India - Western Gas Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 14412 IMPLEMENTATION COMPLETION REPORT INDIA WESTERN GAS DEVELOPMENT PROJECT (LOAN NO. 2904-IN) APRIL 18, 1995 Energy Operations Division Country Department II South Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit = Rupee (Rs) The exchange rate between the Rupee and the US dollar (US$) during the project period was as follows: Year Rs/US$ 1988/89 14.5 1989/90 16.7 1990/91 17.9 1991/92 24.5 1992/93 28.9 1993/94 31.4 FISCAL YEAR April 1 - March 31 MEASURES AND EQUIVALENTS 1 metric ton (t) = 1,000 kilograms (kg) 1 cubic meter (cm) = 35.3 cubic feet (cft) 1 barrel (bbl) = 0.159 cubic meter 1 metric ton of oil (330 API) = 7.3 barrels 1 metric ton of condensate (56' API) = 8.3 barrels 1 metric ton of gas liquids (LPG and NGL) = 9.1 barrels ACRONYMS USED GAIL = Gas Authority of India Limited GOI = Government of India HBL = Hazira-Bijaipur-Jagdishpur (Gas Pipeline) OIL = Oil India Limited ONGC = Oil and Natural Gas Commission MEASUREMENT ABBREVIATIONS cm = cubic meters mcm = thousand cubic meters mmcm = million cubic meters bcm = billion cubic meters mmcm/d = million cubic meters per day mmtoe = million metric tons of oil equivalent mint = million metric tons mmt/y = millions of tons per year toe = metric ton of oil equivalent t = metric ton t/d = metric ton per day t/y = metric ton per year OTHER ABBREVIATIONS ERR = Economic Rate-of-Return LPG = Liquified Petroleum Gas NGL = Natural Gas Liquids PMP = Pressure Maintenance Program SBM = Single-Buoy Mooring System WIF = Water-Injection Facility SAR = Staff Appraisal Report FOR OFFICIAL USE ONLY Table of Contents Preface.........................................................i Evaluation Summary...................n.........................H PART I: PROJECT IMPLEMENTATION ASSESSMENT ...... ......... 1 Evaluation of Project Objectives................................... 1 Project Context........................................ ........ 1 Accelerating Gas Field Development and Production. ....... ...........1 Identifying Gas Markets and Improving Gas Development Planning............... 2 Project Achievements...................3..... ...................3 Overview.......................3..... ......................3 Physical Objectives................... ......................3 Gas Sector Planning and Pricing Policy................................. ......4 Economic Performance.................. ....................4 Financial Objectives for ONGC............... ................4 Macroeconomic Impact.......................................4 Institutional Development.....................................5 Environmental Protection ..................................... 5 Major Factors Affecting Project Performance.......................5 Factors Within the Scope of Government Control....................5 Factors Within the Scope of ONGC Control....................... 6 Factors Outside the Project .................................. 7 Sustainability.................................................. 7 Bank Performance ....... ......................................7 Borrower Performance ................. .. ......................7 Assessment of Outcome .................................. .......8 Future Operations ........................................ ...... 8 Main Findings and Lessons Learned ...............................9 PART II: STATISTICAL ANNEXES ........................ ......11 Table 1: Summary of Assessments ............................ 11 Table 2: Related Bank Loans/Credits ................... ..... 12 Table 3: Project Timetable ....................... .........12 Table 4: Loan/Credit Disbursements: Cumulative Estimated.......... 13 Table 5: Key Indicators for Project Implementation ............... 13 Table 6: Key Indicators for Project Operation ........ ............ 13 Table 7: Studies Included in Project. ................. ........13 Table 8A: Project Costs ............................. ....... 14 Table 8B: Project Financing ............................... 14 Table 8C: Project Financing IBRD Categories.............. ..... 15 Table 9: Economic Evaluation n............... .............15 Table 10: Status of Legal Covenants .................... ..... 16 Table 11: Bank Resources: Staff Inputs ...........................17 Table 12: Bank Resources: Missions ................... .......17 Appendices ..................................................... 18 Appendix 1: Contribution of the Borrower's Implementing Agency............ 19 Appendix 2: Map of the Project Area.......................... 26 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 IMPLEMENTATION COMPLETION REPORT INDIA WESTERN GAS DEVELOPMENT PROJECT (LOAN NO. 2904-IN) Preface This is the Implementation Completion Report (ICR) for the Western Gas Development Project in India, for which Loan 2904-IN in the amount of US$295 million equivalent was approved on February 22, 1988 and made effective on September 2, 1988. The loan was closed on June 30, 1994, the original scheduled closing date. The loan was fully disbursed, with the last disbursement taking place on July 20, 1992. No co-financing was involved. The ICR was prepared by H. Morsli, of the Industry and Energy Department Oil and Gas Division (IENOG), who was the Task Manager throughout the Project, and reviewed by J. F. Bauer, Chief India Energy Operations (SA2EG), and Mrs. Kazuko Uchimura, Project Advisor (SA2DR). Preparation of this ICR is based on material in the project file. The borrower contributed to preparation of the ICR by preparing its own project evaluation.  ii WESTERN GAS DEVELOPMENT PROJECT Loan 2904-IN INDIA Evaluation Summary Introduction i. At the time of project appraisal in 1986, India's industrializing economy had a high energy intensity, despite conservation efforts, and economic growth prospects through the 1990s indicated a large gap between domestic petroleum demand and supply. Forecasts showed a doubling of petroleum demand from approximately 40 million tons (mmt) in 1986/87 to roughly 80 mit in 2000, while output from the Bombay High oil field which supplied about 70 percent of the country's domestic oil production was expected to decline by an annual rate of eight to ten percent, beginning in the mid- 1990s. To meet additional demand and avoid major increases in the country's oil import bill, a key element in the energy sector strategy of the Government of India (GOI) was to supported the substitution of domestic gas for imported oil, making use of flared gas and substantial untapped gas reserves (paras. I and 2). However, several major constraints to gas development existed: (a) lack of sufficient production and transmission infrastructure; (b) need for further resource evaluation; (c) market development uncertainties; and (d) an inadequate institutional framework for sector development. Having financed four projects for oil and gas development during 1981-1984 (para. 3), the Bank had acquired considerable experience in working with India's petroleum sector prior to the Western Gas Development Project (the Project). The Project built upon favorable technical results from previous projects and launched a dialogue between the Bank and GOI to focus on gas marketing, long-term development planning and pricing. Furthermore, the Project took place at a time when GOI was moving toward developing partnerships with the private sector to promote greater efficiency in oil and gas sector operations and increased resource mobilization. Objectives ii. The Project had Lwo major objectives. The first was to assist GOI appraise, develop and produce natural gas reserves in the Bombay offshore areas and in the onshore oil and gas fields in Gujarat State. This objective was reasonable given the physical constraints India faced on the production side of gas development. To meet this objective the Project included the following components: (a) Phase II in the development of the offshore South Bassein field; (b) the construction of a pipeline from the offshore Heera oil and gas field to the Uran gas terminal serving the Bombay market, making use of gas that was being flared; (c) appraisal and initial development drilling of the Gandhar field; and (d) evaluation of offshore reserves in the Tapti and Hazira fields for future development. The Project effectively mitigated risks of not meeting these objectives by careful selection of fields for development, conservative production assumptions and sensitivity analyses of the Project's economic benefits (paras. 2-4). The Project's second objective was to help GOI launch a long-term development plan for the gas sector to ensure gas use in sectors yielding the greatest economic benefit. For this purpose, the Project included funds for detailed sector studies to coordinate the demand and supply aspects of gas development (para. 5). These studies were appropriate given the early stage of gas sector development. To further support sector development objectives the Project included covenants to ensure regular reporting on the status of market development and reviews of oil and gas prices in relation to the financial viability of the Oil and Natural Gas Commission of India (ONGC), the Implementing Agency for the Project. Implementation Experience and Results iii. The Project surpassed its original physical objectives for gas development. Higher than originally anticipated incremental gas and liquids production during Project implementation (1988-94) indicates that output over the life of the Project will be about 126 million tons of oil equivalent (toe) instead of 68 million toe, the estimate at project appraisal. The re-estimated economic rate-of-return (ERR) on the project is 94 percent, compared to the appraisal estimate of 72 percent (Table 9). Paras. iii 9-13 of the ICR review the results of Project components in terms of meeting physical production targets. The Project's current annual incremental production, about 7.7 million toe, represents around 26 percent of India's current oil imports. iv. During the evaluation of gas reserves at Tapti and Hazira offshore fields, a reassessment of the required seismic and drilling programs indicated that the cost involved would be much higher than the budgeted cost and that the original work plan would have resulted in an incomplete evaluation. Therefore, in consultation with GOI and the Bank, ONGC promoted both fields to private participation instead of using project funds. These fields were included in recent petroleum licensing rounds and ONGC is currently negotiating contracts for field evaluation and development with a consortium of local and private companies. v. The Project made some progress in improving gas marketing, development planning and pricing policy. However, GOI did not use funds designated by the Project for detailed studies to promote long-term planning. In compliance with the related project covenant, the gas-producing companies, ONGC, Oil India, Limited (OIL) and Gas Authority of India, Limited (GAIL), initiated an annual three-year rolling gas development plan. However, they did not maintain this activity throughout the Project. Furthermore, GOI conducted a pricing study in 1990 which recommended a move towards market-based pricing instead of a government-controlled pricing system. However, although an initial price adjustment was made following the study, GOI did not fully sustain the study's recommendations. vi. The Project made appreciable contributions in the promotion of environmental protection and the expansion of private-sector participation in ONGC's operational activities, despite no such explicit project objectives. The Project took measures to protect the environment in both the design of its drilling operations and in the clean-up measures for these operations (para. 19). It also promoted private sector involvement in ONGC's operations by demonstrating the cost-effectiveness of contracting out drilling and other well-related services for the appraisal and initial development of the Gandhar field (para. 18). vii. The main factor within the control of GOI which had an adverse effect on the Project's implementation was the recurrent problem of delays that resulted from GOI's complex, bureaucratic procurement process. There are two aspects of the process that led to these delays. First, instead of decentralizing the procurement process for greater efficiency as originally planned GOI exercised excessive centralized control over the process through a complex series of committees. Second, there was a large turnover of procurement officers during the Project's implementation period, which broke the continuity of the process and caused protracted disagreements between ONGC, on one side, and contractors and suppliers, on the other side. These procurement problems delayed most project components by about a year, resulted in mis-procurement of one component (Table 8C), and (along with other problematic administrative procedures) contributed to the cancellation of another project component (para. 21). Factors which enhanced the outcome of the Project were: (a) the use of a pressure maintenance system to increase liquids production from the Gandhar field (paras. 12 and 23); (b) lower than originally anticipated project costs (paras. 9 and 26); and (c) considerable savings to ONGC which resulted from the Bank's agreement to finance the construction of both the oil pipeline and the gas pipeline from Heera to Uran (para. 24 ). viii. The assessment of the Project's outcome, overall, is highly satisfactory. The Project closed as originally planned, on June 30, 1994 ( Table 3). Project costs totaled US$653 million, much lower than the expected cost of about US$1.1 billion. The lower cost primarily resulted from declines in prices of oil industry goods and services worldwide. The Bank disbursed the full amount of the US$265 million loan. Table 4 outlines the schedule of disbursements. Main Findings, Future Operations, and Key Lessons Learned ix. Accelerating Gas Resource Development and Production. The main findings are as follows: (a) there is considerable demand for gas in India; (b) gas development projects are cost-effective; (c) the execution of the technical aspects of gas development are well within the capability of ONGC; and iv (d) privatization of oil and gas field services improved technical performance and reduced costs. The Project's physical results were very favorable, despite procurement problems which lowered the efficiency of project execution. Current production levels and projections from ONGC indicate that the output of gas, condensate and gas liquids should be fully sustainable at least through 2006 (para. 27). The related lessons learned from the Project (para. 37) are: (a) Careful field selection and preparatory work are important to project performance. Gas development work under the Project proved to be very cost-effective because of the Project's focus on well-established fields, which were subject to considerable advanced preparatory work by ONGC. (b) There is a need to focus on the causes of procurement difficulties in India. Given limited supervision time, the Bank focused only on removing specific bottlenecks blocking individual project components. To alleviate some procurement problems, the Bank and GOI have agreed on standardized bidding documentation and the initiation of a bidding process for critical items before the presentation of a project to the Board. (c) The use of technical assistance for onsite managerial and operational expertise can be extremely beneficial to project performance. Technical assistance helped ONGC improve its performance under the Project, especially in the area of onshore operations, which had been neglected for some time. (d) The coordination of a project's implementation work should receive high priority in project preparation and timing. During the two-year lag time between the Project's appraisal and its effectiveness, the ONGC team involved in appraisal which was also to handle implementation moved on to other company assignments and coordination difficulties resulted. (e) Contracting out specialized services to the private sector can improve technical performance and cost effectiveness. The favorable experience associated with using private companies to supply specialized drilling services for the Gandar field convinced ONGC of the effectiveness of such partnerships. x. Due to the success of the Project, the Bank and GOI launched a follow-up operation, the Gas Flaring Reduction Project, begun in 1991. This project's objectives are to: (a) eliminate gas flaring from the Bombay High oil and gas field; and (b) assist ONGC in the construction of a second gas trunkline, designed to allow ONGC to recover gas from other fields adjacent to the Bombay High field, as well as from the South Bassein gas field (para. 35). In addition, ONGC obtained a loan from the Asian Development Bank to implement a second phase in the development of the Gandhar field (para. 36). The Gas Flaring Reduction Project incorporated most of the above lessons in its design. Notably, this project agreement contains covenants to: (a) review the procurement process and the organization of the project's implementation; (b) establish well-coordinated project implementation units; and (c) promote further private-sector involvement in the oil and gas sector. xi. Gas Sector Development Planning and Pricing. The Bank had hoped to convince GOI to move away from central control over gas allocation and pricing to a market-based system that better reflects the value of gas to the economy. This objective was intended to be implemented through the Project's component for planning studies and the covenants for regular reporting on progress in planning and pricing. However, GOI decided not to do the long-term development planning studies originally planned under the Project. Furthermore, GOI did not regularly update and report on its planning according to the specifications of the Loan Agreement (Table 10). Thus, despite some initial interest, GOI did not move toward a market-based system as quickly as the Bank had envisaged. The main lesson learned is that the Bank and GOI should have formulated clear progress indicators taking into account GOI's preference for a gradual approach toward liberalization and the Bank's concerns about ensuring the efficient development of gas resources.  1 PART I: PROJECT IMPLEMENTATION ASSESSMENT EVALUATION OF PROJECT OBJECTIVES Project Context 1. The Western Gas Development Project (the Project) supported the policy of the Government of India (GOI) to promote gas development to satisfy the increasing energy needs of India's industrializing economy. At the time of project appraisal in 1986, India's economy showed significant energy intensity. Petroleum demand was growing at approximately six percent per annum compared to economic growth of around five percent. India had an estimated 1.35 billion tons of oil equivalent (toe) in commercially recoverable oil and gas reserves. Petroleum product consumption was about 43 million tons (mmt) annually compared to crude oil production of about 30 mmt. Oil imports were used to meet the supply gap and they accounted for 30 percent of oil consumption. India was facing the possibility of major increases in these imports due to: (a) expected declines in production from the Bombay High oil field, which provided 70 percent of the country's oil supply; (b) projected continuation of high oil demand growth despite conservation efforts; and (c) limited petroleum exploration success. During the preparation of the Project, as part of a strategy to support the substitution of domestic gas for imported oil GOI constructed the Hazira-Bijaipur-Jagdishpur (HBJ) Pipeline to bring natural gas from the Bombay offshore fields to markets in the northwestern part of the country. The Project also took place at a time when GOI was moving toward partnerships with the private sector to improve operational efficiency in the oil and gas sector and increase resource mobilization. The Project's design built upon successful technical results in four previous Bank projects and expanded Bank involvement in the areas of gas marketing, long-term development planning and pricing. The Project's main objectives are evaluated in the following sections: (a) accelerating natural gas field development and production; and (b) identifying new gas markets and improving gas development planning. Accelerating Gas Field Development and Production 2. India had three established gas-producing areas at the time of project appraisal: western offshore fields and onshore fields in Gujarat and Assam (see map attached as Appendix 2). The estimated total recoverable reserves of these fields amounted to 680 billion cubic meters (bcm), with an annual production capacity of 26.9 million cubic meters per day (mmcm/d), equivalent to 539 million toe. The western offshore field contained 80 percent of recoverable gas reserves and 74 percent of gas production. Project appraisal estimates indicated that natural gas production over the decade beginning in 1987 could rise to 45-60 mmcm/d, equivalent to 13-17 mmtoe per year or about one half of India's crude oil production in 1987. However, there were several constraints to bringing existing reserves into production: (a) the absence of transmission infrastructure; (b) insufficient production facilities; and (c) the need for further resource evaluation. 3. The Project responded reasonably to gas resource constraints with two objectives on the production side of gas development. The first objective was to increase gas production from fields with recoverable reserves through three project components: (a) Phase II development of the South Bassein offshore field, to double gas production capacity from 10 mmcm/d to 20 mmcm/d; (b) the construction of a pipeline from the offshore Heera oil and gas field to the Uran gas terminal serving Bombay, to transport gas that was being flared; and (c) appraisal of and initial development drilling in the Gandhar field. The second objective was to evaluate, through a field evaluation program, gas reserves for future development in the offshore North Tapti and Hazira fields. This program was to consist of seismic surveys, seismic data interpretation and some appraisal drilling. The implementation of these objectives was well within the capabilities of the Borrower's Implementing Agency, the Oil and Natural Gas Commission of India (ONGC), which had experience in all of these activities and had been the recipient of four Bank loans (totaling US$1.18 billion) in the petroleum sector since 1979. 2 4. The major risks in meeting the Project's production objectives were: (a) uncertainties about the commercial viability of proven gas reserves; (b) the possibility of a sharp decline in the international price of oil; and (c) a policy for gas-pricing and allocation that neither promoted the best use of natural gas nor encouraged its efficient development. To adequately minimize these risks the Project's appraisal work (a) focused on well-established fields and used conservative assumptions about expected production; (b) prepared sensitivity analyses of the Project's economic viability based on oil prices as low as US$12 per barrel; and (c) provided a special component for marketing and development planning studies along with covenants to support regular reviews of gas sector development (Table 10). There were no major changes in project objectives on the production side, although there were a few changes in individual project components in response to project findings and the availability of funds. Herein, paras. 21, 24 and 25 outline these changes. Identifying Gas Markets and Improving Gas Development Planning 5. At project appraisal, estimated gas use was about 12.4 mmcm/d (3.6 million toe annually). The fertilizer industry was the main consumer, along with some other industries in the Bombay area. However, GOI had not yet made a detailed review of potential gas markets or established long-term development plans for gas resources. Thus, in addition to meeting physical production targets, an important project objective was to continue Bank dialogue with GOI on gas development policy and planning. In addition, since at project appraisal prices played little or no role in signaling to gas-consuming industries the real value of gas, the Project also intended to assist GOI in developing adequate pricing and contractual arrangements to promote gas use. 6. The Project provided for a study of long-term gas sector planning to support optimum production and utilization of the Western Gas resource base. The scope of the study which the Staff Appraisal Report (SAR) proposed was comprehensive and appropriate to support the large investments required for gas substitution. On the production side, the planning study was to: (a) review reserves and potential production profiles; (b) identify various development options and their related operating costs; and (c) select, on the basis of findings from the gas utilization part of the study, the least-cost program for developing gas resources over a 20-year period. The study was to prepare high, low and medium gas-supply scenarios for gas utilization. To develop these scenarios the study was to identify details about potential gas users in the Bombay and Gujarat areas, such as the volumes of gas they could consume, the costs of gas conversion and the approximate prices that would encourage gas conversion. Then the study was to estimate the economic value of gas for each use, accounting for the fuel replaced, and evaluate related operating costs and environmental benefits (net-back value). ONGC had the capacity to handle the production side of the planning study with some specialized technical inputs from domestic or foreign specialists for complex or marginal fields. The Gas Authority of India, Limited (GAIL), the state-owned gas transmission and distribution company, had sufficient expertise to conduct the studies on gas utilization. GOI's Gas Coordination Committee was an appropriate body to coordinate both the production and utilization aspects of the study. 7. The Project also included several covenants that were reasonable for ensuring GOI's continued attention to the Project's objectives for marketing and planning. It provided for GOI to submit to the Bank an annual report on gas marketing, covering a three-year period and addressing the steps necessary to ensure the connection of sufficient users and thus sustain a high capacity- utilization rate for the gas produced. GOI also confirmed that it would make arrangements to coordinate ONGC's production planning efforts with GAEL's utilization planning efforts, either through GOI's Gas Coordinating Committee or another appropriate authority. 8. At the time of project appraisal, the Bank and GOI recognized that the expected production of large quantities of associated gas resulting from the Project would require GOI to establish a more comprehensive pricing policy. Policy discussions between GOI and the Bank led to the following principles for gas pricing: (a) linkage of the gas price to the price of fuel or feedstock 3 replaced; (b) a simple price structure with uniform prices along the (HBJ) pipeline; and (c) a fair return on costs to the operator of the pipeline, GALL. Based on these principles, GOI developed the following set of gas prices: (a) Rs 1400 per thousand cubic meters (mcm) for gas at the transmission system gate for both offshore and onshore gas; (b) Rs 2250/mcm for gas supplied along the HBJ pipeline; and (c) Rs 500-1000/mcm in Assam, where there was a surplus of associated gas. To insure proper pricing policy between ONGC, as producer, and GAIL as distributor, the Bank requested GOI to provide the Bank with the contractual basis for the provision of gas by ONGC to GAIL. This measure was reasonable to ensure that pricing terms provided ONGC with adequate remuneration to allow the company to meet financial covenants of the Project and ensure the financial autonomy of GAIL. PROJECT ACHIEVEMENTS Overview 9. The Project surpassed its original objectives for gas production. It also made some initial progress in gas development planning and pricing. However, during the Project's implementation the Bank realized that it would be difficult to bring about far-reaching gas sector changes within the scope of one project; the follow-up Gas Flaring Reduction Project contains specific provisions supporting economic gas development and pricing. The Project closed on the original date planned, June 30, 1994, as Table 3 notes. Table 5 outlines the Project's implementation indicators. Project costs, which totaled US$653 million, were much lower than the expected cost of about US$1.1 billion due to declines in the cost of oil industry goods and services worldwide (Table 8A). The Bank disbursed the full amount of the loan, US$295 million, for the Project and Table 4 provides the schedule of disbursements over the project period; Table 8C shows disbursement by category. The Project met the major objectives outlined in paras. 2-8. The following review of Project achievements covers: (a) physical objectives; (b) gas-sector planning and pricing policy; (c) economic performance; (d) financial objectives for the Implementing Agency, ONGC; (e) macroeconomic impact; (f) institutional development; and (g) environmental protection. Physical Objectives 10. South Bassein Field Development. The completion of development infrastructure for the offshore South Bassein field and the related Hazira onshore gas-processing facility has resulted in a net annual incremental production of 10 mmcm/d. The Project did not install the planned single- buoy mooring system (SBM) at Hazira for loading natural gas liquids (NGL) from the gas processing facility onto tankers for transport to the Bombay refinery. The deletion of this component from the Project resulted from protracted Government administrative procedures associated with procurement of the SBM and with obtaining the necessary construction permit from state agencies. The SBM was then relocated outside the Project's area of operation. 11. Heera-Uran Gas Pipeline. The Project supported construction of a 26-inch, 100-kilometer (km) pipeline to transport associated gas from the Heera oil and gas field to the Bombay gas market. Prior to the Project, ONGC was flaring 1.2 mmcm/d of associated gas but, as a result of the pipeline, this gas is now available for use by consumers in the Bombay area. There was a delay of one year in the construction of the pipeline because of lengthy procurement procedures. 12. Appraisal of the Gandhar Gas Field. The original appraisal program in the Project called for drilling 115 appraisal and development wells. By the effectiveness date of the loan, the field appraisal program was already fairly advanced and the Project ultimately drilled a total of 147 wells. However, due to the special characteristics of the reservoir no more than 120 wells are producing at a given time in order to maximize the recovery of condensate, which has a higher market value than gas. Daily production per well averages about 270 mcm of gas and 31 metric tons (t) of oil condensate, compared to the respective appraisal estimates of 180 mcm of gas and 17.5 t of condensate. The initial field appraisal work showed a tendency toward rapid depletion 4 and established the need for a pressure maintenance program (PMP), injecting water into the field to keep the pressure up and prevent irretrievable resource loss. This program began on a pilot basis in 1991-92. After satisfactory results, ONGC decided to expand the PMP to most of the producing areas of the field. The facilities for this expansion were completed in the summer of 1994. The preparation of the program took longer than ONGC originally planned because of the need to resolve related water issues with GOI (para. 23). In the interim between the pilot testing and the full-scale injection program, ONGC limited field production to maximize condensate recovery. 13. Reserve Evaluation of the Hazira and North Tapti Fields. The evaluation of these fields formed part of ONGC's long-term development plan for the Bombay offshore fields, but it turned out that the necessary financial resources required were much higher than what ONGC had budgeted. Instead of using funds from the Project for the evaluation work, ONGC, in consultation with the Bank, decided to open field evaluation of these areas to interested private-sector companies. These fields were part of recent petroleum licensing rounds and contracts are currently being negotiated with international oil companies. Gas Sector Planning and Pricing Policy 14. GOI did not use funds from the Project to do long-term planning studies for gas development, nor did GOI fully comply with related covenants (para. 33 and Table 10). However, GOI appointed an inter-ministerial committee to review various options for changing the basis of pricing from government directive to a market mechanism subject to the basic principles outlined in paras. 7-8. The committee held discussions with gas producers and consumers on various pricing issues and submitted its findings to GOI in a report in 1990, which GOI shared with the Bank. The report recommended: (a) a uniform gas price for consumers along the HBJ pipeline; (b) gas prices to the consumer based mainly on heavy fuel oil but including the prices of other products such as diesel oil; and (c) periodic price reviews in response to international prices for replacement products. As a result, GOI increased the price of gas per mcm at the offshore and onshore transmission gate from Rs 1400 to Rs 1500 in 1992. At that time, the increase brought the price close to its economic price, the international price of fuel oil. However, the domestic price has not kept pace with the international price since that time because of the significant devaluation of the Rupee. Economic Performance 15. The Project's appraisal estimated an economic rate-of-return (ERR) of 72 percent for its three physical components: (a) the second phase in the development of the South Bassein gas field; (b) the appraisal and initial development of the Gandhar gas field; and (c) the construction of the Heera-Uran gas pipeline. Based on the results of the Project, the ICR has re-estimated the ERR at 94 percent (Table 9). The main reason for the overall higher ERR is that the favorable impact of lower project costs and higher production levels far outweighed the adverse impact of lower oil prices during the project period. Table 9 outlines the major costs and benefits associated with the re-estimated ERR. Financial Objectives for ONGC 16. ONGC remained financially viable during the project period. It adhered to the Project's financial covenants by maintaining a current ratio greater than 1:2; debt service coverage at 1.5 times or higher; and a debt to equity ratio of not more than 60:40. Macroeconomic Impact 17. By supporting the substitution of domestic gas for imported oil the Project had a favorable macroeconomic impact, avoiding additional foreign exchange expenditure on oil that would have 5 been required in the absence of production from the Project. The use of previously flared associated gas and the production of new gas and liquids from the Project amount to 7.7 million toe/year, equivalent to about 26 percent of current oil imports. Institutional Development 18. The Project included measures to strengthen ONGC's onshore drilling operations in the Baroda office, which supervised the Gandhar field appraisal by contracting out these services to private companies specializing in these operations. At the same time, the Project helped train ONGC staff to supervise private drilling and other field activities, such as well cementing and rehabilitation, along with general services, such as the building of access roads to field operations. The use of these private services decreased the overall cost of field services and encouraged ONGC to seek further cost-effective partnerships with the private sector. Environmental Protection 19. Although the Project did not have explicit objectives for environmental improvements, it did include several measures to protect the environment: (a) treating formation water in the Gandhar field and offshore fields; (b) monitoring effluent water subject to the standards of the Indian Minimum National Standard Regulations (MINAS), which are at least as strict as those governing oil production in the North Sea; and (c) establishing the requirement for ONGC to ensure that contractors for the Project clean up any additional drilling fluid or chemicals, and reclaim any land not required for production. Furthermore, the Project helped establish multi- directional drilling at given drilling sites, which minimized the use of land in drilling operations by as much as 60-70 percent. MAJOR FACTORS AFFECTING PROJECT PERFORMANCE Factors Within the Scope of Government Control 20. Procurement Procedures. Recurrent procurement problems throughout the Project's implementation were largely responsible for delays in almost all of the Project's components and the mis-procurement of the Hazira compressor station. There were two main problems. The first was excessive government control over the process. Procurement operations were supposed to be decentralized, with regional management in charge of most decision-making, except in the case of large contractors, which required the approval of ONGC's headquarters. Instead, all tendering passed through as many as five committees within ONGC, with the final stage of the process requiring the review of one or two inter-ministerial government committees, depending on the importance of the procurement package. The operating procedures of these committees were especially cumbersome. For example, all members of the committee had to be present for the review. If one committee member was not available for some reason, the entire process was disrupted. Furthermore, high-level officers often appointed new committees which would send the tender evaluation back down the committee-approval chain for the entire process to begin again. The second problem in the procurement process was the large turnover of procurement officers during project implementation, which led to different interpretations of contract terms and resulted in protracted disagreements among contractors, suppliers and ONGC. Furthermore, the heavy involvement of high-level GOI entities in the procurement process made it extremely difficult for ONGC to comply with certain procurement guidelines and resulted in mis-procurement for the Hazira compressor station (US$11.5 million). While ONGC clearly understands Bank procurement guidelines, the involvement of higher GOI authorities has, on occasion, interfered with ONGC compliance. A similar situation arose in the procurement process for the SBM of Hazira, but then the Bank notified the Government that it would cancel the entire project if GOI failed to follow procurement guidelines. Subsequent to this communication there were no other cases of mis-procurement under the Project. 6 21. Construction of the SBM at the Hazira Gas Treatment Plant. There were several factors which led to the delay and eventual cancellation of this project component. First, protracted procurement procedures delayed the initial construction schedule by about one year. Then, after the start of construction, the Gujarat State Maritime Administration objected to it, claiming that the work required a permit from them. The review process for the permit further delayed construction. It took ONGC two years to obtain the permit, which required a realignment of the SBM. Compliance with this request required an extension of the construction schedule and the contractor requested a cost adjustment to take account of the additional work necessary. After several months of negotiations, ONGC and the contractor could not reach an agreement. The contractor demobilized operations and the dispute was submitted to arbitration. ONGC considered re- tendering the SBM's construction but this would have delayed the completion, originally scheduled for 1989, until the end of 1995. Since the NGL processing plant at Hazira was scheduled for completion by that time, the shipment of NGL through the SBM system from Hazira to the Bombay refinery was no longer necessary. The country did need an SBM system for imports of liquified petroleum gas (LPG), however, this area was not part of ONGC's activities. Therefore, the construction of the SBM was canceled from ONGC's work program and related equipment was transferred to another state-owned company, the Indian Oil Corporation. 22. Devaluation of the Rupee. The Rupee's value relative to the US dollar declined from Rs 14 per US$ at the outset of the Project, to Rs 31.4 per US$ at the end of the project period. The main impact on the Project's results was a lower US dollar-equivalent value of the local-cost component. Factors Within the Scope of ONGC Control 23. Optimization of Production Increase from the Gandhar Field. In the course of field appraisal, ONGC discovered the presence of a greater than anticipated petroleum liquid fraction which led to the need for PMP and a related water-injection facility (WIF), components that were not originally part of the Project. Until the completion of the WIF and the operation of the PMP, it was necessary to constrain the field's production to prevent resource loss and advanced field depletion. Given the importance of this program for the productivity of the field, the Bank maintained the original closing date of June 30, 1994, although disbursements for the Project were essentially complete in September 1992. Gas production increased by 400 mmcm/y and liquids production by 0.28 mmt/y as a result of PMP. By keeping the loan open the Bank was able to monitor and assist ONGC in the implementation of this program. 24. Construction of the Heera-Uran Oil Pipeline. At the time of project appraisal, ONGC's investment program included an oil pipeline and a gas pipeline, from the Heera oil and gas field to consumption centers in the Uran area. ONGC was supposed to complete the construction of the oil pipeline prior to the Project. As part of the Project, the Bank was to finance the equipment and the construction costs of the gas pipeline only. However, there was a delay in the procurement of the oil pipeline which ONGC was financing on its own. Coincidentally, that pipeline's construction was to take place at the same time as the Bank-financed pipeline. Since it would not have been possible logistically for two different contractors to construct these pipelines at the same time, ONGC and the Bank decided to have one contractor construct both pipelines. For each pipeline the cost of supplies was about one half of the total construction cost. Thus, it was decided that ONGC would finance all the supplies for both lines on its own and the Bank would finance the construction costs for both lines. This arrangement resulted in cost savings of about 20 percent for the supplies and construction of both lines. 25. Evaluation of the Hazira and North Tapti Offshore Petroleum Fields. ONGC decided to seek funds from international oil companies interested in the evaluation of the Hazira and North Tapti offshore fields and, therefore, did not use Project funds originally allocated for this purpose. The Bank supported this move to make greater use of private resources available for oil and gas field evaluation. 7 Factors Outside the Project 26. Decline in the International Price of Oil and the Related Cost of Oil Field Supplies and Services. The international price of oil fell from US$27 per barrel in 1984 to an average of about US$18 per barrel during the Project appraisal period. The declining oil-price trend led to a sharp curtailment of oil development activity worldwide. This curtailment considerably lowered prices for oil industry goods and services. Price decline led to substantial reductions in project costs. The original estimate of the Project's base cost was US$1.1 billion. The actual cost of the Project was about US$653 million or 60 percent of the original estimate. Most of the cost reduction was in the area of drilling services, as noted in Table 8C. Additionally, during the project period (1989-1994), the international oil price in real terms averaged about US$15 per barrel instead of the constant US$18 per barrel which the SAR assumed for its base case estimate of the ERR. However, the price differential did not threaten the economic viability of the Project, which was to remain viable for oil prices as low as US$12 per barrel, according to the SAR. SUSTAINABILITY 27. Production Benefits. Actual production results and projections from ONGC indicate that the output of gas, condensate and LPG associated with the Project will be fully sustainable at least through 2006. Incremental gas production, which are currently about 4.9 bcm annually, are expected to peak at 8.2 bcm in the late 1990s and gradually decrease to about 6.6 bcm in 2006. The production of oil and condensate, which is currently about 2.0 mmt, is projected to reach peak production of 2.2 mmt in 1996/97 and decline to 1.0 mmt in 2005/06. The production of NGL and LPG is about 870,000 t and is expected to remain at this level through 2006. 28. Gas Development Planning and Pricing Policy. As noted in para. 14, GOI has not regularly updated planning work and the current price of the gas which GAIL pays to ONGC is below the economic price. Thus, it appears that benefits from the Project's dialogue on improved planning and pricing policy in these areas are not fully sustainable by the Project alone. However, the follow-up Gas Flaring Reduction Project contains covenants that should enhance the momentum towards more liberalized sector development and pricing (para. 35). BANK PERFORMANCE 29. Project Identification, Preparation and Appraisal Assistance. The Bank's performance in helping the Borrower identify, prepare and appraise the Project was satisfactory. The SAR was thorough, with considerable attention to linking sector strategy to the various project components. It also took sufficient account of factors to minimize risks that could impede the achievement of the Project's objectives. However, inclusion of some provision to streamline decision-making on procurement and avoid some of the procurement problems that delayed the implementation of the Project would have been desirable. 30. Supervision. Bank supervision of the Project overall was satisfactory. Most of the supervision missions focused on project components for enhancing gas production and distribution. This was reasonable since the bulk of the investment cost was in these components and GOI/ONGC took actions on pricing and sector planning outside the scope of the Project. Furthermore, the Bank had a good working relationship with ONGC on the technical aspects of the Project. BORROWER PERFORMANCE 31. GOI was the Borrower for the Project and ONGC was the Implementing Agency. ONGC's performance in executing the technical aspects of the Project was satisfactory, but was weak in certain areas of project management. Furthermore, since during most of the Project's implementation period ONGC was a commission of GOI, not a separate corporation, ONGC did 8 not have sufficient independent authority to follow all of the Bank's guidelines governing project execution. The performance of GOI was not fully satisfactory, mainly because of its excessive interference in project management and related decision-making, especially in the area of procurement. 32. Project Identification, Preparation and Appraisal. The performance of ONGC in project identification, preparation and appraisal was satisfactory. However, there was about a three-year time lag between project identification and preparation because of GOI delays in granting ONGC approval for the Project. This was due to GOI's preoccupation with the concurrent HBJ gas- pipeline project. 33. Project Implementation. ONGC's performance in executing the physical components overall was satisfactory. ONGC complied with project covenants governing its financial viability, but the performance of ONGC in overall project management could have been better. A two-year lag between project appraisal (1986) and effectiveness (1988) led to coordination problems because of ONGC's staff changes. ONGC did not designate a coordinator for the various physical components of the Project as the SAR specified. This omission resulted in some lack of coordination and unconsolidated reporting on the progress of the Project, which complicated supervision by the Bank. The performance of GOI was not fully satisfactory because of: (a) excess interference in project management and decision-making, especially in procurement matters; and (b) insufficient compliance with the covenant in the Loan Agreement governing regular reporting on gas development planning (Table 10). Notably, GOI's heavy interference in the procurement process made it very difficult for ONGC to follow all of the Bank's procurement guidelines (para. 20). ASSESSMENT OF OUTCOME 34. The outcome of the Project is highly satisfactory because it either met or exceeded its production targets and is expected to result in greater economic benefits than originally anticipated. FOLLOW-UP OPERATION 35. Given the success of the Project, the Bank launched a follow-up operation, the Gas Flaring Reduction Project, begun in 1991. The Project's objective is to eliminate the flaring of large quantities of natural gas associated with oil production at the Bombay High oil and gas field (up to 12 mmcm/d) by simultaneous recovery of the gas for transmission to consumers. This project is also assisting ONGC in the construction of a second gas trunkline, which will allow ONGC to recover natural gas from other fields adjacent to the Bombay High field, as well as from the South Bassein gas field. When completed, the project will allow ONGC to increase its natural gas production and transmission to onshore by about 25 mmcm/d. This gas recovery scheme also will allow ONGC to produce from more wells, which will increase its oil output by about 3 mmt/y. The project's implementation is about 60 percent complete, taking account of components financed by the Asian Development Bank and the Japan Export-Import Bank (J-Exim). The gas trunkline is expected to be completed by mid-1995. Current plans indicate the onshore gas-receiving facility, an expansion of the Hazira gas processing complex, will be completed in 1996. Furthermore, this project is continuing the dialogue with GOI on greater liberalization of gas-market development and private sector participation in the oil and gas sector. Covenants are included to: (a) implement a policy for linking gas pricing to international fuel oil prices; (b) review oil and gas field developments on a quarterly basis; (c) submit annual reports to the Bank indicating changes in gas allocations and their inputted or net-back values; and (d) establish a body in the Department of Petroleum and Gas to monitor the implementation of gas supply and utilization plans. 36. For the Gandhar field, ONGC has obtained a loan from the Asian Development Bank (ADB) to implement a second phase of the field's development. The ADB-financed project is drilling more gas-producing wells, expanding the field's gas-gathering system and extending the 9 PMP for the reservoir. At full development, the Gandhar field should produce as much as 10 mmcm/d of gas and 2-3 mmt/d of condensate and light oil. Furthermore, GAIL is preparing to build two LPG-recovery plants, each with a capacity of more than 200 mt/y, using gas from this project. MAIN FINDINGS AND LESSONS LEARNED 37. The key lessons that emerged from the Project are the following: * Careful field selection and preparatory work are important to project performance. Gas development work under the Project proved to be very cost-effective because of the Project's focus on well-established fields, which were subject to considerable advanced preparatory work by ONGC. In particular, the use of an early-production system for the appraisal and development work for the Gandhar field allowed ONGC to conduct a reservoir deliverability test which showed that the field contained more petroleum liquids than ONGC had originally anticipated. The results were crucial to developing a program for optimizing resource recovery from the field. Notably, the use of reservoir pressure maintenance and drilling programs improved the field's recovery of high- value liquid fractions along with the related gas. * There is considerable industrial demand for gas. Prior to the Project GOI focused primarily on the potential use of gas as feedstock for fertilizer and petrochemical production. However, the market development work which the Project promoted encouraged GOI to look to demand from other sectors. As it turned out, there is considerable industrial sector demand for gas, especially in heat processing operations. * There is a need to focus on the causes of procurement difficulties in India. The Project and preceding Bank projects experienced delays as a result of GOI's cumbersome, bureaucratic procurement process, which revealed GOI's unwillingness to relinquish direct control over ONGC's procurement activities. Instead of focusing on the cause of the main procurement difficulties, the Project and its predecessors concentrated on removing immediate bottlenecks preventing timely implementation of project components. Greater focus on the causes of procurement difficulties, instead of the mechanics to remove them, is required. Bank staff supervising the Project could have focused more on the causes, but this would have involved considerable supervision time on a problem which goes well beyond the scope of the Project and even the oil and gas sector; it is a deep-rooted problem affecting most sectors of the economy. However, to minimize problems in the future, the follow-up Gas Flaring Reduction Project included a covenant in the Loan Agreement to review the procurement process. Also, the Bank and GOI have agreed on standardized bidding documentation, which should help improve the procurement process and reduce the likelihood of mis-procurement. Finally, since ONGC is now a corporation instead of a GOI commission, it will have more independence in the conduct of procurement matters for ongoing and future Bank-supported projects. * The use of technical assistance for onsite managerial and operational expertise can be extremely beneficial to project performance. Technical assistance helped ONGC improve its performance under the Project, especially in the area of onshore operations which had been neglected for some time. In particular, the assistance resulted in the transfer of technology for sophisticated well-completion techniques and PMP in the Gandhar field. * The coordination of a project's implementation work should receive high priority in project preparation and timing. During the preparation of the Project, ONGC organized a team of officers that worked well together and were supposed to coordinate the implementation of the Project's components, which were spread among several offshore and onshore areas. However, there was a lag time of two years between the appraisal of the Project and the effectiveness of the related loan. During this period, most team members who participated in the preparation of the Project were relocated to other parts of ONGC. As a result, the Project experienced coordination 10 difficulties which could have been avoided by retaining the original group involved in project preparation and appraisal. * There is a need for greater dialogue on market-based gas development planning. More commercialization of the gas sector and long-term policy dialogue on pricing outside the context of a specific project are necessary to achieve greater efficiency and sustain some initial progress made in the move to market-based resource allocation. The follow-up Gas Flaring Reduction Project contains some covenants to support this transition (para. 35). In future projects, the Bank and GOI have to work out clear indicators of progress. * Bank willingness to confront serious cases of non-compliance with Bank guidelines and project covenants with the serious prospect of project cancellation is an effective tool of ensuring compliance. After one case of mis-procurement under the Project, the Bank stressed to GOI the importance of procurement guidelines by clearly indicating the Bank's willingness to cancel the entire Project if more cases of mis-procurement arose. This commitment on the part of the Bank to enforcing its guidelines was a key factor in encouraging GOI compliance throughout the rest of the project. The Bank should maintain this stance in the on-going project. 11 PART II: STATISTICAL ANNEXES 11 Tahte .17 kiyx~ 4- A4k!Ossments A. Achievement of Objectives Substantial Partial Negligible Not Applicable Macroeconomic Policies i L 0U Sector Policies U lJ Financial Objectives 0 Ll Institutional Development U O O Physical Objectives W O O O Poverty Reduction 0 0 0 U Gender Issues O ) 0 U Other Social Objectives 0 D 0 N Environmental Objectives U O U 0 Public Sector Management 0 0 0 U Private Sector Development D N U 0 Other (specify) O O O U B. Proiect Sustainability Likely Unlikely Uncertain U 0 0 C. Bank Performance Highly Satisfactory Satisfactory Deficient 01 U 0l 0 U 0 0 U D D. Overall Borrower Performance Highly Satisfactory Satisfactory Deficient 0 U O D 1 0 0 U 0 0 N 0 E. Assessment of Outcome Highly Satisfactory Unsatisfactory Highly Satisfactory Unsatisfactory ) O 0 0 Source: Bank staff estimates. 12 Table Ban Lots$t _______ Year of Loan/Credit Title Purpose Approval Status Preceding Operations. 1. Bombay High Offshore Development Development of Bombay 1981 Completed LN 1925-IN High Field 2. Krishna-Godavari Exploration Exploration and appraisal 1983 Completed LN 2205-IN onshore and offshore 3. South Bassein Gas Development Field development and 1983 Completed LN 224 1-IN pipeline 4. Cambay Basin Petroleum Project Exploration and development 1984 Completed LN 2403-IN of the Cambay Basin Following Operations: 1. Petroleum Transport Onshore gas trunkline 1989 Canceled in part LN 3364-IN 2. Gas Flaring Reduction Project Infrastructure and gas 1992 On-going LN 3364-IN pipelines Bombay offshore Source: Bank Project Files. Steps in Project Cycle Date Planned Actual Date Identification 1/00/86 4/00/86 Preparation 2/86-5/86 6/86-10/86 Appraisal 6/1/86 11/1/86 Negotiations 3/1/87 11/17-11/23/87 Board presentation 7/1/87 2/2/88 Signing NR 4/21/88 Effectiveness NR 9/2/88 Project completion 12/31/93 9/30/92 Loan closing 6/30/94 6/30/94 Source: Bank Project Files. NR = Not reported. 13 Table 4:, Loan/Credit Dishursements,. Cumulativ e Estimuated FY88 FY89 FY90 FY91 FY92 FY93 Appraisal Estimate 10 100 195 255 290 295 Actual 0 75.7 156.6 253.4 282.9 283.3 Actual as % of Estimate 0 76 80 99 97 96 Date of Final Disbursement: July 20, 1992 Source: Bank Loan Department. Table 5: Key Indicators for Project Imoplementation Key Implementation Estimated Actual Indicators in SAR/President's Report 1. Sale of gas from the South 10 mmcmld by 1992 8.5 mmcm/d 1992. increasing to Bassein field. 17.1 mmcm/d by 1997 2. Sale of gas from the Gandhar 1.0 mmcm/d for 1991 1.4 mmcm/d by 1991, increasing to field. 5.5 mmcm/d by 1995 3. Production of liquids from the 1.3 mt/d 2.8 mt/d by 1991, increasing to 3.7 Gandhar field. mt/d in 1993 4. Sale of gas from the Heera field. 0.8 mmcm/d by 1992 0.9 mmcm/d by 1992 5. Pre-develop of North Tapti and Completion of seismic work and Not implemented as part of the Hazira fields. interpretation by 1992. project. a/ a/ To be developed with the private sector. Source: SAR, President's Report, Project Files, and Bank Staff Estimates. Table 6: Key Indicators for Project Operation None Applicable Table 7: S 9tudies IncInded in Project Study a/ Purpose as defined Status Impact of Study at appraisal Gas marketing and long- Identify new gas markets Deleted from the Project at Not applicable. term gas sector and coordinate production the request of GOI. development planning. and market planning. a/GOl prepared the study without project funds. Source: Bank Project Files. 14 Appraisal Estimate (US$mm) Actual/Latest Estimate (US$mm) Local Foreign Local Foreign Item Costs Costs Total Costs Costs Total South Bassein Platform 36.20 117.00 153.20 7.70 152.80 160.50 South Bassein Wells 42.30 61.40 103.70 28.10 38.80 66.90 Hazira Terminal 74.60 55.30 129.90 103.40 23.90 127.30 Heera/Uran Pipeline 5.50 104.60 110.10 31.00 80.50 111.50 Gandhar Wells 203.60 247.00 450.60 79.50 66.10 145.60 Gandhar Facility 53.80 8.00 61.80 36.20 4.90 41.10 N. Tapti/Hazira Seismic 1.00 7.00 8.00 0.00 0.00 0.00 N. TaptilHazira Wells 29.70 47.00 76.70 0.00 0.00 0.00 Studies 0.30 1.00 1.30 0.00 0.00 0.00 Base Cost 447.00 648.30 1095.00 283.70 364.40 652.90 Physical Contingencies 44.70 64.90 109.60 0.00 0.00 0.00 Price Contingencies 91.90 57.10 149.00 0.00 0.00 0.00 Total Project 583.60 770.30 1353.90 285.90 367.00 652.90 Source: SAR, ONGC and Bank Staff Estimates. Table 8B: Project Financiag Appraisal Estimate (US$mm) Actual (US$mm) Local Foreign Local Foreign Source Costs Costs Total Costs Costs Total 295.00 295.00 68.30 215.00 283.00 Co-financing Institutions - - - - - Other External Sources - 475.30 475.30 - 150.20 150.20 Domestic Contribution 583.60 - 583.60 214.60 - 214.60 Total 583.60 770.30 1353.90 282.90 365.20 648.10 Source: SAR, ONGC and Bank Staff Estimates. 15 Appraisal Estimate US$mm Actual US$mm Category Local Costs Foreign Total Local Costs Foreign Total Costs Costs 1. Process Facilities - 76.00 76.00 36.80 28.80 65.60 2. Pipeline Installation - 60.00 60.00 0.30 80.50 80.80 3. Drilling Materials & - 61.00 61.00 19.10 87.00 106.00 Equipment 4. Drilling Services - 70.00 70.00 12.10 18.00 30.10 5. Seismic Surveys - 8.00 8.00 - - - 6. Engineering and Studies - 5.00 5.00 - - - 7. Unallocated - 15.00 15.00 - - - Total - 295.00 295.00 68.30 215.00 283.30 Cancellation a/ (-) -11.70 -11.70 Adjusted Total - 295.00 295.00 68.30 226.70 295.00 a/ Due to mis-procurement of the Hazira compression station. Source: SAR and Bank Staff Estimates. Table 9: Economi Eval4sadon SAR Estimate ICR Re-estimate Economic Rate of Return (%) 72.0 94.0 Major Benefits Gas Production (bcm) 63.0 96.0 Liquids Extracted from Gas (mmt) 11.0 15.0 Condensate Production (mmt) 4.0 27.0 Net Benefits (US $ billion) 2.7 5.4 Major Costs (US$mm) Capital Costs 613.8 535.0 Operating Costs 594.0 312.0 Source: SAR, ONGC and Bank Staff Estimates. Notes for Table 9 1. Costs and benefits expressed in constant 1987 US dollars. 2. For the ICR re-estimate, foreign costs were deflated from current dollars using the MUV index for the appropriate year and local costs in Rupees were deflated using a weighted-average index for the manufacturing and services sector, as indicated by the Indian Country Programs Division. 16 Table 10: Statu's of Le4al Covenants Agreement Section Covenant Status Description Comments I Type Loan 2.02 (b) FIN Compliance ONGC shall maintain a special None Amended account in US$. Loan 3.01 (b) FIN Compliance GOI re-lending to ONGC under None terms and conditions satisfactory to the Bank (not less than 15% per annum repayment, within 15 years including 5-year grace period). Loan 4.01 (b) AUD Compliance ONGC Audit including opinion None on SOE (due within 9 months of FY end). Loan 4.01 (a) AUD Compliance Audit of Special Account (due None within 6 months of FY end). Loan 4.02 (b) AUD Partial (a) ensure the timely offtake of GOI complied with Compliance gas by users along the HBJ part (a) but, pipeline to absorb gas supply concerning part (b), under the Project; did not report on (b) report annually, to the Bank, market on market development progress development and and plans for gas use over a future planning three-year period. regularly and in the manner stipulated by the covenant. Loan 4.03 FIN Compliance GOT to periodically review None prices of crude oil and natural gas paid to ONGC with the aim of permitting ONGC to maintain financial viability. Project 3.03 M&O Complied ONGC shall take out insurance None against risks consistent with appropriate practice. Project 4.01 AUD Complied ONGC Audit due within 9 None (b) (ii) months of FY end. Project 4.02 (a) FIN Complied ONGC shall (i) ensure cash None generation not less than 1.5 x debt service; (ii) not incur any debt that would increase the principal of aggregate debt to greater than 15 times equity; and (iii) maintain a ratio of current assets to liability of not less than 1-2 times. Source: Loan and Project Agreements. AUD= Audit covenant. FIN = Financial covenant. M&O= Management and operations covenant. 17 Table 11: Ilak Resources.- Staf Iputs al Stage of Project Cycle Actual Staff Weeks US$thousand Through Appraisal 164.0 422.0 Appraisal-Board 12.1 33.0 Board-Effectiveness - Supervision 66.7 182.3 Completion 4.6 13.0 Total 247.4 650.3 a/ No dollar costs reported during the project cycle. No estimated or revised estimates of staff weeks available. Source: Bank's time recording system (TRS). Performance Rating Stage of Month/ Number Days Specialized Implemen- Develop- Types of Project Year of in Staff Skills tation ment Problems Cycle Persons Field Represented Status Impact Through Mar-86 6.00 18.00 TM, FA, CG, a/ a/ a/ Appraisal July-86 EC, PE, PR Appraisal b/ b/ b/ b/ b/ b/ b/ through Boad Approval Supervision Dec-88 2.00 8.00 TM, G 2.00 2.00 Feb-90 4.00 10.00 TM, CG, EC. 2.00 1.00 PR Sep-90 1.00 7.00 TM 2.00 1.00 Apr-91 1.00 4.00 CG No rating NA Oct-91 2.00 10.00 TM, CG 2.00 1.00 Oct-92 2.00 7.00 TM, CG 2.00 1.00 Sep-93 2.00 5.00 TM, CG 2.00 1.00 a/ Not applicable for the appraisal process. b/ No missions during this period. Special Staff Skills: TM Task Manager EC Economist PE Petroleum Engineer G Geologist CG Consult Geologist FA Financial Analyst PR Procurement Specialist Source: Project Files and Bank Staff Estimates. 18 Appendix 1 Contribution of Borrower (Prepared by the Borrower's Implementation Agency, the Oil & Natural Gas Corporation Limited) 3mar~MCP1 'ffttV; RNMer*s OIL & NATURAL GAS CORPORATION UMITED e0MISAY REGMLA BUSINESS CENTRE !IIt 8 21. VASUOHARA HAVAN. BANoRA (EAST). 90MBAY.00 051. Phone: 6429971 Telex 011-71010 Fax 022-6400282 No.8RBC/GMF/C-7/94 December 22, 1994 Mr.H.Morsli, Sr.Petrcleum Engineer, Oil and Gas Division, Industry & Energy Department, World Bank, 1818 H Street, N.W. Washington, D.C. 20433 U.S.A. Re: Westerr Gas Develooment Project (Loan NC.2904-IN) - Submission of revised data recarding Project Completion Report Dear Sir, Kindly recall our discussion on 5th December 1994 regarding the statistical data required to be submitted for the purpose of Project Completion Report for WGDP. On the basis of our discussion and your suggestions we have recast the statisti- cal information based on the format given in the Staff Appraisal Report prepared in January 1988. may be noted that no expenditure has been incurred on accout Hazira and North Tapti fields per:aining to apprai- sal drilling and seismic survey. It may also be noted that the operating cost of the project has been considered for the incremental production of the projects covered under the loan. We are also including a write-up regarding the Project Evaluation pertaining to Heera, Gandhar and Hazira terminal facilities. We shall be glad to provide you any further informa- tion in this regard. Thanking you, Yours faithfully, (M.K.Mukhopadhyay) General Manager(F&A) PTedc : j*non Rharai Tower-li, 124. Connaught Circus. New DAhi- 10 001 Phonae J2 2 .; .2A ,ran: COMONG 7h:~ 031-6525285184 Fax 011-3316413 20 HEERA-TRUNK PIPELINE (HUT) PROJECT: ONGC had initiated advance procurement action in November 1987 for the HUT project a component of Heera Phase II Development Project. Since the gas transportation system covered under the project was indicated for possible financing by World Bank provi- sions were kept under the Bidding Documents accordingly besides possibilities of other alternative financing arrangements. However World Bank intimated serious reservations on some of the Bidding Document stipulations and the split up tendering method- 01ogy followed by ONGC. The issues were discussed at higher levels with the Bank, ONGC and the Govt. of India based on which the Bank agreed to finance both the oil and gas transportation systems covered under :he HUT Project for 2 components of works i.e. Coating/wrapping and Laying of the pipeline. Linepipe procurement was decided for financing by ONGC's own arrangements. The Bank identified minimum changes in the Bidding Documents for the Coating and Laying to make the same acceptable to the Bank. All such changes were conveyed to the bidders and their confirma- tions for compliance obtained. Stage approvals from the Bank during stage-1 and stage-? evalua- tions were planned within 15 days but actually took more time. The bidders maintained unacceptable deviations and these were withdrawn after lot of discussion. This in turn delayed the process of evaluation. Since, ONGC had to obtain final approvals of GOI including F.E. release before awards of works against the tenders, some delays were experienced in these interactions also. Above interactions with World Bank, bidders and GOI for the different tenders of the project and the resulting impact on the tendering schedule of the respective tenders had to be reviewed and the overall tendering/implementation schedule had to be revised by ONGC envisaging project completion by 15.5.90 (with one month grace period) as against the original plan of 30.9.89. Procurement guidelines of the World Bank have since been dis- cussed very much in detail and the ONGC's standard Bidding Docu- ments for projects being funded by World Bank were revised. The subsequent projects with financing from World Bank could as a result be implemented much faster. With these changes, interac- tions with the bidders also are less and the time consumed in such interactions has been minimised. Under the present arrange- ments ONGC does not require separate F.E. release from GOI and can decide award of works after internal approvals only and therefore the tendering period has also been reduced consider- ably. 21 By completion of HUT gas pipeline flaring of associated gas from Heera, Ratna and Neelam fields has been reduced considerably. This pipeline is now being connected with Bombay High field through ICP-Heera trunk pipeline presently under implementation after which it can transport upto 16 MMSCMD gas to the shore terminal at Uran for processing/distribution to consumers. By completion of HUT oil line expensive transportation of oil produced from the Heera, Neelam and Ratna fields by tankers has been stopped. 22 Gandhar Project The monitoring of the Project by the Bank through discussions with Bank Missions from time to time contributed to close monitoring and control of the project implementation. The Bank have been helpful in their suggestions from time to time and also the close monitoring and control led to project implementa- tion almost on time and its successful completion. Bank's procedures also helped in deciding the contracts on time and award of work accordingly. Close monitoring and interim review of the progress both physical as well as financial was undertaken with a view to take corrective actions in time. Review meetings were regularly held with the Project Officers and also at the Regional level to monitor the Western Gas Development Project. All these efforts helped in successful completion of the Project and full loan utilisation ahead of schedule. The Bank made the observation about lack of production optimisation due to pressure maintenance in Gandhar. Pressure maintenance in Gandhar got delayed due to poor injectivity of the wells because of formation damage around well bore. Success was achieved by taking measures to improve formation injectivity and carrying out injectivity tests at higher pressures. Water injection @ 8000 M3/d was achieved as on September 1993 and present rate of injection is 12500 M3/d as on 7th December 1994. The regular water injection scheme @ 12000 M3/d has been advanced and has been completed by mid December 1993 as against 1994-95 envisaged in the Gandhar Phase - II development Feasibility Report. Pressure maintenance in Gandhar is being given utmost importance. Higher GOR wells have been closed and production stra- tegy is based on following considerations:- i) Major oil production is taken from upper undersaturated reservoir of Gandhar. 23 ii) High GOR wells of Gandhar are closed/put on restricted withdrawals depending on the order of GORs. iii) Priority is given to produce oil wells lying in exploratory isolated areas. The relationship between Bank and the Borrower during the evaluation and implementation of the project has been excel- lent. The experiences both of the Bank staff and that of the Borrower were so dovetailed as to result in comprehensive evaluation of the project and implementation thereof. Periodical meetings and suggestions of the Bank Missions helped in close monitoring and supervision of each of the components of the Project and its implementation on time successfully. Suggestions for improvement wherever necessary were debated and on that basis on-the-spot decisions saved valuable time. No Co-financing was involved in this project. M/s.EIL were engaged as consultant for construction of surface facilities under Phase -I. The contractors were engaged both for construction of surface facilities and drilling of wells. The performance of EIL and the contractors was satisfac- tory. A summation of the benefits of the project to the Borrower in both quantitati-ve and financial aspects are given bel ow: A. Quantitative: Appraisal Current Estimate estimate Cumulative oil production unto 2000 (MMT) 3.5 6.238 Cumulative gas production upto 2000 (Million M3) 5329.50 4634.04 B. Physical Work Description Appraisal Appraisal Actual Estimate Estimate As per SAR as per loan Agreement Expl.Wells 33 40 40 Dev. Wells 48 75 75 24 Hazira Onshore Terminal During implementation of the Project, performance of the World Bank remained fairly good and appreciable in terms of communica- tion and understanding the problems. The Bank had expressed their views in certain and definite terms while conveying their suggestions and approval for implementation of the projects. A few cases where delays occured on account of clarifications of Bank's observations are compressors and Digital Distributed Control System. Though the execution of project has been delayed, but it has been completed matching with the mutual demand build up of the down- stream consumers. As the project has been implemented in a number of packages, there are lot of interfacing and coordination problems of various contractors and hence the number of packages should be minimised in future. There was no other co finance in this project. The role of consultant was to provide all assistance to the Borrower in the design and engineering for preparation of Bid packages, evaluation and award of work to various contractors and thereafter supervision of contractors' work of residual engineer- ing, procurement, construction and completion of the project. The relationship between the contractors, the consultant and the Borrower was always cordial which resulted in the successful completion of the project. However, the SBM component of the project could not be completed and the contract had to be termi- nated in v;ew of the exorbitant price demanded by the contractor to meet the additional conditions imposed by GMB for laying of offshore-pipelines. On successful completion of the project, the Borrower could process additional gas and earhed a net revenue which have been depicted in the financial statement submitted along with this report apart from having multiplier effect on various other downstream industries. 25 C. Financial Analysis Appraisal Actual Estimate Capital Cost (Rs. Million) 5662.80 3842.20 Financial Benefits: IRR 13.6% 53.78% NPV @ 10% 473.98 1763.02 (Rs.Million) 26 Appendix 2 Map of the Project Area MAP SECTION  IBRD 19877R 71. 73o INDIA WESTERN GAS DEVELOPMENT GUJARAT PROJECT Baroda 2 GA/V. Project: 18 Inch Crude Oil Pipelines 20 Inch Natural Gas Pipelines GUJARAT DAHEJ Broach A Kawas Terminal Extension o O Process Platforms SBM Offshore NGL Loading Point Principal Fields Potential Oil andlor Gas Reserves Proven Oil Reserves (and associated gas) , KOSAMBA Proven Natural Gas Reserves Under Construction 36 Inch Natural Gas Pipeline OSura Fertilizer Plants AIH Surat Process PlatformsHa A Kawas Terminal 21' 2.- Existing. NORTH 36 Inch Natural Gas Pipeline CENTRAL TAPT/ 26 Inch Natural Gas Pipeline TAPT 30 Inch Crude Oil Pipelines Distribution Lines A Uran Terminal Process Platforms SoTATT SBM Offshore Gas Loading Point ------ Fault Lines Isobaths in Fathoms State or Union Territory Capitol - - - State or Union Territory Boundaries - - - International Boundaries DAHANU 20- 20- O/U SATELLITE MAHARASHTRA STRUCTURE-1, TA PU 0 10 20 30 40 50 80 70 Kilomestere BOMBAY HIGH. PANNA BPA 9 OT" BASSEIN MUMBAI Uran Tha HEERAf M 1 Th,. b-,,d.,-r , d-,m,?,,-o, nrd -~y th-. -i,-,,t- Gmpa,"nlVam" .',iv..as,r,~~ re,rv w I. - 1 RA TNA -d., v,,'- '- r - ,i f hh d, 72- 73l) MAY 19,95   IMAGING Report No: 14412 Type: ICR