Argentina - Gas Utilization and Technical Assistance Project

Document of The World Bank FOR OMCIAL USE ONLY Report No. 14728 PROJECT COMPLETION REPORT ARGENTINA GAS UTILIZATION AND TECHNICAL ASSISTANCE PROJECT (LOAN 2592-AR) JUNE 30, 1995 Infrastructure and Energy Operations Division Country Department IV Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FLscal Year January 1 - December 31 Units of Weigbts and Measures: Metric 1 kilometer (km) = 0.62 miles (mi) 1 meter (m) = 3.28 feet (ft) 1 kilogram (kg) = 2.20 pounds (lbs) 1 cubic meter (mi) = 264.2 gallons (gal) Principal Abbreviations and Acronyms CDR Campo Durin Refinery CNG Compressed Natural Gas EOR Enhanced Oil Recovery GUTA Gas Utilization and Technical Assistance IBRD International Bank for Reconstruction and Development IDB Inter-American Development Bank IMF International Monetary Fund JEXIM Japanese Export-Import Bank LCR Lujan de Cuyo Refinery LPR La Plata Refinery MNTOE Million metric tons of oil equivalent SAR Staff Appraisal Report YPF Yacimientos Petroliferos Fiscales  FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation June 30, 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Argentina Gas Utilization and Technical Assistance Project (Loan 2592-AR) Attached is the Project Completion Report (PCR) on the Argentina: Gas Utilization and Technical Assistance project (Loan 2592-AR, approved in FY85) prepared by the Latin America and the Caribbean Regional Office, with Part II prepared by the Borrower. The project, for which the Bank approved a US$180 million loan to YPF (Argentina's national oil company) in 1985, comprised a series of investments for: (i) the expansion of the country's northem gas system, (ii) the upgrading of crude oil and products transport infrastructure; (iii) the expansion of enhanced oil recovery (EOR) facilities; (iv) the carrying out of a pilot compressed natural gas (CNG) program; and (v) the institutional strengthening of YPF. The scope of the project was substantially modified during implementation, with, inter alia, the substitution of most EOR sub-projects by revamnping investments in YPF's refineries and the redirection --and substantial expansion--of the TA component to assist in the privatization of YPF and Gas del Estado (Argentina's natural gas monopoly). The CNG component was only partially carried out. The other physical components of the (revised) project were successfully completed, albeit with a two-year delay. Implementation of the project took place, for the most part, i.e. through 1991, in an environrment of severe macroeconomic crisis and inadequate sector pricing policies which adversely affected YPF's finances and management, and prevented compliance with financial loan covenants. Nonetheless, in the latter years of project implementation, the expanded TA funding under the loan helped lay the groundwork for the radical restructuring and eventual privatization of the sector --supported by the Bank's Public Enterprise Adjustment Loan (PERAL) of 1991--which has resulted in its financial rehabilitation . Accordingly, the outcome of the project is assessed in the PCR as satisfactory, its institutional development as substantial and its sustainabillity as likely. Both Borrower and Bank performance are considered satisfactory. The PCR is generally thorough and informative but its coverage of financial issues could have been more complete. An audit of the project is ongoing. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  I  FOR OFFICIAL USE ONLY - 11 - TABLE OF CONTENTS PREFACE . ....................................i EVALUATION SUMMARY ........................... iv PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE .............................. 1 Project Identity ............................... 1 Background ................................. 1 Project Objectives and Description ................... 2 Project Design and Organization ..................... 3 Project Implementation .......................... 5 Project Results ............................... 9 Project Sustainability ........................... 10 Evaluation and Lessons Learned .................... 11 Bank's Performance ........................... 12 Borrower's Performance ......................... 12 Consulting Services ........................... 13 Project Documentation and Data .................... 13 PART H: PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE ............................. 14 PART Im: STATISTICAL INFORMATION ............... 16 Related Bank Loans ........................... 16 Project Timetable ............................. 16 Schedule of Disbursements ....................... 17 Project Costs ............................... 17 Project Financing ............................. 18 Allocation of Loan Proceeds by Category .............. 18 Summary Financial Statements ..................... 19 Economic Impact ......... .................... 21 Legal Covenants ......... .................... 22 Staff Inputs . ................................ 25 Mission Data . .............................. 26 Map IBRD 25826 ............................. 28 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.   PREFACE This is the Project Completion Report (PCR) for the Gas Utilization and Technical Assistance Project in Argentina for which Loan 2592-AR in the amount of US$180.0 million to Yacimientos Petroliferos Fiscales (YPF) was approved by the Board on June 25, 1985, and declared effective on September 30, 1986. Co-financing was provided by the Inter-American Development Bank with a loan of US$59.5 million and the Export-Import Bank of Japan with a loan of US$187.3 million. The Loan was closed on December 31, 1993, two years behind schedule, with the last disbursement made on May 25, 1993. An undisbursed amount of US$14.6 million was cancelled on November 25, 1993. The loan was fully prepaid by YPF. The PCR was jointly prepared by the Infrastructure and Energy Operations Division, Country Department IV of the Latin America & Caribbean Regional Office (Preface, Evaluation Summary, Parts I and II) and the Borrower, YPF (Part II). Preparation of this PCR is based, inter alia, on the Staff Appraisal Report, the Loan and Guarantee Agreements, supervision reports, and correspondence on the project including internal Bank memoranda.   - iv - EVALUATION SUMMARY Project Objectives and Description 1. The project was designed to rationalize the use and pricing of natural gas and petroleum products, to strengthen the sector by addressing several sector issues, to eliminate bottlenecking in oil and gas deliveries, to enhance hydrocarbon reserves, and to propagate the use of compressed natural gas (CNG) in land transport. The project comprised expansion of the northern gas delivery and liquid recovery systems, efficiency enhancing gas and oil products transport, enhanced oil recovery facilities (EOR), infrastructure to deliver natural gas to vehicles, and technical assistance to strengthen the Borrower (YPF) and the Energy Secretariat (paras. 3.1, 3.2). Design and Implementation Experience 2. The project was first identified in 1981 but was approved (in a substantially different form) in 1985. The delay was mainly due to the uncertainty in energy policies, particularly after a new government took office in 1983. The major issues related to administrated prices, unsatisfactory framework for private sector participation, and YPF's outstanding foreign debt. In addition, the evolution of new Bank guidelines for lending in the oil and gas sectors caused the project to be reorientated more towards "downstream' oil and gas operations (paras. 4.1 - 4.5). 3. Even after the above conditions were rectified, the Bank approved the project only after becoming convinced that the consequences of further delay outweighed the concerns. After 1985, there was further deterioration in the sector, which led to the Bank requesting further financial management assurances prior to declaring the loan effective in 1986 (paras. 4.6, 5.1, 5.2). 4. The Campo Duran liquid extraction and gas compression plant plus the capacity expansion of the Northern Gas Pipelines to Buenos Aires were built under the project. The pipelines in and out of the LujAn de Cuyo Refinery (LCR) were installed and this enabled the LCR to operate at higher rates and more reliably. Only one EOR sub-project was implemented while ten refinery sub-projects, not originally envisioned, were carried out; these required far less time and staff inputs than the EOR sub-projects and had equally satisfactory rates of return. The CNG sub-project was carried out only partially, but it spurred the conversion of vehicles from liquid fuels to natural gas (paras. 5.1 - 5.7). 5. The Technical Assistance (TA) component mushroomed from two percent to nine percent of project costs (US$12 million to US$46 million). The goal of the TA was to strengthen the sector and particularly YPF, but it evolved into helping to develop the privatization of YPF and Gas del Estado which was spearheaded by the Menem Administration (paras. 5.9 - 5.12).  -v 6. The final project costs came in at US$519.5 million versus a Staff Appraisal Report estimate of US$802.6 million, i.e., a decrease of 35%, which was principally due to lower than estimated actual costs and a reduction in the number of EOR sub-projects. The final funding included US$175.7 million from the Japanese Export-Import Bank, not originally envisioned (para. 5.14). Results 7. The infrastructure improvements helped overcome some of the constraints to moving oil and gas supplies. These also contributed to optimizing oil and gas production, while lessening the problem of flaring large volumes of gas. Moreover, the project expanded the possibilities for increasing production and recoverable reserves in the short-term and helped advance the substitution of compressed natural gas for motor fuels consumption in vehicles. The environmental impact of the project was positive. The project was successful in contributing to the stated objectives for improving Argentina's balance of payments and fostering the country's economic recovery. In particular, the technical assistance components contributed to the restructuring of YPF to such a level that it was successfully privatized through a public share offering in the international financial markets. The project was instrumental in establishing a free market in oil and gas operations and privatizing Gas del Estado (paras. 6.1 - 6.3). Sustainability 8. The benefits of the resource improvements will accrue for the remaining life of the facilities or until the oil/gas fields are depleted. The sustainability of the institutional benefits seems assured since YPF has been transformed into a well-managed, profit-orientated, largely private corporation (paras. 7.1, 7.2). Lessons Learned 9. The project was launched when the direction of Bank policy turned to lessened assistance to state oil companies. From this standpoint, the decision to provide the GUTA Loan (instead of channeling assistance to the private sector) may have seemed to be somewhat misguided. However, in retrospect, this decision proved instead to be almost farsighted. The project helped put the sector on a sounder footing, and rather than supplanting the private sector, the project served instead to improve conditions for its activity. The Bank's decision to maintain operational contact with YPF therefore was well justified. The lesson learned is that continued, broad- gauged Bank assistance to public agencies in the energy sector can usefully play a role in ways which enhance economic growth (para. 8.3). 10. From the difficulties encountered in obtaining an extension of the co- financing loan, we learned that when co-financing is involved, it is desirable to have identical closing dates for all loans, credits, grants, etc. (para. 8.4).  PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE 1. Project Identity PrLject Nam Gas Utilization and Technical Assistance Project Loan Number 2592-AR RVP Unit Latin America and the Caribbean Regional Office Country Argentina Sector Energy Subsector Oil and Gas 2. Background 2.1 The Gas Utilization and Technical Assistance Loan (GUTA) to the Yacimientos Petroliferos Fiscales (YPF) was an investment operation designed to support the restructuring of energy supply and demand in Argentina. The project was largely designed to enhance greater use of the country's valuable natural gas resources. 2.2 In the early 1980s, the Government of Argentina requested Bank assistance to counter the disappointing results of its nationalistic 'self- sufficiency' policies in the energy sector. The latter for some time had shown a limited capacity to meet internal consumption demands, despite the country's abundant, well diversified resource endowment. There were fundamental problems in the oil and gas sub-sector. 2.3 Argentina's oil sufficiency became increasingly questionable as production remained far below potential over extended periods of time. Crude oil output fell 14% in 1981-87, and oil reserves that had remained virtually constant for some 15 years began to steadily decline after 1981. These shortfalls resulted, inter alia, from problems in sector regulation, Government interference, petroleum product pricing and taxes, the trade regime, and the state enterprises' weaknesses as explained below. 2.4 Argentina then had considerable capability to ease this troublesome situation through increased reliance on natural gas. The latter's reserves (estimated at 2,089 MNTOE in 1982) were almost twice those of crude oil. Natural gas had also risen substantially after large discoveries in the 1970s, resulting in 1970-83 in gas' share of final energy consumption increasing from 15% to some 24%. However, additional expansion of gas was limited by the inadequate liquids extraction, the transmission infrastructure, and the pricing system. There was also the technical problem that, since many fields had high gas-oil ratios, the production of oil and gas had to be jointly optimized. In several areas, oil production was restrained in order to avoid flaring large volumes of gas for which there was no outlet into the pipeline network.  2.5 Argentina's energy consumption growth was unusually high compared to other countries of similar GDP level and structure-largely due to price distortions. Income elasticity of final demand was 1.5 in the 1960s and 1.2 in the 1970s. Argentine consumption did not even decline during 1980-85 when GDP fell about 1.5% per year. Per capita consumption of oil was almost twice that in reasonably comparable Chile and Uruguay. The combined effect of accelerated consumption growth and shortages in supply led to shortfalls. The economic effects of these shortfalls were pronounced. 2.6 Further, these trends appeared likely to accelerate unless investment in exploration and development rose sharply. However, neither the public nor private sectors were in positions to invest as much as needed; nor did they have the incentives for efficient investment. The Govemment then realized that if this situation persisted, it would rekindle the problems of the "oil shock' periods in the 1970s when the cost of hydrocarbon imports severely wrenched the balance of payments. They also appreciated that the precarious balance between production and consumption could worsen ultimately into the possibility of running out of crude oil. 2.7 The authorities consequently set about to reinvigorate the hydrocarbon sector. The Government began to re-examine its policies and to mobilize greater private sector involvement in exploration and production. However, these efforts were sidetracked by the South Atlantic war and by the economic crisis which President Alfonsin's Administration inherited when civilian rule was reinstated in 1983. Subsequent macroeconomic setbacks resulted in an even more drastic deterioration in Government management. This was the setting for the GUTA Project. 3. Project Objectives and Description 3.1 The main objectives of the project were to rationalize the use of, and further develop, domestic hydrocarbon resources while addressing several policy issues which contributed to the sector's deficiencies. The project was to help YPF eliminate bottlenecks in oil and gas deliveries; make more gas available in industrial regions; expand enhanced oil recovery facilities (EOR) to help increase reserves and production in the short-term; carry out a pilot project for delivery of compressed natural gas (CNG) to converted vehicles; and help strengthen YPF and the Government's Energy Secretariat. Complementary policy measures were directed to reinvigorating YPF's financial viability and rationalizing petroleum product pricing. 3.2 Gas field development and expansion of the transmission system in the north would increase the production of gas and associated liquids. New EOR facilities and more effective reservoir management would increase oil production and reserves. Several oil and gas debottlenecking operations would be undertaken to enhance efficiency in YPF's system. The introduction of CNG would expand gas usage. Related technical assistance would be aimed at upgrading YPF's organization, financial administration,  capabilities in investment planning and special operations (e.g., marketing) as well as energy planning in the Government's main sector overseer agency. 3.3 The specific project components consisted of: (a) facilities for expansion of the Northern Gas Delivery System including field development, pipeline enlargement, and Campo Duran's liquid recovery system' (alongside of the IDB financing for expanding the pipeline); (b) debottlenecking sub-projects concerning gas, oil and product transport, including Lujan de Cuyo pipelines; (c) enhanced oil recovery facilities; (d) construction and modification of service stations to provide CNG to converted vehicles, and a study of CNG's role in transportation; and (e) technical assistance to YPF and the Energy Secretariat. 4. Project Design and Organization 4.1 The project was first identified in 1981 but was not approved until four years later, and only after considerable reshaping. Part of the delay arose from uncertainties about Argentine energy policies associated with the 1983 change in government. A substantial element of this concerned the widely swinging level and structure of the administered petroleum product prices. A second factor contributing to the delay was the resulting disarray in YPF's finances exacerbated by the Government's use of YPF's borrowing capacity to acquire some US$4 billion of foreign exchange for balance of payments purposes. 4.2 There was also an unsatisfactory framework for private sector participation as a result of poor quality and unstable policies. The failure to adjust producer prices in line with inflation was illustrative. Periodic contract revisions also permitted reasonable profit margins but private producers were unable to convert their peso earnings into foreign currency. Basically though, private companies could only function as risk contractors to YPF; they could not directly export product; and their investment opportunities were generally constrained. 4.3 The project accordingly was delayed until there were suitable revisions to contractual arrangements between YPF and private companies for oil and gas exploration and development. In addition, the Bank held off until the Government decided in 1983 to assume responsibility for much of YPF's outstanding foreign debt, which was the basis of the company's financial 1. The estimate also included (tentatively) US$8.7 million for an ethane unit which was not built.  - 4 - recovery plan. There were also impediments resulting from Argentina's difficulties in containing inflationary cycles and worsening the external payments situation. No new Bank operations were therefore approved from mid-1983 to mid-1985. 4.4 There also were uncertainties within the Bank over lending policy towards the hydrocarbon sector. Internal discussions then underway regarding planned new IBRD guidelines had produced substantial differences of opinion concerning lending to national oil companies. Because of reservations about such lending, the Bank had rejected YPF's initial proposals for production-related support, and a second scheme also floundered largely on this account. The new Bank guidelines issued in November 1984 in fact narrowed the Bank's scope for petroleum lending, particularly to state oil companies. They encouraged developing countries to attract international oil companies in order to help accelerate exploration and development. They also stressed confining Bank assistance to formulating the legal and contractual framework to attract private investment. At the same time though, the new rules indicated some latitude for gas development support. 4.5 The proposed YPF operation was amended accordingly, transformed to focus largely on the utilization of natural gas resources, as described above. There were some limited provisions for petroleum-related activities as well entirely in "downstream" areas (e.g., product transport) and in less risky enhanced oil recovery activities. Moreover, the Loan included funds for debottlenecking2 operations to recover marketable liquids from natural gas, provided they were of high priority for oil-gas optimization. 4.6 However, even with this compliance with the new lending rules, the Bank entered into this operation with some trepidation. This was attributable to the numerous deficiencies in the sectoral framework (which were weakening Argentina's performance under on-going energy loans), plus the mounting severity of the macroeconomic problems. These constituted an unfavorable "enabling environment," with only limited opportunities for putting strong, preventive measures in place "up front." However, the project architects persuasively argued that the consequences of further delaying the Bank's intervention outweighed these concerns, i.e., without the proposed activities, Argentina could not even maintain the already low ratio of crude reserves to production. There were also doubts as to YPF's internal improvement prospects, in view of the limited success in strengthening the company's financial management and rationalizing its investment program under the Refinery Conversion Project. But these qualms also were overridden by the force of more pressing concerns. It became increasingly clear that the state enterprises' ills (in which YPF figured prominently) put such a severe burden on the economy as to make sound macroeconomic management virtually impossible. 2. Debottlenecking means removing the capacity constraints imposed by one or more components in a refinery or similar industrial process.  - 5- S. Project lmplementation 5.1 The Loan was approved in June 1985 but was not declared effective until September 1986, after the Board approved several amendments. This delay resulted from further deterioration of sectoral conditions at the time, especially the fact that YPF's finances became even more precarious after several years of operating deficits (US$ 1.3 billion in 1985). The Bank then insisted on amending the Loan to incorporate stronger financial management requirements. These included Government capital contributions to enable YPF to service its debt and balance its budget, a requirement for annual agreement on YPF's investment program, and the initiation of a study on sector reforms and institutional restructuring. 5.2 Subsequently though, country conditions further worsened. Argentina went through turmoil in 1988-90, marked by hyperinflation, recession and repeated coup attempts. It is thus striking that the project proceeded reasonably well under these conditions, which lasted during most of the period of project execution. Admittedly, partly because of the late start, there was a two year slippage in project completion, and disbursements extended over seven (rather than the initially forecast four) years. Nonetheless, as indicated in the following paragraphs, most of the major physical objectives of the operation were substantially achieved. There was far less success though with the parallel policy goals, particularly the Loan covenants regarding product pricing and YPF institutional targets. However, this was more than compensated for by later separate Government measures, abetted by the project in unanticipated activities, also described below. 5.3 The natural gas component comprised production, reinjection and gathering line installation, the capacity increase of an existing liquids extraction plant, and the installation of a new liquid extraction plant at Campo Durln plus the expansion of the Northem Gas Pipelines to Buenos Aires. The latter was financed by the IDB. 5.4 Under the Refinery Project (Loan 2032-AR), YPF had undertaken to build a new crude pipeline to assure the efficient supply of crude oil to the LujAn de Cuyo Refinery (LCR), and to upgrade the system of white products3 pipelines to transport the resulting increased distillates output. Investments in the pipelines, however, were delayed because of lack of foreign exchange to import parts and equipment. GUTA's Lujan de Cuyo component overcame these problems by providing the missing funds for debottlenecking LCR's crude and products flow. 5.5 Ten other sub-projects not in the original design were included which consisted of revamping or replacement of refinery components, that had no relation to gas production and utilization or petroleum and products transport. YPF included these components in the project because compared to the EOR projects, their lead time was much shorter and the required staff effort was 3. White products' include gasoline, diesel oil and jet fuel.  -6 - much smaller. These new sub-projects enhanced operation or increased the reliability of the refineries, and most of them exceeded the 15% rate of return which was the threshold for debottlenecking projects. 5.6 Only one of the contemplated enhanced oil recovery (EOR) sub- projects was built (Los Perales). The contributing factor for this reduction in EOR work was the reallocating of resources towards privatization. Further, an ethane recovery plant was not built, because ethane's then low price did not justify this undertaking. 5.7 The Compressed Natural Gas (CNG) component changed during implementation which resulted in an expenditure of only a quarter of the funds allocated. The project called for conversion of 135,200 vehicles and 366 service stations. In the course of project execution, however, as commercial interest in this new fuel source soared, Argentine private firms and individuals took the initiative to convert over 220,000 vehicles and a large number of service stations on their own. Consequently, YPF cut its plans back, and only a small sum was used for several service stations. A CNG study was also funded and completed under the project which proved helpful in optimizing the use of CNG. 5.8 During project implementation, YPF used pre-qualification procedures for supply and erect contracts in all but one of the infrastructure components, pursuant to arrangements agreed with the Bank. All told, there were 26 different pre-qualification operations, the smallest of which was about US$1 million. Clearly, pre-qualification cost the project valuable time compared with post-qualification which is generally used in Bank projects when the project is not complex, the amounts involved are relatively small, and time is critical. For the revamping of the Platformer4 at the Lujan de Cuyo Refinery, YPF needlessly requested Bank approval to forego pre-qualification in order to save time; the Bank agreed and post-qualification was used for this sub-project, which was the last infrastructure sub-project during implementation, and the only sub-project using post-qualification. The Bank should have encouraged YPF to use this procedure more often. 5.9 Technical Assistance. Overall, the most distinctive feature of GUTA's implementation record was its technical assistance (TA) component. During appraisal, it was decided that this component, entailing only 2% of base costs, would mainly include: reviewing YPF's organization structure; strengthening its financial management systems; conducting a study on automating YPF field installations' communications; and defining its investment program. The TA program increased to almost 9% of project costs, with significant changes in its composition and usefulness. 5.10 Well into the early 1990s, there were very rapid, dramatic changes in Argentina. A score of stabilization programs were introduced with major effects on economic conditions. Substantial reform movements were 4. *Platformers- enhance the octane rating of gasolines with the minimal addition of lead.  triggered to reduce Government's role, refocus it on core public functions, deregulate economic activities and liberalize the economy along market- oriented lines. In their first phase in 1987-89, Argentine officials engaged in preparing a broad gauged program to improve the efficiency of their public enterprises. Later, under the Menem Government, the orientation shifted to formulating a full blown (and the now renowned) program for privatization of the major parastatals, in which YPF figured prominently. 5.11 Throughout the latter endeavor, the Government sought the Bank's assistance to help build the foundations for privatization transactions and to see them accomplished. This entailed considerable technical work to identify and analyze the substantive issues involved, as well as financial and institutional analyses of the state enterprises' conditions. Still more help was needed for the services of experts for advice on conducting the privatization processes. The Government had neither sufficient funds to cover these costs, nor the more important institutional capacity to mobilize and direct these activities, many of which were performed on a "crash" basis. An estimated US$1.1 million of Loan funds were deployed expeditiously for these purposes. 5.12 This transformed the project's planned upgrading of YPF into a more ambitious program for the preparation of its privatization, probably now the most successful accomplishment of Argentina's public sector reform campaign. The Loan funded one consultant team's study of restructuring the company for commercially oriented operations, so as to facilitate the privatization. The study led, inter alia, to a fairly quick reduction in the number of employees, which the Govemment calculated was reduced from some 40,000 to about 10,000, and still more cuts were scheduled to be made. The GUTA Loan also financed a second team's assessment of YPF's assets. This led to the strategy since applied in the sale of poorly performing and ancillary functions, together with strengthening core functions. The disposal of pipelines, refineries, storage facilities, etc. was estimated to have had great weight in enabling YPF to replace chronic losses with profits exceeding US$200 million yearly in 1991-92. Finally, the preparations for the company's privatization proved to yield significant returns: the sale of the majority of YPF shares on foreign stock exchanges in fall 1993 netted over US$3.0 billion. The project's input thereby helped to create the basis for the substantial govemment reform measures which the Bank supported under the Public Enterprise Reform Adjustment Loan (No. 3291-AR). As noted in the PCR on the latter, Argentine officials acknowledged that these ambitious reforms would not have been launched without the Bank's continuous technical and financial support. 5.13 Project Cost and Funding. Actual project costs decreased 35% from the original estimates (US$802.6 million to US$519.5 million), chiefly from implementing fewer EOR sub-projects. Increases in the scope of the technical assistance ultimately brought its cost to US$46 million (of which US$10 million went for planning the privatization of Gas del Estado via the Secretariat of Energy) rather than the US$12 million planned. The final  project funding plan differed considerably from that originally envisaged, mainly as a result of the entry into the project in 1988 of co-financing from the Export-Import Bank of Japan (JEXIM). The latter provided US$176 million for the GUTA Project. JEXIM's involvement also helped fill a funding plan gap caused by the Argentine entities' difficulties in mobilizing their share of the total project costs. 5.14 YPF's accounting system was inadequate for managing a corporation of this size. It did not provide timely and meaningful financial and operational information. This problem was not attacked until 1991 when consultants were appointed to design and implement a new, comprehensive system in line with oil industry standards. This became operational in late 1993. 5.15 FInancial Performance. The Loan covenants called for YPF to: (a) maintain a quick ratio of 0.6:1 and not to make any cash distribution if after the distribution such ratio would be smaller than 0.8:1; (b) maintain a long- term debt/equity ratio not greater than 40:60; (c) not incur any debt unless projected revenues are at least 1.4 times the projected debt service; and (d) not acquire any shares in its capital without the Bank's agreement. The table below shows what YPF accomplished against these undertakings. Forecast Debit Service Covemge -0.25 0.23 0.69 0.92 0.77 0.96 Quick Ratio 0.11 0.62 0.65 0.65 0.67 0.67 Debt:Equity Ratio 100:00 100:00 94:06 86:14 74:26 61:39 Actual Debit Service Coverage 1.15 0.99 0.97 1.71 1.53 1.01 1.52 2.41 Quick Ratio 0.11 0.69 1.24 0.74 0.81 1.13 1.13 0.69 Debt:Equity Ratio 28:72 33:67 56:44 06:94 07:93 22:78 22:78 25:75 Sources: SAR forecasts and YPF audit reports. 5.16 These figures demonstrate YPF's erratic financial performance until its run up to privatization. When hyperinflation hit in the late 1980s, YPF's interest payments peaked and the company registered large losses. This started to change in 1991, when the Government ceased its practice of requesting transfers of funds, and YPF began its restructuring. YPF's new financial strength became evident in the first dividend payment in 1992. However, the company was unable in 1992 (and probably in 1993) to comply fully with the stipulated quick ratio. This was a consequence of: (a) substantial payments to the Government for settling tax disputes; (b) other consequences of the September 1992 law authorizing YPF's privatization; and (c) the completion of its restructuring activities which entailed costly up- front expenses, e.g., staff severance outlays.  -9 - 6. Project Results 6.1 The project ccntributed to Argentina's success in moving forward in the technical areas included in the objectives of the activity. Its key infrastructure improvements helped overcome some of the constraints to moving oil and gas supplies. These also contributed to optimizing oil and gas production, while lessening the problem of flaring large volumes of gas. Moreover, the project expanded the possibilities for increasing production and recoverable reserves in the short-term and helped advance the substitution of compressed natural gas for motor fuels consumption in vehicle transport by greatly spurring the conversion of vehicles to natural gas; from 1990 through 1993, over 220,000 vehicles were converted. 6.2 The infrastructure portions of the project (other than EOR) met the targeted goals. In 1984, 130 million cubic feet per day of natural gas was flared while there were unmet industrial demand and rationing in Buenos Aires during the winter. This gas is now being captured and used and an additional 215,000 tons per year of LPG and natural gasoline are being marketed. Further, natural gas utilization increased from approximately 24% of total energy usage in 1984 to 39% in 1993. The refinery sub-projects helped prevent the refineries from operating at less than full rates, thus enabling them to produce maximum amounts of products and preventing importation of additional amounts of refined petroleum products. The Platformer revamping sub-project enabled YPF to increase the octane rating of gasolines while largely eliminating lead, thus generating financial and environmental benefits. While the international prices of these fuels have fallen since 1985, the lower actual investment costs more than compensated for the lower benefits. 6.3 The benefits of the EOR sub-projects were not as extensive as envisaged at appraisal since only one was implemented. However, part of the benefits will eventually accrue to Argentina because the oil fields are now in the hands of private operators who will undoubtedly maximize oil recovery by implementing future EOR projects. The single EOR facility built will itself carry a high rate of return-as is typical of EOR projects-since the oil production and transport infrastructure was already in place. 6.4 Finally, as described previously, the technical assistance laid the groundwork for the successful restructuring and privatization of YPF (as well as Gas del Estado). The results surpassed the goals set for the company's institutional improvements. Similarly, the Govemment's complementary liberalization of the oil market resulted in fully deregulated prices and free imports and exports, well beyond GUTA's goals (a more balanced-but still administered-pricing structure). 6.5 Economic Rate of Return. The project's economic rate of return (ERR) for the expansion of the Northern Gas Pipeline System at 40% was higher than the SAR estimate of 34%. This was mainly due to decreases in costs. The Lujan de Cuyo pipelines also returned higher ERRs at 42% than  - 10 - the SAR estimate of ;0%. These two components comprised about 75% of the total project costs. The gas debottlenecking and EOR components were not calculated or comoared in the ex post evaluation since no methodology was given in the SAR. The remaining component, compressed natural gas conversions had an estimated ERR of 50% in the SAR and an actual ERR of 20%; the decrease was mainly the result of reduced oil prices in real terms which had originally been assumed to increase. 6.6 Environment. The net environmental impact of the project was positive. As noted above, natural gas is now being flared in much smaller quantities and is being collected, compressed and transported to users. Further, the Platformer revamping enabled YPF to reduce significantly the addition of lead in gasolines (a known environmental hazard) while maintaining their octane ratings. The efficiency-enhancing debottlenecking sub-projects meant that there were fewer product losses and hence less environmental damage, but more importantly, the new and expanded liquids pipelines largely repl,.ced truck transport which is more energy-intensive and far more polluting than pipelines. It is difficult to quantify the environmental improvements due to the absence of measuring practices and baselines. To meet this need and thv need for further environmental improvements, YPF has accelerated and expanded the scope of its environmental program. 7. Project Sustainability 7.1 In all likelihood, the resource improvements will be sustained over the medium term. The increased output of gas, petroleum and products as well as the lower operating costs derived from project investments will continue to accrue benefits to YPF for the remaining life of the facilities-or until the oil and gas fields are depleted. Since the depletion of the affected petroleum and gas fields and the attendant declines in production were factored into the original rate of return calculation, eventual depletion will not affect project benefits. However, rL>servoir damage is always a risk in hydrocarbon extraction. Therefore, the Government will have to monitor field operations of the private firms Who now own and manage the oil fields to ensure optimization of extraction for the country. If the new owners maximize short-term profits by oroducing at rates which are beyond the maximum recovery rate, the ultimate amount extracted would be reduced with negative consequences for the country. 7.2 The prospects for sustainability of the institutional improvements are also favorable. YPF is now a publicly traded company with a majority of its shares in private hands, an independent board, substantial financial strength and is subject to international financial market scrutiny. Its transformation from a near insolvent state enterprise is quite pronounced with efficiency gains and a new commercial orientation apparently firmly implanted. Many of its loss-making activities have been sold. It is now significantly less beholden to the interest groups (private and public alike) whose past influences were often inimical to YPF's success. For these reasons, barring a major reversal of Argentina's public sector reform  - 11 - program or mismanagement by YPF's new (mainly) private directors, it is likely that the company's improvements will stay in place. 8. Evaluation and Lessons Learned 8.1 Most, though not all, Loan objectives were achieved and the GUTA Project experience can be judged successful overall. With its help, there are now promising possibilities of reversing Argentina's extended stagnation in hydrocarbon output and decline in reserves. In 1991, petroleum production reached the highest level over the previous decade, and there were also rising petroleum exports (which totalled about US$800 million in 1992). 8.2 In addition, accomplishments in some important policy and institutional areas far exceeded the original aims, and came about faster than might have been considered feasible during project preparation. On this point though, it bears underscoring that the beneficial outcome was mainly due to purely Government initiatives and decision-making. These would have been less successful without the Bank's considerable sector work, technical analyses underpinning the privatization program, and guidance in carrying it out. But all these were definitely supporting elements. 8.3 The project was launched when the direction of Bank policy turned to lessened assistance to state oil companies for certain activities. From this standpoint, therefore, the decision to provide the GUTA Loan (instead of channeling assistance restricted to private sector beneficiaries) may have seemed to be somewhlat misguided. However, in retrospect, this decision proved instead to be almost farsighted. The Government's hydrocarbon reforms, several of which were advanced by the project, have served to stabilize the supply/demand situation, eliminate Argentina's past primary reliance on a deficit-ridden state entity, and otherwise put the sector on a sounder footing than might have been considered plausible. Rather than supplanting the private sector, the project served instead to improve conditions for its activity. The Bank's decision to maintain sufficient operational contact with YPF therefore was well justified. CONCLUSION: That continued, broac-gauged Bank assistance to public agencies in the energy sector can usefully play a role in ways which enhance economic growth. 8.4 The Bank helped YPF and the Government enlist the participation of JEXIM in the project with the benefits indicated previously. This (alongside of JEXIM's parallel co-financing of the Refinery Project, effected simultaneously), served to establish a bilateral relationship which has grown stronger over time. JEXIM's involvement throughout the project execution period was quite positive and at low cost to the Borrower, with one notable exception. This refers to the fact that, towards the end of project implementation, JEX'M stopped disbursements when the closing date of its loan (which preceded that set in the IBRD Loan Agreement) passed. It subsequently proved difficult for the Borrower to obtain an extension because of Japanese Government concerns about Argentina's external payments  - 12 - arrears and status with the IMF. JEXIM also had to re-enlist private Japanese banks' participation in its GUTA loan in order to amend the closing date. To alleviate the situation, the IBRD increased its share of disbursements until JEXIM's loan was reactivated. CONCLUSION: In negotiating co-financing arrangements, it is desirable to obtain identical closing dates (or the co-financing agent's agreement to no earlier date than the Bank's). 9. Bank's Performance 9.1 Among the reasons for YPF's successful changes, the Bank merits credit for helping ensure consistency and continuity for the advancement of the public enterprise reform program. This was especially helpful under the turbulent conditions of Govemment management during much of this period, under which there were constant changes in the decision-makers. Equally important was the fact that the critical Government reforms in the hydrocarbon area, notably regarding energy pricing and taxation, drew heavily on the Bank's sector work. The Bank's approach was also marked by considerable flexibility, as illustrated by its help in keeping the project on track through the aforementioned decision to fund a larger share of project costs in the absence of the JEXIM portion. In addition, the Bank's appreciation of the frequently badly troubled project situation was manifested in judicious decisions regarding interpretations of the Government's and YPF's commitments under the Loan. 9.2 At the same time, the Bank's work was flawed in two respects. The net environmental impact of the project is judged to have been positive. Yet, although the Bank had been heavily involved in improvements at the La Plata Refinery (LPR) since 1980, it is disappointing to note that GUTA's supplementation of the original (Refinery Conversion Project) assistance to LPR failed to address its pollution problems. The latter posed (and still poses) the most severe difficulties among the refineries of YPF, which is one of Argentina's poorest environmental performers. A second deficiency was the incomplete presentation of the project's risks in the documentation submitted to the Board. The risk assessment was restricted to a discussion of reserve levels, market prospects, conditions surrounding CNG's initiation and possibilities of project implementation delays. It did not take into account the risks caused by the macro economic instability or the dire financial straits of YPF. Fortunately, as the implementation record shows, these had no material effect on the ultimate project results. 10. Borrower's Performance 10.1 From the early stages on, the Borrower made significant contributions to the definition of the project and put in a reasonably good performance. This is credited to an exceedingly effective project unit, whose managers have had extended experience with Bank-assisted operations, aided by an equally sustained staff. This unit provided the continuity and the institutional memory required to successfully execute the project under difficult  - 13 - conditions. Their familiarity with the Bank's requirements and work-ways, particularly affecting procurement and legal issues, was especially helpful. The relationship between YPF and the Bank was cordial and based on mutual understanding, a benefit of the close collaboration between the two staffs since the early 1980s. 11. Contractors and Consulting Services 11.1 All but one of the tenders were of a supply and erect nature, and one, for the Campo DurAn Liquids Recovery Plant, was a turnkey contract. All contractors were pre-qualified, except the contractor for the last infrastructure sub-project who was post-qualified. All procurement was done in accordance with Bank guidelines. 11.2 There were 125 contracts with consulting firms and individuals. Many of the contracts were expanded a number of times; one of them had 14 revisions, and in one instance, the final cost of the contract with its extensions was about ten times the cost of the original contract. Due to the high number of consultant contracts and the speed of the operation, it was not possible to supervise these contracts to the usual degree, and it is possible that some of the prices were high and that some of the contracts duplicated others at least in part. However, given the results, one can conclude that the operation was successful. 12. Project Documentation and Data 12.1 Documentation for the project is generally good. The Staff Appraisal Report was particularly comprehensive in explaining YPF's financial condition and its underlying causes, and the technical and economic setting of the project.  - 14 - PART II: PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE Translated from the Original on File in LACIC Buenos Aires, May 10, 1994 Note B.54.346194 Mr. Alfonso Sanchez Division Chief Infrastructure and Energy, Country Department IV Regional Office for Latin America and the Caribbean Ref. Loan 2592-AR Project Completion Report Dear Mr. Sanchez: We have received and reviewed Parts I and III of the Project Completion Report, which merit no objections on our part, and we are sending for your consideration Part II of the Report, as requested by your office. Project Summary from YPF's Perspective Implementation of Loan GUTA 2592-AR has been satisfactory for this enterprise, which will be reflected in greater benefits in the future. Although not all objectives tackled during the initial phase of the loan were fully achieved, such as the pilot projects for assisted oil recovery, the general balance may be considered positive. The project went through difficult economic circumstances such as two hyperinflationary processes, followed by severe adjustment plans, which made it necessary to renegotiate the contracts in force in order to complete the job. On the other hand, starting from the government decision to transform YPF, as well as the petroleum market, implementation of Part D of the loan experienced a complete change since the major portion of the assigned funds permitted the financing of the transformation and reorganization of YPF and Gas del Estado. The preceding produced a series of reassignments of the loan funds to allow a smooth flow of foreign exchange in order to endure the economic conditions and at the same time maintain the continuity of the processes under way. All this was possible due to the performance of the Bank's staff who duly interpreted the needs of the Project thus making it easier to search for solutions to the different problems arisen during its implementation. Among the results worthy of special attention there remains for YPF the excellent infrastructure of the oil ducts associated with the Lujan de Cuyo  - 15 - Refinery, which allow the integral utilization of the incremental volumes produced due to Conversion Increase (Loan 2032-AR). It was also possible to carry out the infrastructure projects permitting the production and eventual exportation of unleaded gasoline, as well as jet fuel. The use of compressed natural gas (CNG) as fuel for private cars was also implemented, thus opening a new market which has already achieved an interesting development and tends to expand. In this area we hired the services of a consultant to study the possibility of using CNG in public passenger transportation, with good results. As to Technical Assistance, YPF received the services of Arthur D. Little, McKinsey, Arthur Andersen, First Boston, and Merrill Lynch who carried out, in their respective areas, the transformation and reorganization of the company thus making possible the entry of YPF in the stock exchanges of Buenos Aires and New York. Finally for project implementation there were the funds from the loan for US$187.3 million dollars granted by Japan's Eximbank, of which only US$175.7 million were used due to the closing date of the loan. Once again, the goodwill and competence of the Bank's representatives must be emphasized, which helped YPF in all discussions and negotiations with the Japanese institution. In Conclusion The project made it possible to achieve the following objectives: 1. Carry out the transformation and reorganization of YPF. 2. Technological transfer in the area of assisted petroleum recovery, which will permit opening the potential of oil reserves. 3. Improved gas utilization, including its use as fuel for private cars and public transportation of passengers. 4. Utilization of the incremental volumes of products in the Lujan de Cuyo Refinery through the Puesto Hernandez - Lujan de Cuyo oil pipeline and the revamping of the Lujan - La Matanza polyduct. 5. Incorporation of new techniques for resources management through the possibility of using advanced control systems. (sgd) E. Moltrasio Chief, Project Management Area YPF  - 16 - PART III: STATISTICAL INORMATION Table 1: Related Bank Loans (US$ million) Loa ThI A st-;ttt;-tXi t - i;- provaI of Loami Disbursed. tatus Comment -- 1880-AR Oil and Gas 1980 27 24.92 Fully Seismic survey and oil reserves Engineering Disbursed appraal of anistng reaexnira. (PD) Borrower: YPP. 2031-AR Oil and Ga Credit 1981 100 76.86 PD On-lending to private finrms opeating in energy sector. Borrower: BANADE (National Developmcnt Bank). 2032-AR Refinery Conversion 1981 200 199.77 PD Borrower: YPF. Combined operations with loan 2031-AR. 2592-AR Gas Utilization and 1985 180 165.38 PD Borrower: YPP Technical Assistance 2032-1-AR Refinery Conversion: 1986 116 116.00 PD Borrower: YPF Supplementary Loan 3416-AR Hydrocarbon 1991 28 9.47 Disbursing Hydrocarbon engineering Engineering Project (D) project implementation during tranition phae. Help private entrepreneurs. Borrower: YPF. Total 651 592.40 Sources: Staff Appraisal Reports, MIS data, and Statement of Loans (IBRD publication, Nov. '93). Table 2: Project Timetable Phase Planned Date . Actual Date~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.. ........... Identification - 10/01/81 Preparation 07/01/84 01/25/85 a/ Appraisal 11/01/84 11/12/85 Negotiations 05/17/85 5/17-24/85 Board Approval 06/25/85 06125185 h_ Loan Signature -- 05/22/86 Loan Effectiveness 10/03185 09/30/86 Loan Closing 12/31191 12/31/93 Project Completion 12/31/91 12/31/93 Sources: MOP, Loan Agreement, Bank memoranda and MIS data. nI First Issues Paper was dated 3/12/83 and the Second Issues Paper, 1/25/85. _/ First approved on 6/25/85. Amendment to GUTA approved by Board on 5/20/86.  - 17 - Table 3: Schedule of Disbursements (US$ million) 11B) GCaI Yea - - -1986 1987 1988 1989 1990 1991 1992 1993 jI 1994I Eatinated 25.0 80.0 130.0 180.0 180.0 180.0 180.0 180.0 180.0 Revised Estimate 16.7 75.6 135.0 176.6 180.0 180.0 180.0 180.0 180.0 Actual 0.0 10.7 15.3 41.0 76.5 100.0 137.9 169.9 165.4 Actual u % of Rev. Estimates 0.0 12.8 10.2 20.9 38.2 50.0 68.9 85.0 82.7 Sources: Estimated disbursements from Staff Appraisal Report (SAR) and other disbursements from MIS data as of 12/31/93. A/ Formally revised closing date was 12/31193. k/ US$4.52 million was reimbursed during the first quarter of 1994. Table 4: Project Costs (US$ million) . .. .. . .. .....Esthmated Costs Actual Costs Component Local Fog Tota - Lcal Foreig Tota % 1- . Expansion of Northern Gas Pipeline System Field Development 91.1 11.8 102.8 12.8 Increae in Pipeline Capacity 144.8 51.4 196.2 24.4 I/ a/ 5/ Campo Durin Facilities 80.4 60.5 141.1 17.6 Sub Total 316.3 123.7 440.0 54.8 170.4 80. 1 250.6 48.2 -43 Gs Debottleneckdng & Enhanced 73.7 45.1 118.9 14.8 53.4 26.5 79.9 15.4 -33 Oil Recovery Lujdn de Cuyo Pipelines 135.8 33.1 168.8 21.0 110.2 14.9 125.1 24.1 -26 Compressed Natural Gas 6.0 9.9 16.0 2.0 2.0 2.1 4.1 0.8 -74 TechnicalAssistance&Training 3.0 9.0 12.1 1.5 12.3 33.6 45.9 8.8 281 Total Base Cost 535.0 220.8 755.8 94.2 348.3 157.2 505.5 97.3 -33 Interest During Construction 16.0 30.8 46.8 5.8 0.0 13.9 13.9 2.7 -70 Total Financing Required 551.0 251.6 802.6 100.0 348.3 171.1 519.5 100.0 -35 Sources: SAR for Estimated Costs and YPF information up to 12/31/93 for Actual Costs. Note: Values include price and physical contingencies on a pro-rata basis. &! YPF did not use the SAR sub-categories of the Northern Gas Pipeline Expansion in its financial reporting; thus only the aggregate totals are shown.  - 18 - Table 5: Project Fmancing (US$ million) uref - 0 i-Plann ; %X: Revied % Actual % a-ComtI IBRD 180.0 22.4 180.0 43.7 165.4 31.8 USS14.6 million was cancelled IDB 59.5 7.4 - - 42.8 8.2 YPF/Private 104.7 13.0 al al Producers YPF/Government 319.6 39.8 44.9 10.9 39.8 7.7 Gas del 138.8 17.3 - - 95.6 18.4 Estado/Government Japan Export- - - 187.3 45.4 175.7 33.8 Import Bank Total 802.6 100.0 412.2 100.0 519.5 100.0 Sources: Planned financing from SAR. Revised and actual from YPF reports and MIS data. b/ An individual breakdown does not appear in YPF's reports. Table 6: Allocation of Loan Proceeds by Category (US$ million) Equipment, Materiab & Work 126.9 70.5 113.0 68.3 Consultants' Services 15.5 8.6 38.5 23.3 Training Expenditures 0.7 0.4 0.0 0.0 Interst & Other Charges 18.9 10.5 13.9 8.4 Unallocated 18.0 10.0 0.0 0.0 Total Allocations 180.0 100.0 165.4 100.0 Sources: Loan Agreement and Bank disbursement data.  Table 7: Summary Finncial Statements Gas Utilization and Technical Assistance Project (Current US$ millions) MR~~~~~~~~~~ :: A --iJ SAI iR :MtudIA1 19Pl IiG 19 I INCOME SIATEMENT INCOME Gro Value of Retil Sales A Expocsa __ __ Fuel Tax" ( *Onaaum (1,653)1 (3,613) (1,944) (1.664) (I (1.7"] (1,945) 2,197)I (I 945) (2.' 1 (1,945 205'rF1,939)