World Bank Documentdocuments.worldbank.org/curated/pt/540821468058770998/pdf/multi...Last Cost Analysis . 31 D. Project Benefits .32 ... 3.1 SNGPL VI Project ... 4.3 Definition of

Document of

The World Bank

FOR OFFICIAL USE ON?LY

Rqxpt No. 9850-PAK

STAFF APPRAISAL REPORT

PAKISTAN

DOMESTIC ENERGY RESOURCES DEVELOPMENT PROJECT

JUNE 8, 1992

MICROFICHIE ICOPY

Repo-t No. 9850-PAK Type: (SAR)SHARMA, R / X32302 / H-5131/ EM1EG

Energy and Infrastructure Operations DivisionCountry Department IIISouth Asia Region

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EOUTVAIENI(As of Mach 1991)

Currency Un.t = Pakisn Rupee (Rs)US$t = 22.50Rs 1 = 0.045

Focal Year

July I -June 30

WElGHTS AND MEASURES

1 barel (bbl) = 0.1342 rac tonI metric toof oil (MT) = 7.4 bbb.

= 41.2 MCF1160 ike.

MBBL I ioumd barebMCF = I ounamcu. fQMMCF I million cu. ftBCF = Ibiliancu. ftTCP = I tillioncu. fQMMCF = Imiloncu. ft.MMCFD = I milion cu. ft. per dsyBTU = I Britiah Thermnal UAit

= 0.2520 KDlo Caories (KCI)MMPTU = I illion BTUMl = I cubick_trMW = 35.3147cubicfed (cu. fQ.)TOE = I ton of oil equivaln

= 0.9091 tom of refied petrolum= 1068.4 m of nrcula g= 1.333 tow of coal

MTOE = million tow of oil equivalent

ACRONYMS AND ABBREVIATIONS

ADB Asian DevelpmentBankBOPD Barrels of oil per dayDC Direct CoractingDOG Directomtz Gencml for GosDGNRER Dimtc General New ad Rewwable Ecergy ReourcesDGO Directomtc Geneal for OilDGPC Directorate Gnral for Petoleum ConcsionsE & P Erploration and PrductioEA Environmental B mpac AmentENERCON Natonal Enr Conevato CanteESL I Eey Sectoar Loan IESLII Energ Sector Loan 11EUAD Evonmet dd Uzbn Affaie DiionGOP Goveentof PakistaHDIP Hydrocarbon Development lnsttte of PakistaHSD High Speed DieelICB Intcmational Competitive BiddingIDB Islamki DevelopmmtBankIDC latret During ContructionIERR Internrl Economic Rate of RetumKESC Karahi Electric Supply Co., Ltd.LASMO IASMO Oil CompanyLIB nLiited ntrnatioal BiddingPG Liquefied Petroleum Gas

MCA Model Concsion AgreacentMIS Management Inform SystemMOP Minsy of ProductionMPRN M riisty of Petroleum and Natrl ReourceMWP Miiry of Water uad PowerOGDC Oil end Gs DcveopmntCorpotionPC-I Projet Concept Document (GOP)PGCL Pirkob Gas Comwany. Ltd.PSO Pakistn State Oil ;imitedROCE Retum on Capital EmployedSCADA Supervisory Coattol and Data AcquisitionSNGPL Sui Northem Ga Pieline LtdSSGC Sui Southern Gas CorporaDonUSAID United States Agency for Intemationl DevelopmentUTP Union Texa Pakista IncorporedWAPDA Water and Power DevelopmetAutbority

FOR OMICIAL USE ONLY

DOMZMUC ENERGYRESOURCES DEVELOIS UM PROJECT

sunE APEMM" EPR

Table of Contents

Page No.LOAN AND PROJECT SUMMARY ......................... ,.,.. i

I. MACROECONOMIC AND SECTORAL SETTINGA. Macroeconomic Setting. 1B. Enr gSector ..

C. Petroleum Subsector .

II. TE P,ROJECr

A. Project Setting .10B. Project Objectives .10C. Project Description .10D. Technical Assistance .14E. Ptoject Cost .15F. Financing Plan and IBRD Financing .15G. Project ..lementa.i.. 16H. Prject Monitoring ., 161. Prouement .163. Dibusements .17

M:. BENEFICIARIES

A. Sui Northem Gas Pipelins Limited .19B. Oil and Gas Development Corporation .19C. Miistry of Petroleum and Natual Resourcs .24

IV. FIN{ANCES

A. Sui Northern Gas Pipeli Limited .25B. Oil and Gas Development Corporation .27

This report is based upon the findings of an appraisal mission that visited Pakitan in March 1991. The missioncomprised Messrs. Raghuveer Sharma (Mission Leader), Akin Oduolowu (Sr. Energy Specialist), CarlosGavino (Financial Analyst), Rashid Aziz (Ecoomist), Miguel Mantes (Sr. Petroleum Engineer), Sherif Arif(Environmental Specialist), Mikael Mengesha (Energ Specialist), Chades McPherson (Sr. Energy Economist),and Shahid Sattar (Consultant). Ms. Yolaine Joseph-Lucas also contributed to the preparation of the report.Secretarial assistance was provided by Mnes. Hannah Thomas, Anne Haldar, linda de los Santos and YoungOk Hong.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

V. PBQC TICN AND RIM

A. Rationale for ank lInvolvement .......................... 31B. Porecast Sales .......................... 31C. Last Cost Analysis . 31D. Project Benefits .32E. Pojed and Other Ris. .32F. Sustainability .33

VI. AGREEMENTS REACHED AND RECOMMENDATION

A. Ageements Reached .34B. Recommendation .35

ENDNOQS .36

1. 1 Energy Sector Organizational Chat .371.2 Pakistan Oil & Natu Gas Reserves and Cumultive Production .382.1 ProjeatDescription .392.2 Environmental Impact A_t Summary .462.3 Total Project Cost Esimate and Financing Plan ..... 50

2.4 Project Implementation Schedule .512.5 Procuement Arngements .522.6 Disbursement Schedule.533.1 SNGPL VI Project (La. 3252-PAK) - Status of CompLance with

Dated Covenants .543.2 Oil & Gas Development Corporation Oqrniation Chat .56

3.3 Finance & Accounts Dqeanent Organization Chart .573.4 Orgnitional Aspects of Technical Directorates .584.1 Oil & Gas Developmet Corporation Consolidated Financial Statements .614.2 Oil & Gas Development Corporation Forast Investment Pogram .664.3 Definition of Terns for Financial Performance Criteia .675.1 Sector Consumption of Petroleum Products .685.2 Intenal Economic Rate of Retun Calculton .69

Map No. IBRD 23285

nW1R2-MABX

~~imwu Islamic Republic of Pakistan (GOP)

Roficxaries: Oil and Gas Development Coqporion (OODC)SW Northen Gas Pipelines Limited (SNGPL)GOP's Minity of Peroleum and Natural Resourmes (MPNR)

Amct US$180 miflion equivalent

12M Twenty years, incluting a five-year grace period, at the Bank's stndad variableintera trat.

Relendine rmw. The inte rate on onlent fun to OGDC (US$85.0 m ion) and SNGPL(US$S6.5 million) would have a mak-up of one-enth of the Dank's stdadvariable interest rat to GOP. Repayment wms would be the sam as those ofthe Bank loan to GOP. Foreign exchange and interes rat risk would be bomrby the beneficiaries.

}jocl Obiectivos: The objectives of the proposed Project are to: (a) accelert the dovelopmet ofindigenous hydrcaos, utilizing privat sector resources to the mmumextent possible; (b) ensure that such indigenously developed hydrocarbons eachthe end consumers in an efficient manner; (c) enhance the commerciorientation and operinal autonomy of the public sector entities in the subsectorto pave the way for a larger private sector role; and (d) strengthen the egulatowyand policy-makdng functions of govermental agencies in the subsector tofacilitate larger private investments.

ProEdig 2DescrintioI:The proposed Project would include the following components: (a) developmntof oil and gas fields under joint ventures with the private sector (b) constrctionof gas pipelines and installation of compp,sson, and a Supervisory Control andData Acquisition (SCADA) system (c) measres to mitigate the envizonmuntaimpact of (a) and (b) above; (d) corporate restructuring of OGDC;(e) institutional strengthening of MPNR including measures to implement theGOP's new Petroleum Policy; and (t) technical assistance.

Bnfit: The interal economic rate of retum (IERR) of the proposed Project at 56% issignificantly higher than the opportmity cost of capital of about 15 %, primarilybecause, in oil and gas projects the time elapsed between investmets and theaccral of revenues is relatively short. Furtemore, by rapidly incasing itsproduction of oil and gas, through the implentation of this project, OGDCwould be able to benefit from the curent high level of petroleum pnces andhence increa its revenue, of which aomal to the Govemment through taxeswould amount to about Rs 0.7 billion per annum (p.a.). In addition, theproposed Project would inrease development sucharge receipts firom SNGPLby about Rs 1.5 billion p.a. prmarily through an incra in the sale of naturalgas, while an additional Rs 350 million p.a. would be contributed through thesurharge on petroleum pmducts beginning FY94.

In view of the sensitivity of the Project's reur to delays in the realization ofproject benefits (IERR drops to 36% for a two-year delay), messu have beentaken, such as the contractual anangements for gas supply between OGDC andSNGPL to be on a take or pay basis, which are designed to minimie the delays.Another risk of the project is that its institutional reform objectives may bejeopardized by the natural reluctance of a public sector agency (OGDC) toimplement ~e radical change in its modus gm- =di and organizational structure.The Government and OGDC have participated directly in the design of OGDC'scorporate restructuring ptogram and are fully committed to it. Theircommitment is shown by the fact that the reorganizadon of OGDC is underwayand that the technical assistance required for the corporate restructurng is underbidding. This minimi the risk of unsuccessful implementation of thecorporate restructuing of OGDC. Other risks are those usually associated withoil and gas development, such as the possibility of lower than anticipatedproduction and adverse impact. on the environment. However, reservoirengineerng studies are to be carried out by the operators, and independentlyconfirmed by intemational firms of repute, which would reduce the productionrisks considerably. In addition, the Enviro ri- Thct Assessment (EA)carried out in accordance with the Bank's requirements, together with thecommitment of the implementing agencies to implement the recommendedmeasures, would mitigate the adverse impact on the environment. Other Risks.The Federal Shariat Court of Pakistan has recently given a ruling that theSharia does not permit the payment or award of interest in any form. Thiswould have serious implications for the onlencing arrangements under thisproject, which include the payment of interest on the proceeds by OGDC andSNGPL, and future Bank projects with similar onlending arrangements. TheGovernment has filed an appeal against the Shariah ruling which has been stayedfcr the moment. Depending on the rling of the Supreme Court, the onlendingarangements under the Project may be modified and the legal agreementsamended. Another rsk is that the Shariah Court may extend its rling oninerest to existing intemational financial obligations. As far as Pakistan'sobligations under loan and credit agreements with the Bank/IDA are concemed,these obligations are valid and enforceable under international law, inaccordance with the terms of those agreements and the General Conditions ofthe Bank/MDA notwithstanding any local law or judicial decision rega[ding thepayment of intrest and other charges.

listimated Project -Cost:A/(USS Million)

Load Ewr9ism TotalField Development

- Badin Field 30.6 78.4 109.0- Qadirpur Field 27.9 63.5 91.4- Kadanwari Field 30.8 41.9 72.7- Dhodak Field 26.3 20.8 47.0

Gas Pipelines 77.5 39.6 117.1SCADA 1.8 8.7 10.5Technical Assistance 0.8 9.1 9.9

Total Base Cost 195.7 262.0 457.7

Physical Contingencies 19.6 26.2 45.8Price Contingencies 23.3 14.8 38.1

Total Project Cost 238.6 303.0 541.6

Interest During Construction 3.1 7.1 10.2Total Financing Required 241.7 310.1 SS1.8

1 Including taxes and duties equivalent to US$118.0 million.

Financing Plan:- IBRD loan - 180.0 180.0- Private Joint Venbt Partners 51.5 97.0 148.5- Islamic Development Bank - 17.7 17.7- USAID - 1.7 1.7-OGDC 78.4 3.3 81.7- SNGPL 96.8 3.8 100.6-GOP 1S.0 - 15.0- Commercial Sources - .. 6.7Total M 3 O LSJ

Estimated Disbursement Schedule:(USS million)

Bank FY FY93 PY94 PY95 PY96 PY97

Annual 43.0 58.3 42.2 25.2 11.3Cumulative Disbursement 43.0 101.3 143.5 168.7 180.0% Disbursed 24 56 80 94 100

PAKISTAN

DOMESIC ENERGY RESOURCES DEVELOPMENT PROJECT

I. MACROECONOMIC AND SECTORAL SETTING

A. Macroeconomic Settng proposals to divest some or all of its thermal stations andthe distribution system to the private sector.

1.01 In spite of impressive growth performance for mostof the 1980s, Palistan, in recent years, has developed a 1.03 To address the country's fiscal constraints, GOPlarge fiscal deficit, and more recently, serious balance of has renewed and extended the adjustment effort for thepayments problems. Progress in the implementation of the FY92-FY94 period. The adjustment program is supportedstructural reform program of the Government of Pakistan through a third-year arrangement under the Structural(GOP) covering FY88-91, which was aimed at correcting Adjustment Facility of the IMF. While the implementationthese imbalances, had been less than satisfactory, of the privatization and deregulation measures areparticularly regarding efforts to reduce the fiscal deficit. proceeding well under the adjustment program, seriousThe country's problems have been aggravated by the Gulf problems have developed in FY92 in the fiscal area, whichcrisis which has led to a critical foreign exchange reserves are also contributing to slippages in the balance of paymentssituation. The Gulf crisis has also demonstrated once again area. Continuation of a strong adjustment effort is requiredthe country's vulnerability to extemal shocks which have to improve domestic resource mobilization and increaseweakened Pakistan's external resource position. Most of development outlays, while reducing the budget deficit. Asthis is due to higher oil prices and the reduction in a part of this effort, GOP has given high priority to theremittances from Pakistani workers in the Gulf area. The proposed Project, which will contribute towards reducingnew Government, which took office in November 1990, has fiscal imbalances over the medium term by enhancingmoved swiftly in certain areas to reactivate the adjustment corporate profitability and self-financing thus reducingeffort. Investment and import licensing have been virtually public sector borrowings, mobilizing resources to GOP'seliminated; the financial sector reform program has been bdidget through corporate income taxes and surcharges, andreactivated; and major enterprises in energy, enhancing the role of the private sector in financingtelecommunications and highways are being granted investments in the petroleum subsector. It will also reduceincreased autonomy. Important progress has also been the country's vulnerability to external shocks by: increasingmade in two longstanding issues: provincial disputes over the output of domestic gas and oil, thus reducing theallocation of the Indus waters have been resolved with the relatively high burden of energy imports in the balance ofrecent agreement of the four riparian provinces to a water payments, and continuing a policy of pricing pbtroleumapportionment scheme; and the National Finance products which moves in accordance with movements inCommission has recertly announced new revenue sharing international prices. Finally, and in line with recentarrangements between the Federal Government and the initiatives, by providing greater commercial orientation andprovinces. autonomy to the corporate entities involved, as well as

strengthening the petroleum sector policy and regulatory1.02 The Government's policies place a particular framework, it would reward efficiency gains therein andemphasis on industrial deregulation and privatization. The pave the way for the privatization of the subsector.principal aim is to shift from the public to the private sectorthose functions and operations which can be more B. Energy Sectorefficiently and cost effectively carried out by the latter. Asignificant part of this effort is the recently initiated public Institutional Srttingenterprise privatization process. Under this program bidswere invited for 100 public sector manufacturing units ii 1.04 Four ministries share the responsibility for themid-October 1991; bids were received for about 80 units of energy sector: tie Ministry of Petruleum and Naturalwhich 30 have been accepted, and the sale of these units to Resources (MPNR), the Ministry of Water and Powerthe highest bidders is expected to be completed shortly. In (MWP), the Ministry of Prcduction (MOP), and thethe financial sector, two of the nationalized commercial Ministry of Planning and Development (Annex 1.1). Abanks were privatized in 1991, one of them to that bank's high level Cabinet Committee on Energy, chaired by theemployees, while bids have been invited for two of the Prime Minister, is responsible for the revtiew and approvalremainng commercial banks and two development finance of all plans, policies and projects in the energy sector,institutions. In addition, the Government has initiated the while the implementation of the approved projects is tteprivatization of the Telecommunication Corporation and the responsibility of the respective ministries and entities. Th'.Sui Northern Gas Pipeline Limited (SNGTPL). In May functions that are now performed by the Cabinet Committee1991, the national electricity utility, the Water and Power on Energy were previously the responsibility of a numberDevelopment Authority (WAPDA), was asked to prepare of bodies: the formulation of GOP's overall energy policy

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was the responsibility of the National Energy Policy Energy ResourcesCommittee; the approval of all development projects was bythe Executive Committee of the National Economic Council 1.06 Pakistan's commercially exploitable energy(ECNEC) and Central Development Working Party; tariff resources consist of hydropower, natural gas, oil and coal.and pricing proposals were under the jurisdiction of the 'The hydropower potential is estimated at about 30,000Economic Coordination Committee of the Cabinet, budgets MW. Proven reserves of natural gas are estimated at aboutof the energy sector entities were the responsibility of the 30 trillion cubic feet (TCF). Oil reserves, both probablePriorities Committee, the Annual Plan CoordinatioL and proven, are estimated at about 30 milion tons. CoalCommittee, and the Conc2pt Clearance Committee. and lignite deposits are estimated at about 900 million tons,Coordination between the rinistries on energy matters is of which 175 million tons are proven. In addition, theprovided by the Energy Wing of the Ministry of Planning country has a large base of traditional fuels in the form ofand Development, which acts as a sec *etariat for the Energy fuelwood and agricultural and animal waste, which provideReview Group. The Energy Reviewv Group coordinates and a major share of rural consumers' energy needs.monitors the progress of all ongoing projects, programs,policy actions and issues. In addition, the Department of Major Arends in the Consumppdon and Supply of EnergyForestry, Ministry of Agr'ulture, is responsible forafforestation, and the Environment and Urban Affairs 1.07 Pakistan's consumption of commercial energyDivision (EUAD), Ministry of Housing and Works, for increased between FY79 and FY89 at an average annualformulating and monitoring the implementation of GOP's rate of au-t 8.5%, from 10.7 million tons of oil equivalentenvironmental poUcies. (MTOE) to 24.3 MTOE. As seen in Figure 1, the

industrial sector, the single largest consumer of energy in1.05 The management of day-to-day operations in the Pakistan, accounted for about 31% of total energyenergy sector is vested in a number of public and privatesector entities. The public sector entities are: WAPDA,which is responsible for developing Pakistan's water Consumption of Energy by Sectorresources and for the construction, operation and FY89

maintenance of power generation, transmission anddistribution facilities throughout the country, except theKarachi area; the Oil and Gas Development Corporation Comm"dw Idury(OGDC) fc- exploration and development of oil and gas; 3Sthe Pakistan Minexal Developmeat Corporation, for the 1ax8i%exploration and development of mineral resources; and theState Petroleum Refining and Petrochemical Corporationwhich owns the National Refinery Limited (NRL), for ResI Po vier

processing crude oil. Also involved in the energy sector 1 gm 20%are a number of semi-autonomous entities in which GOP 6% 4S

has a controUing interest, either directly or through public __institutions. These are: Karachi Electric Supply E 1Corporation Limited (KESC), which is responsible for theconstruction, operation and maintenance of generation consumed in FY89. The power sector is the next largestfacilities, as well as the trnsmission and distribution of consuming sector!', accounting for about 20% of totalelectricity in the Karachi area; SNGPL and Sui Southem energy use, followed by the transport and residential sectorsGas Corporation (SSGC), for the trasmission and whose shares of total energy consumption were about 18 %distribution of natural gas; and Pakistan State Oil Limited each during FY89. The balance is accounted for by(PSO), for marketing and distribution of petroleum agriculture (5.59%), other government (3.696) andproducts. Private sector entities include: a large number commercial sector (3.1%o). 'During this period, the relativeof Pakistani coal mining companies; two refineries, five oil shares of coal and hydropower in the total supply ofand gas development comnpanies, namely PakistaaPetroleum commercial energy have remained virtually unchanged atLimited (PPL), Palistan Oilfields Limited, the Fauji about 5% and 189%e respectively, while those of gas andFoundation, Union Texas - Pakdstan (UTP) and Occidentai petroleum products, the bulk of which are imnported, havePetroleum Limited. All operational entities (public and varied markedly. In particular, the share of gas aftersemi-autonomous) are under the jursdiction of MPNR, having increased to 41.6 % by FY81, dropped to 34.5 % inexcept for WAPDA, KESC, NRL and Pakdstan Refineries FY89, mainly because of supply constraints. Reflecting theLimited (PRL). MWP has jurisdiction over WAPDA and balancing role of petroleum products in the mix of fuelsKESC, and MOP, over NRL and PRL. consumed, their share has risen from 37% in FY81 to 42%

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in FY89. Moreover, despite the recent threefold incrsase the planning cycle. These reforms, which have been agreedin the domestic output of oil, nearly 80% of the petroleum with the Bank under the ongoing ESL II, call for: (a)products consumed in FY89 were imported. rationalizing investments in the sector and accelerating the

development of domestic energy resources including large1.08 The forecast through the year 2013 calls for energy and small hydro sites, oil and gas, and coal, as part of thedemand increasing at an average annual rate of about 7% least-cost energy investment program; (b) adjusting the levelup to the mid-1990s as shown in Figure 2, and gradually and structure of energy prices to restrain the growth ofdeclining to about 6% thereafter, partly as a result of a demand for energy and mobilize resources for the' sector;projected increase in energy efficiency, particularly in the (c) reducing losses in the production and transport of energyindustrial sector. As a result, although the output of through the rehabilitation and retrofitting of power plants,

refineries and energy intensive industries as well as thrcughthe expansion and reinforcement of the transmission and

Energy Demand Forecast distribution networks; and (d) strengthening the operationsMillion TOE and management of institutions in the sector. Given the

M koE sector's substantial investment requirements, theGovernment will continue to place a major emphasis on

120 . mincreasing pnvate sector investment, while facilitating themobilization of additional resources from external donors.

* 1 J .. . -_The progress to date in ESL II, which provides the policy40 $ ) umbrella for the proposed Project, is'summarized below.

2 Ros rl ow INS moM 2018 Progress Under ESL II

13 *p ly 1.10 Resource Development. GOP has takensignificant steps to accelerate the development of domestic

f1gure2 energy resources. For hydropower, detailed engineeringstudies have been completed for Kalabagh (3,3 00 MW) and

domestic energy resources is forecast to increase in TOE are under preparation for Ghazi Barotha (1,400 MW). Theterms, their share in total energy supply (relative to that of recent agreement on apportionment of Indus waters amongimported energy) is expected to remain steady at about 65% the provinces (parm 1.01), should pave the way forover the forecast period. In order to meet the forecast overcoming the political obstacles for initiating Kalabagh.demand at least cost, the share of coal (both imported and GOP is also taking actions to initiate the feasibility studydomestic) in total consumption is forecast to increase from for Basha (3,300 MW). In the oil and gas subsector,7% in FY88 to about 13% in FY2013 to substitute for domestic oil production has increased from 44,600 barrelshigher value petroleum products and gas. Despite this, the of oil per day (BOPD) in FY88 to about 66,000 BOPDshare of petroleum products would increase from the during FY91. Prospects for increasing production from thispresent level of 39% to 50% in FY2013. This increase in level exist, but will depend on increased refinerydemand could be reduced by substantially increasing the capabilities. Proven and recoverable reserves of gas havesupply of gas either from new gas discoveries and matching increased dmmatically by about 40% (from 16 to 22.4investments in the pipeline infastructure, or from gas TCF) since the inception of ESL II. This is primnarilyimports by pipeline or in the form of liquefied natural gas. attributable to recent new discoveries as well asIn the absence of such supplementary supplies, the share of reasessment of already discovered fields. Two of thegas might decline to as little as 18%. Given the long lead newly discovered fields (Qadirpur and Kadanwari) and onetime and resources required to develop the country's major reassessed field (Dhodak) would be developed under thehydro sites, the hydropower contribution to the overall proposed Project. As required under ESL II, GOP andsupply of energy is expected to increase only marginally to OGDC have initiated action plans to develop fieldsabout 20%. discovered prior to the Bank's approval of ESL II. At

Dhodak field, a condensate processing plant would boGovernment's Strategy for the Energy Sector installed under the proposed Project to produce gas and

petroleum products. As regards coal, GOP has not been1.09 To accommodate these consumption and supply able to develop the country's coal resources or to attracttrends while reducing the dependence on imports,, the private sector investors for the development of coal.Government's strategy is to implement sets of integratedsectoral reforms over five-year intervals corresponding to

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1.11I Energy lnvetenits. While au egyWAPOAS TARIFF A%wRevenue 1985.1991)investmts by the public sector entities fell short of the _A -aCore Investment Program ageed in FY89 under ESL II,acual investments for FY90 and esmaed atual for FY91have beor largely on target WAPDA's investment . .; .: ... .... ...program has been increased for the final two years of the 110 . .............Seventh Plan (PY92 and FY93) in order to offseA the o ..... ........ .shortfall in power genraing caacity which would resultfrom delays being experienced in the initisaion of poposedprivate sector power projects. In the oil and gas subsectoron the other hand, pariculaly the upstream end of the as 87 a BB eo Ssubsector, private investments exceeded expectations, vallowing OGDC to reduce its exploradon activities and to -Mhd +consC8 0concbtat on the developmen of discovered fields, .I._.especially under joint ventur arrgemets, resulting in fure 4increased producton of oil and gas. In the downstemend, the expected investaats by SNGPL for the expansion invesmets. In the petroleum subsector, producer pricesof the system did not materiai in FY90 aad Y9l as a fo domestically produced crde continue to be pegged toconsequence of delays in firning up finacing both from intentional prices of crude while for natural gas, theextenl and i 'ernal sourcsB. Such plans have now been producer price is pegged to 66% 2' of the border price offirmed up and the system expansion is expected to be fuel oil (less negotiated discount) in order to attract riskaccc.ated in the remaining years of the Plan. capital for exploration. Consumer prices of petroleum

products (except for kerosene) are being maintained above1.12 Engy Pl!ing. Agreemts under ESL II the corresponding import prices. To comply with ESL IIregaring enery prices rqi price adjustmets in line agrements, consumer prices of natural gas were increasedwith movements in world mauket prices of petroleum in April 1991, as a result of which gas prices for industrialpoducs to mobilize resou for the budget, and to (other than the fertilizer industry) and power sector are atfinance the investment prograns of the energy sector paity with the domestic price of fuel oil, those for

commecial consumers are at 112% of fuel oil parity, andthose for raw gas supplied to WAPDA are at 40% of the

Natural Gas Priwng (1987 - 1991) domestic fiu oil price enroute to achieving full parity byI4ACiT FY95. For residential consumers, the price of gas is about

R8AM0 72% of the equivalent border price of fuel oil enrout to70 achieving fill parity by FY93. Historical price movementsso ................................................. of prices of natural gas, electricity, ard petroleum productsa _w... z. .. f ... .,r | are shown in Figures 3, 4, and 5 respectively. In4Q <~ ..... ........ .. ........... .... ...... .accordance with agreements under ESL II, COP was toso ................ undertake a study to determine the impact of higher gas

.. 0.___,..._ .......................... ... . . . . . . .

. ...................... Petroleum Produefs Pricing (FY88 - FY91)FM FM "o FM

entities. Such a ts, non-compliance of which hadcotributed to delays in the second tnashe releams of ESL 10 .1, have now been complied with. Electicity pricesincreasd by an avera of 29.3 % from FY89 to the preset . .=.as a of th taff increases in Septemb ___

1989, July 19 and Apri 1991. With these incr e ao FMs

structure of taniffs has moved closer to that of the long n _________________-*D__Fu___C

marginal cost of electricity upply, while enabling WAPDA 0 ~' P - f +AD 0to fina from intanl sources roughly 40% of its

-4.

prices on the ex-factory prices of fertilizer. After some Bank Assistance Strategydelay, the terms of reference have now been agreed andconsultants are being recruited. Follow-up actions, based 1.15 The Bank's assistance strategy is geared to supporton the recommendations of the study, will be addressed the Government's strategy forthe energy sector (parm 1.09).under the proposed Public Sector Adjustment Loan. Accordingly, in addition to the proposed Project to promote

oil and gas development, planned future Bank lending1.13 Institutional Development. GOP and the public includes: a Power Sector Development Project that aims toenergy sector entities have made significant progress in the restructure WAPDA, including privatizing parts of itsarea of institutional development. In the power subsector, existing infrastrcture, while financing a time slice of theGOP has instructed WAPDA to prepare concrete proposals FY93-96 power sector investment program to fiurherfor privatizing parts of its existing infrastructure including expand the system; lending in support of a majorits distribution system, which is a step beyond that hydroelectric project, possibly Ghazi Barotba; and a s:omndenvisaged under ESL 11. In the oil and gas subsector, Private Sector Energy Development Prject to cofinane th*ocommendable progress has been made in the financial second phase of private sector involvement in therestructuring of OGDC despite initial delays. GOP and development of energy infrastructure. This phase isOGDC have agreed on a set of financial performance expected to cover, in addition to power, refineries, oil andcriteria for the Corporation and GOP has promulgated the gas pipelines, as well as the investments to be undertakenRules under the OGDC Ordinance that would make OGDC by the companies now being privatized, such as SNGPL.more autonomous operationally, and accountable for itsperformance. Further corporate reforms, including a study C. Petrolekm Subsectorto assess privatizing part of OGDC, are envisaged under theproposed Project. In the gas subsector, SNGPL would be Hlsotical Developments in the Supply and Consumptionprivatized under the ongoing Corporate Restructuring and of Petrokum ProductsSystem Expansion Project (Ln. 3252-PAK) by diluting theGovernment's shareholding to 40% by FY93 from the 1.16 The supply of crude and petroleum productspresent level of over 90%. increased at an annual rate of 7.8% during FY79-89.

Domestic production increased at an annual rate of 18%1.14 Environment and Energy Conservation. As since FY79 as a consequence of the emphasis placed onagreed under ESL II, EUAD has prepared standards for developing discovered fields and on increasing explorationprotection against air and water pollution, submitted these activities. This helped reduce Pakistan's dependence on oilto the Pakistan Environment Protection Council for Supply of OU and Petroleum Productsapproval, and has prepared guidelines for environmental c'aO. TOE:impact assessment for energy producing activities. TheMinistry of Labor is developing improved health, safety and f scaL.Years-- Orot.emergency management standards for surface and XY9 J.. FY89 X - FMunderground coal mining activities. As regards -d-strengthening of the environmental management capacity of ta Prts 4524 9 8 78 -the energy sector entities, the proposed Project would :develop an effective environmental management capability Totat 4961 '10 1P469 109 ?ti.in OGDC, while the strengthening of WAPDA's Table 1.1environmental management capability is envisaged as partof the Bank's next lending operation to the power sector. and petroleum products imports from 91% of total supplyAs regards energy conservation, the National Energy in FY79 to 78% in FY89 as shown in Table 1.1.Conservation Center has initiated training and outreach Consumption of petroleum products increased from 4,029programs, and completed audits in 42 private sector and 17 thousand TOE in FY79 to 9,307 thousand TOE in FY89,public sector industrial plants. In addition, a Building representing an average annual growth of 8.7 %Y TableEnergy Code has been drafted and a program to audit 300 1.2 and Figure 6 show the consumption of petroleumtubewells and retrofit 100 of them has also been launched. products by sector for the period FY79-89. The tansportA study, with assistance from consultants, to identify the sector is the largest consumer of petroleum products,constraints to conservation arising from tax, industrial and consuming 49% of the total in FY89, followed by powertrade legislation, and to formulate a pa-ckage of incentives (20%) and industrial (14%). The power sector's demandto promote energy conservation, is expected to be for petroleum products has risen sharply over the FY79-89completed by mid-1992. period, from less than 1 % of total consumption to about

20%, primarily due to the increasing share of thermal

-5 -

Consumption o roleum Products by _e =oM_ in Annex 1.2. Proven remaining recoverable reserves as of('000 TOE) January 1, 1991, consist of about 21.7 million tons of oil

against original recoverable reserves of 50 million tons.

Sector FY79 FY89 FY79oFY89 Pakistan's major oil fields (Dhulian, Balkassar and Meyal)have largely been exploited. The Dhurnal, Ratana, Kunar,

Transportation 2312 4571 7.0 Dhodak, Badin Block, and Adhi fields renain Pakistan'sResidential 702 1002 3.6Industry 209 1262 19.7 main sources of recoverable reserves in the near future.Agricutture 241 306 2.4 With a reserves to production ratio of only eight years, thePower 16 1831 60.6other Goverrent 549 335 (0.5) Government clearly needs to attach high priority to oil

.otl.02 9307 .7.. exploration and development.Total 4029 9307 8.7

-' ExcLuding gas 1.18 The prospects for natural gas are moreencouraging. As shown in Annex 1.2, cumulative

Table 1.2 production through 1990 amounted to only 7.2 TCF,

generation in overall generation, particularly of fuel oil leaving a recoverable balance of 22.3 TCF, representing a

based capacity. Residential consumption, which consists reserves to production ratio of over 40 years. Withalmost entirely of kerosene, increased by only about 4% sufficient recoverable reserves of natural gas, GOP hasp.a. during FY79-89, despite falling real prices since emphasized increasing production with a view to replacing

higher value fuels such as HSD in power generation. GasConsumption of Petroleum Products by Sector production is to increase from about 1300 MMCFD in

FY90 to about 1800 MMCFD by FY93, and would befurther enhanced under the proposed Project by at least 420MMCFD following the development of the Dhodak field

579s-o9s 49% - -l l 201 and the recently discovered fields at Kadanwari andQadirpur, and the implementation of the enhanced oil andgas field development program in Badin.

Projected Demand/Supply BalancesFY79 FY89

1.19 As shown in Table 1.3 below, while the transport

ptdt8tiOf Ue30 .GM P* sector would continue to be a major consumer of petroleumi . products (including natural gas), its share in total

Go consumption is projected to decline from 29% in FY89 to

Figure 6 about 19% in FY2008 while that of the power sector would1980,because of the increased availability of gas in line with rise from 31% to about 40%. The power sector'sGOP policy to substitute gas for kerosene in household use. consumption of petroleum products is projected to grow by

15% p.a. up to FY98, since substantial additions to theOil and Gas Reserves and Cumulatie Production power generating capacity during the next 5-7 years are

expected to be based on fuel oil. Subsequently the power1.17 Details of proven oil and gas reserves, cumulative sector's demand for petroleum products is expected to growproduction and remaining recoverable reserves are provided more slowly (by about 3 % p.a.) as a larger proportion of

Projected Consumption of Petroleum Products (including Natural Gas} By Sectors:.(Million TOE)

-Actual- ---------------- Forecast................ Avg.A--nat Growth-- FY89-- -- FY93-- -- FY98- - -FY2003- -FY2008-. . 93 FY9-3

X X X X K -98 .:-200t:

Industry 3.3 21 5.4 22 7.2 19 9.6 20 13.2 22' : -6.0 .461-ResidentiaL 2.2 14 3.4 14 4.6 12 5.8. 12 7 12 6.1- 5.0-AgricuLture 0.3 2 1.6 7 1.9 5 2.3. 5 2.7- 5 4.- 3.6Transport 4.6 29 4.7 19 6.2 16 8.4 18 11.1 19 5.8 5.9Power 4.9 31 8.5 35 17.1 45 20.0 42 23.3 39 15.0:. 6.9Q.Other 0.6 4 0.8 3 1.0 3 1.3 3 1.7 3 5.81 5:.6-

Total 15.9 100 24.4 100 38.0 100 47.4 100. .59.t 100 9.- 6.1

Table 1.3

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the addition to power generating capacity is expected to be development, particularly through maximum private sectorbased on hydro and imported coal. The steady increase in participation. Such incentive framework has been fairlythe industrial sector's demand for gas and petroleum successful in achieving the acceleration of petroleumproducts (about 6% p.a. throughout the projection period) exploration and production, with significant private sectordespite significant restrictions on the allocation of additional participation. Following a promotion round in Decembergas for industrial use reflects, in part, the relatively high 1988 in which the open areas were promoted to theenergy intensity of a number of subsectors that are expected international private sector in order to obtsin competitiveto expand rapidly (e.g., cement). bids for the indicated 43 blocks, 34 new concessions have

been awarded, and negotiations are ongoing for three new1.20 Consumption of petroleum products is expected to concessions. Components of the incentive frameworkincrease by at least 6% annually and would outstrip the which have been instrumental in accelerating private sectorincrease in domestic supply after FY98, as shown in Table participation include: (a) the explicit linkage of the1.4. While the Govemment expects production from benchmark producer prices to international prices, whichexisting oil fields to rise substantially during the remainder assures that the producer price formula is transparent andof the decade and reach just over 8 million TOE by the turn easy to implement; and (b) the Model Concessionof the century, the chances of the petroleum supply Agreement (MCA) prepared in 1988, which makes clear theconstraint being lifted in the foreseeable future are slim. As Government's policies and, perhaps more importantly, itsa result of the increase in domestic production of crude oil, negotiating position. The MCA has provided _zonsistency

Proi_ated Petroleum Supply/Demand Balance not only across companies within the licensing(Million TOE) round, but also over time and has undoubtedly

simplified and accelerated the process ofActuaF FProjected -FY20 Growth Rates negotiations between GOP and would-beFY89 FY93 FY98 FY20 FY20 FY93 FY93

03 08 -98 2008 concessionaires. Adjustments throughOft and PetroLeum negotiations have been made to the provisionsProducts relating to: (a) work programs; (b) price

Conswption 10.5 13.3 19.1 23.6 31.9 7.5 6.0 discounts; (c) GOP/OGDC participationDom. Prod. 2.3 3.9 7.1 8.1 8.6 12.7 5.4 arrangements; (d) future offtake guarntees byImports 8.2 9.4 12.0 15.5 23.3 5.0 6.2. Government (required by investors where.Gas 6.5 11.8 20.2 23.4 27.1 11.4 5.7 export options do not exist); (e) provincial

TotaL 17.0 25.1 39.3 47.0 59.0 conditions on operations (e.g., extreme limitson the concessionaires' abridgement of

DIpendency(or 78.1 70.7 62.8 65.7 3.0 property rights); (f) limits on the export ofDepend__ncy(%)_"_78_1 70.7 62.8 65.7 73.0data; and (g) training and social welfare, etc.v Refers to oil 7and pe-troteum products onty, as gas is Oil companies feel reasonably satisfied with

presently not imported. these agreements as shown by the increasedlevel of proposals for concessions.

Tabtg 1.4

the import dependency ratio is expected to fall to about 1.22 However, the above range of negotiable items left63 % by FY98, before rising to about 73 % in FY2008, in the MCA, plus almost inevitable requests for revisions toassuming no major oil fields are discovered and as the the model by concession applicants, requires specialgrowth rate of domestic production declines dramatically expertise within GOP in key negotiations areas: technical,due to the depletion of currently producing fields (Table legal and economic; skills that are currently unavailable in1.4). Asregards gas, produc'ion would also expand rapidly the Directorate General for Petroleum Concessions(by over II% p.a.) up to FY98 partly as a result of the (DGPC), the regulatory body for petroleum exploration anddevelopment of the Qadirpur, Kadanwari and Dhodak production. Other areas of concern include: (a) the timefields; subsequently the increase in production would be taken to award a concession whose terms have been agreedmore moderate (about 3% p.a.), in line with the planned between DGPC and a concessionaire, because clearance isexpansion in the infrastructure for gas transmission and required from Ministry of Finance, Central Board ofdistribution. Revenue, Provincial Governments, Central Bank, Ministry

of Interior, etc.; (b) the mandatory participation by OGDC,1.21 Recognizing the high level of import dependency even in areas to be explored by the private sector, with ain petroleum products, GOP has accorded high priority 5 % share during exploration and with an option to increasesince 1985 to develop domestic energy resources through an its participation to 50% during development; (c) aiA anomalyincentive framework to accelerate exploration and in the structure of import duties for petroleum operations

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which allows for a concessionary rate of 5-1/4% for government agencies and departments.customs duties on the importation of machinery andequipment for exploration and drilling prior to comnercial 1.24 Fiscal incentives (such as income taxes,discovery, but normal rates of import duties for these depreciation and depletion allowances for tax purposes,equipment (between 80% and 90%) thereafter; (d) the treatment of tax losses and rates of custom duties forpractice of negotiating producer prices of gas only after a petroleum exploration and development) are covered unde,commercial discovery has been made, which does not the Regulation of Mines and Oil Fields and Mineralprovide up-front assurances to potential investors as to Development Act and the Pakistan Petroleum Rates Act ofwhether the returns would be adequate to cover the risks 1986. To compensate for higher risks involved in oil andinvolved in petroleum exploration; and (e) delays in the gas operations, major incentives have been extended tofinalization of the Government's plans for gas utilization investors. A cap of 55% is set on aggregate payments toand installation of the required infrastructure, as a result of the Government (including the 12-1/2% royalty paymentswhich a number of gas fields remained undeveloped for of well-head value for oil and gas and income taxes).extended periods after commercial discoveries. Therefore, Generous allowances such as deduction of 100% ofthe Government announced a new Petroleum Policy in exploration and appraisal expenditures are allowed in theNovember 1991 with the encouragement of the Bank, other first year. The depreciation provisions for developmentdonors and the private sector, which further enhances the expenditures allow for 100% deductions for all items belowincentives for private sector participation, as well as ground level, i.e., drilling costs, casings, tubular and welladdressing the shortcomings in the concession award completion costs. For above ground items, i.e., surfaceprocess listed above. The Government's petroleum policy facilities, well-heads, etc., a depreciation allowance is setframework, including the measures announced in the new at 10% per annum on a declining basis. In addition, aPetroleum Policy, is discussed below. depletion allowance equal to 15 % of gross revenues or 50%

of taxable income, before the depletion allowance, is1.23 Legal Frwnework. The exploration, development allowed. Regulations permit the carrying forward ofand production of petroleum in Pakistan is governed by the exploration losses for up to ten years. Under the new PolicyPakistan Regulation of Mines and Oil Fields and Mineral a uniform rate of 5-1/4% for customs duties on machineryDevelopment (Government Control) Act originally enacted and equipment imports would be levied for all stages ofin 1948, and the Petroleum Exploration and Production petroleum operations, including exploration, developmentRules, promulgated in 1949 under the Act. An amendment and commercial production. Also, the rate of income taxto the Act and the Rules in 1976 provides for the for offshore production will be 5%, lower than theparticipation of GOP in the exploration and production of applicable rate onshore.oil and gas in joint ventures with oil companies. The Rulesprovide the overall framework under which any domestic or 1.25 Producer Pricing. The producer price of crude oil

foreign company can apply for a Reconnaissance Permit, an is determined with reference to a weighted average of theExploration License, or a Development and Production spot prices of Onmani, Saudi Arabian and Dubai crudes, plusLease. These Rules have been periodically updated, transportation costs to Karachi. This price is furtherthrough amendments in the MCA, to incorporate the revised discounted for yield differences between the crude from theproducer pricing formulas for crude and gas production concession under review and Arabian Light Crude, and for(para 1 12). Under the new Policy the standing practice of the cost of inland transport from the field to the point ofGovernment (or OGDC) participation in all concession sale. The discount is agreed after negotiations between theagreements with a 5% share during exploration and the Government and the joint venture partners for eachoption to increase it to up to 50% during the development concession, and generally varies between 3 % for a price ofphase has been eliminated, and replaced by negotiations or crude below US$14 per barrel to an upper limit of 25% incompetitive bidding. Furthermore, under the new Policy case the international price of crude is between US$36-50the Govermnent has committed to (i) indicate its plans for per barrel. In the new Policy the reference producer pricegas utilization within six months after commercial for domestically produced gas has been increased to 75% ofdiscovery, and for installation of the required infrastructure the border price of fuel oil (para 1.12), whereas for gaswithin four years, failing which the producers would be free produced from offshore areas, the producer price would beto utilize the gas for power generation or any other set at full parity with the fuel oil border price, with noindustrial or commercial purposes; and (ii) expeditiously discounts. This reference price is set on January I and Julyapprove all applications for exploration licenses within three I of each year, and is the average of the import cost of themonths, or six months in the case of disputed applications high sulphur fuel oil to Pakistan during the preceding sixthrough a committee in MPNR which would include months. In addition, under the new Policy, producer pricesrepresentation of all the concemed federal and provincial will be agreed at the time of granting the concession (rather

than after the commercial discovery) enabling quicker gas, one to the State Petroleum Refining & Petrochemicaltransition into development. Corporation Ltd. for refinery engineering and energy

conservation and one to the National Refinery Limited1.26 The Government has agreed with the Bank to take (NRL) for improving its energy efficiency. All of thesethe necessary measures to make the new Policy operational, petroleum subsector loans/credits, except the ongoingincluding: (a) promulgation of the required administrative Corporate Restructuring and System Expansion Project (Ln.orders relating to, among others, the revised rates of 3252-PAK) for SNGPL and the Refinery Energycustom duty, availability of foreign exchange etc; (b) Conservation and Modernization Project (Ln. 2842-PAK)establishment (or expansion as necessary) of the standing for NRL, have been completed and required Projectcommittee for the approval of applications for licenses; (c) Completion Reports (PCRs) have been prepared. Themodification of the MCA to incorporate the new producer PCRs on projects that have OGDC and SNGPL aspricing system and the flexible approach regarding joint beneficiaries record that although the physicalventures between foreign investors and local partners; and imnplementation has been successful, the sales of respective(d) a reaffirmation of the Government's commitment to products (oil and gas in the case of OGDC, gas in the caseplacing OGDC on a wholly commercial footing. The of SNGPL) have not been realized at levels forecast atGovernment has also agreed with the Bank to ensure that, appraisal. This was due to the weakness in the reservoirin case of a private sector joint venture with the enginenr;ng capability of OGDC; and the delay in gasGovemment, the Government's interest would be pipeline construction by SNGPL. The PCRs also indicaterepresented by an agency that does not have any regulatory that implementationof institutionaldevelopment componentsresponsibilities related to petroleum concessions. GOP has have not been fully successful primarily because ofagreed to take by December 31, 1992 all necessary actions substantial delays in contracting technical assistance.to implement the new Petroleum Policy, and to review with Accordingly, under the proposed Project, reconfirmation bythe Bank by June 30 each year the progress in the international reservoir engineering firms of gas reserves andimplementation of the Policy (para 6.01 (a)). production capability of not less than 100 MMCFD (from

Qadirpur and Kadanwari fields) for at least 10 years, willbe required before committing the funds to the Project; the

Bank's Experience with Past Lending requisite pipelines are being financed under the Project toensure gas utilization as planned; and the implementation of

1.27 In the petroleum subsector, the Bank's involvement institutional development components, including contractingincludes six loans to SNGPL for the expansion of the of technical assistance as necessary, has been initiated (parainfrastructure for the transmission and distribution of gas, 2.14).four to OGDC for exploration and development of oil and

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II. THE PROJECT

A. Project Setting (c) until recently, OGDC has had a perpetually weakfinancial position and needed to be continuously supported

2.01 The exploitation of domestic energy resources financially by the Government, which jeopardized OGDC's(para 1.06) has not been at a level that the country's autonomy and accountability. Action to improve OGDC'shydrocarbon potential warrants. Hydrocarbon exploitation financial viability were agreed with under ESL II.was entirely a private sector activity in the 1950s but had Complying with those agreements, OGDC has: (i) abdicatedvirtually come to a halt in the 1960s because Pakistan was most of the investments in the high-risk oriented explorationwritten off by the industry as gas-prone. OGDC, the in favor of the private sector; (ii) accelerated thenational oil company, was established in 1961, to fill the development of discovered fields; (iii) stopped receiving anyvacuum and has evolved into an integrated oil company, financial assistance from GOP as grants; and (iv) initiatedhaving both the function of an exploration and production a financial restructuring program. As a consequence,(E&P) company, and of an oil field technical services OGDC generated a profit for the first time in FY90.contractor (seismic, driUing, etc., normally provided by OGDC's financial function, however, needs furthercontractors). The private sector's interest in Pakistan has strengthening. The proposed Project is intended to supportin recent years been revived as a result of: (a) expansion of efforts to address the remaining weaknesses, which GOPthe transmission and distribution infrastructure for natural and OGDC recognize.gas, together with the Government's commitment to expandit; (b) linking the producer price of gas with the B. Project Objectivesinternational price of fuel oil which improves the prospectsfor higher returns; and (c) the active promotion undertaken 2.03 The objectives of the proposed Project are to: (a)by GOP and its agencies to stimulate private sector interest. accelerate the development of indigenous hydrocarbons,Presently, uxploration and development of oil and gas is utilizing private sector resources to the maximum extentprimarily carried out through joint ventures between possible; (b) ensure that such indigenously developedinternational oil companies and OGDC and 37 joint hydrocarbons reach the end consumers in an efficientventures have been formed to date. These joint ventures manner; (c) enhance the commercial orientation andrepresent agreements between the respective oil companies, operational autonomy of the public sector entities in theincluding OGDC, defining the contractual obligations of subsector to pave the way for a larger private sector role;each of the partners. A Joint Operating Agreement, which and (d) strengthen the regulatory and policy makingsets out the details of such contractual obligations, identifies functions of governmental agencies in the subsector tothe operator and the wor'ag interests of each partner. It facilitate larger private investments.is negotiated between the partners, and is subject to GOPapproval as part of the concession agreement. Three of C. Project Descriptionthese joint ventures have discovered significant amounts ofhydrocarbons, mainly gas, and the proposed Project aims, 2.04 The detailed description of the Project componentsamong other things, to provide assistance in the summarized in Box 2.1 is provided below, except for thedevelopment of these three successful concessions. institutional components ((d) and (e)) which are discussed

under the Beneficiaries Chapter (Chapter Ill) and the2.02 Many international oil companies are willing to geological and reservoir analysis of the fields and otheroperate under joint ventures with GOP/OGDC in view of technical information on the components which arethe comfort such an arrangement provides, particularly in discussed in Annex 2.1.the case of discoveries of marginal oil and gas fields whichdo not allow exports. OGDC's effectiveness in attracting Field Developmentforeign investors, however, is impaired because: (a)OGDC's integrated structure causes corporate strategy to be 2.05 Development of Qadirpur Gas Field. Thedriven by the need to make the best use of OGDC's own Qadirpur Gas Field is located in a floodplain in thetechnical services' equipment and crews (6,000 staff), Jacobadad District of Sindh Province of Pakistan betweenwhich OGDC imposes on joint ventures particularly on two major gas producing fields, namely, Kandhkot to thethose in which OGDC is the Operator; (b) DGPC relies on north and Mari to the southeast. The field, which is inOGDC's technical expertise in the evaluation of proposals excess of 73 square miles in size, was discovered in 1990for concessions and granting licenses to OGDC's private by the Qadirpur Joint Venture between OGDC and thesector competitors, which causes conflicts of interest; and private sector partners, Premier, Burmah Oil and PPL.

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OGDC is the operator in the joint venture. The contractual accordance with technical standards satisfactory to theapportionment of working interests during the exploration Bank, by an international reservoir engineering firm as tophase was OGDC 10% and the other partners 90%, the estimate of the recoverable reserves at the Qadirpur Gaswhereas during the production stage the respective shares Field (para 6.06(a)).will change to OGDC 75%, the other partners 25%(Premier 9.5%, Burmah Oil 8.5%, and PPL 7%). Five 2.06 Development of the Kadanwari Gas Field. Thewells have been drilled to date, including the discovery well Kadanwari gas field is located in a rocky desert in the(Qx-1), a second exploratory well (Qx-2) and three vicinity of Khairpur in Sindh Province. The field wasdelineation wells (Qd-2, Qd-3 aid Qd-4). All of these discovered as a result of drilling a well, Kd-1, by thewells were successful and productive, and OGDC's in- OGDC-LASMO joint venture for which LASMO is thehouse reservoir engineering studies indicate the estimated Operator. The ownership of the field during thereserves of gas at Qadirpur to be about four TCF. DGPC exploration/appraisal phase is LASMO (35%); Kuwaithas accepted the Declaration of Commerciality submitted to Foreign Petroleum Exploration (30%); Idemitsu (30%) andGOP after Qd-2, an independent review of Qadirpur field OGDC (5%). A delineation well (Gowar-1) and two

Project Components

The proposed Project would include the following components:

(a) development of oil and gas fields under joint ventures with the private sector, namely (i)Qadirpur Gas Field (OGDC - Premier Joint Venture); (ii) Kadanwari Gas Field (OGDC -LASMO Joint Venture); and (iii) Badin Block Concession (UTP - GOP Joint Venture);

(b) construction of: (i) the Dhodak Condensate Plant; (ii) Dhodak-Kot Addu gas i *eline; (iii)pipelines and compressors to utilize Qadirpur gas; and (iv) installation of a SupervisoryControl and Data Acquisition (SCADA) System;

(c) implementation of measures to mitigate the envirommental impact of (a) and (b) above;

(d) corporate restructuring of OGDC;

(e) institutional strengthening of MPNR including measures to implement the new PetroleumPolicy; and

(f) technical assistance for (a) to (e) above.

Box 2.1

gas reserves has been completed and the draft report additional wells, (Kd-3 and Kd-4) have also been drilledreviewed by the Bank confirms that the field gas reserves and proven successful. DGPC has accepted the jointat about 4 TCF would prove to be economic. A venture's declaration of commerciality and the concessionDevelopment Plan was also submitted to GOP, which the has moved into the development phase. This willBank has reviewed and found satisfactory. The field contractualy change the ownership shares in the jointdevelopment plan calls for the drilling of nine additional venture to 50% OGDC and 50% others. The Developmentwels and for the installation of surface production facilities Plan submitted by the Joint Venture partnership to GOPto enable the production of some 100 MMCFD by June indicates that the recoverable reserves of gas amount to1993, and an additional 100 MMCFD, for a combined total some 573 billion cubic feet (BCF), and with the sevenof some 200 MMCFD, by June 1994. GOP has allocated development wells to be drilled that the field could producethe gas from this field to the SNGPL system. As a 100 MMCFD of gas for 10 years. However, Bankcondition of effectiveness of the proposed Loan, OGDC has financing of OGDC's share of foreign exchange costs ofagreed to furnish to the Bank a report, prepared in developing the Kadanwari field would depend on the

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reconfi'mation of reserves by a reputable reservoir completed, OGDC would be able to produce about 1,450engineering firm and satisfactory arrangements to utilize the barrels per day (BPD) of gasoline; 680 BPD of kerosene;gas. Due to the field's location, the gas to be produced 185 BPD of diesel; 125 BPD of fuel oil; 115 tons per dayfrom Kadanwari field has been allocated by GOP to Sui of LPG and 45 MMCFD of dehydrated (dry) gas at aSouthern Gas Company (SSGC), and the Asian pipeline inlet pressure of 500 pounds per square inch. TheDevelopment Bank (ADB) has approved a project for SSGC gas will be sold to SNGPL and the petroleum products willto finance the pipelines to link the field with SSGC's main be sold to PSO at site (located at about 28 kms from thesystem. The Bank's assistance to OGDC would be in the Dhodak field and about 8 kms from the nearest metalleddevelopment of the field. GOP and OGDC have agreed road). Due to the complexity of the design and installationilhat no withdrawal in respect of expenditures for the process, and to minimizs construction time, OGDC woulddevelopment of the Kadanwari Gas Field can be made until construct the plant unier a tumkey contract -o bethe Bank has been furnished with: (a) a confirination, by implemented over a period of 18 months. OGDC hasOGDC, of reserves prepared by an international reservoir contracted the services of Global Engineering Ltd., UK,engineering firm (para 6.03(a)); and (b) plans, by GOP, under Islamic Development Bank (IDB) financing to: assistsatisfactory to the Bank, for the utilization of the gas in process selection, basic engineering and selection of theexpected to be produced from the field (para 6. 01(b)). turnkey contractor; provide project management service;

and supervise construction of the plant. In addition, OGDC2.07 Development of the Badin Block Joint Venture. has commenced site preparation, provision of water supplyThe Badin Block Joint Venture Concession which dates and access roads to the site. However, OGDC isback to April 1977 is located in the lower Indus River experiencing a delay in selecting the turnkey contractor andsubregion. This concession has been producing oil and gas therefore the plant is expected to be commissioned in mid-since 1982 from some 26 relatively small fields within a 1993. GOP has approved the Project Concept documentsurface area of some 3,500 sq. miles. The Government is (PC-I) prepared by OGDC for the Dhodak condensatea joint venture partner (40%) in the development of the plant.Badin Block concession. GOP's interests are managed byDGPC while OGDC provides technical support to DGPC. Installation of Gas Pipelines by SNGPLThe other partners are UTP (30%), and OccidentalPetroleum Company (30%), with UTP as the Operator. 2.09 Dhodak - Kot Addu Pipeline. This is a 84-km,Estimates of the remaining recoverable oil and gas reserves 16" diameter pipeline to transmit 45 MMCFD of gas fromto be produced from the currently known fields and the Dhodak gas field to the Kot Addu power station. Thestructures over the next 18-year period is some 40 million PC-1 for this project and an EA study for this componentbarrels of oil and some 600 BCF of gas. The produced gas finalized by SNGPL have been approved by GOP. It wouldwill be sold to SSGC. The development program, which take about 18 months to complete construction and SNGPLhas been reviewed by the Bank and found satisfactory, has already completed the surveying of the pipeline routecomprises drilling 11 development wells and implementing and commenced acquisition of right of way. The pipelinea program for maintaining the oil production at about will be attached to an existing barrage across the Indus23,000 (BOPD) from existing fields, and increasing the River, and no major pipeline construction problems areproduction of gas to about 175 MMCFD from the foreseen. OGDC and SNGPL need to enter into a 'take-or-concession area. pay" contract for the gas to be supplied from Dhodak. The

contract would be for 15 years following the completion ofDhodak Condensate Plant the Dhodak field development, i.e., from 1993-2007. The

draft gas purchase agreements are under discussion between2.08 The Dhodak condensate field is situated in an SNGPL and OGDC. In order to ensure that there are nouninhabited mountain terrain, west of Kot Addu, in the delays in gas off-take arrangements, OGDC and SNGPLPunjab province. Currently, there are seven wells drilled have agreed, as a condition of effectiveness of the proposedat Dhodak and no new well is envisaged to be drilled in the Loan, to enter into a contract regarding the arrangementsimmediate future. The proven reserves of Dhodak are in and prices for the guaranteed purchase by SNGPL (on aexcess of 0.6 TCF of gas and 32 million barrels of take-or-pay basis) of about 45 MMCFD of gasfrom thecondensate. To enable the exploitation of such proven Dhodakfieldfor a period of 15 years commencing in 1993reserves, a condensate processing plant comprising: a gas (para 6.06(c)).dehydration plant, Liquefied Petroleum Gas (LPG) recoveryplant, condensate stabilization unit, surface gathering 2.10 Pipelines to utilize Qadirpur Gas. Thisfacilities, and a topping plant with associated facilities are component involves: (a) construction of a 60-kin, 24"to be installed. The current plan is to complete the Dhodak diameter spur line; (b) replacement of two sepate 24 kmcondensate plant by not later than December 1992. When sections of the existing 18" pipeline by heavier gauge

- 12 -

linepipe to mitigate pipeline stress corrosion downstream of design and engineer the expansion and upgrading thecompressor stations (see map) would enable transmission of SCADA System. SNGPL has agreed to recruit by no laterabout 200 MMCFD of gas from Qadirpur to the main Sui- than December 31, 1992, consultants satisfactory to tAeMultan gas trunkline; and (c) instalation of nine Bank to assist in upgrading the SCADA System (para 6.05).compressors (each of 4,000 BHP capacity) at three separatesites (one nud-way on the Qadirpur spur line and two Measures to Mitigate Environmental Impactlocations along the 18" pipeline to Multan) to maintain thepipeline operating pressure of 1,000 pounds per square 2.12 An environmental screening was conducted for theinch, to transmit Qadirpur gas to end-users. The route for proposed Project in which each of the physical componentsthe spur pipeline has been surveyed and SNGPL has ((a) and (b) of para 2.04) were assessed for their impact oncompleted an EA study and prepared the PC-1 document the environment. Two fields, Badin Block and Kadanwarifor this component. SNGPL intends to complete the were found to have no adverse environmental impact. Thepipeline in about 18 months and have it ready for other two fields, Qadirpur and Dhodak required furthertransmitting gas by June 1993, as required by OGDC. environmental analyses. For the reasons cited below, anSNGPL would transmit the first 100 MMCFD through the Environmental Assessment (EA) was conducted by OGDCexisting 18" pipeline between Sui and Muitan, and then and SNGPL. In the Badin Block concession, situated in athrough the recently completed line from Multan to the Kot deltaic plain close to the sea level, 50 % of the land lies inAddu power plant in which there is adequate capacity for desertic to semi-arid areas, while the other 50% of the landthe additional gas. With such pipeline capacity, the is cultivated. UTP, the Operator, is complying with itsutilization of gas from the SNGPL system at Kot Addu can corporate environmental guidelines in Pakistan (which meetsbe increased from 90 MMCFD at end-1991 to 190 United States Environmental Protection Agency standards).MMCFD by 1993. This would also allow the rapid Compliance monitoring is carried out by UTP's (Corporate)substitution of Qadirpur gas for imported petroleum safety inspectors. A review of UTP's past performance, asproducts especially HSD at Kot Addu. At the Kot Addu well as its environmental guidelines, indicates that UTP haspower station, WAPDA under Bank financing (ESL-1I), is been and will continue to be very conscious of protectingconverting the combustion turbines to use natural gas. The the environment. In the Kadanwari field, which is locatedbalance of 100 MMCFD from Qadirpur will be transmitted in a semi-arid plain surrounded by sand dunes, the appraisalthrough the Sui Northern main trunkline which is currently mission visited the site and has ensured that thebeing expanded under the ongoing Ln. 3252-PAK. OGDC development of the field poses no environmental issues.and SNGPL intend to sign a take-or-pay contract for the LASMO, the Operator of the Kadanwari field, also abidessupply of gas from Qadirpur field, for which purpose, by acceptable comprehensive environmental standards andGOP's approval of the PC-1 to install pipelines and procedures, monitored out of their London, UK (Corporate)compressors to utilize Qadirpur gas is a prerequisite. As office. For the Qadirpur field, however, which lies in theconditions of effectiveness of the proposed Loan, (a) OGDC floodplain area between the Indus Liver and a flood controland SNGPL have agreed to enter into a contract regarding levee, the principal concems are: (i) protecting the wellthe arrangements andpricesfor the guaranteedpurchase by heads and production facilities during seasonal floodingSNGPL (on a take-or-pay basis) for a period of 20 years (between July-September each year) since damage to the

from the Qadirpur Gias Field of 100 MMCFD of gas in the well heads and production facilities could affect surface andyear 1993, to be r,creased in the year 1994 to 200 MMCFD groundwater with concomitant effect on population,(para. 6.06(c)); and (b) GOP has agreed to approve the vegetation, wildlife and land uses; and (ii) avoiding adversePC-1 for the pipelines and compressors to utilize Qadirpur impact on wildlife species of Indus dolphin, Hog deer, andgas (para 6.06(b)). migratory waterfowl. As regards the Dhodak field

development, the field itself lies in an uninhabited2.11 Extension of SNGPL's Transmission SCADA mountainous range. However, the proposed condensateSystem. With the addition of the Dhodak - Kot Addu and plant, although situated in a desert, is in the proximity of athe Qadirpur spur pipelines, SNGPL needs to install graveyard. The pipeline from Dhodak to Kot Addu wouldtelemetry and telecontrol equipment along the expanded mainly pass through arid and semi-arid lands but alsotransmission line to enable the monitoring of gas flows. It through approximately 15 miles (23 km) of privatewould also require the upgrading of the existing SCADA agricultural lands.facilities to effectively integrate the new additions. Thehardware required to extend and integrate the SCADA 2.13 The findings of the EA for the proposed Projectsystem with the existing facilities would be financed under are summaized in Annex 2.2. The EA evaluated thethe proposed Project, including the technical assistance to development plans and engineering designs for Qadirpur

- 13 -

from an environmental perspective. The well sites will be consent. OGDC and SNGPL have agreed to ensure that theelevated above 100-year flood crest and armored with construction offacilitiesfor the development of gas and oilconcrete to prevent damage by flood-swept debris and fields and necessary pipelines will be undertaken inscouring by flood waters. Gathering lines will be buried compliance with the measures recommended by theand production facilities wiU be located on a site outside the enifironmental assessment report (para 6.04)).flood area. In order to protect the schools of rare speciesof dolphins in the Indus River, OGDC will maintain a 100- D. Technical Assistancemeter buffer zone on the Indus River and its activechannels, with no wells or other man-made structures 2.14 A significant amount of tecLnical assistance, bothremaining in place in that area after construction other than for institution building and for engineering, is required byessential pipelines which will be carried on barrages over the Government and the project beneficiaries to implementthe river channel. In addition, OGDC will work with the the various components of the proposed Project. AsSindh Wildlife Board to preserve free passage of the hog regardsbuilding institutional capacity, OGDC requiresdeer and curtail illegal hunting of the waterfowl. The EA technical assistance to: (a) establish a modern accrual-basedfound no adverse impact of the pipeline components. The accounting system; (b) establish a comprehensiveEA for the Dhodak condensate plant and ancillary facilities Management Information System; (c) establish anas well as the corresponding pipelines found no significant Environmental Management Unit and make it functional;environmental problems with the proposed development and and (d) assess the feasibility of privatizing the Technicaloperations at the selected site. Nevertheless, in consultation Services. As regards technical assistance of an engineeringwith local villagers, OGDC is relocating the plant site to nature, OGDC has already commissioned a study by anavoid any adverse impacts to both existing and projected intemational reservoir engineering firm to confirn theburial areas. A fence for the burial ground as requested by recoverable reserves and production capability of wells atthe villagers will be erected by OGDC to provide a 100- Qadirpur. In addition, the Corporation has awarded ameter buffer zone. In accordance with Operational contract satisfactory to the Bank for recommending anDirective 4-00, the EA report was released to the Bank's optimum design for surface facilities and otherExecutive Directors with GOP's and OGDC's written infrastructure. SNGPL requires technical assistance to

upgrade its SCADA systemProject Cost Summary F.C for which they are expected

as X to issue bidding documentsof to shortlisted firms

L.C. F.C. TOTAL L.C. F.C. TOTAL Totalt satisfactory to the BankA. Field Devetoament (Rs. Million) (USS Milltion)

Qadirpur 677 1544 2221 27.9 63.5 91.4 69 before April 1992. TheOhodak 644 506 1150 26.3 20.8 47.0 44 proposed Project wouldBadin 763 1940 2702 30.6 78.4 109.0 72 provide funding to OGDCKadanwarl 743 1013 1755 30.8 41.9 72.7 58

.... .... .... -.... - and SNGPL forSubtotal 2826 5002 7828 115.6 204.6 320.2 64 implementing these

S. Gas Pipelines 1895 969 2863 77.5 39.6 117.1 34 institution buildingcomponents. Technical

C. SCADA 45 218 263 1.8 8.7 10.5 83 assistance will also be

0. Technical Assistance& provided under the loan forConsultancy Services 21 223 244 0.8 9.1 9.9 91 upgrading the capability of

---. .... .... ..... ..... ----- .-- MPNR's secretariat and itsTotat Gage Costs 4787 6411 11198 195.7 262.0 457.7 57 technicaldirectorates(DGO,

E. Contingencies HDIP, DGPC, DGG andPhysicat t0X 479 641 1120 19.6 26.2 45.8 57 DGNRER)inregulatingandPrice 581 367 948 23'.3 14.8 38.1 39 monitoring the activities of

... .. .... .... . ---- ----. .... ---.........

Total Contingencies 1060 1008 2068 42.9 41.0 83.9 49 companies in the petroleum-+-- ---- ---- .... * ---- ---- --- subsector and for measures

TOTAL PROJECT COST 5847 7419 13266 238.6 303.0 541.6 56 to implement the new

Int. During Cons. (lOC) 74 174 248 3.1 7.1 10.2 70 Petroleum Policy. GOP has-- .... ..... ..... ..... --- .- - --- already completed a study

TOTAL FliANCING REWUIRED 5921 7592 13514 241.7 310.1 551.8 56 w-th USAID financing to3== 3=31 =3=C= =U33::Ir =3X_ =X

Of whilch Taxes and: Duties 2914 0 2914 11 8. 0.0 118.8 reconmimend a plan for

TAM. 2.1 upgrading the capability of

- 14 -

DGPC, and is currently implementing the recommendations domestic 8 % in 1992, and 6 % for the period 1993 to 1996;of that study. Another ongoing study, also financed by and foreign 5.1% in 1992, 0.4% in 1993, 0.6% in 1994USAID, will develop programs for a similar upgrading of and 2.7% in 1996. Price contingencies amount to aboutthe capabilities of MPNR's technical directorate. Funding 8% of the base cost plus physical contingencies. IDCfor implementing the recommendations of that study would amounting to Rs 248 million (US$10.2 million) will bebe provided under the proposed Project (para 3.22). accrued bringing the total financing requirement to Rs 13.5

billion (US$551.8 million).E. Project Cost

2.15 The total cost of the Project is estimated at Rs 13.3 F. Financing Plan and IBRD Financingbillion (US$541.6 million equivalent) including physical andprice contingencies of about US$83.9 million, and taxes and 2.17 The financing plan for the proposed Project isduties of about US$118.8 million, but excluding interest summarized in Table 2.2 and the details are given in Annexduring construction (IDC) of about US$10.2 million. 2.3. A large share of the financing (US$148.6 milli:an)T)etails of the project cost estimates are in Annex 2.3 and representing about 27 % of total project financing requifedare summarized in Table 2.1. would be bome by private joint venture partners. 'rhe

financing to be provided by this group is largely in foa ign2.16 Direct and indirect foreign exchange costs are exchange as most of the financial commitments of jointestimated at US$303.0 million (56% of total project cost). venture partners in the concession agreements are in foreignThe costs of the OGDC and Badin Block components are cufrency. The joint venture partners will finance thebased on 1991 price levels which were derived from actual expenditure in accordance with their respective workingdevelopment costs for ongoing wells, and recent quotations interest shares in the concession (paras 2.05^2.07). Thefor works and equipment associated with oil and gas joint venture partners are well known companies whoseoperations on a per well basis (such as dnlling services, financial strength has been reconfirmned by GOP duringwellheads, consumables, etc.). Quantities are based on concession negotiations. In addition, these partners havecurrent field development plans of OGDC and the joint been providing their share of the funding in accordance withventure partners. Physical contingencies of 10% of the the joint venture agreement, and are expected to do sobase costs have been assumed for the physical components during the development and production phases. GOP'sof the Project. These contingencies are judged to be share in the financing of the proposed Project amounts toadequate as most of the physical components would be in about US$15.0 million and consists mainly of its locAlareas where the geological conditions are well known due currency share as 40% partner in the Badin fieldto appraisal drilling. The costs of the SNGPL components development. OGDC is expected to finance from internalare based on actual costs under ongoing contracts, and sources its share of the local costs of field development,pipeline construction costs are based on per kilometer costs amounting to about US$78.4 million equivalent and IDC onbeing incurred for ongoing contracts. Price contingencies the foreign cost of the Dhodak condensate plant of aboutare based on the following expected annual inflation rates: US$3.3 million. SNGPL would funance the local cost

Project Financing Ptan

UTP LASKO PREMIER 10B USAID GOP OGOC SNGPL COMM. WORLD TOTAL(JOINT VENTURES) f SOURCE BANK

FIELD DEVELOPENrTWatDRPUR 27.2 25.9 55.0 108.1DNODAK 17.7 36.2 6.4 60.3-BADN is78.1 14.4 36.0 128.5KADANWARI 43.3 19.0 24.1 86.4

GAS PIPELINES 98.3 45.9 144.2SCADA 2.3 10.1 12.5TECHNICAL ASSISTANCE 1.7 0.6 0.6 8.9 11.8AND CONSULTANCY

.. ......... ....... .... ..... .... .... ..... ..... ....... ..... ....... -----

TOTAL 78.1 43.3 27.2 17.7 1.7 15.0 81.7 100.6 6.4 180.0 551.8

X of TOTAL 14.2 7.9 4.9 3.2 0.3 2.7 14.8 18.2 1.2 32.6 100.0

W Only the main joint venture partners are showt.

Table 2.2

- 15 -

portion of the Dhodak to Kot Addu gas pipeline, the components. Accordingly, OGDC has established a Taskpipelines and compressors to utilize Qadirpur gas and Force comprising a task manager, drilling and work-overSCADA for its network, amounting to US$96.8 million engineer, reservoir geologist, reservoir engineer, productionequivalent and IDC on the foreign costs of these pipelines engineer and procurement specialist, to ensure that theof about US$3.8 million. IDB will cofinance US$17.7 Qadirpur implementation timetable is adhered to. Themillion of the Dhodak condensate plant costs and the Dhodak component is also expected to be implemented inbalance of the foreign cost (US$6.7 million) is expected to a timely manner, in view of the fact that the plant will bebe financed through export credit agencies mobilized by the constructed on a turnkey basis and that OGDC'swinning turnkey contractor. Finally, USAID is ftnancing engineering consultant, Global Engineering Limited, alsopart of the technical assistance requirements of MPNR has project management responsibilities (para 2.08). The(US$1.7 million). institutional development components are also expected to

be implemented as scheduled since actions are already being2.18 The Bank's loan of US$180 million would taken to recruit the necessary technical assistance (pararepresent about 33% of total financing requirements and 2.23). The Project is expected to be completed bycover about 59% of the foreign exchange requirement of December 31, 1995.the proposed Project and would finance the foreignexchange cost of field development, gas pipeline H. Project Monitoringconstruction and technical assistance consisting ofconsultancy services, materials and equipment and training 2.20 Th.. proposed Project would require closefor OGDC, SNGPL and MPNR. The Bank loan would be monitoring by the executing agencies, GOP and the Bank,made to GOP which will utilize US$38.5 million to finance particularly in view of the multiple components with criticalits share in the Badin field development, and the proposed interlinkages. Bank's monitoring would involve semi-technical assistance to MPNR. The balance would be annual supervision missions, review of procurementonlent to OGDC (US$85.0 million) and to SNGPL including consultant selection and performance, and(US$56.5 million) on similar repayment terms as the Bank disbursements. To facilitate the Bank's monitoring of theloan to GOP. The onlending interest rate would have a proposed Project, the beneficiaries have agreed to furnishmqrkup of one-tenth of the Bank's standard variable interest Quarterly Progress Reports in a manner satisfactory to therate to GOP. The foreign exchange and interest rate risks Bank. In addition, the Bank will receive audit reports ofwould be borne by the beneficiaries, which will be set out aimual accounts (para 3.19) and consultant reports as andin the Subsidiary Loan Agreements between GOP and when they are furnished to the beneficiaries by the auditorsOGDC, and GOP and SNGPL. GOP and OGDC, GOP and consultants, respectively.and SNGPL have agreed to execute Subsidiary LoanAgreements satisfactory to the Bank, as a condition of I. Procurementeffectiveness of the proposed Project (para 6.06(d)).

2.21 Procurement arrangements for the componen ts toG. Project Implementation be financed by the Bank are provided in Annex 2.5. All

contracts for civil works, supply of goods and for the2.19 The project implementation schedule provided in supply and installation of equipment to be financed from theAnnex 2.4, shows the implementation timetables for each Bank loan proceeds would be procured in accordance withof the proposed Project's components. OGDC will be the Bank's Guidelines for Procurement. Pakistaniresponsible for implementing the Qadirpur field manufacturers competing under intemational competitivedevelopment, Dhodak Condensate Plant and corporate bidding (ICB) would receive a preference in bid evaluationrestructuring components. LASMO will be responsible for of 15% of the CIF price or the prevailing custom dutyKadanwari field development while UTP will be responsible applicable to non-exempt importers, whichever is less,for Badin Block. SNGPL will implement the pipeline provided they can prove that the value added to the productcomponent as well as the SCADA system, and MPNR will in Pakistan exceeds 20% of ex-factory bid price.be responsible for its institutional strengthening component. Procurement of consultant and technical assistance servicesLASMO, UTP and SNGPL are experienced companies with would follow the Bank's Guidelines for Use of Consultants.a good track record in Pakistan and are expected to The Dhodak condensate processing plant, for which theredischarge their implementation responsibilities in a timely are only a limited number of qualified suppliers, would bemanner. OGDC's timely implementation of the Qadirpur procured and constructed under a turnkey contract throughand Dhodak components is critical to the proposed Project Limited International Bidding (LIB). Also LIB procedure,both in terms of the expected production from these which is appropriate in accordance with the Bank'scomponents and for the timely completion of SNGPL's guidelines for petroleum lending, would be used for: (i)

- 16 -

procurement of field services such as well logging, testing Bank share would be about US$126 mnillion. About US$93and stimulation, as well as specialized materials, equipment mllion (17 %) would be procured under the Bank's LIBand spare parts for drilling and well completion; and (ii) procedures of which the Bank's share would be aboutcontracts whose estimated value is US$500,000 or less. All US$24 million. Procurement under DC procedures woulddocuments relating to procurement of consulting services to amount to US$14 million (2%), all of which would bebe financed from the Bank loan proceeds would be subject financed by the Bank. Procurement under 'Others" wouldto the Bank's prior review and approval including the amount to about US$205 million (38%), of which US$6.5qualifications, experience, terms of reference and selection million for 'shopping' and US$9 million for consultanciescriteria of the proposed consultant(s). All bidding packages would be financed by the Bank. It is expected that aboutfor goods and works estimated to cost US$1 million 150 contracts will have to be let out to implement theequivalent or more would be subject to the Bank's prior proposed Project.review of procurement documentation. Other contractswould be subject to ex-post review after contract award. J. DisbursementsThese limits would result in prior review of contractsrepresenting about 70% of the loan. For spare parts and 2.23 The Bank funds would be disbursed against: (a)for items of a proprietary nature or where compatibility 100% of CIF cost of imported goods or ex.factory cost ofwith installed equipment is required, Direct Contracting domestically manufactured goods subject to ICB; (b) 859%(DC) will be applied. International Shopping, based on at of the cost of the supply of goods, associated works andleast three price quotations from at least two countries services with respect to turnkey contracts; (c) 100% of thewould be used for items of small value and having an cost for training and technical assistance; (d) 100% of CIFestimated value of US$250,000 equivalent each up to cost of goods and services procured through LIB; and (e)US$6.5 million in the aggregate. 100% of CIF cost of goods and services procured through

DC, subject to a maximum of 10% of theProcurement Arranemnts Bank's Loan amount. Expenditures

-USS - tiamounting to a maximum ofProcurement ethg.od US$18 million (10% of the Loan amount)

-SlSct EtompeICB iIL h 22hU IatlA which would be incurred within the 12-

ceyetopsient Dritling 94 i 40.9 -2.0 . 74.3 -210t month period prior to loan signatue to(57.1) (24,4)i i20) (4.5) (86.}) finance OGDC's share of the cost of

civit Works - --. 63.7. 63.7Processing Ptants 9.2 52.8- 1450 drilling the delineation wells which is

(27.0- - (27.4) now underway, and expenditures toPipeline Materials 4325 7' finance consultancy services contracted

(32.s) ~ ~ 2.) 36.2Compression Equipment - - 12.0- :::- 0 40 under Bank procurement guidelines,

- - ( 1 * st2.0) jZ (3 :~) -{1would be eligible for retroactive.(9.5) - - . -- ;5 -- t9'5financing. The schedule of disbursements

technicaL Assistance - . :11. 113 for the proposed Bank Loan, presented in

*TrOTAL Fl - * ' ' - OS-0-' 5416-X;', .' Annex 2.6, indicates that more than 75%d126.1) ca4.4) (1440) 15,) i80.0) : of the proposed Bank Loan would be

- . - : - : : ~~~~~~~~~~~~~~disbursed within thre years. SuchIncLudes Shoppir, LMcal tiding, Force Account ard technical d w t

Services for ich Band nuideldies for consuttantts ne ut.d disbursement profile is faster than that foraol-y. an energy project in Pakdstan as the latter

* Includes taxes wrd dwties :of aboiut S118 mllion. includes longer gestation power projects.*:.. Excldes IDC of about USSIO 511IiOfli .. The disbursement profile proposed is

* te.. FIgures in arentheses are the.resptdive' I '. ,: judged to be realistic because: (i) allthe Bank Loan. project components re of short gestation

(18 o 24 months); (ii) the implementingks"Mr_^';L; K7V Magencies are well experienced in

Table 2.3 implementing their respective components

except for the Dhodak condensate plant which is to be2.22 Based on such procurement strategy, the implemented through a single-responsibility tunkeyprocurement arrangements are summarized in Table 2.3. contract; (iii) OGDC has finalized the bidding documentsAs can be seen, contracts with an estimated value of aboutUS$229 million (about 43 % of the total project cost) wouldbe financed under the Bank's ICB procedures, of which the

- 17

for the Dhodak condensate plant tumkey contract and the monthly statements of actual expenses and accompanyingBank's comments to allow joint cofinancing of the contract documentation forwarded to the Bank as soon as they arehave been conveyed to OGDC; and (iv) four of the eight available. Joint venture expenditures requirements fortechnical assistance contracts envisaged are under bidding Qadirpur, Kadanwari and Badin Block would be dealt withand one consultant has been commissioned. The closing on the cash call arrangements stipulated in the joint venturedate for the proposed Loan would be June 30, 1996, six agreements under which the operator estimates the nextmonths after the eatimated physical completion. month's needs and is paid as due through the Special

Accounts. The cash calls would be verified by fully2.24 In order to facilitate disbursements, three separate documented statements of actual expenses prepared by theSpecial Accounts would be set up for GOP, MPNR, OGDC operator at the end of each month and adjustments would beand SNGPL under terms and conditions satisfactory to the made to subsequent monthly cash calls. The SpecialBank with the National Bank of Pakistan or any other Accounts would be audited and the audit certificate wouldcommercial bank(s) in Pakistan. The initial deposit in the be fumished within six months of the end of the financialSpecial Account for OGDC would be US$5 million, US$3 year. GOP, OGDC and SNGPL have agreed to open andmillion for SNGPL and US$2 million for GOP, maintain Special Deposit Accounts separately for each ofrepresenting the estimated average expenditures for a four- MPNR, OGDC and SNGPL, with the National Bank ofmonth period for the items financed by the Bank. The Pakistan or any other commercial bank in Pakistan, onBank will replenish the Special Account on the basis of the terms and conditions satisfactory to the Bank (pam 6.01(c)).

- 18 -

mL TIE BENEFICIARS

Introducdon These steps would also facilitate the utility's efforts tomobilize foreign and local resources on the basis of its own

3.01 The beneficiaries of the proposed Project comprise: financial strength, without sovereign guarantees. OtherSNGPL, OGDC and the technical directorates of MPYR, agreements under Ln. 3252-PAK provide for: (a)i.e., (a) Directorate Generl for Gas (DGG); (b) Directorate estabLishing commercially acceptable financial criteria,General for Oil (DGO); and (c) Directorate General, New together with mechanisms for setting gas utility tariffs thatand Renewable Energy Resources (DONRER) and the encourage improvement in operational efficiency; (b)Hydrocarbon Development Institute of Pakistan (HDIP). recruiting consultants to assist SNGPL in the design,This chapter discusses the organizarional aspects of the engineering and supervision of pipelines across the Indusbeneficiaries of the proposed Ptoject, including the River, (c) forming a collaborative arrangement with aninstitutional development measures to be implemented intemationally reputed gas utility to upgrade the overallthereunder. operational capability of SNGPL; and (d) further developing

SNGPL's financial management information system,A. Sal Northnem Gas Pipelines Limited reviewing the company's billing cycle, and training

SNGPL's staff in computer auditing. Accordingly, together3.02 SNGPL was incorporated in 1963 under the with ESL II which deals with issues relating to consumerCompanies Ordinance as a prvate limited company and prces of gas (pam 1.12), all of the issues peraining toconverted to a public limited company in 1964. Originally SNGPL, including financial and commercial managementestablished as a gas transmission and distribution company, aspects, project design and implementation capabilities, areits activities have expanded and currently include the dealt with under Ln. 3252-PAK. GOP and SNGPL areconstruction and operation of pipelines, both for itself and making satisfactory progress in complying with theother organizations. It has an authorized capital of Rs 400 agreements, and the current status of compliance with datedmillion, of which Rs 383 million has been issued and paid covenants under the Loan is summarizd in Annex 3. 1.up. Presently, the majority of the shares (91 %) is owned However, to ensure that the divestment of GOP and CWIs'by the Govermnent and Government-owned institutions, shares takes place as intended, GOP has agreed, as awhile the remaining 9 % of the shares is owned by the condition of effectiveness of the proposed Loan, to offer itsprivate sector. Policy making and control is carried out by existing equity shares in SNGPL for sale to the generala Board of Directors which includes representatives of public, so as to reduce GOP's direct and indirectshareholders as well as creditors, as provided for by the shareholding in SNGPL to 40% (para 6.06(g)).Companies Ordinance. Currently, SNGPL's Board consistsof 14 members, 13 of whom are appointed by theGovernment including the Chairman, and one from the B. Oia wd Gas Development Corporadoninternational British Oxygen Corporation. ITe ManagingDirector, who is also appointed by GOP, is responsible forthe day-to-day management of the company. The Legal FrameworkGovernment strongly influences the day-to-day running ofthe company, and the autonomy of the company's 3.04 OGDCwas originallyestablishedin 1961 under themanagement is limited. In addition, all the Board's Oil and Gas Development Corporation Ordinance withdecisions require GOP approval and the utility's investment esponsibility for exploration and production ofprogram often reflects the Goveent's socio-political hydrocarbons in Pakistan. Te OGDC Ordinance of 1961priorities. sdpulates that all powers for the efficient functioning of the

Corporation ae vested in its Board of Directors, and that3.03 To redress this stuation and enhance and guarantee the Government's role would be limited to maters of publicthe autonomy of the decision-maing process, GOP has policy. In practice, however, OGDC has functioned as aagreed with the Bank uider the ongoing Corporate Government department subject to Government coiurol,Restructuing and System Expansion Project (Lu. 3252- particularly in the areas of investment levels, financing,PAK), to privatze SNGPL by gradually reducing the staffing and pricing. A major reson for this is the failureGovernment's shareholding in SNGPL to not more than by the Government and OGDC to promulgate Rules under40%; to reconstitute the Board to reflect the increased the Ordinance (even after 29 years since enacting theprivate shareholdings; and to streamline ths mnagement 3f Ordinace) which would have clearly delineated thosethe utility through the appointment of competent staff. operational and corporate policy matters that should be

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under the control of OGDC's Board, and those matters of allocation of foreign exchange to finance its investmentpublic policy that are the Govermnent's responsibility. program, the Corporation's annual budget will continue toFurthermore, O&DC's dependence on the Government for be approved by GOP each year. The OGDC Rules,funding the Corporation's day-to-day operational and capital however, provide autonomy to the Board of Directors asexpenditure progrms, resulting from OCDC's inability to regards investment levels, borrowing, remuneration of staff,make a profit in all its years of existence until FY90, production of oil/gas etc, and to approve OCDC's medium-provided additional avenues for Government involvement in term Corporate Plan, thus implicitly stipulating theOGDC's corporate matters. This had stifled any responsibilities of OGDC's management to be thedecision-maldng initiative within OGDC even in matters of preparation and implementation of the approved plans.corporate policy and functioning. However, in accordancewith the agreements reached under ESL It, GOP has Planning and Budgetingrecently promulgated the OODC Rules which would pavethe way for OGDC to function with increased autonomy 3.07 Corporate planning is the responsibility of theand accountability. This section analyzes the impact of the General Manager, Corporate Affairs, who reports to theexisting legal framework on OGDC's: (a) organization and Chairman, and is assisted by a Manager, Corporatemanagement; (b) long-term planning and annual budgeting Planning and 23 staff. Corporate planning in OGDC ispractices; (c) operation of existing assets; (d) commercial carried out in the context of the Government's annualaspects; and (e) financial management, including accounting budget exercise, and therefore lacks the strategicand auditing. perspective required to achieve the medium and long-term

goals set for the Corporation. The plans are prepared3.05 Since December 1981, OGDC has a wholly-owned without the involvement of the Operations and Financesubsidiary, Pirkoh Gas Company Limited (PGCL), created Departments and without linkages to the budget; thereforein accordance with an agreement with ADB, primarily to there is no commitment of these departments fordevelop the Pirkoh gas concession. PGCL, which has a implementing the plans. Recognizing these drawbacks,skeleton staff primarily to maintain its accounts, is highly OGDC intends to revamp its present plinning practices withprofitable. There are significant tax advantages in merging technical assistance already provided by the Bank, andPGCL with OGDC, because OGDC has sufficient tax losses prepare a comprehensive five-year Corporate Plan, whichfrom previous years to offset any taxable income from the would be rolled over annually. Such Plan will have bothPirkoh field. Accordingly, OGDC has decided, with physical and financial targets and will be an aggregation ofADB's and GOP's concurrence, to merge PGCL into the plans of the various departments. It will also allow forOGDC, and is waiting for the completion of the physical performance monitoring by the Board against previouslyverification of fixed and current assets, and of the agreed targets, and enatle the institution of performance-international audit (both of which have been initiated under linked incentives for the Corporation's staff. Preparation ofESL II) to effect the merger. (The discussion of the such Plan is now a statutory requirement, since the newlyinstitutional aspects of OGDC in this Chapter assumes promulgated OGDC Rules require the Corporation's BoardPGCL's merger with OGDC). of Directors to furnish by May 31 of each year an annual

budget and a five-year rolling Corporate Plan to GOP asOrganizadon and Management part of the budget approval process. The first such plan has

been prepared for the five-year period FY93-FY97. OGDC3.06 As stipulated by the OGDC Ordinance, OGDC has has agreed to: (a) prepare and furnish to the Bank bya Board of Directors comprising the Charman (who is also March 31 of each year, beginning with 1992, for reviewthe Chief Executive Officer), and four Directors (Annex and comments, a draft Corporate Plan, covering OGDC's3.2). One of the Directors, the Director Finance, who is a physlcal,finandal and institutional targetsfor thefollowingnominee of the Ministry of Finace, is also a full time five-year period; and (b)finalize the Corporate Plan, takingdirector of the Corporation. One of the other three Into account the Bank's commentr, and furnish it to theDirectors is a representative of MPNR, while the other two Bank by June 30 of each year, together with the budgetare outsiders. Management of the Corporation is the approved by GOP for the following fiscal year (pararesponsibility of the Chairm, the Director of Finance, 6.03(b)).three Executive Directors, (one each for Exploration andProduction, Procurement and Stores, and Administaion)and the General Manager for Corporat Affairs, who in Personnel and SWffngtum are supported by 13 Mamgers and their staff incarrying out the Corporation's mandate. As OGDC will 3.08 Personnel management is the responsibility of thecontinue to be dependent on the Government for the Executive Director, Administration who reports to the

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the Operator, but mostly as a partner without operational

* ;9css Staflhig (;rc tah 1991) obligations.

Its. of Staff X: ;___ 3.10 OGDC operates four fully-owned seismic crewsEngineers & within the country, wiich compete with three foreign crewsFrofeasionats. 1,268 . 13 .3<. that are under contract by the other oil companies operatingTeOnical & in the country. OGDC has, at times, used contractor crewsAdnin. Suppot: 4,774 to supplement work which cannot be done by O&DC's

skxtl & -39 seismic crews within the timeframe required. ComputationUnskileidbor 3 390:36 and interpretation of geophysical data is done locally in

-9.412 -100 --- OGDC facilities, occasionally with the assistance of______________._________________________ specialized outside experts. AU drilling activi.y in t1h.

Table 3.1 country is being done by some 23 drilling rigs owned byseven rig-operators, which are based there. O&DC ownsand operates nine of the 23 drilling rigs, the balance of the

Chairman. OGDC's staffing as of March 1991 broken rigs are owned by international driling contractors, whichdown by type of skldl, is presented in Table 3.1. A drill wells on a contract basis for any of the oil operatorsmajority of OGDC staff is in support and labor categories when selected by a bidding process. As of October 1990,and is engaged in technical services such as seismic OGDC had two drilling rigs contracted from anactivity, drilling and oil field services. OGDC's labor is international drilling contractor.unionized in several unions which, through a referendum,have chosen one of them as the Central Bargaining Agent Corporate Res*ruucwing of OGDCfor the dialogue with OGDC's management. Themanagement-labor relationship in OGDC is cordial. The 3.11 The effectiveness of OGDC as a national oillabor contract is signed every two years and the latest company is impaired because of the integrated nature of thecontract was negotiated in April 1991. OGDC presently Corporation. The primary objective of OGDC, i.e., of itsdoes not have a strong personnel management function Exploration and Production arm (E&P), should be toprimarily because of GOP's intimate involvement in maximize the production of oil and gas. In order to achieverecruitment and remuneration issues. However, the Rules this objective, OGDC should facilitate risk investments byrequire OGDC to prepare personnel plans for the ensuing the private sector while undertakdng investments on its ownyear in the context of preparing the Corporate Plan and account only in the development of discovered fields,Budget. In order to fulfill this obligation, and in view of particularly gas and marginal fields that may not bethe autonomy granted to the Board to determine the terms attractive to the private sector. OGDC can effectivelyand conditions of employment for OGDC's staff (para support the private sector's operations while remaining in3.06), OGDC plans to strengthen its personnel function, the public sector. OGDC's Technical Services armand, towards this objective, intends to implement a Human however, whose primary function is to provide services toResource Information System as an integral part of the OGDC's E&P arm as well as to other oil companies,Corporate Management Information System (MIS), which should compete with other private sector service companiesis a component of the proposed Project. and therefore could, in principle, be in the private sector.

At present, it is not possible to assess the viability of theOperatmons Technical Services arm owing to the integrated nature of

the operations and the lack of proper systems and records.3.09 OGDC is one of 17 oil companies actively Therefore, the first step is to separate OGDC's E&P andconducting hydrocarbon exploration and production in Technical Services functions into profit/cost centers,Paldstan. Presently, it is also the major producer of oil and financially, managialy and administratively.the second largest producer of gas in the country (after thePakistan Petroleum Limited which owns the Sui gas field). 3.12 This separation involves reorganization of theIn FY90, OGDC's daily average gas production amounted Corporation along functional lines and installation ofto some 246.6 MMCFD and the production of oil amounted systems and procedures. The reorganiL ion alongto some 18,900 BOPD. Gas is produced from eight gas functional lines has already begun and is progressingfields that OGDC operates and from five oil fields that are satisfactorily. The E&P and Technical Services would beproducing associated gas. Oil production is from 15 oil the responsibility of two Executive Directors. The newfields which are operated by OGDC. In addition, OGDC organization chart showing details up to the departmentactively participates in joint venture operations, at tims as head levels, which has been approved by OGDC's Board of

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Directors, is shown in Annex 3.2. Reassignment of staff is Enviromen Managmentongoing. The Executive Director for Technical Services isa newly created position. In order to complete the 3.15 Despite the fact that almost all of its operationsreorganization, the Executive Director for Technical would have an impact on th environment, OGDC does notServices needs to be appointed and OGIYDC plas to appoint have in-house enviromenl management capabilities anda technically qualified person to that position who will be has depended on ad-hoc arrangements, such as externallyfull time employee of OGDC. OGDC has agreed to fimded consultants, to help in this area. Such help is oftenappoint, as a condition of effectiveness, a director for its received in the late stages of project development, causingTecdnical Services, with suitable qualificatione and revision of development plans, cost overruns and delays inexperience (para 6.06(e)). project completion. In recognition of these drawbacks,

OGDC has decided to strengthen its environmental and1a To cater to the restructured organization, OGDC safety management capabilities by establishing an

would implement a modem accounting system (para 3.18) Environmental Management Unit which will be part ofand a Corporate MIS as part of the proposed Project. The OGDC's Corporate Affairs Department. The objective ofmodern accounting system is part of a time-bound program the Environmental Management Unit would be toto improve the Corporation's financial management (para icorporate environmental and safety procedures into3.17) and would enable the maintenance of separate OGDC's planning, project implementation, operations,accounts for the E&P and Technical Services fuictions. supervision and contiol activities; develop environmentalThe Corporate MIS which would include subsystems for guidelines and procedures for OGDC; and monitoraccounting and finance, materials management, operations, compliance with Government regulations regardingpersonnel and corporate planning, would enable operational environment and safety. OGDC would need technicalplanning, performance monitoring as well as admnistior assistance to make the Environmental Management Unitof the two profit centers. OGDC would need technical operational, which would be provided under the proposedassistance to implement these two systems, which would be Project. OGDC has furnished to the Bank a comprehensiveprovided under the proposed Project. Bidding documents, action plan to establish and staff an Environmentalincluding terms of reference approved by the Bank, have Management Unit within OGDC. OGDC has agreed tobeen issued to shortlisted firms, also approved by the Bank. ensure, by December 31, 1992, the establishment andOGDC has agreed toc (a) select, as a condition of operation, with appropriate structure, staffing andfacilitieseffeaiveness, consuitants to assist OGDC in the of the EnviWronental Management Unit (para 6.03(d)).establishment of a comprehensive Management InfonmationSystem (para 6.06(t)); and (b) inplement, by June 30, Commerciaspects1994, the Management Information System (para 6.03(c)).

3.16 Oil and Gas Pticing: The reference producer3.14 After such separation, expected to take about two prices for oil and gas produced by OGDC is the same asyears, the Technical Services arm could be privatized after for other oil companies operating in Pakistan (pam 1.25).a careful assessment of its viability, demand for its sevices Prices of oil for all producers are regulated by DGO, whileand overall financial market conditions. OGDC's role as an gas producer prices are regulated by DGG. Within OGDC,E&P Company is expected to be substantial in the near negotiating the producer price of oil and/or gas is thefuture as 34 joint ventures have been signed since 1986. responsibility of the Corporate Affairs Department, whileThis share is, however, expected to decline in the future as administaion of the negotiated price is with the FinanceOGDC's participation and share in new concessions is not Deatment. Differences betwee the intemational priceexpected to be as high as it is at present. In addition to and the regulated price result from the discount mechanism.which OGDC will be developing its wholly-owned fields Ibe discounit sructure in the pricing of oil and gaswhich are unlikely to attract private sector interest, due to produced in Pakistan is based on such factors as: (a)many of them being relatively marginal in nature. GOP interational crude and fuel oil price; (b) expected risk; (c)and OGDC have agreed to: (a) cany out by June 30, 1994, expected cost; and (d) expected well productivity. Thewith the assistance of consultants, a study of options with discount is negotiated before field development commences.respect to the fWture role of OGDC's Technical Srvices, For the majority of oil produced by OGDC, the discountsincluding the option ofprivatizing these services; (b) revew vary from 3% at a reference price of US$14/bbl to 25% atwith the Bank the recommendation of the study by a reference price between US$36-50/bbl. In the event theSeptember 30, 1994; and (c)formulate, on the basis of the referce price goes beyond US$50/bbl, the concessionreview, measures for the implementation of the agements provides that the parties meet within 60 days torecommendations, starting December 31, 1994 (para detrmine a new apppriate dscou efact that the6.02(a)). discount level increases with any increae i international

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prices limits the upside potential and eliminates any windfall documentation of accounting policy and preparation of year-profits. The inverse situation, i.e., falling international end accounts. OGDC's external auditors have cited theseprices, produces some downside protection as the discounts deficiencies. In order to address these deficiencies and toare reduced. For gas, the discount varies with either the comply with the OGDC Rules, OGDC has initiated thenet reference price of fuel oil or the volume of gas revamping of its accounting systems and procedures withproduction. In some fields, where the discount structure technical assistance to be financed under the proposedvaries with the net reference price, the discount ranges from Project. The revamped accounting system will comprise10% at an intemational fuel oil price of up to US$50/MT two distinct subsystems, one each for the E&P andto 92 % at a corresponding fuel oil price of between Technical Services. Accordingly OGDC has agreed to: (a)US$190-205/MT. A typical discount for gas, when the as a condition of effectiveness, select consultants to assistintemational price of fuel oil is in the range of US$101- OGDC In the design of a modern accounting system (para120/MT (about US$ 15/bbl), is 20%. In those fields where 6.0609); (b) prepare and adopt by December 31, 1992 withthe discount varies with the volume of production, the range the assistance of such consultants, a detailed accountingis 10% for a daily production of up to 100 MMBTU to system consistent with International Accounting Standards;45% for gas production of more than 300 MMBTU/day. (c) complete the preparation of its accounting procedures by

March 31, 1993; and (d) maintain the Corporation'sFYnancidal Management accounts in accordance with the new system,from July 1,

1993 (para 6.03(e)).3.17 Financial Organization: OGDC's financialfunction is headed by the Director Finance, who is 3.19 Auditing: OGDC has an intermal audit departmentsupported by the Manager Finance and about 200 staff. which until recently reported to the Director Finance. TheThe finance function has had a lower profile relative to the internal audit department is mandated to carry out, intertechnical functions, and reflects the inadequate commercial alia, the pre-audit of local and foreign procurement, post-orientation of the Corporation. The lack of an adequate audit of joint venture payments, audit of imprest accounts,number of qualified personnel has been an impediment to payroll, and 100% audit of stocks and inventories.maintaining accounts properly, while treasury activities However, owing to the lack of an adequate number of(cash and debt management) and financial planning are non- qualified staff, the internal audit departnent has been unableexistent. To address these deficiencies, OGDC has: (a) to fulfill its mandate. Therefore, OGDC is taking theestablished the position of a General Manager (Finance) necesary steps to recruit qualified staff also for the intemalwho will be a part of OGDC's senior management; (b) audit department (para 3.17) and broaden its mandate to

_ the finance function (Annex 3.3) to establish include audits of systems and controls within theivities and financial planning and to cater to the Corporation and therefore be a useful management tool. Ing of operations; (c) initiated a concerted effort addition, to ensure its impartial and independent nature, theualified accounts and finance personnel; and (d) intenal audit department now reports directly to theaining programs for the accounts staff. Such Chairman. As regards external audit, the OGDC Ordinance3grams will be financed under the proposed stipulates that the Corporation's accounts are to be auditedview of the urgent need to recruit staff for the by two finns of chartered accountants, known as statutory

ipartment, GOP and OGDC have agreed to auditors. In the past, OGDC's audits were less thani, fn accordance with an action plan agreed with the satisfactory. However, in compliance with agreements

Bank, by December 31, 1992, qualifted professional staff under ESL II, OGDC recruited new statutory auditors asfor OGDC's Finance Department and Internal Audit well as the international firm of Coopers and LybrandDepartment (para 6.02(b)). (C&L) to audit the Cororatioln's FY90 and FY91 aecounts.

C&L has completed the audit of FY90 accounts and asAccounting and Auditing expected, the auditor's report is heavily qualified,

particularly in the areas of accounting system, financial3.18 Accounting: OGDC has a centalized management, intenal auditing and fixed and current assets.accounting system based on commercial accounting As discussed in paras 3.17,3.18 and 4.06, OGDC is takingprinciples under the OGDC Ordinance. In addition, OGDC steps to address the deficiencies highlighted by the auditors.Rules stipulate that the Corporation's accounts are to be However, OGDC would need about two years to address allmaintained in accordance with International Accounting of the auditor's observations during which time OGDC'sStandards. Because of the lack of qualified staff and progress in this regard would need monitonng. 7herefore,insufficient attention given to the accounting and finance OGDC has agreed to: (a) recruit private auditors,function in the past, OGDC's accounting systems are satisfactory to the Bank, to annualy audit the Corporation'sdeficient in many areas such a i.ecording of transactions, accounts; and (b)Jrnfsh to the Bank, beginning with FY92,

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audited accounts together with the auditor's reports within is key to facilitating a larger private sector role bysix months of the end of thefinancial year (para 6.03(O)). responding quickly to the private sector's applications forIn addition, an understanding was reached that, in concessions, as well as field development proposals.DGPCaccordance with agreements under ESL-II, OGDC would would need enhanced authority to enter into concessioncontinue to recruit international auditors to audit the agreements; the ability to review oil company workCorporation's accounts until a clean audit certificate from programs and activities from a view point of techno-such auditors is obtained. economic efficiency, safety and environment; and the

capacity to maintain (or have access to) a geoscientificlnsumrance database. A USAID study which identified the above

requirements for strengthening DGPC, has also identified3.20 OGDC's insurance requirements are underwritten the necessary staffing, equipment and facilities, and trainingby the National Insurance Corporation, the Govermment requirements for DGPC. The Bank has reviewed theinsurance corporation. Insurance coverage for OGD C's USAID study and supports its findings. Presently, DGPCstaff in the form of group insurance, accident and is implementing the recommendations of the study.worlknen's compensation, as well as its motor vehicles and Furthermore, DGPC requires consultants to assist in theaircraft insurance, is adequate. OGDC's rigs are insured formulation of guidelines for enviromnental assessments,and coverage is adequate. However, the crude oil and gas and monitoring exploration and development activities of oilproduction facilities of only five of OGDC's twenty three companies from an environmental and safety perspective.fields have adequate insurance coverage. Recognizing the GOP has agreed toformulate by December 31, 1992 withrisk of non-insurance of its equipment and productive the assistance of appropriately qualified consultants,assets, as well as to address the concerns of the guidelines for environmental assessment and safety forinternational auditors, OGDC has agreed to take out, by petroleun exploration and development activities (paraJune 30, 1993, and thereafter maintain with responsible 6.01(d)).insurers, insurance covering all of OGDC's plants,machinery, pipelines and otherfacilities against such risks 3.23 Strengthening of the other three directorates inin an amount consistent with appropriate petroleum MPNR, i.e., DGG, DGO and DGNRER would also focuspractices (para 6.03(g)). on enhancing their regulatory capabilities. As in the case

of DGPC, it would, therefore, involve provision ofC. Ministry of Petroleum and Natural Resources adequate numbers of qualified staff, equipment and facilities

appropriate to their function, exposure to, and training in,3.21 DGPC functions as a regulatory body for the modem industry and regulatory practices, as well asimplementation of the Pakistan Petroleum (E&P) Rules establishment of scientific and management information1986. DGO is assigned the responsibility of implementing systems, preferably computerized, in their sphere ofGOP policies regarding the importation, refining and activity. A study, financed by USAID, is currently beingdistribution of petroleum products. DOG is the carried out to identify the staffing, equipment and trainingGovernment's regulatory body for the gas subsector, and its needs of MPNR's secretariat, technical directorates andmajor functions in that capacity include: supervision of the HDIP. GOP has agreed to: (a) by June 30, 1992 reviewoperations of the gas transmission and distribution with the Bank the report containing the findings andcompanies, including review of their financial performance, recommendations of the study which is being currentlyinvestment programs, resource requirements, etc. undertaken of the capacity and organization of MPNR'sDGNRER is expected to develop and implement policies secretariat, technical directorates and HDIP and toand programs in the areas of biomass, fuelwood, solar, prepare, on the basis of the review, an action planwind, mini-hydroelectric and other renewable forms of satisfactory to the Bankfor the implementation of suchenergy. HDIP is an autonomous commercially-based recommendations; and (b) thereafter, carry out such actionorganization under MPNR and serves as the national plan in accordance with the time schedule stated thereininstitution responsible for research and development in the (para 6.01(e)).petroleum subsector. The detailed institutional assessmentof the technical directorates of MPNR and HDIP ispresented in Annex 3.4.

3.22 Institutional strengthening of MPNR wouldcomprise: technical assistance to its secretariat, technicaldirectorates, i.e., DGPC, DGG, DGO, DGNRER as wellas HDIP. The strengthening of DGPC as a regulatory body

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IV. FINANCES

A. Sul Norhern Gas Pipelines Limited investment programs as well as borrowings also requireGOP approval.

IntroductionPast Financial Performance

4.01 The financial and accounting affairs of SNGPL aregoverned by the Companies Ordinance of Pakistan which, 4.02 SNGPL's operating perforrnance is summarized inamong others, broadly stipulates the accounting system, Table 4.1.disclosure requirements, audit procedures, and accountingfor deferred taxation. However, because SNGPL is a 4.03 In order to put the performance of the utility on autility which has the distribution monopoly in the northern basis consistent with what private sector investors wouldpart of the country for natural gas, a scarce resource, GOP seek in terms of a sufficiently attractive return on shares inat present stipulates both the volume of gas sales and the the context of GOP's restructuring of SNGPL, it wassales prices for each customer category, and levies a Gas agreed under the ongoing Ln. 3252-PAK to introduce byDevelopment Surcharge on SNGPL's sales revenues July 1, 1993 a formula under which the utility's pricesdesigned to transfer to the national budget all income other rather than its rate of return would be capped, thusthan that which is required to provide the agreed rate of providing upside/downside potential for greater/inadequatereturn to SNGPL's shareholders. The net sales prices operating efficiency. Consultants are being selected tocorresponding to the revenues retained by SNGPL after define an appropriate formula which is to be implementeddeduction of the Gas Development Surcharge are known as within three years. In addition, under the ongoing Ln.its Prescribed Prices. In addition to SNGPL's tariffs, its 3252-PAK, the Bank agreed to replace the rate of return

SMGPL*s Operating ResiuLts, FYa6-90

FY86 FY87 FY88 FY89 FY90

Avg. Daity Gas Purchases CMNCFD) 394 386 426 451 497Anmual Gas Purchases (MMCF) 143,670 140,835 155,398 164,790 181,341Gas Throughput (Purchases Net of Purification

fuel and Stock Variations) (MMCF) 140,080 136,899 150,556 159,401 175,831Internal Consumption tX) 3.3 2.8 2.8 2.3 2.6Unaccounted Losses ML) 2.0 3.1 4.1 4.2 3.3Annual Gas Sales (MMCF) 131,370 128,799 140,300 149,084 164,845Avg. Tariff CRs/MCF) 35.95 31.89 36.59 37.52 38.54Gas Development Surcharge (% of tariff) 43 25 38 50 40

Gas Sales Revenue (Rs million) 4,723 4,108 5,134 5,593 6,353Gas Developt Surch.(Rs million) 2,049 1,039 1,947 2,782 2,545Net Gas Sates Revenue (Rs million) 2,674 3,069 3,187 2,811 3,808Net income (RB miltion) 123 109 76 134 103

Rate of Return CX):On net fixed assets in service '

- revatued through June 30, 1990 9.0 8.9 9.4 8.1 8.1On share capital & reserves"' 18.8 15.7 10.8 18.4 13.5

Internal Cash Generation (X)d' 33.0 31.0 49.0 32.0 65.0Debt Service Coverage Ratio 2.3 2.0 2.0 1.5 1.6Debt/Equity Ratio 45/55 49/51 54/46 53/4752/48Current Ratio (exctdg. stores and spares) 1.3 1.4 1.3 1.1 1.1

Transmission and distribution losses during recent years have been abnormally highdue-to teakages from corroded pipes and defective metering. Replacement ofcorroded pipes and defective meters Is in process.

Y Average revalued net fixed assets in service, net of unamortized consumer contributions.f Excluding revaluation surplus and deferred consumer contributions.-' tneluding consumer contributions and deposits, and net of non-cash working

capital requirements and other cash outflows..

Table 4.1

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requirement of 10% on revalued assets under Ln. 2324- satisfactory, and is expected to remain so (Table 4.2).PAK by a minimum rate of return requirement of 17.5% onfixed assets valued at historical cost. As shown in the Future Financial Perfornanceprojections in Table 4.2, a 17.5% rate of return onSNGPL's fixed assets at historical cost during the period 4.05 SNGPL's financial projections for the periodFY91-96 would be roughly equivalent to a rate of return of FY91 to FY96 were analyzed in detail under Ln. 3252-PAK10% on revalued assets. Furthermore, in order to ensure and are summarized in Table 4.2. The projections arethat a reasonable amount of SNGPL's investment program based on the sales forecast by the Company and the Bankis generated from internal sources, GOP agreed to set the and assume that the prie of gas used by households willGas Development Surcharge at no more than 32% of gross reach 50% of the domestic price of kerosene by June 30,revenues in FY92 and at no more than 28 % thereafter. 1993 in accordance with the various provisions concerning

gas pricing which are now included in ESL II, and 100%4.04 Under Ln. 3252-PAK, SNGPL has agreed to by June 30, 1998. The projections also assume thatseek the Bank's approval before incurring additional SNGPL's average sales revenue net of the Gaslong-term debt if after the incurrence of such debt its Development Surcharge payable to GOP, will cover thedebt/equity ratio would be greater than 70:30. SNGPL is purchase price for gas, plus the cost of transmission andexpected to remain below this ratio during FY91-96 (Table distribution and secure a 17.5% rate of return on SNGPL's4.2). Also under Ln. 3252-PAK, SNGPL is to declare net fixed assets in service valued at historical costs. Individends for any one year only if after payment of the order to ensure that SNGPL achieves the agreed financialdividends, SNGPL's current assets excluding stores and performance targets in each year, GOP and SNGPL havespares would not be less than its current liabilities. As agreed to fuumish to the Bank by December 31 of each year,shown in Table 4.1, SNGPL's current ratio has been a report on the company's actual and forecast operating and

SIGPLBs Projected Operating Results, FY91fY96

FY91 fY92 FY93 FY94 FY95 FY96

Avg. Daily Gas Purchases (MMCFD) 460 536 628 671 710 757Annual Gas Purchases (MMCF) 167,754 195,685 229,305 245,043 259,184 276,124Gas Throughput (Purchases Net of Purification

fuel and Stock Variations)(MMCF) 162,818 188,947 221,408 236,565 250,216 266,569Internal Consumption (X) 2.3 2.3 2.3 2.3 2.3 2.3

Unaccounted Losses (M) 3.8 3.3 3.3 2.9 2.9 2.9Annual Gas Sales (MMCF) 152,839 178,247 208,914 224.293 237,250 252,773Avg. Tariff (RsIMCF) 42.97 49.32 49.56 54.68 60.75 65.92Gas Development Surcharge (X of tariff) 27 32 28 28 28 28

Gas Sales Revenue (Rs million) 6,567 8,791 10,354 12,264 14,414 16,661Gas Dev. Surch. (Rs million) 1,780. 2,813 2,899 3,434 4,036 4,665Net Gas Sales Revenue (Rs million) 4,787 5,978 7,455 8,830 10,378 11,996Net Income (Rs mittion) 239 317 447 572 652 801i

Rate of Return:On net fixed assets in service Y- valued at historical cost 17.5 17.5 17.5 17.5 17.5 17.5- revalued through June 30, 1985 r' 13.9 14.7 15.4 15.7 16,0 16.A- revalued through end of projections 9.8 9.6 10.1 10.1 10.0 10.1On share capitat and reserves 20.2 18.0 19.6 19.4 19.0 21.8

Internal Cash Generation (X) d} 34.1 41.2 38.a 48.5 56.2 56.9Debt Service Cover. Ratio 1.8 2.0 2.1 2.3 2.1 1.6Debt/Equity Ratio 52/48 55/45 55/45 55/45 57/43 56*4.Current Ratio (exctdg. stores and spares) 1.2 1.1 1.1 1.0 1.0 1.0

5' Average net fixed assets in service, net of unamortized consumer contributions.' Value shown in Company's balance sheetsY Exeluding revaluation surplus and deferred consumer contributions.ge Including consumer contributions and deposits, and net of non-cash working

capital requirements and other cash outflows.

Table 4.2

- 26-

financial performance for the previous and current financial criteria; and appointment of international auditors. OGDCyear, specifying the actions that will be taken to fulfill the has made substantial progress in these areas, and partly asfinancial covenants. Furthermore, SNGPL has agreed to a result, OGDC's financial condition has improvedprepare and furnish to the Bank annually for review and substantially, and OGDC has reversed the trend of the firstcomment, not later than June 30 each year, a revised 29 years of its existence and generated a profit for the firstcorporate investment and financing plan. time in FY90. Prospects for continued improvement in

financial viability are also good.B. OU and Gas Development Corporatdon

Past FYnancial PerfonnanceIntrod4ction

4.07 In view of the recent decision of OGDC to4.06 The financial and accounting affairs of OGDC are merge its wholly-owned subsidiary PGCL into OGDC, thegoverned by the OGDC Ordinance of 1961 which, among analysis of OGDC's past and projected financialother things, broadly stipulates the maintenance of proper performance are based on OGDC's consolidated financialaccounts and audit, disclosure requirements, budgets, statements. OGDC's detailed financial statements forfunding and investments. Although the Ordinance has FY87-FY91 are presented in Annex 4.1, and its operatingempowered the Board to act autonomously on commercial performance is summarized in Table 4.3.considerations, OGDC's perpetually weak financial positionrequired continuous financial support from the Government, 4.08 As a consequence of emphasizing thewhich jeopardized OGDC's autonomy and accountability. development of discovered fields, OGDC's oil and gasOGDC is liable to pay dividends, and under the previous production more than tripled: for oil, from 3.1 millionBank loans to OGDC (pam 1.27), the Corporation agreed barrels in FY87 to about 10.4 million barrels in FY91; andnot to declare dividends unless its earnings could cover a for gas, from 33.3 BCF to 112.0 BCF. The resultingreasonable part of its investments from internal sources. increase in sales levels, together with better producerThis covenant was largely inapplicable because of the lack pricing arrangements (pam 1 12) caused operating revenuesof profitability of OGDC. In order to address these to increase from Rs 1.2 billion in FY87 to about iRs. 6.0problems and to enable the Corporation to operate along billion in FY91, an average annual increase of over 50%.commercial lines, OGDC's priorities have gradually been OGDC generated a profit of Rs 510 million in FY90. Inshifted away from exploration into developing discovered FY91, following a 51% increase in the production of oiloil and gas fields since mid-1989. In addition, agreements and a 61% in gas, coupled with the sharp escalation ofto carry out institutional and financial reforms were reached intemational prices for part of the year, OGDC's operatingunder ESL II. These agreements have promoted financial revenues nearly doubled. As a result, provisional netdiscipline by requiring that Government contributions to profits are over Rs 2.4 billion. As a consequence of -'OCDC be made only as loans, and by starting the operating revenues growing at a faster rate than that ofimplementation of a financial restructuring plan which unrevalued fixed assets in use, the rate of returnwould, inter alia, provide for physical valuation of OGDC's unrevalued net fixed assets improved. Particularly durfixed assets, stores and spares, and reconciliation of these FY90-FY91, operating income increased by morewith its balance sheet; adoption of financial performance 100% whilq net fixed assets increased by 75% result

the return on assets jumnping to 41.5%.Other ratios have also shown

*.-:'-'.-'.-''.' ' Croli te ,eIa,,t, Re..,.l,t,s C.Y8,Tq,l) ,.-.'.:'"improvement. The current ratio, though' ''" ''- Y8 ;'F ".Y89 Y FY91 declining from FY87 to FY90 due to a

'. it Prution NBL) - 3134 3888: 5001 .888 10386 build up of OGDC's accounts payable,fl~sProd~et on NMCF).'-. 33363 42770-. 48057' 69532:112030

CFS :atin e (................... ' 3: .11o.. 407•. 1627-2 112090 328 04 improved to 5.3 in FY91. WithOperatng incme (ReNIL.) 516 73 98 19 35 nrae revenues during this period and.- ~~~~~~ ~.. .s M{.....' ..516.'.....

Net Pu~ef1t ~ C299~ 28 (204) 510 2451 a modest increaew in average investments,.'. et Fxe ssets {XX 1--1.3 1i3.8- 1Y6.3- 24.6 41.5 the Corporation's self-financing ratio

Curt ti.9 . 4. 3 3 increased from about 25% in FY87 toSelf fflOfCiVIgRatio(~W 2,5 316 32. 20.8 87.~ about 88% in FY91. The reason for the

--- .. ..... . y- ;reverse i trend i self-financig fromT pfit shn in FY88 .is attrtabe to PGCL. .- -. : FY89 to FY90 is due to the 56% increase

,'', Basd , n' th erae ,o,f ,,ltm in ,th,e,p,revios, ,-.-., in debt service, as OGDC paid off mostcurt ;,n*,, ,csuin r.,r,,......... .-.- of its local loans. Despite increased

overall borrowings by OGDC betweenTable 4.3

27-

OGDC's Investments and FinancingDOC Coasolidated SuLary Btlaome Sheet (Pf87-91)(Rs Million)

4.10 OGDC's forecast investments forFY87 FY88 FY89 FY90 FY91 FY92-FY96 are presented in Annex 4.2.

AssetsThinetetpormicosstDeferred Costs (net) 5282 6102 6872 6654 7530 The investment program is consistentInvestments in Subsidiary 1164 855 307 138 138 with the agreements under ESL II whichNet Fixed Assets 478 490 772 1305 2284 call for abdicating, as much as possible,Subtotal (Cap. Assets) 6924 746; 7951 8097 9952 exploration to the private sector while

emphasizing development of discoveredWorking Capital (NetW 3329 3507 3743 4613 5873 fields, both wholly-owned and with joint

... -. ventures. The Corporation plans toTotat Net Assets 10253 10955 11694 12710 15825 invest about Rs 35.9 billion (US$1.6Financed By: billion equivalent) over the five-yearGovernment Contributionsi 9060 9066 9467 9580 9680 penod. Investments in wholy OGDC-Retained Earnings (2054) (2025) (2251) (1742) 699

... ... .. . . ...-. ... owned fields as a percentage of the totalEquity 7006 7040 7216 7838 10379 investment program is high during the

Long-Term Debt 3247 3914 4478 4872 5446 early years of project implementationTotal CapitaLization 10253 10955 11694 12710 15825 (about63% by FY94). Such investments

which are, however, fully funded, wouldDebt: Equity Ratio 32:68 36:64 38:62 38:62 34:66 drop to about 12% thereafter, as

-' Includes gratuities and contingency fund. investments in developing existingdiscoveries decline. Table 4.5 shows theTable 4.4 investment and fmancing plans for theCorporation's investments. Net internal

FY87-90, the Corporation continued to achieve a debt cash generation is expected to account for Rs 20.2 billionservice coverage ratio of at least 2.2. (US$0.9 billion) representing about 48% of the required

fmnaciig. "_-- rennmg woulld he borrowed, only toPresent Financial Posidon finance foreign exchange costs as OGDC would cover all of

its local cost requirements from internal sources. OGDC's4.09 OGDC's financial position is shown in Annex 4.1 investments in the proposed Project represent about 5.7%and summarized in Table 4.4. The strength of OGDC's of its total investment program. The proposed Bank loanfinancial position is in the value of net deferred costs would provide about 5% of OGDC's total financing(which are the capitalized costs of successful drilling and requirements. Other borrowings, primarily from ADB,field development expenditures, minus the amortization Canadian International Development Agency, IDB and therates of such deferred costs which in tum have been set by Bank's ESL II, amount to Rs 10.5 billion (US$471 million).annual reservoir audits and expected production profiles) The foreign financing requirements for new discoveries andrather than in the value of net fixed assets in use.Accordingly, at end FY91, OGDC's net fixedassets amounted to Rs 2.2 billion and net deferred OGDCOS FINACING OF CAPITAL EXOEDITURE PROGRAK1costs amounted to Rs 7.5 billion. By the end of (FV92-f6)FY92, OGDC's profits are expected to be Rs..Mitlion USSMiltlion Xsufficient to wipe out its accumulated losses, andalso write off the extraordinary losses which may INVESTMENTSresult from the ongoing fixed asset valuation and Capitat Investments 4918 2t9 t2Expiaration498 29 2inventory verification exercise required under ESL Development 31074 1381 74II, without diminishing the nominal value of the Subtotal capital Experditures 35992 1600Government's investments in OGDC. With the Working capita Increase 801 1858 100decline in Government contributions to theCorporation from FY87 and all external financing FINANCED BY:being provided to OGDC as debt since FY89, Norrt eings 20215 899 48long-term debt increased from Rs 3.2 billion in Proposed Loan 2153 89 5FY87 to Rs 5.4 billion in FY91, which led to Other Borrowings 19433 870 47OGDC's debt:equity ratio deteriorating slightly otal Borrowins 21586 188 100from 32:68 in FY87 to 34:66 in FY91, which T _t_thowever is still satisfactory. Table 4.5

- 28 -

expected to exceed the estimated averageOW"OS PROJECTED FINANCIAL PERFORMANCE CF1296) cost of capital of OGDC during the project

FY9Z F93 FY94 FY95 fXl life and beyond. Furthermore, OGDCwould remain solvent with a projected

Gas Production (MMI4) 116675 124340 201480 258055 269735 current ratio in the range of 4.3 to 6.1 andOperating Revenues (Re Hil.) 6975 7914 10359 13633 15322 an acid-test ratio in the range of 1.9 to 2.6Operating Income (Rs Nit.) 4215 4477 5705 8012 8947 through FY96. Surpluses are expected toNet Profit 2010 2188 2499 3208 3600 be enerated for the Corporation to coverRate of Return (X) g

-On Met Fixed assets 42X3 33.6X 28.8E 31.6% 31.4X its debt service obligations at least 2.4-On Capitat EWLptayed 20.0a 20.3X 19.8X 20.5X 19.9% times. With these surpluses, OGDC would

Acid-Test Ratio 2.6 2.3 1.9 2.3 2.6 be able to finance the local currencycurrent Ratio 6.1 5.4 4.3 4.3 4.5Setf Financing Ratio (%) 60.93% 46.04X 55.62X 75.35X 81.51X requirements of its investment programDebt Service Coverage (times) 3.1 2.7 2.6 2.6 2.4 from internal sources. With the lumpinessDebt: Equity Ratio 34:66 42-58 49:51 482 of its future investment program including

Table 4.6 the proposed Project, the Corporation's

foreign borrowings are expected to increasejoint ventures which amount to Rs 8.9 billion (US$399 from FY93 and FY94. Thus the debt:equity ratio wouldmillion) and which are mainly required in the later years of decline but still remain favorable through FY96.the investment program, are yet to be identified. However,such financing will become necessary only if the newexploration and joint venture investments result in Financial Perfornance Criteriacommercial discoveries. Moreover, in view of GOP's andOGDC's past success in mobilizing foreign financing in a 4.13 As part of the financial restructuring of OGDCtimely manner, as well as the significant improvement in provided under ESL II, OGDC has agreed to adopt a set ofOGDC's financial strength, the Bank expects that the financial performance criteria, developed with the assistancefinancing requirements of the total investment program of reputable consultants, to enable it to address issues ofwould be adequately met. long-term profitability, short-term capital adequacy and

ienders conucrua. in ierms of profitabiiity criterion, theForecast Financial Performance Internal Cash Generation (which is common among

revenue-generating Bank beneficiaries), is inappropriate4.11 The forecast financial statements of OGDC are because the investments of OGDC, given the nature of itsshown in Annex 4.1, and a summary of OGDC's forecast business, could vary widely from year to year. The Returnfinancial performance for the period FY92-FY96 is shown on Net Assets criterion is also not suited to an oil companyin Table 4.6. Projected production profiles of OGDC's like OGDC because its fixed assets are only a small portionmajor oil fields indicate that oil production is expected to of total assets, and its other major asset category, the Netdecline gradually from 10.2 million barrels in FY92 to Deferred Costs, which need to be adjusted annually to theabout 8.2 million barrels in FY96 due to the small size of varying amortization rates, makes the net asset value of thethese fields. Gas production, however will increase company a moving target. Therefore, OGDC has adoptedsignificantly in line with OGDC's policy to accelerate the Return on Capital Employed (ROCE) as a measure ofdevelopment of discovered gas fields and aggressive search profitability since this would measure the returns generatedfor new gas finds. With production from Qadirpur gas by the company against items that OGDC has to service,field of 100 MMCFD expected to come on stream in mid- i.e. equity and debt. In order to address the short-term1993 and an additional 100 MMCFD in mid-1994, gas capital adequacy and lenders' concerns, OGDC has alsoproduction is expected to more than double from about 117 adopted the Acid-Test and Debt Service Coverage Ratios.BCF in FY92 to about 270 BCF by FY96, boosting The method of calculating the ratios and the definition ofrevenues by about Rs 8.3 billion over tha four-year period. terms are provided in Annex 4.3. GOP and OGDC haveThe combination of higher gas production, and the increases agreed to take all necessary actions to enable OGDC toin nominal prices of international crude and fuel oil prices, achieve for each financial year beginning FY92: (i) a rateis expected to generate a surplus for OGDC throughout the of return at least equivalent to the higher of 15% of itsproject period and beyond. average capital employed or the weighted-average cost of

its capital; (ii) maintain a ratio of current assets to current4.12 OGDC's projected financial performance is liabilities of not less than 1:1; and (iii) ensure that OGDC'sexpected to continuae to improve significantly in future estinated net revenues for any fiscal year shall be at leastyears. The rate of return on capital employed (ROCE) is 1.5 times the estimated maximum debt service requirements

- 29 -

of OGDC for such fiscal year on aU debt of OGDC (para Income Taxes6.02(c)).

4.15 Under the OGDC Ordinance, OGDC is liable for4.14 While these criteria were set taking into account income taxes. In accordance with the applicable taxiaws ofOGDC's projected financial performance (para 4.12), a Pakistan, tax credits of up to the amount of accumulatedsensitivity analysis of the financial performance of OGDC losses may be carried forward into future years. However,was carried out. Such analysis indicates that the ROCE the significant amount of losses for tax purposes (which arewould drop by about 0.5% for each 10% reduction in higher than accounting .,sses) accumulated through FY90,intemational crude oil price, and 1.0% for each 10% are barely enough to offset the high level of taxable profitsdecrease in production. In other words, if the intemational (which are, however, lower than accounting profits) incrude oil price drops by 40% or if production of both oil FY91. As a result, OGDC will pay income taxes beginningand gas drops by 20%, OGDC would stil be able to meet in FY92. It is estimated that the tax liability of OGDC inthe financial performance criteria mentioned above. FY92 would be about Rs 1.0 billion. However, as

OGDC's investments are forecast to increase in thesubsequent years, the tax liability would average about Rs0.7 billion through FY96. In order to plan for such taxliabilities, OGDC has contracted advisors to assist theCorporation in tax planning.

- 30 -

V. PROJECT JUSTIFCATION ANI) RISKS

A. Raionale for Bank Involvement result of the increased emphasis being placed by OCDC onthe development of discovered fields, domestic oil

5.01 The Bank's involvement in the Project provides an production is expected to increase faster than demandopportunity to support GOP's reform of Petroleum Policy during the remainder of the 1990s (para 1.20). Gasand the restructuring of the institutions in the petroleum production is projected to increase significantly over thesubsector, particularly OGDC, to enable Pakistan to attract next five years, from 340 MMCFD in FY91 to 817larger private sector investments. The existing MMCFD by FY96. As a result, the structure of OGDC'sarrangements regarding joint ventures between private revenues will change significantly from a major reliance onforeiga investors and OCDC require OODC to contribute oil (over 75 % of total revenues in FY91) to a pronouncedits share of total costs (including the foreign exchange dependence on gas (over 50% of total revenues) by FY95.component of such costs) in return for a corresponding Reflecting the prospects for a sustained increase in gasshare of the productioa from these joint ventures. production, SNGPL's operations are also forecast toHowever, OGDC's revenues are in local currency since in increase substantially during the next five years. Detailsthe case of oil, though a tradeable commodity, OGDC is regarding the planned increase in domestic oil and gaspaid in local currency under existing contractual production over the next IS years, and the share of thearrangements. Similarly, in the case of gas, which is increase that would be contributed by the proposed Projectessentially a non-tradeable product, sales also do not lead to are presented in Annex S. 1 and suramarized in Table 5.1.foreign exchange eamnings for OGDC. Furthermore,OGDC does not have access to foreign exchange from the C. Least-Cost An4lysisGovemrnment given the low level of the Governuent'sforeign exchange reserves. As a result, joint venture 5.03 For the least-cost analysis, the cost of supplyingopations are constrained by the degree to which foreign petroleum products through the proposed Project bs beenexchange is available for meeting OGDC's portion of compared with the alternative of meeting these demandsovell costs. Bank financing, which would be utilized by through additional imports of crude oil and products, valvAAOGDC to cover its share of the foreign exchange costs at the CIF equivalent price of imports, as at the margin, itwould thus complement private sector financial resources is these imports that would be replaced by the outputs fromwhich are potentially available, but would not be the proposed Project. The proposed Project is the least-costforthcoming in the absence of the respective joint ventures, alternative for supplying the additional outputs, as theIt will also support GOP and OGDC's initial steps to pave present value of this level of imports is Rs 23 billionthe way for privatization of OGDC's Technical Services (US$1.1 billion), as opposed to which, the cost of supplyingunit. Bank support for the Project would represent a these outputs through the proposed Project is Rs 17.9continuation of the assistance provided for the billion (US$834 million).rationalization of energy investments, restructuring therevenue earning entities in the sector in orderto reduce their reliance on the budget, andmobilizing additional extemal and domesticresources for energy development, both from Att at Sate. of Oit and 6aa

other donors and from the pnvate sector.Furthermore, the Bank's involvement in the Altuat-- Fast .Project also helps to ensure tha project design FY89 FY93 FY98 FY20 :and implementation would include measues oil sates - 10610 13326 19112 235- to mitigate any adverse impact on the [Wafsa 8179 9431 11982 54ow-eaviroment. Oamstic Prodction 2431 3896 7130 047 8k.-*(of-which -proposed Project) (4?6) (880) (ft?4) (m7

Gas Sates 6542 7040 10961 1214k 1339B. Forecast Sales (of which prosed Project) (800) (3604) (3604) (360"

5.02 Following the discovery of a number a IncLudes crude.. oi l, pettoleumproducts and LPG.of new oil and gas fields under joint venuwith private foreign oil companies, and aS a Table S.l

- 31 -

D. Prject Benefits taxes, thus mobilizing additional revenues to GOP.OODC's profits for example, which have been quantified,

5.04 Iaternal Economic Rate of Return. The IERR would be substantially enhanced. As a result offor the overall project is estimated at 56%, based on implementing the proposed Project, after-tax profits wouldmeasurable costs and benefits. Measurable costs include: rise from about Rs 2.4 billion in FY91 to about Rs 3.6(a) the costs of capital and labor required to implement the billion by FY96. OGDC's expected payment of incomeproposed Project, including the pipelines; and (b) operation taxes from FY92 would generate additional rev-,nues ofand maintenance costs. Measurable benefits include about Rs 0.7 billion p.a. on average for the Govermment.incremental revenues from oil and gas sales based on: (a) In case the proposed Project is not implemented, OGDC'sthe producer price of gas which is linked to the equivalent after-tax profits are projected to fall to Rs 1.7 billion inCIF price of fuel oil; and (b) the CIF price of crude oil and FY96 and as a consequence of tax credits arising from highpetroleum products. All costs and benefits are expressed in level of past investments, OGDC would not be liable forconstant 1991 prices. Details regarding IERR, including taxes after FY93.the assumption used, are provided in Annex 5.2. In orderto test the sensitivity of IERR to less favorable scenarios 5.06 As said earlier (para 1.12), the domestic prices ofregarding recoverable reserves, an increase in project costs petroleum products are set higher than the internationalor delays in implementation, the IERR was also calculated prices. This difference presently accrues to GOP as a renton the following assumptions: (i) a delay of two years in through the Development Surcharge on oil and gas sales,the realization of project benefits; (ii) a 20% increase in and represents a significant contribution of resources by thecapital costs; and (iii) a decline of 20% in revenues. Such petroleum subsector towards the Government's budget. It

is estimated that the proposed Project wouldincrease development surcharge receipts from

$ensitiv~tyw ~ ~ ~ ~SNGPL by about Rs 1.5 billionp.a. primarily- - Ca$ Projct delay C.pttM Coats 2O¢ 1ctrw- d through an increase in the sale of natural gas,__ S ADhCSt~92~ -flAtW - r while an additional Rs 350 million p.a. would

n eL I .PDlit 56 36 . be contributed through the surcharge on§ 58 -4 -4* - 49 44 petroleum products beginning PY94.

Dhod .57 .51 . 4

Badin $ 4 25 . 69 38. E. Project and Other Risks

Table 5.2 5.07 Project Risks. In view of thesensitivity of the Project's returns to delays in

analysis, the results of which are presented in Table 5.2 the realization of Project benefits, measures have been takentogether with the base case, indicates that the Project is to mitigate the likelihood of such delays. In the Qadirpursensitive to delays in project completion (which can be field for exaniple, while the five wells already drilled canminimized) as well as to a decline in international prices of be used to produce 100 MMCFD, all the required pipelinescrude and fuel oil (which are beyond the control of the are in place, with the exception of the spur line linking theBeneficiaries). Nevertheless, even in the mnost unfavorable field to the main transmission line, which will becase, i.e., delays in project completion, the IERR of the constructed under the proposed Project. Furthermore, theproposed Project would be 36 %. contractual arrangements between OGDC and SNGPL will

be on a take-or-pay basis, which will provide a further5.05 Sharing of Benefits. The IERR of the proposed impetus to minimize the delays on either side. One of theProject is significantly higher than the opportunity cost of other risks of the project is that its institutiooal reformcapital of about 15%, pdmarily because: (a) in oil and gas objectives may be jeopardized by the natural reluctance ofprojects the time elapsed between investments and the a public sector agency (OGDC) to implement a radicalaccrual of revenues is relatively short; (b) in 9he case of change in its modus operandi and organizational structure.Dhodak and Badin components, sunk costs have been The Government and OGDC have participated directly inexcluded4; and (c) the existing level of intemational prices the design of OGDC's corporate restructuring program andfor oil and gas is substantially higher than the cost of are fully committed to it. Their commitment is shown byexpanding domestic supplies (including recurrent costs). the fact that the reorganization of OGDC is underway andSuch difference is presently shared between the producers that the technical assistance required for the corporate(through increased profits) and GOP (through royalties on restructuring is under bidding. This minimizes the risks ofoil and gas produced, and discounts il prices paid to unsuccessful implementation of the corporate restructuringproducers). Producers' profits are firther liable for income of O&DC. The other risks of the proposed Project are

- 32 -

those usually associated with oil and gas development, such infrastructure, would further stimulate private sectoras the possibility of lower than anticipated production and involvement in the sector. This would be aided by theadverse impact on the environment. However, reservoir improvements in the new Petroleum Policy framework. Inengineering studies are to be carried out by the operators, addition to providing resources for the development ofand independently confirmed by international firms of existing and proven oil and gas reserves, the proposedrepute, which would reduce the production risks Project would provide support for the institutionalconsiderably. In addition, the commitment of the strengthening of OGDC, which would allow OGDC toimplementing agencies to implement the recommended expand domestic production o. petroleum products in anmeasures in the EA, which was carried out in accordance efficient manner. OGDC's corporate restructuring willwith the Bank's requirements, would mitigate the adverse enable it to participate more effectively in partnership withimpact on the environment. private oil companies. Furthermore, as OGDC is now

provided funds by GOP only on a loan basis, the5.08 Other Risks. The Federal Shariat Court of restructuring of its balance sheet could allow OGDC, inPakdstan has recently given a ruling that the Sharaiah does future years, to mobilize resources directly (withoutnot permit the payment or award of interest in any form. Government guarantees) through borrowing in domestic andThis would have serious implications for the onlending foreign markets. The terms of such borrowings may bearrangements under this project, which include the payment more favorable than those of existing debts, and thus leadof interest on the proceeds by OGDC and SNGPL, and to a lowering of OGDC's debt-servicing burden.future Bank projects with similar onlending arrangements.The Government bas filed an appeal against the Shariahruling which has been stayed for the moment. Dependingon the ruling of the Supreme Court, the onlendingarrangements under the Project amy be modified and thelegal agreements amended. Another risk is that the ShariahCourt may extend its ruling on interest to existinginternational financial obligations. As far as Pakistan'obligations under loan and credit agreements with theBank/IDA are concerned, these obligations are valid andenforceable under international law, in accordance with theterms of those agreements and the General Conditions ofthe Bank/IDA, notwithstanding any local law or judicialdecision regarding the payment of interest and othercharges.

F. Suaahbit

5.09 The high returns on investments in oil and gasexploration and development in Pakistan, which is afunction of, inter alia, the producer pricing formula,existence of demand and availability of supply

33

VL AGREEMENTS REACHED AND RECOMMENDATION

A. Agrements Readhed study with the Bank by September 30, 1994; and(iii)formulate, on the basis of the review, measuresfor the implementation of the recommendations,

6.01 The Government of Paldstan has agreed: starting December 31, 1994 (para 3.14);

(a) to take by December 31, 1992, all necessary (b) recruit, in accordance with an action plan agreedactions to implement the new Petroleum Policy, with the Bank and OGDC, by Decemiuer 31, 1992,and to review with the Bank by June 30 each qualified professional staff for OGDC's Financeyear the progress in the implementation of the Department and Internal Audit Department (paraPolicy (pam 1.26); 3.17); and

(b) that no withdrawal in respect of expenditures for (c) take aU necessary actions to enable OGDC tothe development of the Kadanwari Gas Field can achieve for each financial year beginning FY92:be made until the Bank has been fiumished with (i) a rate of return at least equivalent to the higherplans, satisfactory to the Bank, for the utilization of 15% of its average capital employed orof the gas expected to be produced from the field weighted-average cost of its capital; (ii) maintain a(pam 2.06); ratio of current assets to current liabilities of not

less than 1:1; ar . (iii) ensure that OGDC's(c) to open and maintain Special Deposit Accounts estimated net reve.Aues for any fiscal year shall be

separately for each of MPNR, OGDC and at least 1.5 times the estimated maximum debtSNGPL, with the National Bank of Pakistan or service requirements of OGDC for such fiscal yearany other commercial bank in Palistan, on terms on all debt of OGDC (para 4.13).and conditions satisfactory to the Bank (pam2.24); 6.03 OGDC has agreed:

(d) to formulate, by December 31, 1992, with the (a) that no withdrawal in respect of expenditures forassistance of appropriately qualified consultants, the development of the Kadanwari Gas Field can beguidelines for environmental assessment and made until the Bank has been furnished with asafety for petroleum exploration and development confirmation of reserves at the Kadanwari Gasactivities (pam 3.22); and Field prepared by an international reservoir

engineering firm (pam 2.06);(e) to: (i) by June 30, 1992, to review with the

Bank, the report containing the findings and (b) to (i) prepare and funish to the Bank by March 31recommendations of the study which is being of each year, beginning with 1992, for review andcurrently undertaken of the capacity and comments, a draft Corporate Plan, coveringorganization of MPNR's secretariat, technical OGDC's physical, financial and institutional targetsdirectorates and HDIP and to prepare, on the for the following five-year period; and (ii) finalizebasis of the review, an action plan satisfactory to the Corporate Plan, taking into account the Bank'sthe Bank for the implementation of such comments, and furnish it to the Bank by June 30 ofrecommendations; and (ii) thereafter, carry out each year, together with the budget approved bysuch action plan in accordance with the time GOP for the following fiscal year (pam 3.07);schedule stated therein (pam 3.23).

(c) to implement, by June 30, 1994, a comprehensive6.02 The following agreements have been reached with Management Information System (para 3.13);

GOP and OGDC:(d) to ensure, by December 31, 1992, the

(a) (i) carry out by June 30, 1994, with the establishment and operation, with appropriateassistance of consultants, a study of options with structure, staffing and facilities of therespect to the future role of OGDC's Technical Environmental Management Unit (pars 3.15);Services, including the option of privatizbg theseservices; (ii) review the recommedations of the

-_3A -

9

(e) to (i) prepare and adopt by December 31, 1992 6.06 As conditions of effectiveness of the proposedwith the assistance of financial consultants, a Loan:detailed accounting system consistent withIntemational Accounting Standards; (u) complete (a) OGDC has agreed to furnish to the Bank a report,the preparation of its accounting procedures by prepared in accordance with technical standardsMarch 31, 1993 and (iii) maintain the satisfactory to the Bank, by an intemationalCorporation's accounts in accordance with the reservoir engineering finn as to the estimate ofnew system from July 1, 1993 (par 3.18); recoverable reserves at the Qadirpur Gas Field

(pam 2.05);(f) to (i) recruit private auditors, satisfactory to the

Bank, to annually audit the Corporation's (b) GOP has agreed to approve the PC-1 for theaccounts; and (ii) funish to the Bank, beginning pipeline and compressors to utilize Qadirpur gaswith FY92, audited accounts together with the (para 2.10);auditor's reports within six months of the end ofthe financial year (para 3.19); and (c) OGDC and SNGPL have agreed to enter into

contracts regarding the arrangements and prices for(g) to take out by June 30, 1993, and thereafter the guaranteed purchase by SNGPL (on a take-or-

maintain with responsible insurers, insurance pay basis) (i) from the Dhodak field, of about 45covering all of OGDC's plants, machinery, MMCFD of gas for a period of 15 yearspipelines and other facilities against such risks commencing in 1993 (pam 2.09); and (ii) for aand in an amount consistent with appropriate period of 20 years from the Qadirpur Gas Field ofpetroleum practices (para 3.20). 100 MMCFD of gas in the year 1993, to be

increased in the year 1994 to 200 MMCFD (parsIn addition, an understanding was reached with OGDC that, 2.10);in accordance with agreements under ESL-II, OGDC wouldcontinue to reerit international auditors to audit the (d) GOP and OGDC, and GOP and SNGPL haveCorporation's accounts until a clean audit certificate from agreed to execute the Subsidiary Loan Agreewn 'r#zsuch auditors is obtained. satisfactory to the Bank (para 2.18);

6.04 OGDC and SNGPL have agreed to ensure that the (e) OGDC bas agreed to appoint a director for itsconstruction of facilities for the development of gas Technical Services, with suitable qualifications andand oil fields and necessary pipelines will be experience (pam 3.12); andundertaken in compliance with the measuresrecommended by the environmental assessment report (f) OGDC has agreed to select consultants to assist it(pam 2.13). in the design of a modem accounting system and

the establishment of a comprehensive Management6.05 SNGPL has agreed to recruit, by no later than Information System (paras 3.13 and 3.18).

December 31, 1992, consultants satisfactory to theBank to assist in upgrading the SCADA system (par (g) GOP has offered its existing equity shares in2.11). SNGPL for sale to the general public, so as to

reduce GOP's direct and indirect shareholding inSNGPL to 40% (para 3.03).

B. Recommendaton

6.07 On the basis of the above agreements, the proposed Project is suitable for a Bank Loan of US$180 million equivalentto the Islamic Republic of Pakistan, at the Bank's standard variable interest rate, with a repayment period of 20 yearsincluding five years grace.

- 35 -

END NOTES

This share reflects the conaumption of about 4.9 3/ The difference between the supply and consumptionmillion TOE of commerial fiels (mainly gas, fuel oil levels in thousand TOE terms is accounted fot by theand high speed diesel (HSD)) for thermal power losses in refining, transportation and storage, as well asgeneration; in addition, the power sector consumed the stocks maintained in the refineries.approximately 4 million TOE of primary energy(hydel and nuclear). Theso inputs were trnusformed 4/ Sunk costs in Dhodak comprise the cost of wellsinto about 7.9 million TOE of electricity. drilled, and in Badin, the surface facilities. IERR with

sunk costs included would be: 47 % for overall project;Z/ Under the new Petroleum Policy announced in 28% for Dhodak and 57% for Badin.

November 1991 (pam 1.25) the producer price of gaswould be pegged to 75% of the border price of fueloil.

- 36 -

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Annex 2.1Page 1 of 7

EAIUSTAN

DOMESTIC ENERGY RESOURCES DEVELOPMENT PRQTECT

Proid Description

A. Development of the OadirMur Gas Field (OGDC)

1. The Qadirpur Gas Field is located in the Jacobad District of Sindh Province of Pakistan, between twomajor producing fields, namely, Kandhkot to the north and Mari to the southeast. The field, which is in excess of117 square kilometers in size, was discovered in 1990 as a result of drilling exploratory weUl Qx-I by the QadirpurJoint Venture. The working interest for the parties during the exploration phase was 10% for OGDC and 90% forthe other partners, whereas ownership during the development and production stage will be 75% for OGDC, andthe other partners, 9.5 % for Premier, 8.5 % for Burmah Oil, and 7% for PPL.

2. In-house analysis by OGDC's reservoir engineering group of the data from production testing of thediscovery well Qx-1 and of delineation wel Qd-2 (which was driled some five kilometers north of the discoverywell) indicated that the field is a large gas field with reserves possibly in excess of 1.2 TCF. A second exploratorywell, Qx-2, located some three kilometers southeast of the discovery weUl was also drilled to evaluate a structurlhigh observed on seismic maps, within the same area. The results from the driling of this wel raised theconfidence level of the discovery, thus encouraging OGDC and the Joint Venture Partners to submit to GOP a3Declaration of Commerciality for the Qadirpur Gas Field'.

3. However, at the insistence of the Bank and DGPC, and in order to furfther delineate the size of thefield, the Joint Venture was requested to driUl two additional delineation wells, Qd-3 and Qd-4 strategically situatedalong the flanks of the structure. Both of these two delineation wells were drilled and found to be also productive,thereby raising the volume of gas reserve estimates for the field to about 4 TCF.

4. With the 'Declamtion of Commerciality', a two-phase development plan for the Qadirpur Gas Fieldwa submitted to GOP. The Bank has reviewed this plan and found it satisfactory. The first phase comprisesdrilling of two additional wells on the structure and for the installation of surface production facilities, to permitproduction of some 100 MMCFD by June 1993. The second phase calls for drilling of three to four additional wellswhich will make available an additional 100 MMCFD for a combined total of some 200 MMCFD by June 1994.

5. Although OGDC has carried out an in-house reservoir engineering study of the Qadiipur Gas Field,OGDC has recruited, as per Bank request, and in accordance with the Bank procedures and guidelines, Gaffney,Cline and Associates (GCA), an international reservoir engineering firm, to confirm the in-place and recoverablegas reserves of the Qadirpur Gas Field. The draft final report is under review by OGDC and the Bank. It isexpected that this study will be finalized by January 1992.

6. OGDC's share of the cost for drilling the two delineation wells as well as the cost for the reservoirengineering study would be met through retroactive financing arrangements under the proposed Project.

7. Regarding the gas allocation, GOP is filly committed to utilize the gas from the Qadirpur Field throughthe SNGPL system in accordance with the production schedule approved for the field, i.e. 100 MMCFD byDecember 1992, and 200 MMCFD by December 1993. Accordingly, GOP has allocated the gas from this fieldto the SNGPL system.

- 39 -

Annex 2. 1Page 2 of 7

B. Development of the Kadanwari Gas Field (OGDC)

8. The Kadanwari Gas Field is located in the rocky desert in the vicinity of Khairpur in Sindh P.ovince.The field was discovered by the OGDC-LASMO Joint Venture, for which LASMO is the designated operator.The ownership of the field during the exploration/appraisal phase is LASMO 35%, Kuwait Foreign PetroleumExploration (KUFPCO) 30%, IDEMITSU 30% and OGDC 5%. An application for declaring the Kadanwari GasField as a commercial discovery was submitted by the Joint Venture Partners in February 1991 to DGPC on thebasis of the data obtained from the drilling of the discovery well Kd-1 and of the drilling of Gowar-1 delineationwell. The original documents in 'The Declaration of Commerciality' submitted by the Joint Venture partnershipto the GOP, indicate that the recoverable reserves of gas amounted to some 573 BCF, and that the field couldproduce 100 MMCFD of gas for 10 years. However, on the basis of the data provided (seismic maps, well logsand tests) of Kd-I and Gw-i, it was considered that the level of reserves quoted in the 'Declaration ofCommerciality" appeared optimistic. Nonetheless, development and delineation drilling continued, in an effort toincrease the confidence level of the reserves quoted and to continue to add proven reserves to those alreadydiscovered.

9. To this effect, Well Kd-3 was drilled near the discovery well, Kd-1, and it's success raised theconfidence level of the reserves volumes in the northern part of the Kadanwari Structure. Well Kd-4 was drilledin the same geological unit of Kd-l but some 10 kilometers to the southeast. This well was also successful. On thebasis of the results from the delineation wells, DGPC, informed the Joint Venture Partnership that it was preparedto accept 'The Declaration of Commerciality' of the Kadanwari Field, and has requested the joint venture to submita development plan for the project. However, Bank assistance for financing the development of the Kadanwari GasField is dependent upon the outcome of a reservoir engineering study to be conducted by an independentinternational reservoir engineering firm confirming the resuts and quantities of gas quoted by the Joint Venturepartnership.

10. The gas expected to be produced from Kadanwari Gas Field has been allocated by GOP to Sui SouthernGas Company (SSGC), and the Asian Development Bank has indicated its willingness to finance the pipelinesrequired to link the field with SSGC's main system.

C. Operation of the Badin Concession (GOP)

11. The Badin Block Concession Agreement which dates to March 20, 1977, currently includes theGovernment of Pakistan as one of the working interest partners with 40% of the Joint Venture. Union Texas -Pakdstan (UTP), is designated as the Operator by the Joint Venture Partners, and Occidental Petroleum the otherpartner with the remaining 30%. This joint venture was formed to develop and produce the oil and gas from theBadin Concession. The concession covers a surface area of 3500 sq.mi. and is located in southern Pakistan, Eastof the Indus River Valley in Badin, Hyderabad, Tharparker and Thatta districts.

12. This concession is producing and delivering oil and gas from some 26 relatively small oil fields (withone or two wells). By the end of 1990, the cumulative production from the fields was some 38 million barrels ofoil. The total capital investments and operating expenses over this time, amounts to slightly less than US$500million. The reservoir engineering estimates of the remaining oil and gas reserves which are expected to beproduced from the existing fields and structures by the end of the concession period (Year 2008), will be some 106million barrels of oil and some 600 BCF of gas. The gas produced will be sold to SSGC through a pipelineconnecting the Badin Field area with the SSGC pipeline which is located on the left bank of the Indus River.

13. It is estimated that in order to achieve the production goals mentioned above, it will be necessary forthe Joint Venture to continue and invest an additional $307 million in capital goods and services and $360 millionfor operating expenses over the concession.

- 40 -

Annex 2.1Page 3 of 7

14. Currently, the Govemment of Pakistan's (GOP) interest is monitored through the Directorate Generalof Petroleum Concession (OGDC) who in turn relies heavily on the assistance of the technical staff of OGDC. AsOGDC is also responsible for regulating the activities of all oil and gas exploration companies, its involvement inthe Badin Block constitutes a conflict of interest. Therefore, GOP is now considering transferring its assets in theBadin Block Joint Venture to OGDC and has requested Bank's assistance in developing a formula for achieving this.

15. The five-year investment program which has been developed to achieve the production goals mentionedabove, includes; (i) $12.2 million for drilling nine new wells and for the acquisition of additional geologicalinformation, (ii) $41.5 million for equipping and work-over of old wells as required, buying oil production andtreatment equipment, flow lines, enhance oil recovery technology and other related services, and (iii) $52.7 millionin operating expenses.

D. Dhodak Gas Field Develonment (OGDC)

16. Geologically, the Dhodak anticline (Dome) is a gentle asymmetrical anticline with the major axis inthe N NW by S SE direction. The anticline has been defined with the drilling of six wells, and is bound by majorreverse faults to the east and to the west, and reverse transversal faults to the south and north of the structure. Theoverall thickness of gas reservoir is some 431 meters and extends through two distinct geological formations, theLower Ranikot and the Pab. The cap-rock for the system is a blanket shale which extends throughout the region.

17. Within the unfaulted and relatively undisturbed central block of the Dhodak anticline, four wells havealready been drilled and these wells have defined the upper and lower limits of the reservoir:

a. Well Dk-1, the discovery well, was suspended and abandoned at 2133 meters depth, afterdrilling some 50 meters into the Pab Formation, when the rig went into a 'blowout' condition.

b. Well Dk-2 was located about 500 meters to the north of Dk-1. The well was drilled as areplacement well for Dk-1, and drilled down to 3004 meters. The well proved with nineseparate production tests, that the overall thickness of hydrocarbon bearing formation in excessof 400 meters. The gas is found in all of the Lower Ranikot Formation and extendingdownward, partially into the Pab Formation.

c. Well Dk-3 was located some three kilometers south of Dk-1, and drilled down to 3060 meters.The hydrocarbon system is only 132 meters thick in this well. But geophysical and geologicalinformation subsequently indicated that the well was located across a major reverse faultseparating the smaller block in which Dk-3 was drilled, from the main body of the reservoir.The probability that these two blocks are hydrodynamically connected has not been proven.

d. Well Dk-4 was located some two kilometers NW of Dk-1 and drilled to 2489 meters. Thiswell was proven dry and abandoned.

e. Well Dk-5 located about two kilometers S SE of Dk-1, drilled down to 2443 meters and foundthe cap-rock to the gas reservoir at around -1525 meters and the gas/water level at -1807meters sub-sea. The overall thickness of the hydrocarbon-bearing rock in this well is some317 meters.

f. Well Dk-6 is located at the highest point of the structure. In this well the cap-rock to thesystem was logged at -1375 meters and the gas/water contact at -1807 meters sub-sea. Theoverall thickness of hydrocarbon bearing rock in this well is some 432 meters.

- 41 -

Page 4 of 7

18. OGDC, with consultancy assistance, had completed a comprehensive computer simulation study of theDhodak field production characteristics. The study was financed by the Bank. Based on the result of the analysisdone in the study, the proven gas reserves of the Dhodak Gas Field are found within an undisturbed parallelogram,which is about three kilometers wide by some five kilometers long. The area within this parallelogram is some 4000acres. The maximum hydrocarbon thickness witiin this area is 430 meters (1400 feet). The average porosity ofthe rocks which contain the gas is estimated to be some 13% to 15%. The irreducible water saturation of the rockis estimated to be as low as 35%. The reservoir pressure that has been measured with bottom hole pressure gaugesand RFT's at -1660 meters sub-sea is 3225 psi. The estimated gas reserves is in excess of 600 BCF.

19. Regarding the quality of the gas which is found in Dhodak, it is believed that the gas is not verticalyhomogeneous throughout the field. There appears to be a vertical gradation in the composition of the gas (ie. thelower most gas appears to be richer with heavier hydrocarbon molecules than the gas at the top of the reservoirwhich appears to be much leaner). In view of the fact that the reservoir consists of an extremely long hydrocarboncolumn, the limiting factor for producing the field is the well design, therefore, future wells should be designed withlarger diameter tubing in order to reduce not only the friction losses in the tubing, but also to increase theproduction capacity of each well.

20. The production scheme which will ultimately be used to exploit the reservoir will depend on how thefluid behavior evolves in the reservoir with production and time, and the priority OGDC will give for hydrocarbonfluids in the future. Re-cycling of the Dhodak Gas, at this time, should not be a discarded option.

E. Dhodak Gas/Condensate Plant (OGDC)

21. The gas/condensate processing plant will be designed to process 54 MMCFD reservoir fluid, producingapproximately 45-47 MMCFD of export gas, 180-190 tons/day of LPG and approximately 2500 BPD of condensatefractionated into regular gasoline, 600 BPD of kerosene, 185 BPD of high speed diesel (HSD) and 125 BPD ofdiesel fuel oil (DFO). The main elements of the processing and support facilities are:

a. gathering system with 6" flow lines, manifold and test separators located adjacent to the field;

b. a 24 km, 12" trunkline to transport the fluid to the processing plant on the river plain;

c. feed inlet facilities at the processing plant (slug catcher, gas/liquid separators);

d. gas dehydration;

e. gas chilling, expansion and liquid recovery;

f. condensate stabiliztion and LPG production;

g. condensate fractionation into gasoline, kerosene and diesel, etc.;

h. product storage and road tanker loading;

i. all utilities and support system;

j. permanent camp for 350 staff; and

k. upgading access roads to the processing plant and field.

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Annex 2.1Page 5 of 7

22. Surface gathering facilities for seven wells will be installed in order to colect production from wellsand combine it into single production stream. The facilities include mains from wells, gathering manifolds andmetering instmumentation. A combined single stream of condensate gas would be transported via a 12-inch diameter,24-km. pipeline to the processing plant. At the plant, the single fluid stream would enter into separation/slugcatcher facilities to be separated into raw gas, condensate and water.

23. LPG Recovery Unit. An LPG recovery system wiUl be installed to extract LPG from the gas. Thedehydrated gas, after the removal of heavier hydrocarbons, will then be transmitted through the SNGPL spur-lineto Kot Addu. The composition of the pipeline quality gas at delivery point is shown in the table below. The liquidsrecovered in the dew-point reduction section are then fed to de-ethanizer and de-butanizer columns from where LPGand condensate oil (NGL) are recovered.

Component Mol Percent

Methane 84.57Ethane 7.89Propane 1.03Iso-Butane 0.12N-Butane 0.07Pentane 0.05Nitrogen 4.41Carbon Dioxide 1.86

100.00

24. Condensate Stabilization Unit and Storage. The unstabilized condensate from the separator is fed tothe condensate stabilizer unt where lighter hydrocarbons (gas) are removed. The stabilized condensate recoveredis then sent to the debutanizer. From the debutanizer the fluids are either sent to the topping unit for fractionationor to the condensate storage tanks.

25. Tom,ing Unit. The condensate fractionator splits the stabilized condensate into gasoline, kerosene,diesel plus a residue which will be marketable as DFO. The feed stock to the topping unit will be provided fromstorage hot condensate from the debutanizer. The feed stock is heated to achieve the required Feed InletTemperature to the fractionator and flashed into the column. The unvaporized heavy portion of the condensate, isthen stripped to meet the DFO specifications.

26. The processing facility at Dhodak will be designed and constructed to meet accepted engineering andenvironmental standards. Design and construction specifications will include provision for monitoring of air andeffluent emission as well as disposal of solid waste. OGDC staff would be provided adequate training in use andmaintenance of pollution control and monitoring equipment.

F. Dhodak-Kot Addu Gas Pipeline (SNGPL)

27. Construction of the 16-inch diameter Dhodak spur-line of 84 kms. in length to link Dhodak field withthe Kot Addu power plant, currently undergoing conversion to utilize domestic gas, would be under force account,using SNGPL's own Project Department. The capacity of this pipeline would be 45 MMCFD of gas and wouldbe commissioned by January 1993. The standards for equipment and installation processes would conform tointernational codes. The foreign exchange component at about US$2.0 million (16% of the total cost of US$13million) is low, since SNGPL has decided to order the steel linepipe from local manufactuTers rather than from

- 43 -

AnnexQ2.1Page 6 of 7

abroad for this small size diameter pipeline. In addition, consultants would be hired to assist SNGPL on the designof the Indus River crossing. Moreover, since the pipeline as proposed will be adjacent to the oil pipeline alreadyexisting on the southern pillars of the Taunsa Barrage, no environmental problems are foreseen.

G. Pipelines and Compressors to Utilize Oadirpur Gas (SNGPL)

28. OGDC, the Operator of the Qadirpur Gas Field, plans to supply SNGPL 100 MMCFD of pipelinequality gas for transmission to Kot Addu power plant along the existing 18-inch diameter pipeline (less than 1.5%carbon dioxide and less than 15 parts per million of hydrogen sulfide and about 890 BTU) by June 1993 to beincreased to 200 MMCFD by June 1994. In designing the system, SNGPL evaluated three pipeline diameters,namely 18-inch, 20-inch, and 24-inch for eventually evacuating 200 MMCFD of Qadirpur gas. Ultimately, a 24-unch pipeline was selected in order to minimize the pressure losses, enhance economics of operation and toeventually increase gas deliveries. A 60-km., 24-inch diameter pipeline linking the Qadirpur Gas Field to theexisting 18-inch diameter pipeline (at the Guddu barrage) would be initially laid. The next phase would involvereplacement of two 24-km. sections of the existing 18-inch pipeline between the towns of Rahimyar Khan and Uchby heavier gauge pipeline to mitigate stress corrosion downstream of AC-4 and AC-2 compressor stations. Bothphases would be constructed by a contractor selected on a competitive basis. The selected contractor would instalthe pipelines in accordance with international standards for pipeline equipment and installation including burial,cathodic protection, routine patrol and maintenance, automatic monitoring, and remote controlled shut-off valves.SNGPL plans to instal nine compressors at three sites, six of which wiU be procured under the proposed Projectand three will be relocated from existing compressor stations, where they are no longer required. The total instaledcompressor capacity of 36000 BHP (9 x 4000 BHP), would raise the 750 pounds per square inch (psig) fielddelivery pressure to 1000 psig, the pipeline operating pressure.

H. Development of Sunervisorv Control and Data Acauisition (SCADAM

29. SCADA systems are widely used by the gas industry to gather information from a number ofgeographically dispersed sites/nodes to a central point. SNGPL has had data acquisition facilities instaUed underprevious Bank loans on portions of the main transmission line only to gather information on system operations, e.g.flow rates and pressures, to facilitate load dispatching and remote control. If a SCADA system for SNGPL, whichhas one of the more developed gas infastructures in the developing world, is to remotely control gas flow rates,the installation of more complex and expensive remote-control valve operators and other equipment to cover theremaining system as well as the proposed spur lines is necessary. It is envisaged that initially, equipment to monitorgas flow rates would be installed for only large industrial consumers.

30. Currently, SNGPL's master control station to remotely control parts of transmission system particularlymain valves and gas supply off-takes to power stations, through telemetry and telecontrol based on a VHF multi-channel radio relay system, is located at Faisalabad. The SNGPL system stretches from Sui in Baluchistan toPeshawar in the NWFP. It consists of about 2800 km of main/loop pipeline ranging from 6 to 24-inch diameterand a total of 99000 BHP compression facilities installed at 10 different compressor stations. Tie present systemcapacity is about 450 MMCFD, while under a recently approved Bank financed project, it would be increased toabout 800 MMCFD by construction of 215 km, 30-inch diameter pipeline and installation of 6x4000 BHPcompressors. The Bank under the recently completed (1990) SNGPL V Project (Loan 2324-PAK) had financedtelemetry and telecontrol system along the high pressure transmission line from Multan to Faisalabad. Additional,telemetry/telecontrol facilities will be financed on the proposed spur line from Multan to Lahore, under the ongoingCorporate Restructuning and System Expansion Project (Loan 3252-PAK). The proposed Project would financedextension of this facility and its integration with the existing system, and as such is an important aspect of theutilities future development.

- 44 -

Anlllx 2. 1Page 7 of 7

31. The proposed amount allocated for expanding SCADA facilities for the trsnsmission system (approx.US$10 million) is based on an appraisal of a possible system design, equipment specification and cost estimatesundertaken by the Borrower to improve the operational efficiency of the system, which is affected by significantgas load fluctuations and load shedding prevailing in the colder northern regions of Pakistan. In view of thetechnically complex nature of the SCADA equipment to be procured and installed under this project, financing forconsultancy sevices to design and assist SNGPL in the installation of SCADA system are being provided. Theconsultants are expected to design the computerized SCADA system in order to continuously receive and analyzedata from all major sources including underground storage. The SCADA system would be developed in four phasesas follows: (i) system design; (ii) development of technical specifications; (iii) project management andsupervision; and (iv) institutional development aspects for efficient operation of the installed SCADA system.

- 45 -

Annex 2.2Page 1 of 3

PAKISTwAN

DOM C ENERGY RESOURCES DEVELOPPMENT PRO.lECT

Environmental hnpact Assessment Stmrmara

A. Introduction

1. An envirokmental screening for the Badin Block, Kadanwari, Qadirpur and Dhodak fields wasconducted during pre-appraisal to identify the environmental impacts that are likely to result from the projecteddevelopment activity in each of the areas. Such environmental screening indicated that the development of BadinBlock and Kadanwari fields do not have adverse environmental impacts as explained below. However, Qadirpur andthe Dhodak development required that an environmental impact assessment be prepared in order to address thepossible adverse impact on the environment identified during the environmental screening. Accordingly, the Projectfalls under the environmental screening category 'A consistent with Operational Directive 4.00, Annex A. Thelimited environmental impact assessments for the Qadirpur and Dhodak Gas fields were prepared by OGDC and forthe trnsmission pipelines were prepared by SNGPL with the assistance of qualified and experienced Pakistaniconsultants in accordance with terms of reference approved by the Bank. The mitigating measures for the twocomponents (gas development and pipeline transmission) were reviewed and approved by the Government of Palistan.The environmental consequences, impacts and mitigating measures for both fields including gas transmission areexplained in the EA report. Extensive local consultation was performed with 12 settlement villages in Dhodak and21 villages and settlement in Qadirpur. Copies of all environmental documents including Government approval torelease the EA reports to the Executive Directors, are available in the Project File.

B. Environmental Screening

2. The Badin Block concession is situated in a deltaic plain close to the sea level; 50% of the landlies in desertic to semi-arid areas, while the other 50% of the land is cultivated. The devtlopment of oil and gasfields funded under the project are situlated in the desert area. UTP as the main operator, has been exploring foroil and gas since 1977 and is applying its corporate environmental guidelines which meet United StatesEnvironmental Protection Agency standards. A review of UTP's gas facilities and gas development plan indicatesthat good operting practices and safety are being followed. Field inspection, including testing safety equipment,is made on a regular basis and an emergency response program is established. UTP has appointed Pakistaniengineers to monitor all environmental effects of its operations. A review of llTP's past performance, as well asits environmental guidelines, indicates that UTP has been and will continue to be very conscious about protectingthe enviromnent.

3. The Kadanwari Gas Field is located in a rocky semi-arid plain surrounded by sand dunes. Thethree exploration wells have been drilled in the desert far from human and wildlife habitat. The operator LASMOand its drilling contractor (Sedco Forex) abide by comprehensive environmental standards and procedures whichare set by their Corporate office in London. The appraisal mission which visited the field was satisfied withLASMO's drilling and work practice. All wastes were disposed of in envirommentally sound landfills; drilling sitesusing accepted reclamation practices were restored to their original conditions after drilling was completed. All fieldstaff and technicians were trained on safety and emergency operations.

4. The Qadirpur gas field lies in a floodplain area between the Indus river and a flood control levee.The projected flood level in Qadirpur was estimated to be at approximately 235 ft. elevation between the monthsof July and September. The principal environmental concerns are: (a) protecting the well heads and gas productionfacilities during flooding since damage to these could affect surface and groundwater with concomitant effect on

- 46 -

Annex 2.2Page 2 of 3

population, vegetation, wildlife and land uses; (b) avoiding adverse impact on wildlife which includes a rare speciesof fresh-water blind dolphins called the Indus dolphin, Hog deer and migratory waterfowls; and (c) land acquisition.

S. The Dhodak condensate field is situated in an uninhabited mountain range and the proposedprocessing plant would be situated near Kot Qaisarini village graveyard. While the condensate processing plant andits auxiliary facilities were found to have no significant adverse environmental impact, the Qaisarini burial area isof religious imporance to the local villagers. In addition, issues of land acquisition need to be addressed.

6. As regards the gas transmission pipelines, the Qadirpur Spur line will be 60 kms. long and willbe parallel to an existing feeder canal for about 56 kms., then cut across the floodplain to connect with the Sui maintrunkline at the Guddu barrage across Indus river. The Dhodak-Kot Addu pipeline, will be 84 kms. long and willbe crossing the Indus River at the Taunsa barrage. The principal environmental concerns in the construction andoperation of the proposed gas transmission lines are the routing of the lines in relation to settlements, safety featuresand additionally for the Dhodak-Kot Addu line, crossing of the Indus River at the Taunsa barrage.

C. Mitigation Measures

Oadirpur Field

7. Flood Protetion: In order to protect the well heads from floods, OGDC has constructed 9-foot high padsprotected with cement and riprap for the recently drilled sites. OGDC plans to continue this practice as necessary,maing appropriate height adjustments to reflect differences in local topography. This provides 1 to 2 feet offreeboard at the projected floods. Examination of one completed wellsite confirmed the integrity of the design andcnstruction of the field structures. The proposed gas gathering facilities will be buried below plow depth and gasproduction facilities will be located outside the flooding area.

S. Wildlife Protection. In order to avoid any impact on the Indus dolphins, OGDC will maintain at least a100-meter buffer zone off the river aad al active channels. OGDC will also coordinate its development activitieswith the Sindh Wildlife Board in order to preserve free passage of the Hog deer and curtail illegal hunting of themigratory waterfowl.

9. Land Aqisition. Land for the well sites (4 acres each) and for the processing area (40-80 acres), willbe acquired through negotiations with owners and payment of fair market value. GGDC has already initiated theprocess through GOP's Land Revenue Office which is responsible for all state compensations. Consultations withlocal officials and villagers indicated a very favorable attitude toward the proposed development. Ninety-ninepercent of those inteaviewed felt that the overal effect of the project on the local community world be positive andthey will be wiLlng to sell or lease their lands.

Dhodak Condensate Prosing Plant.,

10. gavEyd. In reference to the religious beliefs of the Qaisarini villagers, OGDC will leave a 100-meterbudfer zone between the plant site and the burinl area. Extensive consultations with the local community indicatethat the new location of the Dhodak faciity as sited would not be considered to have an adverse impact on the burialarea, which will be fenced by OGDC to safeguard the buffer zone as requested by the villagers.

11. Iand c&Maisio. Land for the Dhodak plant site and colony (300 acres of desertic lands) will be acquiredthrough negotiations with owners by the Land Revenue Office and fair market value vvill be paid by OGDC. Thisland is not cultivated but left as a potential investment by landowners. However, the majority of the populationworks on fanming in agricultual lnds adjacent to the project site. Consultations with !ocal officials and villagersidicated a very favorable attitude toward the proposed development. Vilagers are wilng to sell their lands,

- 47 -

Annex 2.2Page 3 of 3

though O&DC now plans to buy only a portion of the am originally identified for purchase. OGO)C has alsoagreed to hire villagers as semi-skilled laborers in the new gas processing plant.

Gas TransMission Pipelines

12. With a view to minimizing the impact on population, the route survey carried out by aerial and groundsurvey for the two pipelines indicates that five villages and habitations have been avoided to a large extent with adistance of 2-4 kms from the village. Construction and operation will follow international standards for pipelinepractices, with burial, cathodic protection, routine patrol and maintenance, automatic monitoring, remote-controlledshut-off valves, and an emergency rsponse capability. Site investigations indicated that crossing the Indus Riverat the Taunsa barrage as proposed presents no environmental problems since the pipeline will be constructed underthe bridge, on the pilars extended to the northern side and away from an oil pipeline already existing on thesouthern pillars of the bridge.

Environmental Management and Safety

13 The EA report recommended that OGDC strengthen its environmental management capabilities to ensurethat OGDC's activities are environmentally sound and sustainable. OGDC has, therefore, agreed to establish anenvironmental management unit within OGDC reorganization. The Environmental Management Unit will beresponsible for all the envirommental functions related to oil and gas activities. In order to specifically address themitigating measures identified in the EA, which indicated that no safety manuals currently exist for oil drillingoperations in OGDC. OGDC should agree to submit to the Bank by September 1992 the following safety manualswhich will be prepared with the assistance of international consultants:

* General safety guidelines for exploration and protection;* employee safety manual;* work authorization safety procedures;o disaster recovery plan; ando opeating guidelines for good oil field practices and for restoration procedures for all OGDC

concessions.

- 48 -

Atz4a i -L

M Z ' wO 20 IU ?!G&?z UY WAL DQAar

M I T I ? A T I O N P U R P O S RESPONS :9:':'y

e no dam at diversions oan Indus e proceect Indus dolphin e OGDCRsver or Channel

100-me der buifer sons otn tdus 0 ptet Indus dolphin * OG3CRiver and Choeanel

e LdentifY nd avoid hog door habitat e protect ha$ door * OM

* wildlife mnagement plaa o protect has de- and other wildlife *(section 3)

* well sites and fieLd lines desga n d * ad *eLL nd pspelsne gda * OGfor 100-year flood

DEhaK

O buffer sono and fence fot e protect cultural heritage * OGCQasaerani burial area

o improve truck access roam main * minamize noise and accidents * O=Croad to plant site

P.T1 Sim

r negotiate and pay fair market * mnimisze land Lose effects a OSDCi for land

* p_'y*r Ftv:k desin ftor CO e avoid local air degradtien e OGDC

* drilling e! i msnaseaeat plan e avoid contamination of soil * OG3Cand water

* safety training. guidce. * avoid accidents, injuries and a OGCequipment eand onforcement fatalities

* pcovide full-time medical coverage 0 minimise effects of accidents * OGDCat field fitos and injuries

* Lnclude aesthetics and tree-belts 0 minimse noise and dust in a OSin plant site and colony designs residential areas

* proper handling and disposal of * avoid contamination of soil * OGCsolid wastes and water

ENWEMMMGMTAL M_L499MM OM (SW)

* establish EMU a provide OOOC-wide envsronmentel * OGDCover-eight. guidaee and sesistanceto field

• issue EMN asesstance contract 0a ssist ZU in becoming operational e OGDCand effeetive

• prepare suideLines and safety *establish proper field enviromatal * OC - with consultant'e asistancemanuals practices

o training establish proper field envrsIeZ=Mtal O CGDC w with consultant's assistancepractices

• monitoring e enforce proper field practices I DC - with eosultant's assistance

e site audits - identify and correct enviromuestal * . OC - with cosuLtan t's assistaneepRobLhms; improve operating practices

• rehabilitation of OODC field coreett enviroamental problems ad a - with consultantCe assistaneeaLtoo lessen adverse Impacts rcen OQC

eativities

- 49 -

PAKISTANDOMESTIC ENERGY RESOURCES DEVELOPMENT PROJECT

TOTAL PROJECT COST ESTIMATE & FINANCING PLAN(US$ Millon)

TY92 FYA3 CY PY9 PY9 TrOTAL

ACOS CINO NCIT S T 2TA 1T1.2 0. 26T3 T A T TPHb SDIN AL DOD9 2(5.2 1 15.3 2 2.9 2 2 45.189R WCSE 1.2 W 14.8 D D3.5 V

35.6 e4.0 7A4. 3. 14

0 nOASIRPUR CoItrDDE. ___6 84.3 3 i6 0.0 .60 . 91.DHODANC MGBLAN 8.fLI 32.9 310.1 16.7

TOCHMAL AINANCINGCE RE 4 78.0 23.4 15982.0.OA 370

TOASMOBASEPAR TNSS 69620. 53.42 1 2.72 2.86 .3 437.3

PHSIAL (D % 06 20.60 03.5 3;. .. 0 0. 4.6 .6Patca 2~~~.r- .2 14.8 2B 23.s A 346 4. .0 0.0. 14.9OGDC .~~~~~~otl & 18. 157.~ 87 1 " .4 321.9 ).3i .. 541.7COMMERCIAL SOURCES 01 ~~~ I 51 ~~'~P'i2~ 1.2 ~~ 0.0 *'~~~0.1- 0.1 4 60.2TOTA FMAC TOTREQIRE 78.87 i~ 243.4 I'SS19.9 2. 37.0 .2132.9 310.2,3.

WORLD BTANK&mad24.4 53.91 4 352. 32 8 ..6 7A 75 C'

LC. * Ioal Cot. P.C. * PoepCa USAID 0.6 X'j~~~~~~~~~~~~~~~~~~0

I0 OQ

GOP 3.2 2.8 2A 3A 3.3 OA, 14.9~~~~

SNGPL 8.7 49.1 42.1 0.8 0.0 200.6~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~F

PAKISTAN

DOIMTIC ENERGY RESOURCES DEVELOPMENT ROJECTPk)J0.'T IMrI.EMVNTATKON 56.tIPUID

FY91 _ _9I FW3 FY94 1 ' §S FY96Qi I2 usI } Q, Q2 I, go lQ9QIIQ I Q, I Q, Qs I Q2 ,IQ lIQ !I0IQ _2IQ

QADItPUR GAS nELD DEV. DC)1 _ _ _E-h_S~~~~~~~i1 riirwr I II I I I

RerEnw_lmm_ l Asnae

D2w1h_ Diaq .,,___Oa d 1aMI It OO MMCFD -.-....On Padcdlai 2sd IW MMCFD

QADIIR PWMPELINE GSN__IIIS6ursy. Eqimeedag & PMCCMtAu

KADNWRIGAS FIEU8DEY. (LASIE)- - -1 I 1.J.....Sodas. FecWaleDmVdaOPIMs DdUleg ..

tAp.aAicti IOO MMCFD......KADANWARI niPELINE (S;CC8- ymv. F.qgmenq & P,ocuawweA

9,E-_&P ~~~~~~~~~~~~~~~~~~~..... . . .. .....

DISODAK TOPPING PLANT (OG_C _ _T

ED&Mlifilg & ProCUMMzuAEaviommass ssua

DIBODAK PIPELNE ISNGI'L).Stowel.Ealw An P,ocamewd....

BDAIN GAS FIELD 83EV. (UTFIDwmkmao DdNW . .

OCKIC CORP. RESTRULTURING

Sepelatia. of AccewU...................

F _ie M,,ane Iayznvea I SE bid EaeIoimmnat Mascagm Unit ..........

MIN. OF PETROLEUM a NATURAL RES.. I I Neds. A s A§.-.-.,. ....... I, I I I

j-ykgaeagtj I I I1 I c I I I I E 1 .-. :-.-.-.::-.-.)-:.-.-.-.X.:-.::-.-:, .-. .:::-.-. :.':. . | I I I I I I I I~~~~~~~~~~~~~~~~~~~~~I-

UOfkO Oampi.u.wu~ Aew.cv):OGOCI. O,.& e.,O.,o~.. C.. ,NR ., io.dw ,o P.pn L.. SG .. St.n ....... p.f. !J U'... bo.....ow

NP I.o Igja Is Ic.ss I~ IMIS*- ,

Annex 2.5Page 1 of 1

PAK'STANDOMESTIC ENERGY RESOURCES DEVELOPMENT PROJECT

Prourmemnt Anangomets(USS Million)

Project Element lCB LIB DC Others a/ Total1. Developmet Dilling

a. Qadirpur 16.6 9.4 2.0 10.6 38.6(16.6) (9.4) (2.0) (28.0)

b. Dhodak 4.7 b/ 4.7c. Kadanwari 14.0 7.0 18.8 39.8

(14.0) (7.0) (3.0) (24.0)d. Badin 64.0 24.5 40.2 128.7

(26.5) (8.0) (1.5) (36.0)

2. Civil Worksa. Qadirpur Field 19.0 19.0b. Dhodak Pipeline 6.5 b/ 6.5c. Qadirpur Pipeline 31.0 31.0d. Kadanwari Field 7.2 7.2

3. Processing Planta. Qadirpur 54.2 54.2

(27.0) (27.0)b. Dhodak 52.8 52.8c. Kadanwari 38.0__ 38.0

4. Piplino Mateiala. Qadirpur Pipeline 30.3 30.2 60.5

(30.3) (2.0) (32.3)b. Dhodak Pipeline 2.2 11.3 13.5

(2.2) (2.2)

a. Qadirpur Pipeline 12.0 12.0 b/ 24.0(12.0) (12.0)

6. SCADA 9.5 2.3 11.8

(9-5) (9.5)7. Technical Assistane

a. MPNR 2.5 2.5(2.5) (2.5)

b. OGDC 8.3 8.3(6.0) (6.0)

c. SNGPL 0.5 O.S

.___________________________ ._______A (0.S) (0-5)

TOTAL .1 228.8 93.7 14.0 205.1 541.6 d/

L . . . . . . (126.1) (24.4) (14.0) (15.S) (180.0)anldads Shopping, Loal BDddI Forc Account nd Tecnical Sevices for which Bnk

gidene for coasutans us would apply.bW OWDC and SNGPL Foce Acount1/ bIludes duies and taes of abut USS118 milion.d/ Bxcluds Interes Dring Coasbu_ci (IDQ of about USS10.2 mllon.Note: Figur in erg dt e am teapvo amounts finaned by the Bank Loan.

- 52 -

AnnexI 2,6Page 1 of 1

PAISTAN

DOMESTIC ENERGY RESOURCES DEVELOPEiNT PRO= ECT

Disbutsement Schedule

IBRDFiscal Year US S Million

Cumulative

FY93September 30, 1992 8.0 8.0December 31, 1992 8.0 16.0March 31, 1993 12.0 28.0June 30, 1993 15.0 43.0

FY94September 30, 1993 15.0 58.0December 31, 1993 14.S 72.5March 31, 1994 14.S 87.0June 30, 1994 14.3 101.3

FY9SSeptember 30, 1994 11.2 112.5December 31, 1994 11.2 123.7March 31, 1995 10.0 133.7June 30, 199S 9.8 143.5

FY96September 30, 1995 7.0 150.5December 31, 199S 6.3 156.8March 31, 1996 6.3 163.1June 30, 1996 S.6 168.7

EY97September 30, 1996 3.8 172.SDecember 31, 1996 3.0 175.5March 31, 1997 2.7 178.2June 30, 1997 1.8 180.0

- 53 -

SUt NORtIERN GAS PIPELINES LII4ITED

Coroorate Restructurtno and S1stem Exianslon Prolect (Ln. 3252-PA)

Status of Capilance with Dated Coveants(As of May 1t 1992)

Legl Documentsferwa scrirtitan of C ot QriinalDate sed Oate Status

Section 3.04 SlOPt to commece with land acquiaition Dec. 31, 1990 Dec. 31, 1990 Undermy.-'figs.

SeW 5,07(i) Pvoida evidence to the Sak that all Dec. 31, 190 Nay 31, 1992 Cmpteted.necessary conset and c(earaners formartketing shares hae been ebtained.

Sec 5.07 (if) Appoint Aerwiters to mrket rw equftCy Jan. 31, 1991 May 31, 1992 Underwriter ba been selected.shres. Contract siwture expected 1st weekof Jim. 1992.

Schedule 4 Sec 11 Appoint consultants for detalted design, Narch 31. 1991 June 30, 1992 Ffnati3ed Lot and TOt issued to seven(a) wigineering end cnstruction supervislon of shortlisted cnsultants. Proposaslaying 30" dia pipelines across are mider evtlation.Rwvi/Sutle).

Schdikale 4 Sec 11 Aoint conltants to forsalate strategy Horeb 31, 1991 Key 31, 1992 1o1 and TOo were sent to six ffius(b) fto further davelpeent of finamesal IIS, approve by the Bank. Prosals werereview billing cycte and train SU;PDs evaluated and a contrct with thestaff in ceguter audIting. consultants iose proposat tas rakdhighest Is expected shortty.

Section 4.05 Apoint an ecosmist, a tinancial analyst March 31, 1991 Nay 31, 1992 Posts advertied aid cwdidbtesand a system ptlmer *tt with appropriate Identified.qmtficatIaw and experience In theCorprate Plaming Departmnt.

Schedulo 4 Sec. Appoint coumwltants for study to establish Jum 30, 1991 Jiu. 30, 1992 LOI, TOR atd dtwe tist havo been1I(c) a new forItla for setting prescribed sgreed with 8ank; OI Is pending GOPprices and financial performance criteria. clearance.

Sec 3.09(11) Submit completed FNIS study to Bank for Jam. 30, 1991. Aug. 31, 1992. Not yet due.review.

Section 3.07 Issuance of first tranche of shares. June 30, 1991 Sept. 30, 1992 GOP approCat of equity shares o totalling 86.2 mlillon shares taa been K Xreceived. Issuance, after completion wof formalities expected by September O*30, 1992 the share Issue plen. ".

Section 3.02 Criteria for ranking and selection of new June 30, 1991 Jium 30, 1991 complied.toas for supply of gas to be estabtishedIn consultatiom with GOP.

Legal DaAaentsReference Oescriotion of Covenants Original Date lsed Dat Status

Section 3.05 Finalize contractual arranrement for a June 30. 1991 June 30. 1992 After empteting evaluation of theCotlaborative Arrangement with an technical proposats SNGPL has openedinternationally reputable private sector the price proposats and expects togas utility for providing technical finalize arrangements with the utilityassistance/trainins. have been ranked first.Section 5.06 Subif t a five-year corporate f westmant and June 30, 1991 June 30, 19M Compied.

financial plan.

Section 3.10 Reconstitute Board of Directors to reflect March 31. 1992 March 31, 1992 Not complied with.new owaership of SNGPL.

Section 3.08 (ii) Subnit ccapleted gas pricing study June 30, 1992 Sept. 30, 1992 Not yet due.to Bank and GOP.

Section 3.08 Ci(f) Implement new formula for July 1, 1993 October 1, 1993 TOR received by the Bank for review.prescribed prices established byGOP.

Guarantee Lareement

I Section 3.04 Notify fInal prescribed prices for FM90 and Dec. 31. 1991 Dec. 31. 1991 Cozplied.Ln provisional increase in prescribed prices

by FY91.

Section 3.06 (i) Initiate study to upgrade regulatory September 30, 1992 October 1t 1991 Benkfs comments on draft TOR as eellcapabilities of DGG. as suggested LOI have been provided to

GOP. Revised version and agreement onshorttist of consultents for studyexpected shortly.

(fi) Cotplete the above study and submit March 31 1993 arch 31. 1993 To be implemented by Ministry ofcompleted study to Bank for review. Petroleus & Vaturat Resources.fiii) Implement recoemendations of study. March 31. 1994 March 31, 1994 - do -

00

N:VN%sngpi.otx IN

Annex 3. Page 1 of 1.

T T

M0

A..

56-

PAKISTAN1111. ANI) AS I)EVEIA)PMN CORPORATION

&INANCE AND ACCOUNTS DFPARTMENTORGANIZATION CHANT

DIRECTORMINANCE

FiNANCE

rMANAGE.R || WMANAGER MANAGE l!FRNANC'E | | SYSTEMS ACCNTS

CHIEF ACCY CHIEF ACCT CHIEF ACCT CHIEF ACCT CHIFF AACT C&EI LBUDt1ET | | ASURY | nANNING l,8Cy [|_ E & P lLA

DY. CHIEF DY. CHIEF DY. CHF DV. C'HIEF DVY. CHIEF ACCI VT. CHIEF ACCr DY tcHIjBUDGET BAN4KINO RNlN0AL COMlUTE GFOI'OY & 0UIC lAX I PAYABIJ--%COMniAllom MGS CdEOPHYSICAL

DY. CHIEF DY. ChfIEF DY. CHIEF ACCT DY. CHIEF DY. CHIEF ACCT DY. CHIEFFACCT DY CHILBUDCIET IDNG-TlRM TAX TRAINING DRIIING IV-OlW PAYR(11.IMONITORING DEBT

li.NIbs

|DY. CHIEF 0DY. CHIFF ACCT Dy (11 1f3D. w-om~~~~~~~~~~~~~~~~~~~~~~sas ~~~~~~~~~S111RESI lY L } . | ~~~~~~~~~~~~~~~~~~~~~~~~~~~~IV-0THER | 5F. D|

KARiACHI F ASSETSO

LI

Annex 3.4Page 1 of 3

PAKINDOMESTIC ENERGY -RESOURCES DEVELOPMENT PROJECT

MINISTRY OF PETROLEUM AND NATURAL RESOURCESORGANIZATIONAL ASPECTS OF TECHNICAL DIRECTQRATES

1. Directorate General Petroleum Concessions (DGPC). DGPC functions as a regulatory body forthe implementation of the Pakistan Petroleum (Exploration and Production) Rules 1986. These rles provide theoverall framework under which any (domestic or foreign) company can apply for a Reconnaissance Permit (RP),an Exploration Licence (EL) or a Development and Production Lse (DPL) for exploration and production of oiland gas in Pakistan. DGPC's main areas of operation include:

(a) Review of applications received from oil companies for granting RP, EL or DPL, negotiation andfinalization of concession agreements;

(b) Review of proposed work programmes, (including survey activities, drilling, production anddevelopment plans), approval and monitoring of the implementation of these programmes(including well commencement, work-over, testing, plugging and abandonment);

(c) Compilation of information regarding drilling, exploration and production activities, teceipts ofrents, royalties, etc;

(d) Administration of GOP's interest in joint ventures; and

(e) Provision of policy advice to the Govermment.

2. DGPC has an allocated staff strength of 20 officers, along with the required support staff. Theseare organized into three sections dealing with Exploration, Production and Data Management activities respectively.Of this allocated strength, 11 positions were filled and 9 were vacant as of June 1990. While the fact that almosthalf the total staff positions are vacant is by itself a cause for concern, a more serious issue is the fact that two ofthe three aenior positions-that of Director (Production) and Director (Data Management)-are also vacant at present.To complement its existing resources DGPC presently obtains specialist/technical advice and facilities (e.g. in theinterpretation of seismic and geological data, economic modelling, storage of data and digital tapes, etc.) ftom otherorganizations, particularly OGDC. These issues have been brought to the attention of GOP as they were highlightedin the recently completed study by USAID. GOP assured the mission that these vacancies would be filled as soonas possible and in particular that consuttants would be provided to complement the activities of DGPC during theimplementation of the recommendations of the USAID study.

3. Directorate General Oil (DGO). The Directorate General Oil (DGO) is assigned the responsibilityof implementing GOP policies regarding the import, refining and distribution of petroleum products. Itsresponsibilities include:

(a) Contracting for import of crude oil and deficit petroleum products;

(b) Supervision of local refinery operations, including the determination of ex-refinery prices;

(c) Allocation and distribution of petroleum products among various regions, and supervision andmonitoring of retail operations; and

(d) Preparation of recommendations regarding the retail pricing of petroleum products for approvalby the Cabinet.

- 58 -

Ansle 3.4Page 2 of 3

4. DGO presently has an allocated staff strength of 27 officers, of which 18 are filled at present.These are organized into 5 sections", each headed by a Director, dealing with refining, oil movement, marketingoperations, systems, and computer data management respectively. For the new Sections (i.e. systems and computerdata management) only one position each - that of Director -has been created, while the necessary supportingpositions have not been created as yet. The staffing position further indicates that while at the senior level (DeputyDirectors and Directors) the positions have generally been filledM, at the worldng level (i.e. Assistant Directorsand Research Officers) 5 out of the 14 positions are vacant.

5. DGO's most important functions are the contracting of imports of deficit petroleum products, theallocation of imported crude to local refineries and finished products to various regions. For this purpose DGOcoordinates the operations of two distribution companies, one in the public sector (Pakistan State Oil), and the otherin the private sector (Pakistan Burmah Shell) and a number of private trucking companies that are engaged in thetnmsportation of crude oil and petroleum products.

6. Directorate General Gas (DGG). DOG is the Govermment's regulatory body for the gas sub-sector, and its major functions in that capacity include:

(a) Supervision of the operations of gas transmission and distribution companies, including review oftheir financial performance, investment programs and resource requirements;

(b) Developing rules and procedures for gas allocation to various regions and consumer categories,in accordance with the priorities fixed by the ECC;

(c) Preparing proposals for adjustments in the level and structure of consumer gas prices, forconsideration and approval by the ECC/Cabinet Committee on Energy; and

(d) Regulating the operations of a number of private companies that are involved in the marketing anddistribution of LPG.

7. DGG presently has an allocated strength of 23 professional staff, along with the required supportstaff. Tnese staff have been assigned to two technical sections (dealing with gas and LPG operations respectively)and one section which handles administrative matters. While at present only one position in DGG is vacan', theDirectorate has acquired the services of three professionals from DGNRER and Sui Southem Gas Company ondeputation. Under the Corporate Restructuring and System Expansion Project, the Government has agreed to carryout a study to develop proposals for upgrading DGG's regulatory capabilities. This review would develop a workprogram for DGG to efficiently carry out its regulatory responsibilities, upgrading the technical capabilities of staffthrough training programmes, provision of equipment (computer hardware and software) to develop a data base forthe gas sub-sector, and consultancy services for specialized studies.

8. Pirectorate General New and Renewable Ena Resouarce (DGNRER). DGNRER is expectedto develop and implement policies and programs in the areas of biomass, fuelwood, solar, wind, mini-hydroelectric

I/ Two of these sections (relating to Systems and Computer Data Management) have been newly created, in order to cater to therequiremets for seting up and operati a efinery simulation model, as agreed under ESLII.

2/ With the exception of the new positions, i.e., Director Systems and Director Computer Data Management.

I/ In this regard the staffing position of DOG is mucb better tham that of a!l the other Ditectoat, where between onquasr to one-third of the exdsting positions are vacant.

- 59 -

Annex APage 3 of 3

and other renewable forms of energy. In addition, DGNRER is required to compile and publish annualy, in theform of the Energy Yearbook, a data-base on the energy sector. However, to date DGNRER has continued to existin a sort of vacuum, and its operations have never been filly integrated with the work program of the Ministry ofPetroleum and Natural Resources. The major reason for this state of affairs is that adequate staff has not beenassigned to DGNRER for it to be able to develop and implement a long term work program. At present DGNRERhas an allocated staff strength of 10 officers; however, only one position is presently filled!/. GOP is currentlyreviewing the options of transferring DGNRER or its responsibilities to the Energy Wing of Planning Division orto the Ministry of Science and Technology, but there has been no definite decision on these matters as yet.

9. DGNRER's past activities have included setting up (with bilateral donor assistance) a number ofdemonstration projects using photo-voltaic (PV) power systems for the electrification of remote villages. However,as DGNRER has been unable to effectively coordinate its operations with WAPDA e.g. to identify areas whereextension of the national grid is not feasible, investigating consumer acceptance of PV technology as a viable optionfor vilage electrification, improving its own managerial and advisory capabilities, these activities have not resultedin the sustained development of PV as a means for viUlage electrification. Similarly DGNRER has attempted topopularize through demonstrations the viability of village level bio-gas plants as a source of household fuel (as asubstitute for kerosene); the large scale acceptance of such plants, however, has been limited, as inadequate attentionbeing devoted to their acceptability among the beneficiaries.

10. Hydrocarbon Develogment hIstitute of Pakistan (HDIP1. HDIP was set up in 1975 as anautonomous organization under MPNR to serve as the n-tional institution responsible for research and development(R&D) in the petroleum subsector. HDIP's main areas of activity include:

(a) Carrying out basin studies - including field surveys, source rock geochemistry, geological andgeophysical services - to support petroleum exploration and development;

(b) Providing analytical and laboratory facilities for testing, evaluation and quality control of cnudeoil and petroleum products, developing specifications for these products as wen as for oil and gasindustry equipment; and

(c) Undertaking research in the areas of interfuel substitution, enhanced oil recovery, combustionengineering, petroleum conservation, and the development of indigenous technologies forprocessing oil and gas.

11. HDIP presently has an overal staff strength of about 300, of which around 70 are professionals,located at the head office, and at HDIP's laboratories in Islamabad and the four provincial capitals. The availablelaboratory facilities alow HDIP to (i) carry out geological and geochemical analyses on source rock/core samples,and chemical analyses of crude oil and petroleum products in accordance with internationally accepted standards;(ii) evaluate cmdes/lube oils to ascertain their yields and lubricant characteristics, and carry out pilot plant studiesfor process development and training, to assist the refineries; and (iii) conduct research in various fields - e.g.,developing alternate and additional energy sources and bio-detergents for oil spill clean-up, evaluating thecombustion efficiency of burners, etc. HDIP also publishes a six-monthly Journal, the Pakistan Journal ofHydrocarbon Research, and arranges periodic seminars on areas of interest in the petroleum subsector.

It lhis is the Director General's positon which, incidentally, is filled as an additional charge at present.

- 60 -

Annex 4.1Page 1 of 5

DOMESTIC ENIERGY RESOURCES DEVELOPMENT PROJECTOIL AND GAS DEVELOPMENT CORPORATION

NOTES AND ASSUMPTIONS FOR FINANCIAL FORECASTS

Income Statement

1. Oil and Gas Production. Oil and gas production based on forecasts by OGDC excludingprovision for production from fields yet to be discovered.

2. International Crude Oil Prices & Fuel Oil Border Prices. International crude oil price forecastbased on World Bank estimates as of July 18, 1991 as follows:

Crude Oil Fuel Oil Border Price'Yeas (US$/bbl) (US$/ton)

1992 17.3 90.31993 18.5 96.61994 19.6 102.31995 20.9 109.1

1996 23.0 120.01997 26.0 135.7

3. Oil Price for Individual Fields. The oil price paya.ble to OGDC for each field is based on theinternational crude price less a discount based on an agreed schedule.

4. Gas Pricing. Gas price is based on 66 % fuel oil border price parity adjusted for caloric valueof each gas and the varying discount structures for each field.

5. Pricine of Petroleum Products. Prices for other products such as LPG, sulphur, and Dhodak-refined products are based on prices prevailing in Palcistan on October 1990 and adjusted byinflation.

6. Transuortation Costs. Transportation costs have been calculated using rates as of October1990 paid by OGDC and adjusted for inflation in future years.

7. Production Costs. These are structured for each field assuming 75% fixed and 25% variablecosts, based on historical trends for producing fields, and best estimates for fields not yet onproduction.

8. Rovalties. Royalties are calculated at 12.5 % of gross sales as per existing GOP regLiations.

9. Othr Income. Other income consists of income from the sale of services such as seismic,drilling etc. to other oil companies operating in Pakistan.

1/ Assumes 7.33 bbl/MT; fuel oil border price is .712 of crude oil price.

- 61 -

Annex 4.1Page 2 of 5

10. Debt-Service Payments. Interest on new loans is calculated at 14% per annum, 3 years graceand repayment over 12 years.

11. Depreciation. Depreciation is calculated on a straight line basis.

12. Sales in T.O.E. Calculated at 7.33 barrels per ton for oil, and 41.2 MCF per ton for gas.

Balance Sheet

13. Investment Program. Detailed field wise investment program was provided by OGDC.

14. Success Ratio. Based on OGDC historical success rates, it is assumed that 1 out of 3exploration wells are successful. The costs of dry wells are written off against income. It isassumed that the same success rate applies to Joint Venture exploration activities.

15. Accounts Receivable. Accounts receivable are assumed at 60 days sales.

16. Accounts Payable. These are assumed to be 90 days of the amount of the investment programfor the current year.

17. Inventories. Inventories are assumed to increase by 25% of the current year's productionexpenditure.

18. Deferred Costs. Deferred costs are field development and successful exploration costs whichare capitalized and amortized against estimated recoverable reserves.

Deferred Costs by FieldX Current Year Production

Estimated R.R.

19. Joint Venture Investments. These are the total of OGDC contributions for successfulexplorations and development of joint venture fields where OGDC is not the operator. Theseare forecast at the same proportion of overall investments as in 1993.

20. Contingencv Fund. This consists of funds set aside for rig insurance, workmen's compensationand vehicle repair.

21. Gratuity Fund. OGDC operates a gratuity fund scheme which pays out a benefit to staff oncompletion of service.

mA:finasum

- 62 -

DOMESTIC ENERGY RESOURCE DEVELOPMENT PROJECTOIL AND OAS DEVELOPMENT CORPORATION

ACTUAL AND FORECAST CONSOUDATED INCOME STATEMENTS(Rupe Milion)

Actual Prov. Act. 0 l "' ' XOpeting Revenues FY36 Fy87 FY88 FY89 FY90 FY91 son an Gas in TOE '000 1,137 1,311 1,543 4.162

Sale of Oil 96 - 754 1,015B1,391 2,329 4,653 3 47 S Sale of GMs2 32 5? 68 228 465 ~ ~ ~ S,

Sale of other Products 0 6 12 is 2t 93 .. ,.A'-i '

Saes Of Pkk 204 387 544 616 700 829 ~ * ., ,.

Totl Operating Revene 1,J07 1.179 1,627 2.00 5,278 6,040

_ .. ... ~~~~~**.". .s

Ptoduction Costs 307 278 362 345 613 622 5Transmission Costs 'S3 52 67 95 134 281 ' ) ~ BRoyalties & Duties 139 112 162 266 423 913 *? ~ 1~$~J14''::$~~ ,DGeneal &Admin. Costs 62 45 134 181 205 241 17 37 . 40. 44DeprclatonAmortdiaton 142 176 ISO 206 213 533 ~ 1O l4~*4** 22

w~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

TOl Operating costs 703 663 8.'75 1,092 4,587 26590 36 X j $h

OperatingIncome 444 516 753 998 1.691 3.451 41)5 442? ~705 $011 S947 aa6Other Income 28 176 236 259 281 300. 1.0

Inclome Before Ineet 473 692 989 1,256 ,972 31751 4,3 .0 03..63? 30 97Interest 159 30 417 526 640 72 '9 , ,fO Z* ~1

Nct Income 314 392 572 733 1,332 3,049 $31 ,4 0 ui $2Less:Unsuc.Exp. - OGDC 294 242 498 541 736 500(m6$ ~ 1 $ 0Less:Unsuc.Exp. - JV 0 10 10 0 0 98 2 7 5......,.....71 4 4

Net Profit/(Loss) 20 341 64 389 596 2.451 ,6 Z53 211 2A 457 ,4)Adjustmenuts 21 440) 36 393 44 0 .Tax 0 0 0 0 42 0 E2~I4 7j.

Net Surplusl(Dcflcit) 41 (299) 28 (204) $lo 245AS 4*0ZI 4* t$ ~ * ,0 ~

Retum on Net Fixed Assets 11.3% 13.8% i6.3% 24.6% 41.5% 42.3% 3.% 20I 36~ 34 7% .46Return on Capita Employed 6.5% 7.4% 9.3% 11.1% 35.8% 26.3% 4 '. 14 6)4 IV% . f,O0peratig Ratio 38.4% 43.76% 46.2.7% 47.73% 52.58% 57.12% op3.5,% ~ 8%8.#

U%

PAKISTANDOMESTIC ENERGY RESOURCE DEVELOPMENT PROJECT

OIL AND GAS DEVELOPMENT CORPORATIONACTUAL AND FORECAST CONSOLIDATED BALANCE SHEETS

(Rupees Million)

Acitual Prov. Act."*~~' '

ASSETS FY86 FY87 FY88 FY89 FY90 FY91 ' / Y fiFixed Assets

4.' /GOs Fied Assets 1.113 1,265 1,396 1,93 2,835 4,205 n ..-.Ae. Depreciation 624 787 0? 1,212 t,530 1,921 ZS 36 ~ ~ ~ ~ lZN4et Fixted Assets 489 478 490 772 1,305 2,284 ~~ ~ .~ t4S I6l' 4 ~~~9

Defenred Costs 5,156 6.215 7,159 8,237 8,223 9,250 3 iAce. Amortization 776 933 1,058 1,366 1,569 1,720 A _Net Defeffed Costs 4,380 5,22 61 6,872,654 7,530 (2 S

Invesments in Subsidiaiy S05 1.164 855 307 138 138

CurPes Assets :44. ,..cash 120 373 371 312 442 1,814 73 Z9' 21 $5 A2 4,8Inventories 2.795 3,196 3,459 4,175 4,244 4.5S23 $U6 6S4 49 1$* 42*Debtor 213 568 737 956 1,703 1.007 4$ IS 1?2"Z?A 44 2,7Oter Currnt Assets 440 149 186 0 0 __ 00. ' . _ _'0 0

Total Curren Assets 3,566 4,8 4754 5444 639 7,34 *: 1 t2Z~,$ 7,~'~1 ~TotalE Asses 8,941 11,211 12,201 13,394 14,486 17,295 $ #4

I EQUITY & LIABILITIES 1.R-qniyGOP Contributions 8,i51 9,060 9,066 9,467 9,580 9,680 ''60. 8 '48 . 60Retained Earmings (174 3054) (2,02) (2,251) (1,742) 699 *0' 4$ t47-',0'._ *.::jA .

Total Equity 6,407 7,006 7,041 7,216 7.838 10.379 ~ I$4 1 ~ ~ 4LiabilityContingency Fund 62 62 6 2 4 * 26Long Torm Debt 2,059 3,24? 3,914 4,478 4,87 2 5.446 A U 3.. 1Gratuity Fund 49 79 109 137 0 10 '0* 3 41

Cumret LiabilitieAccounts Payable 344 686 965 1,199 1,310 910 t4 6> 1R ZT ,24Cufrent Portion Of LTD 81I W9 169 364 404 487 55 42~~ $ .3Total Current Liabilities 45 879 1.134 '1,562 1,714 1,397 40 *S ML

Tota Equity &Liab. 8,941 11,211 12,198 13.393 14,486 17,29S 06 720 63 ~ ~ .0

Debtas % of (Debt+Equity) 24% 32% 36% 38% 38% 34% 0%Equity as % of (DebttEquity) 76% 68% 64% 62% 62% 66% mp -~ $0Current Ratio 8.4 4.9 4.2 3.5 3.7 5.3 US .SLn,~~~Mcid-Test Ratio 1.8 1.2 1.1 0.8 I.3 2.0

PAKISTAN

DOMESTIC ENERGY RESOURCE DEVELOPMENT PROJECTACTUAL AND FORECAST SOURCES AND APPLICATIONS OF FUNDS

(Rupees Million)

._ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ~ s.* > . , Prov .Act.sourcs FY6 F8 Y8 Y9 F9 Y91l Incom Beforn Ite 413 692 939 16741 8 E ID| dpriRa mbrzol%) 207 340 262 21. 543 8 7.Gross IniCash Generation 480 1,32 -4

GOPC;oatributloas 662 !X09 424 400 114 lOo(,4

.. ~~~~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~ II P _ u

orrowings ForepR Currency I_ _ -i -d .30Borrowings Local currenc 935 1,257 8SW 1.364 1.3 -

Total Sources 2.9t`28 ,14 3.51 .1 .9 4 .7~~'1 ~

Capital Expenditur 2/ 2.169 2,189 1.707 2,100 1.625 295Long TermLan to subsidiazy 0 11 108 22t 0

* Paymzent for Prior Years 0 130' 86 338 44 0 ' ~..0% TA ax m

.. s 42: 0

Debt SeviInterest ~~~~ ~~~~~159 300 417 526 640 702

Repayment 72 93 1 2. 3.73 826 Tota Debt Service 231 393 538 649 1,013 1.528

Change in Working CapitaCubh (6) 253 (4) (57) 130 1,372 5 Othe Than Casu(8 145 82 459 704 (0) ~ ...

Total Change in W/C (1lS) 397 78 403 834 1.271 *S~~STota Application 2295 3.228 2.515 3,517 3.516 5.794 24 U >

Self Finacing Ratio(S 24A4% 24.5% 31.6%* 32.4% 208% 87.5 .%2.,Debt Service Coverage .2.94 2.63 . 2.33 2.61 .2.16 2.80 ~~4

0.It hetudes Papesd Dank Lan..

2/ Imluda OODCS capital expeMadlis now doe propod ProJec.

PAKISTANDOMSTC ENERGY RESOURCES DEVELOPMENT PROJECT Annex 4.2

OIL AND GAS DEVELOPMENT CORPORATION Page 1 of 1FORECAST INVESTMENT PROGRAM

(Rupee. Millon) _ _ _ _ _ _ _ _

PROJECT FY92 FY93 FY94 FY95 FY96 ToW

TANDO ALAM DEV. PROJ. 295 0 0 0 0 295inforeigncunsey 244 0 0 0 0 244inlocal cunrcy 51 0 0 0 0 51

PItKOH GAS COMPRESSION I 945 3129 809 918 5801in fondgn cuerny 0 703 2341 605 69 3718inlocalcurrency 0 242, 788 204 849 2082

DHODAK DEV. PROJ. 26 894 649 0 0 1569inforelgncurrency is 392 184 0 0 591inlocd lunaocy 11 502 465 0 0 978

OIL & GASDEV.PROJ.II 0 702 1232 0 0 1934infoepgcurrnoy 0 380 675 0 0 1055i locd cureucy 0 322 557 0 0 879

QADIRPUR JOINT VENTURE 264 938 769 0 0 1970inforeignaurnicy 166 667 509 0 0 1341inlocalcurrey 98 271 260 0 0 629

NANDPUR DEV. PROJECT 0 48 61 0 0 109inforelgncurrncy 0 27 33 0 0 60inlocal currecy 0 21 28 0 0 49

LOTI DEV. PROJECT 310 129 135 0 0 574in forel currency 204 70 74 0 0 348in loc _curreny 106 59 61 0 0 226

KADANWARI(50%) 20s 561 561 71 75 1471inforelnourmcy 117 310 79 40 42 S87i lood ccurmcy 88 251 59 31 33 461

EXPLORATION (OIL & GAS) 884 913 978 1037 1106 4918In foreign curreny 369 495 535 568 603 2570Inlocdacurrancy 51S 418 443 468 504 2348

JOINT VENTURE DEV. 72 1027 1537 1962 2054 6652i foreign curre 52 773 1167 1469 1534 4995in local curvncy 20 253 370 493 520 1657

CIDA TECH. ASSISTANCE 73 0 0 0 0 73in foreig currency 61 0 0 0 0 61inlocalcurreicy 12 0 0 0 0 12

CIDA EQUIPMENT 48 0 0 0 0 48in foeign currency 41 0 0 0 0 41ia local cuany 7 0 0 0 0 7

DEV. OF NEW DISCOVERIES 0 761 1262 2867 3423 8312i forelpncurrency 0 412 621 1280 1629 3942

in loed acurrency 0 349 640 1587 1794 4370

OGDC BUIILDING 44 60 107 0 0 210In foregin ourency 0 0 107 0 0 107i local cw cy 44 60 0 0 0 104

PIRKOH DEV. PROJECT 653 798 835 0 0 2286in forpga ourrncy 390 473 499 0 0 1362t, loca currny 263 326 336 0 0 925

TOTAL INVESTMENT 2874 7774 11022 6746 7576 35992

FOREIGN CURRENCY 1659 4702 6823 3962 3876 21022

LOCAL CURRENCY 1215 3072 4199 2783 3700 14969

OGDC'S WHOLLY-OWNED INVESTMENTS

OODC'S WHOLLY-OWNED INV. 1665 4514 6916 809 918 14822

TOTAL INVESTMENTS 2874 7774 11022 6746 7576 35992

PERCENTAGE SHARE 57.95 58.1%1 62.8% 12.0%1 12.1% 41.2%

- 66 -

Annex 4.3Page 1 of 1

DPNL ENERC;Y i]OURCEiS ZLELEQMTPRJCTOILF AND GAS MYEVLOP1ENT CI!RTO

DefiWfoit of Tonos ftaginiePa nceU Qiteria

OGDC shall for each year beginning FY92: (i) emu a rate of retum at least equivalent to the higher of 15 %of its average capital employed, i.e. the ratio of net operating income after taxes to the Corporation's average capitalemployed, or the weighted avenage cost of its capital; (ii) maintain a ratio of current assets excluding inventories tocurrent liabilities of not less than 1.1; and (iii) maintain a debt-servicoe coverage ratio, i.e. the ratio of net revenues ofthe Corporation to its es:imated debt-sevice requiments of at least 1.5. For the purposes of the above criteria:

(i) Net operating income is total operating revenues less total operating expenses.

(ii) Total operating revenues are the revenues from all sources related to operations.

(iii) Total oprating expenses include all expenses elated to operations, including administration, adequatemaintance, taxes and payments in lieu of taxes, and provision for depreciation, but excluding interest andchages on debt.

(iv) The average capital employed is one half of the -m of equity and long-term debt at the beginning and atthe end of each year.

(v) TIe weighted average cost of capital is the weighted average of the sum of the cost of OGDC's capital(asmed at 15% of the amount thereof) plus the cost of OODC's long-term debt.

(vi) Equity is the sum of the total unimpaired paid-up capital, retained earnings and reserves of the Corporationnot allocated to cover specific liabilities.

(vii) Long-tem debt is the indebtedness of the Corporation, with the appropriatly revalued foreign portion,which has a matuity of more than one year.

(viii) Current ats include cash, all assets which could in the ordinary course of business be converted into cashwithin twelve months, including accounts receivable, marketable securities, and prepaid expenses properlychargeable to operating expenses within the next fiscal year, but exdudes inventone.

(ix) Cufnnt liabilities include aU liabilities which will become due and payable within twelve months, includingaccounts payable, customer advances, cunrent portion of long-term debt, taxes and payments in lieu oftaxes, and dividends.

(x) Debt servieo is the agegt amount of repayments (including sinkag-fund payments, if any) of, and othercharges on, debt.

(xi) Net revenues are the difference between: the sum of revenues from all sources rolated to operations andnet non-operaing inome; and the sum of all expenses related to operations including administation,adequate mainten , taxes and payments in lieu of taxes, but excluding provision for depreciation, othernon-cash operating charge and interest and other cbarges on debt.

(xii) Net non-operaig income is the diffeace between: revenues from aU sources other than those related toopaions; and expenms, including taxes and payments in lieu of taxes, incurred in the generation ofrevenues from all sources other than those reed to operations.

- 67 -

PAKISTANDOMESTIC ENERGY RESOURCES DEVELOPMENT PROJECT

SECTORAL CONSUMPTlON OF PETROLEUM PRODUCTS IFY89-FY200)('000 TOE)

Adod ForteW ~~~~ ~~~~~~~~~~Ave. A GmslhPE OLEUM FY89 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FYO FY03 FYirbladuute 1262 g .6 1846 2058 2295 2559 23 3181 3490 382 5054 j7?848 24.iResidenia 1007 .20.6 1018 1056 109S 1135 1177 1221 1292 1367 1618 g1 2378 .4ApleubltrelU 306 5,2. 1576 1642 1711 1783 1858 1936 2008 2082 2322 9.. 2678 8.4

Trlasport 4S71 9 4690 4962 S250 SS54 S876 6217 6609 7025 8439 3 11134 3Power 1831 29.1 2949 3244 3568 3925 4317 4749 4915 5087 5640 . 6699 D.9Otie 3 ,.4 49 53 6 0 642 684 728 775 937 3* 1283. ,

TOWe 9312 12578 133 1448s 15559 16724 17988 19042 20165 24010 32020 2 lGAS

duyst y2l 2038 )<.I 3S52 3648 3746 3848 3951 4058 4156 4255 4569 19. 5297 1 ..- 'Res=dea 1217 U 2411 2580 2760 2954 3160 3382 3507 3636 4055 . 4701 114AgrIutur 0 .0 0 0 0 0 0 0 0 0 0 0*0 ..Tansps 0 00 0 0 0 0 0 0 0 .0 0 0 *Power 3035 '46.4 5581 82U 11320 11659 12009 12369 12740 13123 14339 614 16623 41.iC Oher 253 ;I 277 m 289 302 316 330 345 355 366 398 1.7 462 . _

Tota 6543 11821 14805 18129 18?76 19451 2054 207S 21380 23362 27083 j Q00

TOTAL 'Industry 3300 *,S 5398 5706 6041 6406 6805 7239 7645 8084 9623 20.3 13145 2S2 ' ' 44,tResdetial 2224 34.0 3429 3635 3855 4089 4338 4602 4798 5003 5674 12,0 7079 2.0Agriculture 306 1.9 2576 1642 1711 1783 1858 1936 2008 2082 2322 4.9 2678 4. 5f 46Trnaspt 4571 2.8. 4690 4962 5250 5554 5876 6217 6609 7025 8439 1i.8 11134 388 . 2 : v $Power 4866 : 30.7 8530 11532 14888 15584 16326 17118 17656 18210 19980 42.2 23322 39.5 1StOther 588 3,7 776 821 868 919 972 1029 1083 1141 1335 2.8 1745 3.0

Tota 15855 100.0 24399 28299 32614 34336 36175 38142 39799 41545 47372 100.0 59103 100.0 I 6

OQ 0It For FY89 cmnptli of HSD in th Agrkulture ector s Iclued l the Tanspoi sectoar for mbsequess yeanis isincluded in agricultural conmption.

oH

21 Exekudlq FetaIIe.

0*

Mm=Page 1 of 3

DOMESTIC ENERGY RESOURCES DEVEOMETPRJCT

Apfgions,

1. Capia Costs.

- All project costs are calculated in 1991 prices; trnusfer paymnts (including taxes and duties)and price contingencies have been excluded. Locd costs ae expressed in their equivalentborder prices by using a conversion factor of 0.77 of the domestic wage rate, sad 0.80 of thedomestic price for capital goods.

- All coss incurred prior to 1991 (i.e. sunk costs) have been excluded.

2. Econmic Benefit Estimates.

- qMinimum benefits are taken into account because environmental, training and technicalassistance benefits are excluded.

- A;l benefit estimates are based on the Bank's forecast of oil prices, expressed in constant 1990dollars.

All gas volumes are converd to their calorific value equivalent using the thermal value ofeach gas.

3. Opemtin Costs

- Field operating costs include pipeline mainteance and operating costs, and exclude tanusferpayments.

- - Operating costs consist of 75% local costs and 2S% foreign costs; loca costs comprise labor(95%) and materials (5%).

Production, cost and benefit streams under the proposed project and the Internal Economic Rate ofRetun (IERR) calculation for the base case are listed separaly. The bas cm IERR is 55%.

Sienslitiit Analvzs.s

The Project's rate of retn can be negatively affectd by:

(i) Capital cost overrun (by 20%) 45.6%(ii) Shortfall in projected revenues (of 20%) 37.5%(iii) Delay in Project implementation (by 2 years) 35.0%

Even under the worst case scenario i.e. a delay of 2 years in project implementation the IMR remains highertha 35%.

,u:lrn'ann6xS-9

- 69 -

PAKISTANDOMESTIC ENERGY RESOURCE DEVELOPMENT PROJECT

INTERNAL ECONOMIC RATE OF RETURN

cosIs FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03EemtCpdl CostQaditp' 229 1346 1169 0 0 0 0 0 0 0 0 0Kamnward 882 929 148 73 71 0 0 0 0 0 0 0Dhodak 174 731 387 66 0 0 0 0 0 0 0 0Radft 431 312 230 301 317 654 639 0 0 0 0 0

Total 1716 3318 1934 439 388 654 639 0 0 0 0 0

Eamnde OpesdqCoastQadh o 0 0 255 452 452 452 452 452 452 452 452 4S2Kadaawarl 0 0 132 132 132 132 132 132 132 132 132 132Dhodk I 1 106 133 133 133 133 133 133 133 133 133Baki 0 917 1034 1162 1266 1383 1472 1630 1728 1831 1941 2058

Total 1 918 528 1879 1984 2100 2190 2348 2445 2549 2659 2776.I . ,,1,716 ' 426 3463.; 29 ,2,372 2754 '229 248 2445 2549 2659 776 NPV at 10%

BENEFIIS FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 Basc disc. aeGas ReMe MDU) IERRa Case (Millo RA)Qasdhl 0 0 1112 2224 2224 2224 2224 2224 2224 2224 2224 2224 f59-Kadanwar 0 0 1112 1112 1112 1112 1112 1112 132 1112 1112 1112 KYdanwarl 40.51 2910Dhldak 0 0 159 637 637 637 637 637 637 637 637 637 Dhodk 57.0 3177Badla 0 377 375 726 878 1054 1299 1463 1454 1454 1454 1454 BAn 8".7 3668Total 0 177 2758 4699 4851 5027 5273 5437 5428 5428 5428 5428 Totd 50.4 15314

Oil Rowna (Ra. Mulln)Dhodak 0 0 74 328 328 328 315 311 301 301 294 294Bad 0 800 1476 1997 1987 1718 1291 1323 1326 1326 1326 1326Total 0 800 355I 232 2315 2046 1606 1634 1627 1627 1620 1620

LPO Rowss.( Mom)Dhodak 0 0 59 238 244 251 196 208 194 181 169 157

Tatal Rcovaus0i1 0 800 1553 2325 2315 2046 1606 1634 1627 1627 1620 1620as 0 177 27S8 4699 4851 5027 5273 5437 5428 5428 5428 5428LPG 0 0 59 238 244 251 196 208 194 181 169 157

Told Rwasc 0 976 4368 7262 7411 7324 7074 7279 7249 '7236 7217 7206

Net Be .Aa oQadlrer -229 -1346 -311 17;2 1772 3772 1772 1772 177 3 m im WKadanwari -882 -929 832 907 909 980 980 980 980 980 980 980Dhodak -175 -732 -200 1004 1075 1083 1014 1023 999 986 967 955

_Bdin -431 -252 587 1260 1282 73S 479 3356 1053 949 839 723

Tatal Nct DefiIt -1716 -3ZS9 907 4944 5039 4570 4246, 4931 4804 4687 4558 4430

PAKISTANDOMESTIC ENERGY RESOURCE DEVELOPMENT PROJECT

INTERNAL ECONOMIC RATE OF RETURNASSUMPTIONS FOR PRODUCTION AND BORDER PRICES

FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03Gas Production (MCF)Qadirpur 0 0 31350 62700 62700 62700 62700 62700 62700 62700 62700 62700Kadanwarl 0 0 31350 31350 31350 31350 31350 31350 31350 31350 31350 31350Dhodak 0 0 3878 15510 15510 15510 15510 15510 15510 15510 15510 15510Badin 0 4983 10560 20460 24750 29700 36630 41250 41000 41000 41000 41000

TOl 0 4983 77138 130020 134310 139260 146190 IS0810 150560 150560 150560 150560Roiw Prko - Gas (R/MCF) A

Qallpur (950 BTU) 35.5 35.5 35.5 35.5 35.5 35.5 35.5 35.5 35.5 35.5 35.5 35.5Kadanwari (9.50 BTU) 35.5 35.5 35.5 35.5 35.5 35.5 35.5 35.5 35.5 35.5 35.5 35.5Dhodak(I100BTU) 41.1 41.1 41.1 41.1 41.1 41.1 41.1 41.1 41.1 41.1 41.1 41.1Badia (950 BTU) 35.5 35.5 35.5 35.5 35.5 35.5 35.5 35.5 35.5 :S.5 35.5 35.5Oil P0ductioa ('000 BBL)Dhodek 0 0 198 792 792 792 759 751 726 726 710 710Badbl 0 2046 3927 4818 4795 4145 3115 3191 3200 3200 3200 3200

* ToWal 0 2046 4125 5610 5587 4937 3874 3942 3926 3926 3910 3910Bore Price - Oil RAhb.)Dhodak 376 391 376 414 414 414 414 414 414 414 414 414Badla 376 391 376 414 414 414 414 414 414 414 414 414LPG Producion (em)Dhodak 0 0 15840 62700 62700 62700 47125 48273 43446 39101 35191 31672Border Pric - LPG (Rdsa)Dhodak 3657 3657 3741 3797 3885 4001 4153 4315 4470 4631 4798 4971

i~~~~~~~~~~~~~~~~~~~~~~~ 0.

3fr ez or o_e 7? yr 7 6 38*

rUZBEKISTANr T.IKISTAN TAJIKISTAN5

CHINATURKMENISTAN

AFGHANISTAN

/ f 5 NO~~~~~~~~~~~~RTH WESTJ ~~~~~~~~~~~PAK I STA N FRONTIER

DOMESTIC ENERGY RESOURCESDEVELOPMENT PROJECT

PROPOSED UNDER PROJECTGAS PIPEUNES JAMMU AN

O GAS FIELDS TO BE DEVELOPED

C COMPRESSOR STATIONS

O GAS FIELDS

POWtR PLANT

-32 SUI NORTHERN GAS PIPEUNES j /u

SUl SOUTHERN GAS PIPEUNES . -

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