan signature to finance, MOI, PETROM, ROMGAZ and CONPET share of the cost of expenditures for consultancy services, equipment and matei gals contracted under Bank procurement guidelines, would be eligible for retroactive financing. The detailed schedule of disbursements for the proposed Bank Loan is presented in Annex 3.5 and summarized in Table 3.4. It indicates that about 78% of the proposed Bank Loan would be disbursed within three years, and about 94% after four years. The disbursement profile proposed is judged realistic because: (a) most project components are of short gestation (18 to 24 months, except for the enhancement of oil and gas production); and (b) the implementing agencies will receive technical assistance for implementing their respective components. -te closing date for the proposed Loan would be December 31, 1999, six months after the estimated physical completion of the Project. Table 3.4: Estimated Disbursement Schedule FY95 FY96 FY97 FY98 FY99 Annual 35 58 44 28 10.6 Cumulative 35 93 137 165 175.6 3.20 In order to facilitate disbursement of the Bank loan, on Special Account would be setup and managed by the Ministry of Finance, under terms and conditions satisfactory to the Bank, with an approved commercial bank in Romania, for MOI, PETROM, ROMGAZ and CONPET. The initial deposit in the Special Account would be US$10 million in total representing the estimated average  - 29 - expenditures for a four-month period for the items financed by the Bank. Disbursements for contracts valued at US$250,000 or less, will be made on the basis of fully documented Statements of Expenditures (SOEs). The Bank will replenish the Special Accounts on the basis of the monthly statements of actual expenses. Supporting documentation will be retained by the GOR and the entities and be made available for review by Bank supervision missions and by external auditors. All withdrawal applications will be fully documented. GOR a&eed to open and maintain a Special Deposit Account for the beneficiaries with an acceptable commercial bank in gomania. on terms and conditions satisfactory to the Bank (para. 6.01(g)). In addition, GOR and the entities have afreed to have the Special Account and the project accounts audited and submit to the Bank. by June 30 of each year. the adit certificate (para. 6.02(b)). The establishment by GOR of separate Subsidiary Loan Agreements with ;ach of the entities. accegtable to the Bank, has been set as a condition of effectiveness of the Loan (para. 6.08(b)). J. Environmental Aspects 3.21 In accordance with O.D. 4.01 (Environmental Assessment), the proposed Project has been assigned Category B. On this basis, a formal environmental assessment prior to appraisal was not required. Since the proposed Project will seek to: (a) shut down uneconomic inefficient wells (the biggest polluters); (b) rehabilitate economic wells (primarily through application of modern non-polluting production technology); (c) enhance and develop new wells (in compliance with all appropriate environmental health and safety regulation, permits and licenses); and (d) rehabilitate leaking oil and gas pipelines, all components of the proposed Project lead to environmental improvements, thus the rating is considered appropriate. Additionally, the Government has initiated a Sector Environmental Assessment Study aimed at recommending further priority measures for addressing environmental issues associated with existing operations. This study is being financed through grant funds from EBRD under terms of reference approved by the Bank. As this study was not completed until December 1993, the investments to be identified for addressing long-term measures have not been included under this Project. However, with regard to immediate abatement measures already identified, ICPT with assistance from foreign consultants, will supervise and implement these investments for the entities. During negotiations, PETROM, ROMGAZ and CONPET agreed to: (a) establish by November 1. 1994. under terms of reference satisfactory to the Bank an environmental management unit. to be responsible for carrving out their respective environmental action plan: and (b) procure the services of foreign environmental specialists. satisfactorv to the Bank. to assist in implementing immediate measures to mitigate environment degradation (para. 6.02(c)). IV. BENEFICIARIES A. Introduction 4.01 The beneficiaries of the proposed Project comprise the Government, i.e. MOI and NAMR, and three of the operating entities in the sector, i.e. PETROM, ROMGAZ and CONPET. In this chapter, the institutional aspects of NAMR and the three operating entities are discussed, together with the financial aspects of PETROM, ROMGAZ and CONPET. In addition, the development program for NAMR and corporate restructuring and development programs for the three entities, which will be carried out under the proposed Project, are elaborated in this chapter. Some common features of the beneficiaries (PETROM, ROMGAZ and CONPET) include the fact that their financial statements and accounts are not fully reliable and suffer from the inter-company arrears which have been made to accumulate as a result of lack of financial discipline. Furthermore, the review of the past and future financial performance of the entities has been carried out using US dollar, rather than Lei, due to exchange rate fluctuations and uncertainty about future levels of inflation. In 1992, there was an official  - 30 - exchange rate, a black market and an auction rates. Therefore, the average market exchange rate at US$1 =308 Lei was used for 1992 and projected market exchange rate at US$1 =720 Lei used for 1993. B. National Agency for Mineral Resources 4.02 NAMR was established with a Government's Decree No. 417 dated August 17, 1993, as a legal entity reporting directly to the Government i.e. to the Cabinet. NAMR would represent the State in all relations with the central and local government bodies involved in mineral resources, as well as with the Romanian and foreign entities. NAMR's main functions are: (a) the management of Romania's mineral resources; (b) the negotiations and conclusions of the agreement for the exploration, production and assessment of tde mineral resources; and the supervision of the activities and operations performed on the basis of these agreements or any other agreements; (c) the establishment of the fees for the geological exploration and if the case may be, of the taxes, royalties and prices for the activity of production, as well as for the utilization, in the hydrocarbon case, of the corresponding networks and installations for transport and distribution of the crude oil, its products and of the natural gas; and (d) the issuance of regulations regarding the (geological) exploration, production and protection of the useful deposits of mineral resources. 4.03 The organizational structure of NAMR is provided in Annex 4.1. NAMR will be managed by a President having the rank of Secretary of State, appointed by the Prime Minister. In its activity the President, will ne supported by a Board of Administration consisting of seven (7) members to be designated by the Prime Minister and will include experienced representatives from the Ministry of Finance, Ministry of Justice, Ministry of Industries and Ministry of Water Resources, Forestry and Environmental Protection. The general managers as well as the directors of the directorates, as well as the chief inspectors for geological areas are appointed by the President of the Agency. The necessary funds for NAMR to perform its functions will be allocated from the national budget. 4.04 The President of NAMR has already been appointed (as a condition of Board presentation of the proposed Project), and fully staffing NAMR is a condition of effectiveness of the proposed Project (para. 3.03). To fully staff NAMR and utilize a lot of existing skills base within the sector, the staff of the present State Inspectorate of Mineral Resources will be transferred to NAMR. In order to ensure efficient operation of NAMR, assistance would be provided to upgrade the capabilities of the newly appointed staff. This assistance would follow a two-pronged approach. Firstly, key NAMR staff, including its President, will be exposed to the workings of North American regulatory agencies, particularly the Texas Railroad Commission (which is the petroleum sector regulatory body for the state of Texas) and the Energy and Mineral Resources Board in Alberta, Canada. The Romanian authorities will be guided by an experienced petroleum industry consultant who understands the Romanians needs. Secondly, several international advisers covering the areas of legal, technical, reservoir engineering, financial, economic and environmental aspects of pe.roleum industry regulations, as well as exploration promotion will be attached to key departments of NAMR in Romania. These advisers will provide on- the-job training to NAMR during the first two years of NAMR's operations. Financing for both of these approaches, i.e. exposure to other regulatory agencies and for the resident advisers, is likely to be provided by USAID and under the Bank loan. Accordingly, in two years time i.e. by 1996, NAMR is expected to be a fully operational petroleum sector regulatory body for Romania. In addition, technical assistance will be provided under the proposed Bank Loan and additional resources for technical  - 31 - assistance would be sought from bilateral donors and grant funds to enable: (a) NAMR undertake the Pe.roleum Exploration Promotion Program, and undertake the rate and tariff study; and (b) MOI, for establishing a Fuel Policy and undertake a Refinery Sector Restructuring Study (para. 3.03). C. PE1RQM R.A. Organization 4.05 PETROM is the main national oil exploration and production company in Romania responsible for onshore and offshore E&P activities. Presently, all natural gas produced by PETROM (and not used in field operations) is sold to ROMGAZ. PETROM is headed by a Director General (DG) who reports to an Administration Board. The Director General and the six other Board members are appointed by GOR. Board membership consists of the DG, one representative each from MOT, MOF and Ministry of Commerce, and three outsiders. The outside members are appointed from fields of petroleum-related activity. The Administration Board has the power to approve budgets, work and investment programs within guidelines approved by MOI. It also approves salary levels and personnel policies. Personnel Management is the responsibility of the DG, assisted by the Director of Corporate Services. The Finance Department of PETROM consists of Treasury, Accounting, Budgeting and Forecasting, and Internal Auditing functions. Parallel functions are performed by personnel located at each of PETROM's subsidiaries. 4.06 Day-to-day management is the responsibility of the DG, who is assisted by two Deputy Directors General and the Directors of 10 internal departments. Three of the 10 internal departments and ICPT report directly to the DO. The other departments report to one of the two Deputy Director Generals. In addition, 25 regional operating units, Schellas or districts, report to six Territorial Group offices which are staffed with technical personnel assigned from PETROM headquarters. The Schellas also are staffed with technical, financial and managerial staff which perform functions similar to those carried out by headquarters and territorial group personnel except for exploration activities which are managed from the Headquarters in Bucharest. This duplication of activities has led to a large overhead and has made efficient management difficult Lo achieve. The total complement of personnel, including management, technical, administrative, accounting and financial staff and skilled and unskilled labor is currently 64,000. About 86% of PETROM's staff are in operations. Total work force employed per Schella averages 2,224, including managerial, professional and clerical staff. Training is given special consideration at PETROM, which maintains training units throughout the country. The trainers/educators are partly paid by the Ministry of Education and partly by PETROM. Operations 4.07 PETROM has 30 operating units comprising: 25 onshore producing Schellas; I offshore producing division (PETROMAR); I transportation and automotive workshop sub-branch; 6 construction and maintenance sub-branches; 2 supply stores; I computer center; I training center; 11 industrial schools; the Institute for Research and Technology (ICPT) at Cimpina; and the Ploiesti Oil Museum. Until recently, PETROM had 12 drilling subsidiaries with varying capabilities for production-testing, work overs and well maintenance and 6 construction and maintenance subsidiaries. These drilling and construction subsidiaries were recently spun off as separate CCs. PETROM currently produces about 18,700 tons (140,250 barrels) of oil per day; 400 tons of LPG/day; 200 tons of ethane/day; 100 tons/day of condensate and 17 million cubic meters of natural gas from sedimentary basins other than the Transylvanian basin. The crude oil is stored at central depots and transported by pipelines and railcars by CONPET, the crude oil carrier, on a contract basis.  - 32 - Financial Aspects 4.08 PETROM's operating results for 1992 and estimated for 1993 are summarized in Table 4.1: PETROM - Actual and Projected Table 4.1 and detailed in Annex 4.2. PETROM Operating Results sold about 6.5 million tons of crude in 1992, 1992 1993* compared to 10.9 million tons in 1985. The O Production (M tons) reasons for this decline are due partly to natural Gas Produion (Million TOE) 5.8 5.2 decline from the old fields and partly to the Total Available for Sales (Million obsolescence and poor quality of the production TOE) 12.3 11.8 equipment and technology applied by PETROM; Total Sales 12.1 11.7 and reservoir problems, such as sand corrosion, Operating Revenues (USSM) 921.0 879.7 water encroachment and inability to implement Operating Costs (Inc. Excise) 530.7 46182 Operating Income (US$M) 390.3 418.5 timely workovers for lack of essential equipment Change in Working Capital (185.7) 109.2 and materials. PETROM's profit margin (the Net Available for Invest. 213.8 117.7 ratio of net profit to gross revenues) is only 22% R compared to industry standards where the profit Ratios margins are substantially higher. This is because Internal Cash Generation (%) 359 121 PETROM's producer prices in 1992 were about Current Ratio 0.7 0.9 US$91 /ton (using the market exchange rate of 308 Receivables (days) 93 117 Lei/US$), compared to the international price of crude of US$133/ton. Indeed, a primary reason * Estimated that PETROM made a profit at all in 1992, is due to the fact that PETROM had very little long-term debt. However, GOR, through the application of the variable excise taxes on production in particular, allowed PETROM to retain only 5% of its profit, thereby leaving the company with minimal funds to finance its capital expenditures. For 1993 prices were increased (para. 2.23). However, due to a reduction in sales and the fact that these price increases did not keep up with inflation, PETROM's revenues for 1993 have been projected to decline only slightly from 1992 levels. 4.09 The Balance Sheet of PETROM is summarized in Table 4.2S/. Fixed assets were revalued by about 11 times in 1992. Nevertheless, PETROM's financial position is understated, as it does not show the capitalized costs of discovering the oil, commonly referred to as "Deferred Costs". Indeed in an E&P Company, fixed assets (comprising production facilities, reservoir engineering and analysis equipment, computer hardware/software) are normally a smaller proportion of its asset base and the Deferred Costs are the company's principal assets. These Deferred Costs should be depreciated each year based on the rate of production and the remaining recoverable reserves. PETROM's lack of knowledge of conventional accounting principles; reliable estimates of its production costs per well; and of the remaining recoverable reserves, will prevent it from calculating a reliable estimate of its Deferred Costs until a proper and generally accepted accounting system is implemented, and production and reserves estimates are confirmed. 4.10 During 1992, PETROM's current ratio deteriorated from 1.2 to 0.7 due to the financial blockage which is causing deficits in short-term capital. All the crude produced by PETROM is sold to RAFIROM, which coordinates the operations of all the Romanian refineries. The refineries have been operating inefficiently, have obsolete technology and have been incurring substantial losses. Consequently, RAFIROM, has been experiencing financial distress and has been unable to meet its obligations. As a result, PETROM has had difficulty collecting from RAFIROM, and its receivables in 8/ As is the case with the other entities, PETROM's balance sheet cannot be relied upon due to the fact that the accounts are not maintained in accordance with generally accepted accounting principles.  - 33 - 1992 represented over three months' sales. Therefore, PETROM has had to defer payments to its suppliers and to borrow short-term in order to meet its working capital requirements. Financial Forecasts Table 4.2: PETROM - Balance Sheet - 1992 4.11 In view of the problems of (USs Million) reliability of PETROM's balance sheets and income statements, only cash flow forecasts have ASSETS been prepared to project PETROM's future Net Fixed Assets 1,505 performance. This is summarized in Table 4.3 WqP 379 and detailed in Annex 4.2. In terms of Total Fixed Assets 1,884 production, assuming that no new fields are discovered and put into operation by PETROM, Current Assets and that only the application of production Cash and Securitics 27 Inventories 31 enhancing techniques under the proposed Project Receivables 103 are implemented, crude production is projected to Other 133 decline to about 6.5 million tons in 1995. Total Current Assets 294 Starting 1996, reserves on these fields will be gradually depleted and crude production will go TOTAL ASSETS down to 5.6 million tons by 2000. However, gas EOUITY AND LIABILITIES production from PETROM's existing fields is Equity assumed to remain stable (4.9 million TOE/year) Subscribed Capital 1,741 over the period. Financial and Other Reserves 16 Retained Earnings 4 4.12 PETROM's producer prices will Total Equity 1,761 Current Liabilities 393 be adjusted to the average international price of Long-term Debt 24 US$128/ton for crude oil and US$81.6/TOE for gas, respectively by 1994, as a consequence of TOTAL EQUITY AND LIABILITIES 21a Governmental actions (para. 2.23). Compared to Current Ratio 0.7 1993, PETROM's revenues would increase by Receivables (days) 93 about 40% in 1994, the first full year of impact Debt/Equity Ratio 1/99 of maintaining the new petroleum producer prices. Thereafter, i.e. 1995 through the year 2000, the company's revenues are estimated to increase by an average of about 4%, annually, attributable to slight increase in oil production due to improvements in production technology implemented by PETROM. PETROM's operating costs are projected to increase by an average annual rate of 11%, as a consequence of increase in royalty tax (para. 2.23), increases in operation and maintenance expenditures and salaries and wages (as these costs, which are very low relative to international levels, tend to catch up). Since operating costs and other financial obligations (debt service, working capital increases) will grow at a higher rate compared to revenue growth rates, PETROM's internal cash generation will show a declining trend, but will, however, remain above 50% during the forecast period. 4.13 As regards PETROM's financial position, its assets are fully depreciated, and more importantly, it has virtually no long-term debt. At the present time, the only long-term debt PETROM has includes the World Bank subloan under the TA/Critical Imports (Ln. 3363-RO), the EBRD loan and would in the near future include the proposed loan. Given that it has minimal long-term debt, and the fact that these foreign loans have grace periods, PETROM's debt-servicing capacity will remain high through the year 2000. However, PETROM's working capital will be affected by the arrears from RAFIROM and ROMGAZ which will continue to be a problem through 1994. Therefore, in order to ease PETROM's cash flow problems, PETROM agreed during negotiations. to gradually reduce its accounts receivables on average to not more than: (a) three months billing by December 31, 1994:  - 34 - (b) two months billing by December 31. 1995: and (c) thereafter. continue to maintain its accounts receivables at not more than two-months (para. 6.05(b)). Furthermore, and as a measure towards addressing the arrears situation between the enterprises in the sector, GOR has agreed to take all necessarv actions on its Dart to ensure that its departments. agencies and all entities owned or controlled by it. will settle their bills on account of oil and gas purchased from PETROM and ROMGAZ within a period of not more than three months of the date of such bills (para. 6.01(h)). Table 4.3: PETROM - Projected Operating Results 1994 1995 1996 1997 1998 Oil Production (M tons) 6.7 6.5 6.3 6.2 6.1 Gas Production (million TOE) 4.9 4.9 4.9 4.9 4.9 Total Available for Sales 11.6 11.4 11.2 11.1 11.0 Total Sales 11 4 11.2 11.0 10.9 10.8 Operating Revenues (US$M) 1233.8 1256.4 1307.0 1362.1 1435.7 Operating Costs (Inc. Royalties) 591.2 645.8 705.9 766.8 832.3 Operating Income (US$M) 642.6 610.7 601.1 595.3 603.4 Net Available for Invest.Y' 205.2 322.4 278.1 265.8 256.3 Ratios Internal Cash Generation (9) 112 129 92 80 73 Debt Service Coverage (times) 24 24 16 12 9 Current Ratio 1.2 1.1 1.1 1.2 1.3 After income taxes, debt service and change in working capital. D. ROMGAZ R.A. Organization 4.14 ROMGAZ is a vertically integrated company responsible for gas exploration and production, transmission and distribution. It is managed by a General Manager (GM), who reports to an Administrative Board. Both the GM and all members of the Board are appointed by MOI. The Board consists of 7 members, including the GM and one representative each from MOI, MOF and Ministry of Commerce. The Administrative Board has the power to approve budgets prepared by the management of ROMGAZ and to approve work and investment programs within guidelines set by MOI. It also approves the salary levels recommended by the management, as well as ROMGAZ personnel policies. Personnel management is handled by the Management Department, which includes Training, Payroll and other administrative functions. 4.15 ROMGAZ's corporate management functions at Medias are organized into five departments, each headed by a director: Production, Transmission and Distribution; Research and Development; National Dispatching Center; Management; and Finance. The heads of the first three departments report to a deputy GM; the two remaining departments report directly to the GM. Each of these departments or divisions is further subdivided into offices for detailed supervision of their activiies and corporate affairs. ROMGAZ has 10 cost centers: two for drilling and workover; three for production; one for gas transmission; two for gas distribution; one research and design unit; and the training unit. Four other units were spun off earlier and reorganized as commercial societies: one for construction of pipelines and compressor stations and one for the manufacture of gas metews; one technology and transportation cost center; and one supply warehouse. Total staff complement of ROMGAZ, including subsidiaries, is about 21,500 employees.  - 35 - Operations 4.16 Exploration and Production. ROMGAZ has responsibility br exploration and production (E&P), transportation and distribution of most of the eon-associated natural gas produced in Romania. The major gas producing fields of ROMGAZ are located in Transylvania basin, and in the Moldova, Muntenia and Oltenia regions. In Transylvania, ROMGAZ produces mainly from the shallow miocene formations at depths up to 3,200 m. Production from outside Transylvania is from the Pliocene and Miocene reservoirs. The reservoirs in these areas consist of unconsolidated sand and are water driven. At the current rate of discovery, only 20% of ROMGAZ annual production is being replaced by new discoveries from additional drilling rather than new exploration activities. In 1992, the addition to reserves was only 3 BCM (or 2.6 Million TOE) while production was 15.1 BCM (or 12.9 Million TOE). Some of these additions to reserves are based on revision of previous estimates necessitated by new development drilling. ROMGAZ operates approximately 150 gas fields and 3,600 producing wells. Although it has its own geological staff, ROMGAZ relies on the exploration department of ICPT in Bucharest for generating new exploration prospects. Seismic and other geophysical data are acquired, processed and interpreted on a contract basis by PROSPECTIUNI. Drilling is carried out mainly by ROMGAZ's two drilling cost centers. Auxiliary services, such as wireline logging and mud logging are contracted out. Over the past three years, ROMGAZ production has been declining at a rapid annual rate of 8.3%. Production in 1990 was about 19.7 BCM (or 16.9 Million TOE) compared to 15.1 BCM (or 12.9 Million TOE) in 1992. Production decline is caused by a variety of factors including: (a) sand production from the unconsolidated sand reservoirs; (b) poor logging and improper well completion; (c) delayed workover of wells due to lack of proper equipment and materials; and (d) water encroachment in gas wells. 4.17 Gas Transmission. ROMGAZ transports gas imported from the former Soviet Union, and transits Russian gas purchased by Greece, Turkey and Bulgaria. In addition, ROMGAZ carries gas for chemical plants in Romania, which have direct purchase agreements tor Russian gas. Its gas transmission networks, with some 11,000 km high pressure pipeline and 82,800 kW installed compressor capacity, is a complex system which receives gas from 260 oil and gas fields, underground storages, as well as one major measurement and monitoring center for imported gas. At the same time, this system delivers gas to 378 points consisting of underground storages, major industrial consumers, city gate stations, as well as transit to other countries. The transmission system is controlled, maintained and supervised through the transmission of data from 10 regional dispatching centers. However, the transmission system is not automated, requiring manual operation and closing of valves, on-site meter and flow monitoring, and an elaborate and expensive manned dispatching system for telephone-based communication of data on a 24-hour basis. Leak detection is not automated, and requires continual monitoring of pipelines using inadequate and costly methods. 4.18 Gas Distribution. The distribution system, with some 15,000 km pipeline which supplies gas to over 2.5 million consumers, is practically under no cathodic protection and is severely suffering from corrosion. ROMGAZ estimates the gas loss at 3 - 4% of total throughput. ROMGAZ has already undertaken a study to identify about 1000 kms of badly corroded pipelines to be replaced under this project. In addition, grant funds are being sought from EIB for undertaking a technical audit of the remaining system. Financial Aspects 4.19 ROMGAZ's operating results for 1992 and estimated results for 1993 are summarized in Table 4.4 and detailed in Annex 4.3. In 1992, ROMGAZ sales amounted to 25.9 BCM (or 2.4 Million TOE) representing a decline of 37% from the 1985 sales levels of 40.9 BCM (or 35 Million TOE). In 1993, ROMGAZ revenues from its activities are expected to amount to about US$1,687 million. ROMGAZ is a relatively financially viable company, with virtually no long-term debt and has  - 36 - the potential to make reasonable T___le_4___ROMGZ_-_Acual_an_Projeted_Cah_FlowResult profits. It has the ability to finance Table 4.4: ROMGAZ Actual and Projected Cash Flow Resuls its own investments, with only 1992 1993* minimal borrowing from the domestic market. However, on the basis of the Gas Production (Bil. cu.m) 17.9 16.0 A . . ~~~Gas Purchases (Bil. cu.m) 11.2 10.1 tax regime in 1993, the ability of Total Gas Available for Sales 29.1 26.1 ROMGAZ to finance its capital Gas Sales (Bil. cu.m) 28.9 25.9 expenditures is hampered because it is Operating Revenues (USSM) 1530.8 1686.8 only allowed by GOR to retain 5% of Operating Costs (inc. excise) 1434.9 1332.9 its total operating income. For Operating Income (USSM) 95.9 353.9 example, in 1992, ROMGAZ was Change in Working Capital 150.4 200.3 obliged to pay to GOR in the form of Net Available for Investments 376.6 394.1 an excise tax about US$434 million RatBio and an additional US$37 million in Internal Cash Generation 25 46 the form of corporate tax. Current Ratio 1.8 1.6 Furthermore, due to the distortion in Reoeivables (days) 120 122 pricing of gas, the domestic price of Estimated gas was priced at about 60% of the imported price (US$48/1000m3 as compared to US$76/1000 m3). As a result, the profit margin of ROMGAZ was very low at 6% compared to industry standards where the profit margins are substantially higher. 4.20 ROMGAZ's balance sheet is summarized in Table 4.5 As is the case with Table 4 5: ROMGAZ Balance Sheet - 1992 PETROM, ROMGAZ's financial position is (US$ Million) understated, since it does not know of its GSSre t 243.9 Deferred Costs. ROMGAZ also lacks knowledge Les Deprecation 21.0 of: conventional accounting principles; accurate Net Fixed Amu 222.9 production rate from each field; and accurate TtalFixed 2452 estimate of its remaining recovering reserves. Cut Awto Therefore, ROMGAZ will be unable to establish Cm and Se 14.8 a reliable estimate of its Deferred Costs until a Invamtone 25.8 more efficient accounting system is implemented, Otber 51.5 and production and reserves estimates are Total Curet As 3 confirmed. TOTAL ASSETS 368.5 EOUITY AND UABWUTIES 4.21 At the end of 1993 ROMGAZ's Subwned CapitaI 226.2 current ratio at 1.6 was satisfactory. However, FaAci and Other Reaerves 33.7 receivables at the end of 1992 were very high, ToUl EqWV 296.6 representing about four months sales. The main users of gas are power and the industrial sectors. CuTennt Liabilie 69.8 g po ~~~~~~~~~~~~~~~~Log-Tcwm Debt 2.1 The industrial sectors, mainly steel, TOTALEQUrrYAND ass petrochemicals and fertilizers, as well as RENEL, UBll have been experiencing financial distress. As a Cunmt Rato 1.8 result, ROMGAZ has had difficulty collecting its Reeivables 120 outstanding accounts. DebEquity RAt it" Financial Prospects 4.22 The financial forecasts for ROMGAZ (including the assumptions for these forecasts), are summarized in Table 4.6 below and detailed in Annex 4.3. Production enhancement investments under  - 37 - the proposed Project will retard the decline in gas production to a level of only 5% per year (from the present level of 7%) during the period 1994-2000. Additionally, with the modernization and automation of the transmission and distribution systems, losses in throughput, which are currently estimated at 3-4%, will be brought down to 19% by 1997, a level considered acceptable by international norms. As a result of: the improvement in production; decreases in throughput losses; and constraints in foreign exchange, gas imports are expected to decrease by 50% between 1992 and 1995. Starting in 1996, demand for gas is anticipated to increase. In order to meet the shortfall in domestic production, imports will increase from 1996 onwards, gradually from 6.8 BCM (or 5.8 Million TOE) to 11.2 BCM (or 9.6 Million TOE) by 2000. However, overall gas consumption is not expected to surpass the 1992 level owing to reduced demand which will have resulted from the implementation of measures for improving efficiency in production and adopting energy efficiency measures in the power and industrial sectors (para. 2.16). Table 4.6: ROMGAZ - Projected Cash Flow Results 1994 1995 1996 1997 1998 Gas Production (Million TOE) 13.9 13.1 12.2 11.4 10.6 Gas Purchases (Million TOE) 9.6 9.4 10.7 11.7 12.7 Total Gas Available for Sales 23.5 22.5 22.8 23.0 23.3 Gas Sales (Million TOE) 23.0 22.1 22.4 22.7 23.0 Operating Revenues (US$M) 1874.2 1817.9 1900.2 1990.0 2075.6 Operating Costs (inci. royalties) 1030.5 950.6 911.1 887.4 857.1 Operating Income (US$M) 683.8 615.7 560.3 579.3 472.5 Net Available for Investments 200.6 332.4 295.2 267.1 237.2 Ratios Internal Cash Generation 95 130 110 94 80 Current Ratio 2.5 2.1 2.0 1.9 1.8 Debt Service Coverage (times) 68 54 67 44 25 4.23 In accordance with the gas producer price reforms implemented by GOR, the producer price of gas would be maintained at parity with the international (border) price of fuel oil on thermal equivalent basis in 1994. Consequently, ROMGAZ revenues will increase by about 43% compared to 1993 revenues. Thereafter, its revenues will increase by an annual average of 3%; primarily because of loss reduction and other efficiency measures. ROMGAZ's operating costs are projected to increase by an average annual rate of 9% mainly as a result of the increase in the price of gas purchased from PETROM and increase in gas imports to make up for ROMGAZ's shortfalls in production. In addition, salary and wages and operation and maintenance expenditures are expected to continue to increase in real terms over the period as ROMGAZ will face pressure to bring these costs towards international levels. 4.24 ROMGAZ's long-term prospects are good. During the period under review, debt service will be relatively low given the low levels of indebtedness, and the terms of multilateral financing. Debt service will then rise gradually to US$51 million in 2000. Internal cash generation at about 83% on average will adequately finance a large portion of its capital investments throughout the period. Over the period, ROMGAZ should maintain its working capital at a level which will allow it to meet its short-.erm obligations, while keeping to a minimum changes in working capital; thereby, making funds available for financing capital expenditures. ROMGAZ will be able to keep its working capital investments to a minimum throughout the period, provided that its receivables are gradually reduced 60 days of sales. Therefore, ROMGAZ agreed during negotiations. to gradually reduce its accounts receivables on average. to not more than: (a) three-months billing by December 31. 1994: (b) two-months billing by December 31. 1995: and (c) thereafter. continue to maintain its accounts receivable at not more than two- months billing (para. 6.06(c)). As part of actions to be taken towards reducing the inter-enterprises arrears problem, within the sector, GOR has agreed to take all necessary actions on its part to ensure that its departments. agencies and all entities owned or controlled by it. will settle their bills on account of  - 38 - gas purchased from ROMGAZ. within a period of not more than three months of the date of such bills f(ara. 6.01(h)). Corporate Restructuring and Development of PETROM and ROMGAZ 4.25 The restructuring of PETROM and ROMGAZ is designed to deal with the anomalies and inefficiencies created by their involvement in service and maintenance-oriented activities and the need to improve their accounting and management information systems, and by the need to reorganize along lines more closely reflecting their core businesses. In the present structure, management attention is spread across the management of not only the E&P in the case of PETROM, and the E&P, transmission and distribution operations in the case of ROMGAZ, but also of service activities, which contribute only marginally to their overall profit. To compound the problem, the companies do not have a reliable data base on its different costs and reserves (para. 4.09). They will need at least 1-2 years to establish a reliable production and reserves database which will be provided by the ongoing studies of INTERRA and Harms & Brady (para. 2.24). In order to initiate improvements in operational efficiency, financial management and accountability; and commercial orientation, each of PETROM and ROMGAZ would undertake a Corporate Restructuring and Development Program. The details of these programs including the terms of reference for implementation which have been reviewed, with the entities are summarized below in the following paragraphs. Corporate Restructuring and Development Program for PETROM 4.26 PETROM's current structure, which involves duplication of managerial, technical, financial and administrative office functions in 25 producing districts onshore (schella) and its PETROMAR subsidiary offshore, is cumbersome and difficult to manage efficiently. Even if PETROM possessed modern accounting, information and communications systems, such a degree of geographic decentralization would be challenging to manage. Under the Corporate Development Program, assistance would be provided to PETROM to complement actions already initiated under EBRD's Petroleum Sector Loan so as to reduce the number of onshore operating offices from 25 to a more manageable number based on geographical location and efficiency of operations. This will improve controls and significantly reduce duplication of management, staff, effort and facilities. The Corrnorate Development Program of PETROM would include: (a) divestiture of contracts services, such as drilling, workovers and major repair facilities; (b) developing of reliable operating and accounting information at the producing unit and the individual well levels in order to improve reservoir and production management, cost controls and economic analysis; (c) installation or upgrading of management tools, such as a modern accounting system conforming to international Generally accepted Accounting Principle (GAAP) standards, and a management information system with subsystems for materials handling and inventory control, personnel management, treasury systems and corporate planning; (d) assisting in the design and development of a five-year rolling corporate plan to include procedures for monitoring of performance under the plan, and for training for their key personnel at both the headquarters and the Territorial levels in the preparation and use of the planning system; (e) adoption of modern methods of economic analysis and establishment of performance criteria;  - 39 - (f) assessment by independent consultants of the companies' staffing requirements, and the design and implementation of social safety net programs in line with the national safety net program to be developed by the Ministry of Labor and Social Protection; of recruitment programs to close the skills gap; and of training programs both for senior management and for staff to acquire specific technical/commercial skills; and (g) developing the options for privatizing PETROM. Corporate Restructuring and Development Program for ROMGAZ 4.27 Since ROMGAZ is a vertically integrated company, its exploration and production, gas transmission and gas distribution activities are presently the responsibility of a single headquarters management group. The Corporate Development Program of ROMGAZ would include: (a) restructuring ROMGAZ into a company that would coordinate the activities of four Strategic Business Units (SBUs): one Jor exploration/production of oil and gas; one for gas transmission and two for gas distribution; (b) reorganizing the functions of the SBUs and the Headquarters group along lines more closely related to their respective activities and upgrading their departments for accounting, financial management, corporate planning, human resources, environmental affairs and economic analysis; (c) establishment of financial performance criteria for each SBU; (d) converting the transmission SBU into a regula, A "common carrier" to ensure equitable access to the pipeline system to all producers and users, and to allow direct contracting of gas sales between producers and major e' I-users; (e) adopting, and periodically adjusting, transmission and distribution tariffs set by NAMR on the basis of transparent criteria; and (f) developing options for privatizing the SBUs. 4.28 Under the proposed Project, technical assistance would be provided to PETROM and ROMGAZ for implementing the above program. Consultants for installing a modern accounting system for PETROM are being financed by EBRD under their recent Petroleum Sector Project. Suggested TORs for consultants to assist the companies in implementing the Program are in the Project File. These TORS were discussed and agreed upon during negotiations. PETROM and ROMGAZ agreed during neeotiations to recruit. by December 31. 1994. consultants acceptable to the Bank to assist them in designing the Corporate Restructuring and Development Program and review the program with the Bank by no later than March 31. 1995. finalize it and implement it in accordance with an action plan satisfactory to the Bank (para. 6.04(c)). In addition, PETROM and ROMGAZ agreed to submit to th Bank. beginning October 31. 1994. their draft five-year rolling corporate plan. including a full set of projected financial statements. by October 31 of each year and final corporate plan approved by GOR by December 31 of each year and review with the Bank all maior investments (para. 6.04(d)). Financial Performance Criteria 4.29 PETROM and ROMGAZ, at the present time, do not have reliable data about their operations, costs, revenues, etc., on which acceptable assessment can be made about their future financial performance. However, once the hydrocarbon reserves and potential studies are completed by February  -40 - 1994, PETROM and ROMGAZ will be able to build the necessary information basis and adopt financial performance criteria (e.g. Return on Assets, Return on Capital Employed) as a part of their corporate development process. In view of the risky nature of their business, the selected criteria should ensure that their cashflow should cover as a minimum, the annual exploration costs and the local cost share of their capital expenditure program, in view of the absence of domestic financial markets. Therefore, PETROM and ROMGAZ agreed to: (a) adopt. after their fiscal year ending December 31. 1994. financial performance criteria which should enable them to cover, as a minimum, from their internal sources of funds, their annual exploration costs or the local costs of their capital expenditure program which ever is higher: and (b) submit to the Bank within six months of the end of the fiscal year. starting the 1994 accounts. the audit report of their annual accounts carried out by auditors satisfactory to the Bank (para. 6.04(e)). E. CONPET Organization 4.30 CONPET was established in 1905 with responsibility for transportation of crude oil and petroleum products throughout Romania. CONPET is the only company in Romania engaged in the transportation of both domestic and imported crude oil, and petroleum products such as gasoline, natural gas condensate and ethane. CONPET is organized into seven regions. Since 1970 and through the first half of 1992, the company was handling the transit of products through Romania to Yugoslavia. CONPET, which was restructured under Laws 15/1990 and 31/1990 into a joint-stock company, is overseen by a Commission of State Representatives consisting of three members: the Chairman, who is a representative of the MOI; and two other members selected from outside the company. 'The General Manager is the Chief Executive Officer of the company, and the senior management team comprises a Technical Director, responsible for all CONPET's operations, a Finance Director who oversees the finance and accounting functions, and a Marketing Director who has responsibility for marketing and procurement functions. Personnel management is the responsibility of the Chief of Personnel who reports to the General Manager. CONPET presently has 2,200 employees. Operations 4.31 CONPET's transportation system consists of 4,500 km of pipeline, with sizes ranging from 2 to 28" diameter, 30 pump stations, several hundred railway oil tanks, 50 of which are owned by CONPET and the remaining leased, and 25 operational and maintenance points. At each receiving and delivery points, the crude oil is measured in calibrated tanks, where specialized laboratories verify the oil quality. CONPET has the capacity to transport about 32 million tons/year of crude oil and other petroleum products, but is currently operating at about 70% capacity as a result of a decline in PETROM's production and in imports. The following subsystems are used for moving petroleum products: (a) the IPLS which carries crude from the Constanta harbor to the refineries located near Pitesti, Ploiesti, Onesti and Midia. It operates as a closed system, or pump-to-pump system, is partially locally automated and its operational control and supervision is handled by a dispatcher. It currently transports approximately two-thirds of Romanian oil consumption; and (b) the DPLS which transports crude from fields to refineries located near Ploiesti, Cimpina, Darmanesti and Onesti. It operates as an open system, or storage tank to storage tank system, whereby the pumping takes place from a storage tank in one station to another storage tank in the next station. This mode of operation allows for system flexibility, but  - 41 - results in higher energy consumption, higher operating cost, larger number of operating personnel and product losses. The system is mainly manually operated by dispatcher; 4.32 The [PLS and DPLS suffer from heavy losses, ranging from 0.1% to 0.29% in throughput for the IPLS and from 0.6% to 0.7% for the DPLS. The damaged pipelines, which lack adequate cathodic protection, have caused leakages of crude oil and salt water on the surface and into the ground water aquifers. Losses from fixed-roof storage tanks, caused by constant evaporation and the effect of wind and temperature have resulted in direct dispersion of hydrocarbons to the atmosphere. About 400 line walkers watch for leaks from continuous observation points located at critical pipeline crossings, such as rivers. In addition, the safety of the operations is a major concern. Under this project, assistance would be provided to CONPET for the rehabilitation of the two transmission systems and to modernize its oil flow monitoring system by installing a SCADA system that would also facilitate the detection of leaks, and hence, improve safety and reduce environmental problems from oil leakages. Financial Aspects 4.33 A summary of CONPET's operational and financial Table 4.7: CONPET - Actual and Forecast Operating Results performance for 1992, is provided in 1992 1993* Table 4.7 and detailed in Annex 4.4. CONPET transported 14.5 million Throughput (million tons) 14.5 17.6 tonnes of crude in 1992. comprOperating Revenues (US$M) 32.0 39.8 tonnes of crude in 1992, comprisIng Operating Costs 26.7 32.7 46% domestic crude, 18% imported Operating Income (US$M) 5.3 1.7 for domestic consumption, 6% for Change in Working Capital 9.3 (13.2) crude in transit to Yugoslavia, and Net Available for Investment 12.3 (11. 1) 30% crude imported for toll processing. In comparison, the total Ratios crude transported in 1989 (the peak Internal Cash Generation - 30 year for CONPET in terms of Current Ratio 5.4 1.7 quantity transported) was 31 million Receivables (days) 52 61 tonnes comprising 30% as domestic crude, 70% imported crude, including Estimate toll processing. The decline in cruder transported between 1989 and 1992 is due to the significant declines in domestic crude production and the country's inability to import crude (to make up for the shortfall) due to foreign exchange constraints. 4.34 CONPET's tariffs for 1992 for the various activities Table 4.8 are presented in Table 4.8. CONPET's tariff are low in Period Activity Tariff Level comparison to international levels but are sufficient in financial 01/01 - 10/15/92 Domestic 2.00 terms to meet all of CONPET's Transit 1.35 costs and/or surplus given the Toll Processing 1.23 low level of salaries and other 10/16 - 12/31/92 Domestic 3.44 costs in Romania, at the present Imported 2.93 costs ~~~~~~~~~~~~~~~Transit 1.61 time. Given the total distance Toll Processing 1.77 transported in 1992 of 4,500 km (foz all crudes), the revenue/ton Y Based on average distance of 200 kms then amounts to 0.10 Lei which translates to 0.03 US cents/ ton/km. In comparison, the transportation tariffs (by pipeline and rail) in the US average between 0.3 US cents to 0.4 US cents/ ton/km.  - 42 - CONPET's tariffs have been increased in October 1992 to a weighted average of about 0.1 US cents/ton. However, the present tariff regime has some drawbacks: (a) the tariffs are set based on the average distance transported and expenses incurred in transporting the crude and the volume of crude; and (b) tariffs are adjusted subject to GOR's approval, on an ad hoc fashion and do not consider the impact of the exchange rate and inflation on costs. These tariff setting practices are causing financial problems to CONPET in that any increases in its costs e.g., salaries and wages, debt service on foreign loans in particular, are not taken into account. The proposed rate and tariff study to be undertaken under this project (para. 3.03), will recommend options for establishing a tariff structure, taking into account the capacity, distance and volume of crude transported, as well as movements in exchange rate and/or inflation. 4.35 In 1992, CONPET generated gross revenues of US$32 million. CONPET CONPET's Summary ble 4.9 spent a high proportion (83%) of its revenues to (USS Million) Deemer311 meet operating costs. This is largely due to the fact that while costs were rising throughout the Assets year, CONPET's tariffs were increased only in Net Fixed Assets 66.1 the last quarter of 1992. Also, owing to the lack TotalWixe 1.6 of knowledge of conventional accrual-based accounting, CONPET includes most cash Current Assets outflows (including investments) other than taxes Cash and Securitics 1.2 under the term operating costs giving rise to the Inventories and Stocks 14.6 high operating ratio, which is the ratio of Receivables 5.9 Other 3.3 operating costs to operating revenues. As a Total Current Assets 25.0 consequence, the net profits available to TOTAL ASSETS 92.7 CONPET are relatively low at 17% of its gross revenues. Equity & Liabilities 4.36 For the first time in 1992, Equt Subscribed Capital 80.9 CONPET's assets were revalued, resulting in an Financial and other Revenues 2.6 increase in the fixed asset base by 12 times. Retained Eamings 4.6 CONPET's summary Balance Sheet at end-1992 Total Equity 88.1 is shown in Table 4.9. As a consequence of revaluation, the company achieved a 12% return Current Liabilities 4.6 on its net fixed assets compared to 21% in 1991. Long-term Debt 0 Current liabilities amount to about US$5 million, TOTAL EQUITY and LIABILITIES 92.7 resulting in a current ratio of 5.4, which is also a consequence of revaluation of inventories. Current Ratio 5.4 Receivables (days) 52 4.37 CONPET's business prospects are bright, since it is a monopoly providing an important service. CONPET will continue to generate profits, provided that: (a) CONPET remains as a crude oil "common carrier' for both domestic and imported crude oil; (b) CONPET implements urgently needed infrastructure rehabilitation program to reduce the losses in the transmission of crude oil; (c) CONPET's transportation tariffs are sufficient to achieve real returns on investments; and (d) CONPET improves its institutional efficiency through the implementation of modern management systems and elimination of duplicative functions and persoMnel. The proposed Project is designed to address these issues for CONPET.  - 43 - Financial Prospects 4.38 The cash flow projections for CONPET and details and assumptions for the forecasts are summarized in Table 4.10 below and detailed in Annex 4.4. In order to maintain a profit level that will allow it to finance the cost of its local investments and service its debts, CONPET needs to gradually increase its tariffs from an average of US$2.3/ton in 1993 to about US$6. 1/ton in the year 2000. As regards operating costs, starting 1995, the rehabilitation and modernization of the system will result in a gradual decrease of up to 10% in operation and maintenance costs. The anticipated operating costs savings arising from the project are: (a) reductions in transmission loss of both domestic and imported crude oil from the current 0.7% and 0.1%, to 0.3% and 0.05%, respectively; (b) saving in electricity consumption of about 14.2 million kWh/year; and approximately US$2.9 million/ year reductions in operating costs. However, salaries and wages are expected to increase towards international levels, thereby contributing to an overall increase in operating costs of about 3.3% annually on average. If tariffs are adjusted as proposed, CONPET will be able to meet from its internal sources all of its financial obligations. It is expected that the ratio of current assets to current liabilities will remain at a satisfactory level, i.e. between 1.7 and 2.1. Tabie 4.10: CONPET - Cassh Row Forecast 1994 1996 1996 1997 1998 Throughput (million tons) 20.1 21.0 21.3 21.7 21.9 Operating Revenues (USSM) 49.5 64.1 80.5 82.0 91.1 Operating Costs 39.0 40.3 41.6 43.0 44.4 Operating Incorne (US$M) 10.5 23.8 38.9 39.0 46.7 Net Available for Investment 3.3 8.9 15.3 16.5 18.8 Ratios Intemal CAsh Geeatlon 48 47 54 48 57 Cunent Ratio 1.9 2.1 2.3 2.2 2.3 Debl SerVIce Coveragp (Imes) 18 9 7 5 5 Corporate Development Program of CONPET 4.39 CONPET's Corporate Development Program is primarily aimed at preparing the company for privatization. CONPET does not need any restructuring but would need an internal reorganization. The Corporate Development Program for CONPET comprises: (a) reorganization of its operating departments to eliminate duplicative functions; and to establish appropriate management functions such as planning, operations, financial, personnel, environmental management, etc.; (b) establishment of appropriate management tools, e.g., accounting, corporate planning, and management information systems; (c) restatement of the financial statements to comply with modern conventional accounting principles and after a physical verification of its fixed assets, inventories and liabilities; (d) development, with the assistance of consultants, of a five-year rolling corporate plan and training CONPET's staff in the preparation and updating of the plan; (e) adoption of financial performance criteria for the company;  -44 - (f) assessment of staffing requirements, design and implementation of social safety net programs, and recruitment programs to close the skills gap; and (g) preparation in concert with the State Ownership Fund, of the company's privatization program. This will include preparation of Investor Information Memorandum/Prospectus, identifying potential investors; and offering the company for sale. 4.40 In accordance with the strategy of GOR, CONPET will be confirmed as a common carrier of all crude oil for Romnnia, which will be regulated by NAMR and CONPET would adopt and periodically adjust tariffs as set by NAMR in accordance with the recommendation of the planned Rate and Tariff Study (para. 6.01(d)). 4.41 Technical assistance to implement the Corporate Development Program will be provided to CONPET under the proposed Project. CONPET will recruit consultants to provide assistance for the design and implementation of its Corporate Development Program including a timetable for privatization. Draft Terms of Reference for the appointment of Management Consultant/Investment Bankers to carry out the Corporate Development Program have been agreed to with CONPET and are found in the Project File. CONPET agreed to appoint consultants to design by December 31. 1994. the Corporate Development Program. and thereafter finalize it and implement it in accordance with an action plan satisfactory to the Bank (para. 6.07(b)). Following the implementation of the corporate development program, the stage would be set for the entity to be offered for privatization. In addition, CONPET agreed during negotiations that by October 31 of each year. beginning with October 31. 1994. to prepare and furnish to the Bank. for its review and comments. a proposed five-year rolling business plan. The plan shall include projected financial statements and all investments CONPET plans to undertake: and by December 31 of each year. finalize and implement the plan after taking into consideration the Bank's comments (para. 6.07(c)). Financial Performance Criteria 4.42 CONPET will need to restate its financial statements and adopt a conventional accounting system to be able to assess its performance and maintain acceptable financial performance criteria. The proposed Rate and Tariff Study may also change the revenue picture of CONPET because it could recommend indexation and much more frequent tariffs adjustment. Therefore, since the company is to be privatized (at which point it is expected to seek profit maximization), the tariff levels will be closely monitored for CONPET. The Bank's monitoring of CONPET's financial performance will focus on CONPET generating enough funds to cover its debt service obligations. CONPET agreed during negotiations. to take all measures to achieve each year beginning 1994. a Debt Service Coverage Ratio (the ratio of its operating profit to its debt service) of not less than 1.5 (para. 6.07(d)). In addition, CONPET agreed to recruit auditors. satisfactory to the Bank. to audit its annual accounts beginning with the 1993 accounts and furnish to the Bank a copy of the audit report within six months of the audit (para. 6.07(e)).  - 45 - V. PROIECT JUSTIFICATION A. Rationale for Bank Involvement 5.01 The Bank's involvement in the proposed Project would ensure that the Government's strategy for the development and implementation of market oriented sectoral policies and institutional reforms in the petroleum sector are carried out on a timely basis. The Bank's support for the proposed Project, therefore, represents a first step to implement such strategy over the medium-term by providing assistance in the form of investments in new technology in the petroleum sector as well as ensuring commercial orientation and operational efficiency of the revenue earning entities through restructuring. The Bank's involvement in the proposed Project will also facilitate the mobilization of additional resources for energy development through cofinancing. Furthermore, because of the Bank's past experience in promoting acreage to private interests, the Bank can play a pivotal role in assisting GOR in the initial steps of attracting private investors in oil and gas exploration and development. In addition, the Bank's involvement in the proposed Project would ensure that the necessary measures that would mitigate adverse impact on the environment are implemented. A. Foreast Sales 5.02 Romania's crude oil and natural gas production has decreased by 46% and 41 %, respectively, between the period 1976 and 1991. Under the proposed Project, it is anticipated that this declining rate would be slowed through the investments for the introduction of modern technology, equipment and materials for the enhancement of oil and gas production. In addition, the proposed exploration promotion program to be implemented under the proposed Project may result in the discovery of new reserves while the rehabilitation of the transmission system would reduce losses and increase the availability of gas and oil to consumers. Despite the ongoing economic recession of Romania, sales of domestically produced oil and gas are strictly supply constrained, since the country currently imports a large proportion of its hydrocarbon requirements. There are, therefore, no market constraints to the entities from increased production. Also, the revenues from transportation of oil and gas are not likely to be substantially affected by the current contraction of the economy, as the sale of oil is projected to decline only moderately from 16 million TOE in 1990 to 14.8 million TOE by 1995, after which they are forecast to increase by about 2.2% from 1995 to 2000, and by 5% thereafter. The sale of gas, on the other hand is forecast to decline from 28.7 Million TOE in 1990 to 22.5 Million TOE in 1995, after which it is forecast to increase by about 1.5% from 1995 to 2000 and by 5% thereafter. Forecast of sales of oil and gas and the share of increase that would be contributed by the proposed Project are summarized in Table 5.1.  - 46 - Table 5.1: Actual and Forecast of Saes of Ol and Gas (Million TOE) Forecast--- Actual 1990 1996 2000 2005 2010 O0 Sales Y 16.0 14.8 16.5 21.1 26.9 Imports (Net) 7.7 8.3 11.1 15.9 20.9 Domestic Production 8.3 6.5 5.6 5.1 5.7 Proposed Proed 0.1 0.13 0.10 0.3 Gas Sales 28.7 22.5 23.8 25.3 32.8 Inports 5.8 7.6 12.3 16.0 25.4 Domesic Production 22.9 14.9 11.5 9.3 7.4 Proposed Pro4ecl 0.07 0.94 0.5 0.4 I/ Includes crude oil, petroleum products and LPG. Source: Bank Estimates C. Least-Cost Analysis 5.03 For the least-cost analysis, the cost of supplying oil and gas through the proposed Project has been compared with the alternative of meeting the forecast demands through additional imports of crude oil and gas, valued at the CIF equivalent price of imports, as at the margin, it is these imports that would be replaced by the outputs from the proposed Project. The present value of import costs is compared against the present value of costs of domestic production cost. The proposed Project is the least-cost alternative in supplying the additional outputs, as the present values of these levels of imports would be US$83 million for oil, and US$400 million for gas, as opposed to which, the cost of supplying these outputs domestically through the proposed Project would be US$72 million and US$178 million for oil and gas, respectively. D. Project Benerits 5.04 Internal Economic Rate of Return (IERR). The IERR for the overall project is Table 5.2: Summary of Internal Economic estimated at 40%, based on measurable costs and Rate of Return Calculation benefits. Measurable costs include: (a) the cost of capital and labor required to implement the proposed Project; and (b) operation and maintenance costs. Base Ca*e Measurable benefits include: (a) revenues from the Entities NPV* IERR sales of incremental oil and gas to be produced, under (USS Million) the project and where price is based on the CIF price Overall Project 228 40 of crude oil and border price of equivalent fuel oil for gas; and (b) incremental revenues accruing to CONPET 92 45 CONPET resulting from the reduction in loss in the transportation of crude and to ROMGAZ resulting PETROM 3.6 12 from the reduction in loss in the transmission and distribution of gas. All costs and benefits are ROMGAZ 166 54 expressed in constant 1990 dollars. The analysis for USS Million; at 10% discount rate. the IERR and the Net Present Values (NPVs) for each of the entities are in the project file while the analysis for the overall project is presented in Annex 5.1 and summarized in Table 5.2. The IERR of the  - 47 - proposed Project estimated at 40% is significantly higher than the opportunity cost of capital (10%). This is primarily because the capital costs (which are a major portion of the total cost) are incurred during the initial 3-4 years only, while the benefits streams extend over a period of 15 years. Additionally, existing capital that is already in use is considered as sunk cost and therefore not considered into the economic rate of return calculations. 5.05 Sensitivity Analysis. In order to test the stability of the IERR under several adverse scenarios such as increase in overall project costs or delays in project implementation, a sensitivity analysis was carried out. The IERR was calculated on the following assumptions: (a) increase overall project cost by 20%; and (b) delay in the realization of project benefits by two years. The results of the analysis indicate that increasing the overall project cost by 20% would result in reducing the IERR from 40% to 25%, and that a two year delay in realization of project benefits would reduce the IERR to 21 % respectively. The project is time sensitive, particularly, to implementation delays and less to increases in capital costs. Additional sensitivity tests (switching value analysis) were carried out to show the robustness of the project against adverse conditions. For the IERR of the overall project to approach 10%, a combination of the above drastic changes would have to occur simultaneously: (i) project delay by two years; and (ii) increase by 20% in overall project costs. E. Macroeconomic and Structural Adjustment Linkages 5.06 The implementation of the proposed Project would also contribute significantly to the achievement of the objectives of the Government's structural reform programs as agreed with the Bank under the SAL (Loan 3481-RO) by addressing the following issues: (a) the stabilization efforts with regards to budget deficits; (b) maintaining the momentum of price liberalization; (c) progressively opening the economy to international/private investment; (d) carrying out enterprise reforms, especially enterprise financial discipline and privatization; and (e) development of affordable social safety net. 5.07 Energy imports absorb nearly three-quarters of the foreign exchange earnings of the country, and in recent years have contributed significantly to the balance of payments problems. The increases in the domestic production of oil and gas to be achieved under the proposed project would reduce the level of oil and gas imports and hence a reduction in the balance of payments problems. The foreign exchange savings resulting from reduced imports between 1995 and 2000 are estimated at about US$412 million. As regards improving fiscal balances, the project would contribute about US$2.7 billion through the year 2000 to the national budget. These contributions are from royalties on domestically produced oil and gas (US$579 million); and corporate income taxes (US$2.1 billion) as the companies become more profitable because of price increases, efficiency improvements and increased production. The estimated contribution of the project to the Government's budget is summarized in Table 5.3 and detailed in Annex 5.2. Table 5.3: Resource Mobilization (USS Million) 1994 1995 1996 1997 1998 1999 2000 Total Royalties 89.8 78.3 77.3 80.1 89.6 84.0 80.2 579.3 Corporate Tax 367.9 330.6 311.4 291.3 280.5 260.6 229.6 2071.9 Total 457.7 408.9 388.7 371.4 370.1 344.6 309.8 2651.2  - 48 - 5.08 The proposed Project would help maintain the momentum of price liberalization of energy resources. Already, the Government has issued a decree establishing the producer price for oil at parity with international prices and producer price for natural gas equivalent to the international price of fuel oil (thermal equivalent) using current exchange rates. Also in the area of natural gas supplies to consumers, the project will help establish separate pricing regimes for transmission and retail distribution of gas in accordance with economic criteria. 5.09 In terms of opening up the economy to international/private investment, the project will help establish a legislative framework that includes the promulgation of a Petroleum Law, Petroleum Regulations and Policies, and Model Contracts for exploration and development of oil and gas This framework would create an enabling environment for encouraging needed international/private investment for accelerating the exploration and development of petroleum resources in new areas; and in deeper and complex geologic horizons. The proposed Project will also help develop NAMR as an independent regulatory body for the petroleum sector, which is critical for encouraging private investment in the sector. 5.10 In the areas of enterprise reforms and privatization, the project will carry out a restructuring and implementation of corporate development programs for each of the entities to improve their operational efficiency. Furthermore, financial discipline would be ensured through the setting up of a set of financial performance criteria to which each beneficiaries will be held accountable. These include: internal cash generation levels, debt service coverage ratios that will also address format for addressing the issue of inter-enterprise arrears and accounts receivable targets. The project will also position PETROM, ROMGAZ and CONPET for privatization in the future. 5.11 As the entities undergo corporate restructuring program and to the extent that redundant staff and labor may not be quickly absorbed in other sectors, the entities will design labor transition programs to counter the adverse effects of restructuring. Such social safety net programs which will be compatible with the national programs will be implemented through corporate earnings of the entities undergoing restructuring so that the social safety net expenditure will not be a burden on the Government budget. F. Project and Other Risks 5.12 The proposed Project faces the following risks: (a) implementation risks; (b) technical risks; (c) financial risks; and (d) market risks. These risks and measures to mitigate and/or minimize them are discussed below. 5.13 Implementation Risks. Implementation risks, which could delay project implementation, can be categorized into: absence of appropriate legal, regulatory and pricing framework for the success of the project; lack of know-how on the part of the Romanian implementing agencies; and the ability to comply with the Bank's procurement and disbursement procedures. To mitigate the risks arising from the absence of appropriate legal, regulatory and pricing framework, tiie Bank asked for, and obtained, prior to neb,otiations of the proposed Project, a decree which has established the appropriate legal, regulatory and pricing framework (para. 2.23). To minimize the risks arising from the lack of know-how on the part of the Romanian implementing agencies, appropriate consulting assistance (technical, engineering, management consulting) has been included and terms of reference for all of the consulting assignments have bee.n agreed to. To enable compliance with the Bank's procurement and disbursement procedures, the standard bidding documents to be used by the implementing agencies have been agreed to. Furthermore, a procurement seminar has already been planned to be held in Bucharest, Romania, in January 1994, to help the Romanian authorities understand the Bank's requirements. In addition, the  - 49 - above-referred consulting assignments in technical and engineering areas will also include assistance in preparation of documentation that would meet the Bank's requirements. 5.14 Technical Risks. The primary technical risk that the proposed Project could encounter is that the actual production levels of oil and gas could be lower than forecast. To minimize this risk, the production estimates used are very conservative and only good producing wells which are currently shut in due to technical problems or unavailability of proper subsurface production equipment will be rejuvenated using international contractor services. 5.15 Financial Risks. The major financial risk faced by the proposed Project is that of mobilizing required finances in a timely manner for implementation of the project. To minimize this risk, appropriate pricing reforms have been implemented which, together with the increased production of oil and gas and improved corporate efficiency (as a consequence of corporate restructuring and development), will enable PETROM, ROMGAZ and CONPET to generate sufficient revenues from their internal sources to cover all of the local costs of the proposed Project. Furthermore, GOR with the Bank's assistance has ensured that there is no foreign cost financing gap. 5.16 Market Risks. In view of the fact that Romania would continue to be an importer of petroleum and petroleum products in the medium to long term, the ability of PETROM and ROMGAZ to sell the incremental production as a consequence of the proposed Project is not an issue. However, there is a risk of failure to attract private sector investments to increase the exploration production of oil and gas. To minimize this risk, the incentive regime has been enhanced (producer pricing linked to border prices, no restrictions on the limitation of depth9/), more acreage are being made available to IOCs, a well-prepared petroleum exploration promotion will be carried out and a transparent regulatory framework for award of concessions has been created. G. Sustainability 5.17 As a result of the restructuring process, commercial orientation and financial accountability of the sector entities would be ensured. This in turn would improve the efficiency and profitability of the main sector entities on a sustained basis, thereby eliminating their reliance on budgetary allocation from GOR for their operational activities. Working with the three main entities including the regulatory body together would provide the appropriate impact on the management of the sector as a whole and develop the confidence needed for encouraging private sector investment. The availability of project funds for the acquisition of urgently needed modern equipment and materials for the rehabilitation and proper completion of the producing wells will help increase domestic production and arrest the decline in oil and gas production thereby reducing the dependence on imports. In addition, the rehabilitation of the existing transmission networks will improve the efficiency of oil and gas transmission, reduce losses and provide opportunity for the substitution of gas for high value petroleum products. Finally, the proposed Project would assist in addressing the environmental degradation in the oil and gas sector. 9/ Presently the IXCs are allowed to explore only at depths treater than 3,500 metres.  -50 - VI. AGREEMENTS REACHED AND RECOMMENDATIONS 6.01 During negotiations, GOR agreed to: (a) maintain the producer prices for: (i) crude oil at levels equivalent to the average FOB price of similar quality crude oil; and (ii) natural gas at levels equivalent to at least the average FOB price level of thermally equivalent imported fuel oil (para. 2.26(a); (b) (i) by December 1 of each year, prepare and furnish to the Bank for review and comments a report, in form and substance satisfactory to the Bank, on the progress achieved in implementing the petroleum sector restructuring strategy based on the results of the monitoring and evaluation of activities performed and the recommended measures to ensure that the implementation of the strategy remains on track; and (ii) based on the conclusions and recommendations of the report, after incorporating the Bank's comments, update the strategy and subsequently implement the measures required to ensure the achievement of its objectives (para. 2.26(b); (c) (i) with the help of consultants, whose qualifications and terms of reference are satisfactory to the Bank, recruited by November 1, 1994, complete the series of studies required for the establishment of a fuel policy for Romania by December 31, 1995; and (ii) immediately thereafter, review the studies and their recommendations with the Bank, and implement the recommendations, taking into account the Bank's views, in accordance with a timetable satisfactory to the Bank (para. 3.03(A)); (d) initiate by November 1, 1994, a refinery subsector restructuring study, with the help of consultants whose qualifications and terms of reference are satisfactory to the Bank and by December 31, 1995, ensure that the said study is completed and a copy thereof furnished to the Bank for its review and comments and thereafter take all measures required to implement a strategy for restructuring and optimizing the refinery subsector operation based on the recommendation of the study and Bank's comments (para 3.03(A)); (e) (i) adopt Petroleum Regulations and model concession contracts satisfactory to the Bank by November 1, 1994; (ii) demarcate by November 1, 1994, the areas to be promoted including those to be relinquished by PETROM and ROMGAZ, into exploration acreages to be provided to the private sector; and (iii) with the help of consultants, recruited by December 31, 1994, whose qualification and terms of reference are satisfactory to the Bank, design and undertake a Petroleum Exploration Promotion Program by March 31, 1995 (para. 3.08); (f) appoint conLsultants, by November 1, 1994, to carry out and complete by July 31, 1995, a rate and tariff study under terms of reference satisfactory to the Bank, which will recommend appropriate rates to be charged by common carrier pipelines for oil and gas, and the tariffs to be paid by final consumers of distributed gas (para. 3.03(A)); (g) open and maintain a Special Deposit Account for the beneficiaries with the National Bank of Romania or any other acceptable commercial bank in Romania, on terms and conditons satisfactory to the Bank (para. 3.20); and (h) take all necessary actions on its part to ensture that its departments, agencies and all entities owned or controlled by it, will settle their bills on account of oil and gas  -51 - purchased from PETROM and ROMGAZ, respectively, within a period of not more than three months of the date of such bills (paras 4.13 and 4.24). 6.02 Agreements Reached with GOR and the Entities: (a) the entities would: (i) fumish Quarterly Progress Reports in a manner satisfactory to the Bank; and (ii) submit to the Bank, consultants reports as and when they are furnished to the beneficiaries by the consultants (para. 3.10); (b) GOR and the entities have the Special Account and project accounts audited and submit to the Bank, by June 30 of each year, the audit certificate (para. 3.20); and (c) PETROM, ROMGAZ and CONPET would each establish by November 1, 1994, under terms of reference satisfactory to the Bank, an environmental management unit, responsible for carrying out their respective environmental action plan (para. 3.21). 6.03 GOR and ROMGAZ have agreed to: by December 31, 1994, enter into a Loan Agreement with EIB for the requisite amount and make it effective; or establish to the satisfaction of the Bank, that the requisite funds for the implementation of SCADA and Telecommunication portion of ROMGAZ's component are available on terms and conditions satisfactory to the Bank (para. 3.05). 6.04 Agreements Reached with PETROM and ROMGAZ to: (a) (i) relinquish all areas not currently being produced or explored by October 1, 1994; and (ii) by the same date, make available to NAMR all data relating to petroleum exploration and production (para. 3.08); (b) contract the services of internationally reputable companies, oil services contractors and consultants, as necessary to assist in the implementation of their programs (para. 3.09); (c) recruit by December 31, 1994, consultants acceptable to the Bank to assist in the design of their Corporate Restructuring and Development Program and review it with the Bank, finalize and implement it in accordance with an action plan satisfactory to the Bank (para. 4.28); (d) submit to the Bank, beginning October 31, 1994, a draft five-year rolling corporate plan, including a full set of projected financial statements, by October 31 of each year and final corporate plan approved by GOR by December 31 of each year and review with the Bank all their major investments (para. 4.28); and (e) (i) adopt, after their fiscal year ending December 31, 1994, financial performance criteria which should enable them to cover, as a minimum, from their internal sources of funds, their annual exploration costs or the local costs of their capital expenditure program whichever is higher; and (ii) submit to the Bank within six months of the end of the fiscal year, starting the 1994 accounts, the audit report of their annual accounts carried out by auditors satisfactory to the Bank (para 4.29). 6.05 During negotiations PETROM agreed to: (a) review with the Bank on a yearly basis the success of joint ventures with JOCs (para. 3.09); (b) gradually reduce its accounts receivables on average to not more than: (i) three-months' billing by December 31, 1994; (ii) two-months' billing by  - 52 - December 31, 1995; and (iii) thereafter, continue to maintain its accounts receivables at not more than two-months' billing (para. 4.13). 6.06 Agreement Reached with ROMGAZ to: (a) select and submit to the Bank by December 31, 1994, on the basis of criteria to be agreed to with the Bank, lists of prospective fields to be promoted to lOCs for the implementation of enhanced oil recovery techniques under cooperative or joint venture arrangements (para. 3.09); (b) appoint reputable engineering firms and consultants satisfactory to the Bank for the design and supervision of the rehabilitation of the distribution and transmission networks and for the implementation of the SCADA and Telecommunication system and for the implementation of its other activities under the project (para. 3.09); and (c) gradually reduce its accounts receivable on average to not more than: (i) three-months' billing by December 31, 1994; (ii) two-months' billing by December 31, 1995; and (iii) thereafter continue to maintain its accounts receivable a# not more than two-months' billing (para. 4.24). 6.07 During negotiations CONPET aereed to: (a) appoint consultants with qualifications, under terms of reference and in accordance with a timetable satisfactory to the Bank, to assist in the implementation of the rehabilitation and modernization program and its other activities under the project (para. 3.08); (b) appoint consultants to design by December 31, 1994, the Corporate Development Program and review it with the Bank and thereafter finalize it and implement it in accordance with an action plan satisfactory to the Bank (para. 4.41); (c) submit to the Bank, beginning October 31, 1994, its draft five-year rolling business plan including a full set of projected financial statements and all investments it plans to undertake, and by December 31 of each year finalize and implement the plan after taking into consideration the Bank's comments (para. 4.41); (d) take all measures, to achieve each year beginning 1994, a Debt Service Coverage Ratio (the ratio of its operating profit to its debt service) of not less than 1.5 (para. 4.42); and (e) recruit auditors, satisfactory to the Bank, ti audit its annual accounts beginning with the 1993 accounts and furnish to the Bank a copy of the audit report within six months of the audit (para. 4.42). 6 08 As special conditions of effectiveness of the proposed Loan. GOR should have: (a) fully staffed NAMR in order to make it operational (para. 3.03(A)); and (b) establish separate Subsidiary Loan agreements with each of the entities acceptable to the Bank (para. 3.20).  ROMANIA PETROLEUM SECTOR REHABILITATION PROJECT Organization Chart of the Energy Sector MINISTRY OF INDUSTRY Policy. Allocation Economic Reform and Legislation Management Dept. of Chemicals b of Resources and Industrial Restructuring (Secretary of State) Petrochemicals Department of Mining 3 - 11* Distribution (Secretary of State) (Chief of Department) (Chief of Departmeh.L) (Chief of Oepartment) orSecretar of States ENERGY SECTORw |Oil & Gas Exploration || Power II l Gol ||Ol a6s Distribution/| Poduction llll Transmissio enrls - PETROM - ROMGAZ RENEL - RAH - RAFIROM - PROSPECTIUNI - RAL - CONPET *Note: Oepartment Chiefs have equal seniority as the Secretaries of States Departments 3 through 11 have no relevance to the Energy Sector, hence have not been shown. m  Anex 1.2 ROMAN1A Petroleum Sector Rehabilitation ProWect Primary Eneg Sources and Uses (in million tons of oil equivalent)W 1980 1985 1986 1987 1988 1989 1990 SOURCES 72.8 80.9 83.6 81.7 883 88.5 74.9 Domestic Output 51.8 58.3 57.6 55.7 56.6 S4.7 42.8 Crude Oil 11.5 10.7 10.1 9.5 9.4 9.2 7.9 Natural Gas 28.9 32.8 33.1 31.4 30.4 27.3 23.5 Lignite and coal 7.8 10.0 10.1 11.2 12.5 12.8 7.7 Electric hydropower 2.8 3.0 2.8 2.8 3.5 3.3 2.9 Others 0.8 1.7 1.5 0.7 0.7 2.1 0.8 Imports 21.0 22.7 26.0 31.4 31.8 34.3 30.1 Crude Oil 15.7 14.6 17.0 21.3 21.0 21.8 16.1 Natural Gas 1.3 1.5 2.0 2.7 3.3 6.0 6.0 Coal and Coke 3.7 5.4 5.5 5.8 5.3 5.0 5.0 Electricity 0.1 0.8 1.1 1.3 1.9 2.0 2.5 Others 0.2 0.4 0.3 0.4 0.4 - 0.6 0.5 USES 72.8 80.9 83.6 87.1 88.3 89.0 74.9 Domestic Consumption 64.0 71.6 72.2 76.3 74.1 76.4 70.4 of which Energy sector - 12.5 12.0 14.2 12.2 13.4 0.0} Industry 44.1 39.6 41.2 42.2 42.6 48.5 49.0} Construction 1.0 1.2 1.2 1.6 1.3 1.2 1.1 Transportation 3.2 2.9 2.8 2.6 3.1 2.9 3.5 Agriculture 3.0 3.1 3.0 3.0 3.0 3.0 2.9 Households 6.7 6.9 7.2 6.9 5.0 7.4 8.6 Exports of oil Products 8.8 9.6 10.5 12.1 13.5 13.6 5.3 Net Consumption 55.2 62 61.7 64.2 60.6 52.8 65.1 Others 0.0 - 0.3 0.8 - 1.3 0.8 - 1.1 n.a (incl. changes in stocks) Net Imports 12.2 13.1 15.5 19.3 18.3 20.7 24.8 Source: Data supplied by Romanian authorities and mission estimates. a/ One TOE is equivalent to 9,700 x 1G kcal  - 55 - Annex 1.3 ROMANIA PETROLEUM SECTOR REHABILITATION PROJECT Enerv Prices Movements and Comparison with Import Parity Prices uss Energy Product (1) (2) (3) (4) (5) (6) 7 (7) as % of Nov. NWov. May March May Nov. Dec. Import 1990 1991 19m 19i3 1993 1993 1993 PaFy Price Cr.-de Oil (Pnce to Reftnery) Comestic (ton) 117 134 80.3 70.4 105.3 90.6 81.7 79 Irnpored ton) 117 134 85.3 117.0 130.4 129.5 116 8 113 Petroleum Products (Retain/ton) Premium Gasoline 342.5 508.4 270.0 349.0 384 9 475.C 428.6 Regular 337.8 441.5 238.0 320.0 368.4 445.5 401 7 Nommal 333.3 402.7 218.0 302.0 352.5 427.1 385 1 Diesel 263.2 342.3 166.0 269.4 306!6 276 4 Fruel Oil f from domestic crude/Ion 66.7 91.4 54.8 67.0 107.2 122.2 110 2 (1% Of sulpniur) (ii) from imported cruoe/ton 66.7 91.4 54.8 60.0 87.6 92.3 8.3.2 (3.3% sulphur) LPG (householos)/ton 46.7 15.6 9.3 20.0 169.1 181.8 1639 Natural Gas (OOm') Ind ustry 46.7 59.2 39.0 33,0 39.0 70 0 63.1 68 Ui HOuSeholdS 16.7 5.6 12.3 6.0 39.0 21.8 19 67 27 Coai ard Lignite Ex-rnmne Lign.le (ton) 7.1 15.2 9.1 13.5 13.9 21 9 19.5 1 toj Tfermal Coae (Ion) 7.1 30-40 25.0 20.0 29.0 28.9 34.3 tn6K o(k ) Coe (ion)", 7.1 55 117.0 96.0 146 3 127 6 115 0 1cc r f>r!ct (kwfil 2J Aie,aq.,je 0.024 0.052 0 032 0.028 0 04 0 05 0.05 96 IrOustry 0.025 0.050 0.03 0.026 0.04 0.06 0 05 96 HcosenoidS 0.011 0.0036 0.012 0.01 0.05 0.025 0.02 40 Tnermna Enercv (Glgacaiorles) Industry 7.8 4.2 8.0 10.5 12.0 17.9 17.9 117 Housenolds 3.7 1 2 3.0 1.7 14.0 8.2 7.4 51 E.ctar'2e Rates (Lel/USS) N NGV 1990 - 60 No . 1991 180 M M3j 1992 - 300 J an 1993 - 600 |May 1, 1993 615 Nov. 1993 - 1100 |_Dec. 1993_-_1220 === = _ . f 1! / Electrctty price Is compared to US cents 5.2/kWh. wthlch represents Import partty. As % of cIt of IntematlonaJty traded hard coal on a feat equivalent As % of marginal fuel cost ... Used t)j melailurgical plants  - 56 - ANNEX 2.1 Page 1 of 2 ROMANIA PETROLEUM SECTOR REHABILITATION PROJECT OVERVIEW OF ROMANIAN GEOLOGY AND THE POTENTIAL FOR OIL AND GAS 1. The potential areas for petroleum exploration (oil and gas) can be divided into six main geological zones. These comprise: (a) Transylvanian depression; (b) Panomian Basin; (c) East Carpathian basin; (d) South Carpathian depression; (e) Moesan platform; and (f) Offshore of the Black Sea. A brief description of the characteristics of each of these areas is given in the following paragraphs. 2. The Transylvanian DeDression - This is located in the central part of the country and is surrounded by igneous crystalline rocks that form a ring around the depression. The crystalline basement is overthrusted by thick mesozoic and paleogene sediments consisting of sandstones, limestones dolomite and salt domes. The mesozoic sediments which are the deeper sediments (500 m thick approximately) have been heavily faulted and extremely complex to explore using the obsolete exploration equipments of PETROM. Overlaying the mesozoic sediments are thick monotonously laid paleogene sediments with streaks of volcanic sediments. The paleogene sediments are rich in gas and gas reservoirs have been discovered from as shallow as 100 m to depths of 4500 m mainly in limestones and on top of salt domes. The Transylvanian depression is the main gas producing region in Romania. It is currently explored and produced by ROMGAS, the complement of PETROM. One of the main gas fields in the basin is the Filithethis gas field with recoverable reserves estimated at 150 billion cubic meters [5.3 trillion cubic feet (TCF)]. 3. Due to the limited capability of their exploration technology, ROMGAS and PETROM have only been able to concentrate their exploration activities in the relatively shallow sediments. However, a deep wildcat well drilled to a depth of 5200 m shows traces of oil and gas from the cretaceous and upper jurassic sediments of the mesozoic. ROMGAS and PETROM plan to seek assistance for the exploration of these deeper horizons from the private international oil companies throuah joint venture arranoemer.ts. 4. Panomian Basin - This is located in the western part of the country and comprise the eastern extension of the, Panomian Basin known to be productive in Yugoslavia. Here also, mesozoic age rocks are overthrusted by miocene and pliocene rocks. Oil that is found in this basin is believed to have been generated in the miocene rocks and to have migrated to shallow pliocene rocks and fissured crystalline intrusive basement rocks. Oil fields in this area are shallow at 100-500 m depths. The oil is heavy (about 19 API) and may have been biodegraded due to in situ weathering. PETROM's future objective for this area is to use high technology  - 5 7 - ANN 21 Page 2 of 2 seismic to locate the pinch outs and subtle stratioraphic traps. and also with a view to promote the area to foreign investors. 5. East Carpathian Depression - This is located on the eastern side of the Transylvanian depression and separated l, om it by the intrusive crystalline basement rocks. The sediments of this basin are of the paleogene rocks. Explorations below the thrust has been hindered by lack of modern technology. Invariably only the shallow sediments have been extensively explored. The main oil field in this area is the Moinesti field with recoverable reserves of oil of about 100 million tons. The recovery factor is low at about 20%, which implies that the overall oil in place could be over 500 million tons. Over 60 million tons have been recovered so far. PETROM intends to seek modern technology to improve Rts recovery factor and also explore the zones below the thrust fault. possibly through loint ventures with lOCs. 6. South Caroathian Depression - This is the southern part of the Carpathian Depression which is thrusted over the MOESAN platform. It is one of the most prolific oil producing areas in Romania. Uke the east Carpathian Depression, exploration efforts have been concentrated mainly in the shallow thrusted rocks. The underlining rocks below the thrust faults have not been explored for reasons already given above. There are large oil fields in the shallow sediments, of which the MORENI field is the largest oil field in Romania with recoverable reserves of over 400 million tons or 2.94 billion barrels. It has been producing for over 50 years and over 350 million tons may have been produced from this field. 7. On the basis of the production techniques being used by PETROM, it is estimated that only 10 million tons more of oil can be recovered from this field unless modern techniques are applied. In addition, PETROM has recently discovered a heavy oil field -- Ghimati -- in this basin with 18 API gravity oil. Assistance in the application of modern enhanced oil recovery (EOR) technique is required for efficient production of this field. Furthermore, PETROM would like to seek assistance also from possible foreign joint venture patners for the exploration of sediments below the thrust where oil in the mesozoic structure is considered likely. A deep wildcat well (7050 m) drilled through the fault encountered oil and gas in the older deeper sediments. 8. MOESAN Platform - This is the other main petroleum producing area in Romania. It is overthrusted in the north by the South Carpathian Depression and bounded in the south by River Danube. There are several oil and gas field found in structures from 100-500 m depths. Main oil field is around CRAIDUA which is close to Bucharest. Again, it is believed that oil exists in deeper unexplored horizons but proper structural mapping will require acquisition of good quality and detailed seismic using modern technology. 9. Offshore Black Sea - PETROM has undertaken limited exploration work offshore in the shallow water of the Black Sea. About 26 structures have been located, of which 17 have been drilled resulting in the discovery of three oil fields and one gas field in water depth of 80- 90 m. Reservoir depths vary from 2000 m to 4000 m. Main offshore fields are the LEBADA and OVIDIU fields. Estimated oil recoverable reserves in these fields are estimated at 10-20 million tons. In all the six exploration basins, about 465 potential structures have been found and are being developed. Some of these structures have multiple pay zones. m:\ao\annex2.bto  - 58 - Annex 2.2 Page 1 of 4 ROMANIA PETROLEUM SECTOR REHABILITATION PROJECT Proiection of Oil Production (Hillion Tons) Projected Current Projected Natural Incremental Due Project Field Year Trend Depletion Rate to Project Potential 1991 6.8 6.8 0.00 6.8 1992 5.9 6.5 0.00 6.5 1993 5.1 6.7 0.00 6.7 1994 4.4 6.5 0.00 6.5 1995 3.8 6.3 0.00 6.3 1996 3.2 6.28 0.02 6.3 1997 2.8 6.15 0.05 6.2 1998 2.4 5.92 0.09 6.1 1999 2.1 5.76 0.13 5.9 2000 1.8 5.47 0.13 5.6 2001 1.5 5.48 0.12 5.6 2002 1.3 5.29 0.11 5.4 2003 1.1 5.20 0.10 5.3 2004 1.0 5.20 0.10 5.3 2005 0.85 5.20 0.n0 5.29  RcOb4ATA 59 _____ ;'PWTRflT.W?1MAM t~O U~RE1ffr?TATMN~ PRMlTr ______ ______ --7 *_ 7 .- :Pa e:2.of:4-... - PojectLom- of aa;L !rodu