Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 14412

DMPLEMENTATION COMPLETION REPORT

INDIA

WESTERN GAS DEVELOPMENT PROJECT(LOAN NO. 2904-IN)

APRIL 18, 1995

Energy Operations DivisionCountry Department IISouth Asia Region

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

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CURRENCY EQUIVALENTS

Currency Unit = Rupee (Rs)

The exchange rate between the Rupee and the US dollar (US$) during the project period was asfollows:

Year Rs/US$1988/89 14.51989/90 16.71990/91 17.91991/92 24.51992/93 28.91993/94 31.4

FISCAL YEAR

April 1 - March 31

MEASURES AND EQUIVALENTS

1 metric ton (t) = 1,000 kilograms (kg)1 cubic meter (cm) = 35.3 cubic feet (cft)1 barrel (bbl) = 0.159 cubic meter

1 metric ton of oil (330 API) = 7.3 barrels

1 metric ton of condensate (56° API) = 8.3 barrels1 metric ton of gas liquids (LPG and NGL) = 9.1 barrels

ACRONYMS USEDGAIL = Gas Authority of India LimitedGOI = Government of IndiaHBL = Hazira-Bijaipur-Jagdishpur (Gas Pipeline)OIL = Oil India LimitedONGC = Oil and Natural Gas Commission

MEASUREMENT ABBREVIATIONScm = cubic metersmcm = thousand cubic metersmmcm = million cubic metersbcm = billion cubic metersmmcm/d = million cubic meters per daymmtoe = million metric tons of oil equivalentmmnt = million metric tonsmmt/y = millions of tons per yeartoe = metric ton of oil equivalentt = metric tont/d = metric ton per dayt/y = metric ton per year

OTHER ABBREVIATIONSERR = Economic Rate-of-ReturnLPG = Liquified Petroleum GasNGL = Natural Gas LiquidsPMP = Pressure Maintenance ProgramSBM = Single-Buoy Mooring SystemWIF = Water-Injection FacilitySAR = Staff Appraisal Report

FOR OFFICIAL USE ONLY

Table of Contents

P reface .......................................................... iEvaluation Summary ................. .......................................... i

PART I: PROJECT IMPLEMENTATION ASSESSMENT .......................... 1Evaluation of Project Objectives .......................................................... 1

Project Context ........................................................... 1Accelerating Gas Field Development and Production ..................................... 1Identifying Gas Markets and Improving Gas Development Planning .................. 2

Project Achievements .......................................................... 3Overview .......................................................... 3Physical Objectives .......................................................... 3Gas Sector Planning and Pricing Policy .................................................... 4Economic Performance .......................................................... 4Financial Objectives for ONGC .......................................................... 4Macroeconomic Impact .......................................................... 4Institutional Development . .......................................................... 5Environmental Protection .......................................................... 5

Major Factors Affecting Project Performance ........................................... 5Factors Within the Scope of Government Control ........................................ SFactors Within the Scope of ONGC Control .............................................. 6Factors Outside the Project .......................................................... 7

Sustainability .......................................................... 7Bank Performance .......................................................... 7Borrower Performance .......................................................... 7Assessment of Outcome .......................................................... 8Future Operations .......................................................... 8Main Findings and Lessons Learned ....................................................... 9

PART II: STATISTICAL ANNEXES ....................................................... 11Table 1: Summary of Assessments .11Table 2: Related Bank Loans/Credits .12Table 3: Project Timetable .12Table 4: Loan/Credit Disbursements: Cumulative Estimated . 13Table 5: Key Indicators for Project Implementation .13Table 6: Key Indicators for Project Operation .13Table 7: Studies Included in Project .13Table 8A: Project Costs .14Table 8B: Project Financing .14Table 8C: Project Financing IBRD Categories .15Table 9: Economic Evaluation .15Table 10: Status of Legal Covenants .16Table 11: Bank Resources: Staff Inputs. 17Table 12: Bank Resources: Missions. 17

Appendices .......................................................... 18Appendix 1: Contribution of the Borrower's Implementing Agency ................ 19Appendix 2: Map of the Project Area .................................................... 26

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

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IMPLEMENTATION COMPLETION REPORT

INDIA

WESTERN GAS DEVELOPMENT PROTECT (LOAN NO. 2904-IN'

Preface

This is the Implementation Completion Report (ICR) for the Western Gas DevelopmentProject in India, for which Loan 2904-IN in the amount of US$295 million equivalent wasapproved on February 22, 1988 and made effective on September 2, 1988.

The loan was closed on June 30, 1994, the original scheduled closing date. The loan wasfully disbursed, with the last disbursement taking place on July 20, 1992. No co-financing wasinvolved.

The ICR was prepared by H. Morsli, of the Industry and Energy Department Oil and GasDivision (IENOG), who was the Task Manager throughout the Project, and reviewed by J. F.Bauer, Chief India Energy Operations (SA2EG), and Mrs. Kazuko Uchimura, Project Advisor(SA2DR).

Preparation of this ICR is based on material in the project file. The borrower contributed topreparation of the ICR by preparing its own project evaluation.

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WESTERN GAS DEVELOPMENT PROJECT

Loan 2904-IN

INDIA

Evaluation SummaryIntroduction

i. At the time of project appraisal in 1986, India's industrializing economy had a high energyintensity, despite conservation efforts, and economic growth prospects through the 1990s indicated alarge gap between domestic petroleum demand and supply. Forecasts showed a doubling of petroleumdemand from approximately 40 million tons (mmt) in 1986/87 to roughly 80 mnit in 2000, whileoutput from the Bombay High oil field which supplied about 70 percent of the country's domestic oilproduction was expected to decline by an annual rate of eight to ten percent, beginning in the mid-1990s. To meet additional demand and avoid major increases in the country's oil import bill, a keyelement in the energy sector strategy of the Government of India (GOI) was to supported thesubstitution of domestic gas for imported oil, making use of flared gas and substantial untapped gasreserves (paras. 1 and 2). However, several major constraints to gas development existed: (a) lack ofsufficient production and transmission infrastructure; (b) need for further resource evaluation; (c)market development uncertainties; and (d) an inadequate institutional framework for sectordevelopment. Having financed four projects for oil and gas development during 1981-1984 (para. 3),the Bank had acquired considerable experience in working with India's petroleum sector prior to theWestern Gas Development Project (the Project). The Project built upon favorable technical resultsfrom previous projects and launched a dialogue between the Bank and GOI to focus on gas marketing,long-term development planning and pricing. Furthermore, the Project took place at a time when GOIwas moving toward developing partnerships with the private sector to promote greater efficiency in oiland gas sector operations and increased resource mobilization.

Objectives

ii. The Project had .wo major objectives. The first was to assist GOI appraise, develop andproduce natural gas reserves in the Bombay offshore areas and in the onshore oil and gas fields inGujarat State. This objective was reasonable given the physical constraints India faced on theproduction side of gas development. To meet this objective the Project included the followingcomponents: (a) Phase II in the development of the offshore South Bassein field; (b) the constructionof a pipeline from the offshore Heera oil and gas field to the Uran gas terminal serving the Bombaymarket, making use of gas that was being flared; (c) appraisal and initial development drilling of theGandhar field; and (d) evaluation of offshore reserves in the Tapti and Hazira fields for futuredevelopment. The Project effectively mitigated risks of not meeting these objectives by carefulselection of fields for development, conservative production assumptions and sensitivity analyses ofthe Project's economic benefits (paras. 2-4). The Project's second objective was to help GOI launch along-term development plan for the gas sector to ensure gas use in sectors yielding the greatesteconomic benefit. For this purpose, the Project included funds for detailed sector studies to coordinatethe demand and supply aspects of gas development (para. 5). These studies were appropriate giventhe early stage of gas sector development. To further support sector development objectives theProject included covenants to ensure regular reporting on the status of market development andreviews of oil and gas prices in relation to the financial viability of the Oil and Natural GasCommission of India (ONGC), the Implementing Agency for the Project.

Implementation Experience and Results

iii. The Project surpassed its original physical objectives for gas development. Higher thanoriginally anticipated incremental gas and liquids production during Project implementation (1988-94)indicates that output over the life of the Project will be about 126 million tons of oil equivalent (toe)instead of 68 million toe, the estimate at project appraisal. The re-estimated economic rate-of-return(ERR) on the project is 94 percent, compared to the appraisal estimate of 72 percent (Table 9). Paras.

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9-13 of the ICR review the results of Project components in terms of meeting physical productiontargets. The Project's current annual incremental production, about 7.7 million toe, represents around26 percent of India's current oil imports.

iv. During the evaluation of gas reserves at Tapti and Hazira offshore fields, a reassessment of therequired seismic and drilling programs indicated that the cost involved would be much higher than thebudgeted cost and that the original work plan would have resulted in an incomplete evaluation.Therefore, in consultation with GOI and the Bank, ONGC promoted both fields to private participationinstead of using project funds. These fields were included in recent petroleum licensing rounds andONGC is currently negotiating contracts for field evaluation and development with a consortium oflocal and private companies.

v. The Project made some progress in improving gas marketing, development planning andpricing policy. However, GOI did not use funds designated by the Project for detailed studies topromote long-term planning. In compliance with the related project covenant, the gas-producingcompanies, ONGC, Oil India, Limited (OIL) and Gas Authority of India, Limited (GAIL), initiated anannual three-year rolling gas development plan. However, they did not maintain this activitythroughout the Project. Furthermore, GOI conducted a pricing study in 1990 which recommended amove towards market-based pricing instead of a government-controlled pricing system. However,although an initial price adjustment was made following the study, GOI did not fully sustain thestudy's recommendations.

vi. The Project made appreciable contributions in the promotion of environmental protection andthe expansion of private-sector participation in ONGC's operational activities, despite no such explicitproject objectives. The Project took measures to protect the environment in both the design of itsdrilling operations and in the clean-up measures for these operations (para. 19). It also promotedprivate sector involvement in ONGC's operations by demonstrating the cost-effectiveness ofcontracting out drilling and other well-related services for the appraisal and initial development of theGandhar field (para. 18).

vii. The main factor within the control of GOI which had an adverse effect on the Project'simplementation was the recurrent problem of delays that resulted from GOI's complex, bureaucraticprocurement process. There are two aspects of the process that led to these delays. First, instead ofdecentralizinig the procurement process for greater efficiency as originally planned GOI exercisedexcessive centralized control over the process through a complex series of committees. Second, therewas a large turnover of procurement officers during the Project's implementation period, which brokethe continuity of the process and caused protracted disagreements between ONGC, on one side, andcontractors and suppliers, on the other side. These procurement problems delayed most projectcomponents by about a year, resulted in mis-procurement of one component (Table 8C), and (alongwith other problematic administrative procedures) contributed to the cancellation of another projectcomponent (para. 21). Factors which enhanced the outcome of the Project were: (a) the use of apressure maintenance system to increase liquids production from the Gandhar field (paras. 12 and 23);(b) lower than originally anticipated project costs (paras. 9 and 26); and (c) considerable savings toONGC which resulted from the Bank's agreement to finance the construction of both the oil pipelineand the gas pipeline from Heera to Uran (para. 24 ).

viii. The assessment of the Project's outcome, overall, is highly satisfactory. The Project closed asoriginally planned, on June 30, 1994 ( Table 3). Project costs totaled US$653 million, much lowerthan the expected cost of about US$ 1.1 billion. The lower cost primarily resulted from declines inprices of oil industry goods and services worldwide. The Bank disbursed the full amount of theUS$265 million loan. Table 4 outlines the schedule of disbursements.

Main Findings. Future Operations. and Key Lessons Learned

ix. Accelerating Gas Resource Development and Production. The main findings are as follows:(a) there is considerable demand for gas in India; (b) gas development projects are cost-effective; (c)the execution of the technical aspects of gas development are well within the capability of ONGC; and

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(d) privatization of oil and gas field services improved technical performance and reduced costs. TheProject's physical results were very favorable, despite procurement problems which lowered theefficiency of project execution. Current production levels and projections from ONGC indicate that theoutput of gas, condensate and gas liquids should be fully sustainable at least through 2006 (para. 27).The related lessons learned from the Project (para. 37) are:

(a) Careful field selection and preparatory work are important to projectperformance. Gas development work under the Project proved to be very cost-effectivebecause of the Project's focus on well-established fields, which were subject to considerableadvanced preparatory work by ONGC.

(b) There is a need to focus on the causes of procurement difficulties in India.Given limited supervision time, the Bank focused only on removing specific bottlenecksblocking individual project components. To alleviate some procurement problems, the Bankand GOI have agreed on standardized bidding documentation and the initiation of a biddingprocess for critical items before the presentation of a project to the Board.

(c) The use of technical assistance for onsite managerial and operationalexpertise can be extremely beneficial to project performance. Technical assistancehelped ONGC improve its performance under the Project, especially in the area of onshoreoperations, which had been neglected for some time.

(d) The coordination of a project's implementation work should receive highpriority in project preparation and timing. During the two-year lag time between theProject's appraisal and its effectiveness, the ONGC team involved in appraisal which was alsoto handle implementation moved on to other company assignments and coordination difficultiesresulted.

(e) Contracting out specialized services to the private sector can improvetechnical performance and cost effectiveness. The favorable experience associatedwith using private companies to supply specialized drilling services for the Gandar fieldconvinced ONGC of the effectiveness of such partnerships.

x,. Due to the success of the Project, the Bank and GOI launched a follow-up operation, the GasFlaring Reduction Project, begun in 1991. This project's objectives are to: (a) eliminate gas flaringfrom the Bombay High oil and gas field; and (b) assist ONGC in the construction of a second gastrunkline, designed to allow ONGC to recover gas from other fields adjacent to the Bombay Highfield, as well as from the South Bassein gas field (para. 35). In addition, ONGC obtained a loan fromthe Asian Development Bank to implement a second phase in the development of the Gandhar field(para. 36). The Gas Flaring Reduction Project incorporated most of the above lessons in its design.Notably, this project agreement contains covenants to: (a) review the procurement process and theorganization of the project's implementation; (b) establish well-coordinated project implementationunits; and (c) promote further private-sector involvement in the oil and gas sector.

xi. Gas Sector Development Planning and Pricing. The Bank had hoped to convince GOI tomove away from central control over gas allocation and pricing to a market-based system that betterreflects the value of gas to the economy. This objective was intended to be implemented throughthe Project's component for planning studies and the covenants for regular reporting on progress inplanning and pricing. However, GOI decided not to do the long-term development planningstudies originally planned under the Project. Furthermore, GOI did not regularly update and reporton its planning according to the specifications of the Loan Agreement (Table 10). Thus, despitesome initial interest, GOI did not move toward a market-based system as quickly as the Bank hadenvisaged. The main lesson learned is that the Bank and GOI should have formulated clearprogress indicators taking into account GOI's preference for a gradual approach towardliberalization and the Bank's concerns about ensuring the efficient development of gas resources.

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PART I: PROJECT IMPLEMENTATION ASSESSMENT

EVALUATION OF PROTECT OBJECTIVES

Project Context

1. The Western Gas Development Project (the Project) supported the policy of theGovernment of India (GOI) to promote gas development to satisfy the increasing energy needs ofIndia's industrializing economy. At the time of project appraisal in 1986, India's economy showedsignificant energy intensity. Petroleum demand was growing at approximately six percent perannum compared to economic growth of around five percent. India had an estimated 1.35 billiontons of oil equivalent (toe) in commercially recoverable oil and gas reserves. Petroleum productconsumption was about 43 million tons (mrnt) annually compared to crude oil production of about30 mmt. Oil imports were used to meet the supply gap and they accounted for 30 percent of oilconsumption. India was facing the possibility of major increases in these imports due to: (a)expected declines in production from the Bombay High oil field, which provided 70 percent of thecountry's oil supply; (b) projected continuation of high oil demand growth despite conservationefforts; and (c) limited petroleum exploration success. During the preparation of the Project, aspart of a strategy to support the substitution of domestic gas for imported oil GOI constructed theHazira-Bijaipur-Jagdishpur (HBJ) Pipeline to bring natural gas from the Bombay offshore fields tomarkets in the northwestern part of the country. The Project also took place at a time when GOIwas moving toward partnerships with the private sector to improve operational efficiency in the oiland gas sector and increase resource mobilization. The Project's design built upon successfultechnical results in four previous Bank projects and expanded Bank involvement in the areas of gasmarketing, long-term development planning and pricing. The Project's main objectives areevaluated in the following sections: (a) accelerating natural gas field development and production;and (b) identifying new gas markets and improving gas development planning.

Accelerating Gas Field Development and Production

2. India had three established gas-producing areas at the time of project appraisal: westernoffshore fields and onshore fields in Gujarat and Assam (see map attached as Appendix 2). Theestimated total recoverable reserves of these fields amounted to 680 billion cubic meters (bcm),with an annual production capacity of 26.9 million cubic meters per day (mmcm/d), equivalent to539 mnillion toe. The western offshore field contained 80 percent of recoverable gas reserves and74 percent of gas production. Project appraisal estimates indicated that natural gas production overthe decade beginning in 1987 could rise to 45-60 mrnmcm/d, equivalent to 13-17 mmtoe per year orabout one half of India's crude oil production in 1987. However, there were several constraints tobringing existing reserves into production: (a) the absence of transmission infrastructure; (b)insufficient production facilities; and (c) the need for further resource evaluation.

3. The Project responded reasonably to gas resource constraints with two objectives on theproduction side of gas development. The first objective was to increase gas production from fieldswith recoverable reserves through three project components: (a) Phase II development of the SouthBassein offshore field, to double gas production capacity from 10 mmcm/d to 20 mmcm/d; (b) theconstruction of a pipeline from the offshore Heera oil and gas field to the Uran gas terminal servingBombay, to transport gas that was being flared; and (c) appraisal of and initial development drillingin the Gandhar field. The second objective was to evaluate, through a field evaluation program,gas reserves for future development in the offshore North Tapti and Hazira fields. This programwas to consist of seismic surveys, seismic data interpretation and some appraisal drilling. Theimplementation of these objectives was well within the capabilities of the Borrower's ImplementingAgency, the Oil and Natural Gas Commission of India (ONGC), which had experience in all ofthese activities and had been the recipient of four Bank loans (totaling US$1.18 billion) in thepetroleum sector since 1979.

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4. The major risks in meeting the Project's production objectives were: (a) uncertaintiesabout the commercial viability of proven gas reserves; (b) the possibility of a sharp decline in theinternational price of oil; and (c) a policy for gas-pricing and allocation that neither promoted thebest use of natural gas nor encouraged its efficient development. To adequately minimize theserisks the Project's appraisal work (a) focused on well-established fields and used conservativeassumptions about expected production; (b) prepared sensitivity analyses of the Project's economicviability based on oil prices as low as US$12 per barrel; and (c) provided a special component formarketing and development planning studies along with covenants to support regular reviews ofgas sector development (Table 10). There were no major changes in project objectives on theproduction side, although there were a few changes in individual project components in responseto project findings and the availability of funds. Herein, paras. 21, 24 and 25 outline thesechanges.

Identifying Gas Markets and Improving Gas Development Planning

5. At project appraisal, estimated gas use was about 12.4 mmcm/d (3.6 million toeannually). The fertilizer industry was the main consumer, along with some other industries in theBombay area. However, GOI had not yet made a detailed review of potential gas markets orestablished long-term development plans for gas resources. Thus, in addition to meeting physicalproduction targets, an important project objective was to continue Bank dialogue with GOI on gasdevelopment policy and planning. In addition, since at project appraisal prices played little or norole in signaling to gas-consuming industries the real value of gas, the Project also intended toassist GOI in developing adequate pricing and contractual arrangements to promote gas use.

6. The Project provided for a study of long-term gas sector planning to support optimumproduction and utilization of the Western Gas resource base. The scope of the study which theStaff Appraisal Report (SAR) proposed was comprehensive and appropriate to support the largeinvestments required for gas substitution. On the production side, the planning study was to: (a)review reserves and potential production profiles; (b) identify various development options andtheir related operating costs; and (c) select, on the basis of findings from the gas utilization part ofthe study, the least-cost program for developing gas resources over a 20-year period. The studywas to prepare high, low and medium gas-supply scenarios for gas utilization. To develop thesescenarios the study was to identify details about potential gas users in the Bombay and Gujaratareas, such as the volumes of gas they could consume, the costs of gas conversion and theapproximate prices that would encourage gas conversion. Then the study was to estimate theeconomic value of gas for each use, accounting for the fuel replaced, and evaluate related operatingcosts and environmental benefits (net-back value). ONGC had the capacity to handle theproduction side of the planning study with some specialized technical inputs from domestic orforeign specialists for complex or marginal fields. The Gas Authority of India, Limited (GAIL),the state-owned gas transmission and distribution company, had sufficient expertise to conduct thestudies on gas utilization. GOI's Gas Coordination Committee was an appropriate body tocoordinate both the production and utilization aspects of the study.

7. The Project also included several covenants that were reasonable for ensuring GOI'scontinued attention to the Project's objectives for marketing and planning. It provided for GOI tosubmit to the Bank an annual report on gas marketing, covering a three-year period and addressingthe steps necessary to ensure the connection of sufficient users and thus sustain a high capacity-utilization rate for the gas produced. GOI also confirmed that it would make arrangements tocoordinate ONGC's production planning efforts with GAIL's utilization planning efforts, eitherthrough GOI's Gas Coordinating Committee or another appropriate authority.

8. At the time of project appraisal, the Bank and GOI recognized that the expected productionof large quantities of associated gas resulting from the Project would require GOI to establish amore comprehensive pricing policy. Policy discussions between GOI and the Bank led to thefollowing principles for gas pricing: (a) linkage of the gas price to the price of fuel or feedstock

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replaced; (b) a simple price structure with uniform prices along the (HBJ) pipeline; and (c) a fairreturn on costs to the operator of the pipeline, GAIL. Based on these principles, GOI developedthe following set of gas prices: (a) Rs 1400 per thousand cubic meters (mcm) for gas at thetransmission system gate for both offshore and onshore gas; (b) Rs 2250/mcm for gas suppliedalong the HBJ pipeline; and (c) Rs 500-1000/mcm in Assam, where there was a surplus ofassociated gas. To insure proper pricing policy between ONGC, as producer, and GAIL asdistributor, the Bank requested GOI to provide the Bank with the contractual basis for theprovision of gas by ONGC to GAIL. This measure was reasonable to ensure that pricing termnsprovided ONGC with adequate remuneration to allow the company to meet financial covenants ofthe Project and ensure the financial autonomy of GAIL.

PROJECT ACHIEVEMENTSOverview

9. The Project surpassed its original objectives for gas production. It also made some initialprogress in gas development planning and pricing. However, during the Project's implementationthe Bank realized that it would be difficult to bring about far-reaching gas sector changes within thescope of one project; the follow-up Gas Flaring Reduction Project contains specific provisionssupporting economic gas development and pricing. The Project closed on the original dateplanned, June 30, 1994, as Table 3 notes. Table 5 outlines the Project's implementationindicators. Project costs, which totaled US$653 million, were much lower than the expected costof about US$1.1 billion due to declines in the cost of oil industry goods and services worldwide(Table 8A). The Bank disbursed the full amount of the loan, US$295 million, for the Project andTable 4 provides the schedule of disbursements over the project period; Table 8C showsdisbursement by category. The Project met the major objectives outlined in paras. 2-8. Thefollowing review of Project achievements covers: (a) physical objectives; (b) gas-sector planningand pricing policy; (c) economic performance; (d) financial objectives for the ImplementingAgency, ONGC; (e) macroeconomic impact; (f) institutional development; and (g) environmentalprotection.

Physical Objectives

10. South Bassein Field Development. The completion of development infrastructure for theoffshore South Bassein field and the related Hazira onshore gas-processing facility has resulted ina net annual incremental production of 10 mmcm/d. The Project did not install the planned single-buoy mooring system (SBM) at Hazira for loading natural gas liquids (NGL) from the gasprocessing facility onto tankers for transport to the Bombay refinery. The deletion of thiscomponent from the Project resulted from protracted Government administrative proceduresassociated with procurement of the SBM and with obtaining the necessary construction permitfrom state agencies. The SBM was then relocated outside the Project's area of operation.

11. Heera-Uran Gas Pipeline. The Project supported construction of a 26-inch, 100-kilometer(km) pipeline to transport associated gas from the Heera oil and gas field to the Bombay gasmarket. Prior to the Project, ONGC was flaring 1.2 mmcm/d of associated gas but, as a result ofthe pipeline, this gas is now available for use by consumers in the Bombay area. There was adelay of one year in the construction of the pipeline because of lengthy procurement procedures.

12. Appraisal of the Gandhar Gas Field. The original appraisal program in the Project calledfor drilling 115 appraisal and development wells. By the effectiveness date of the loan, the fieldappraisal program was already fairly advanced and the Project ultimately drilled a total of 147wells. However, due to the special characteristics of the reservoir no more than 120 wells areproducing at a given time in order to maximize the recovery of condensate, which has a highermarket value than gas. Daily production per well averages about 270 mcm of gas and 31 metrictons (t) of oil condensate, compared to the respective appraisal estimates of 180 mcm of gas and17.5 t of condensate. The initial field appraisal work showed a tendency toward rapid depletion

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and established the need for a pressure maintenance program (PMP), injecting water into the fieldto keep the pressure up and prevent irretrievable resource loss. This program began on a pilotbasis in 1991-92. After satisfactory results, ONGC decided to expand the PMP to most of theproducing areas of the field. The facilities for this expansion were completed in the summer of1994. The preparation of the program took longer than ONGC originally planned because of theneed to resolve related water issues with GOI (para. 23). In the interim between the pilot testingand the full-scale injection program, ONGC limited field production to maximize condensaterecovery.

13. Reserve Evaluation of the Hazira and North Tapti Fields. The evaluation of these fieldsformed part of ONGC's long-term development plan for the Bombay offshore fields, but it turnedout that the necessary financial resources required were much higher than what ONGC hadbudgeted. Instead of using funds from the Project for the evaluation work, ONGC, in consultationwith the Bank, decided to open field evaluation of these areas to interested private-sectorcompanies. These fields were part of recent petroleum licensing rounds and contracts are currentlybeing negotiated with international oil companies.

Gas Sector Planning and Pricing Policy

14. GOI did not use funds from the Project to do long-term planning studies for gasdevelopment, nor did GOI fully comply with related covenants (para. 33 and Table 10). However,GOI appointed an inter-ministerial committee to review various options for changing the basis ofpricing from government directive to a market mechanism subject to the basic principles outlined inparas. 7-8. The committee held discussions with gas producers and consumers on various pricingissues and submitted its findings to GOI in a report in 1990, which GOI shared with the Bank.The report recommended: (a) a uniform gas price for consumers along the HBJ pipeline; (b) gasprices to the consumer based mainly on heavy fuel oil but including the prices of other productssuch as diesel oil; and (c) periodic price reviews in response to international prices for replacementproducts. As a result, GOI increased the price of gas per mcm at the offshore and onshoretransmission gate from Rs 1400 to Rs 1500 in 1992. At that time, the increase brought the priceclose to its economic price, the international price of fuel oil. However, the domestic price has notkept pace with the international price since that time because of the significant devaluation of theRupee.

Economic Performance

15. The Project's appraisal estimated an economic rate-of-return (ERR) of 72 percent for itsthree physical components: (a) the second phase in the development of the South Bassein gas field;(b) the appraisal and initial development of the Gandhar gas field; and (c) the construction of theHeera-Uran gas pipeline. Based on the results of the Project, the ICR has re-estimated the ERR at94 percent (Table 9). The main reason for the overall higher ERR is that the favorable impact oflower project costs and higher production levels far outweighed the adverse impact of lower oilprices during the project period. Table 9 outlines the major costs and benefits associated with there-estimated ERR.

Financial Objectives for ONGC

16. ONGC remained financially viable during the project period. It adhered to the Project'sfinancial covenants by maintaining a current ratio greater than 1:2; debt service coverage at 1.5times or higher; and a debt to equity ratio of not more than 60:40.

Macroeconomic Impact

17. By supporting the substitution of domestic gas for imported oil the Project had a favorablemacroeconomic impact, avoiding additional foreign exchange expenditure on oil that would have

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been required in the absence of production from the Project. The use of previously flaredassociated gas and the production of new gas and liquids from the Project amount to 7.7 milliontoe/year, equivalent to about 26 percent of current oil imports.

Institutional Development

18. The Project included measures to strengthen ONGC's onshore drilling operations in theBaroda office, which supervised the Gandhar field appraisal by contracting out these services toprivate companies specializing in these operations. At the same time, the Project helped trainONGC staff to supervise private drilling and other field activities, such as well cementing andrehabilitation, along with general services, such as the building of access roads to field operations.The use of these private services decreased the overall cost of field services and encouraged ONGCto seek further cost-effective partnerships with the private sector.

Environmental Protection

19. Although the Project did not have explicit objectives for environmental improvements, itdid include several measures to protect the environment: (a) treating formation water in theGandhar field and offshore fields; (b) monitoring effluent water subject to the standards of theIndian Minimum National Standard Regulations (MINAS), which are at least as strict as thosegoverning oil production in the North Sea; and (c) establishing the requirement for ONGC toensure that contractors for the Project clean up any additional drilling fluid or chemicals, andreclaim any land not required for production. Furthermore, the Project helped establish multi-directional drilling at given drilling sites, which minimized the use of land in drilling operations byas much as 60-70 percent.

MAJOR FACTORS AFFECTING PROJECT PERFORMANCE

Factors Within the Scope of Government Control

20. Procurement Procedures. Recurrent procurement problems throughout the Project'simplementation were largely responsible for delays in almost all of the Project's components andthe mis-procurement of the Hazira compressor station. There were two main problems. The firstwas excessive government control over the process. Procurement operations were supposed to bedecentralized, with regional management in charge of most decision-making, except in the case oflarge contractors, which required the approval of ONGC's headquarters. Instead, all tenderingpassed through as many as five committees within ONGC, with the final stage of the processrequiring the review of one or two inter-ministerial government committees, depending on theimportance of the procurement package. The operating procedures of these committees wereespecially cumbersome. For example, all members of the committee had to be present for thereview. If one committee member was not available for some reason, the entire process wasdisrupted. Furthermore, high-level officers often appointed new committees which would send thetender evaluation back down the committee-approval chain for the entire process to begin again.The second problem in the procurement process was the large turnover of procurement officersduring project implementation, which led to different interpretations of contract terms and resultedin protracted disagreements among contractors, suppliers and ONGC. Furthermore, the heavyinvolvement of high-level GOI entities in the procurement process made it extremely difficult forONGC to comply with certain procurement guidelines and resulted in mis-procurement for theHazira compressor station (US$11.5 million). While ONGC clearly understands Bankprocurement guidelines, the involvement of higher GOI authorities has, on occasion, interferedwith ONGC compliance. A similar situation arose in the procurement process for the SBM ofHazira, but then the Bank notified the Government that it would cancel the entire project if GOIfailed to follow procurement guidelines. Subsequent to this communication there were no othercases of mis-procurement under the Project.

6

21. Construction of the SBM at the Hazira Gas Treatment Plant. There were several factorswhich led to the delay and eventual cancellation of this project component. First, protractedprocurement procedures delayed the initial construction schedule by about one year. Then, afterthe start of construction, the Gujarat State Maritime Administration objected to it, claiming that thework required a permit from them. The review process for the permit further delayed construction.It took ONGC two years to obtain the permit, which required a realignment of the SBM.Compliance with this request required an extension of the construction schedule and the contractorrequested a cost adjustment to take account of the additional work necessary. After several monthsof negotiations, ONGC and the contractor could not reach an agreement. The contractordemobilized operations and the dispute was submitted to arbitration. ONGC considered re-tendering the SBM's construction but this would have delayed the completion, originally scheduledfor 1989, until the end of 1995. Since the NGL processing plant at Hazira was scheduled forcompletion by that time, the shipment of NGL through the SBM system from Hazira to theBombay refinery was no longer necessary. The country did need an SBM system for imports ofliquified petroleum gas (LPG), however, this area was not part of ONGC's activities. Therefore,the construction of the SBM was canceled from ONGC's work program and related equipmentwas transferred to another state-owned company, the Indian Oil Corporation.

22. Devaluation of the Rupee. The Rupee's value relative to the US dollar declined from Rs 14per US$ at the outset of the Project, to Rs 31.4 per US$ at the end of the project period. The mainimpact on the Project's results was a lower US dollar-equivalent value of the local-cost component.

Factors Within the Scope of ONGC Control

23. Optimization of Production Increase from the Gandhar Field. In the course of fieldappraisal, ONGC discovered the presence of a greater than anticipated petroleum liquid fractionwhich led to the need for PMP and a related water-injection facility (WIF), components that werenot originally part of the Project. Until the completion of the WIF and the operation of the PMP, itwas necessary to constrain the field's production to prevent resource loss and advanced fielddepletion. Given the importance of this program for the productivity of the field, the Bankmaintained the original closing date of June 30, 1994, although disbursements for the Project wereessentially complete in September 1992. Gas production increased by 400 mmcm/y and liquidsproduction by 0.28 mmt/y as a result of PMP. By keeping the loan open the Bank was able tomonitor and assist ONGC in the implementation of this program.

24. Construction of the Heera-Uran Oil Pipeline. At the time of project appraisal, ONGC'sinvestment program included an oil pipeline and a gas pipeline, from the Heera oil and gas field toconsumption centers in the Uran area. ONGC was supposed to complete the construction of theoil pipeline prior to the Project. As part of the Project, the Bank was to finance the equipment andthe construction costs of the gas pipeline only. However, there was a delay in the procurement ofthe oil pipeline which ONGC was financing on its own. Coincidentally, that pipeline'sconstruction was to take place at the same time as the Bank-financed pipeline. Since it would nothave been possible logistically for two different contractors to construct these pipelines at the sametime, ONGC and the Bank decided to have one contractor construct both pipelines. For eachpipeline the cost of supplies was about one half of the total construction cost. Thus, it was decidedthat ONGC would finance all the supplies for both lines on its own and the Bank would finance theconstruction costs for both lines. This arrangement resulted in cost savings of about 20 percent forthe supplies and construction of both lines.

25. Evaluation of the Hazira and North Tapti Offshore Petroleum Fields. ONGC decided toseek funds from international oil companies interested in the evaluation of the Hazira and NorthTapti offshore fields and, therefore, did not use Project funds originally allocated for this purpose.The Bank supported this move to make greater use of private resources available for oil and gasfield evaluation.

7

Factors Outside the Project

26. Decline in the International Price of Oil and the Related Cost of Oil Field Supplies andServices. The international price of oil fell from US$27 per barrel in 1984 to an average of aboutUS$18 per barrel during the Project appraisal period. The declining oil-price trend led to a sharpcurtailment of oil development activity worldwide. This curtailment considerably lowered pricesfor oil industry goods and services. Price decline led to substantial reductions in project costs.The original estimate of the Project's base cost was US$1.1 billion. The actual cost of the Projectwas about US$653 million or 60 percent of the original estimate. Most of the cost reduction wasin the area of drilling services, as noted in Table 8C. Additionally, during the project period(1989-1994), the international oil price in real terms averaged about US$15 per barrel instead ofthe constant US$18 per barrel which the SAR assumed for its base case estimate of the ERR.However, the price differential did not threaten the economic viability of the Project, which was toremain viable for oil prices as low as US$12 per barrel, according to the SAR.

SUSTAINABILITY

27. Production Benefits. Actual production results and projections from ONGC indicate thatthe output of gas, condensate and LPG associated with the Project will be fully sustainable at leastthrough 2006. Incremental gas production, which are currently about 4.9 bcm annually, areexpected to peak at 8.2 bcm in the late 1990s and gradually decrease to about 6.6 bcm in 2006.The production of oil and condensate, which is currently about 2.0 mnmt, is projected to reach peakproduction of 2.2 mmt in 1996/97 and decline to 1.0 mmt in 2005/06. The production of NGLand LPG is about 870,000 t and is expected to remain at this level through 2006.

28. Gas Development Planning and Pricing Policy. As noted in para. 14, GOI has notregularly updated planning work and the current price of the gas which GAIL pays to ONGC isbelow the economic price. Thus, it appears that benefits from the Project's dialogue on improvedplanning and pricing policy in these areas are not fully sustainable by the Project alone. However,the follow-up Gas Flaring Reduction Project contains covenants that should enhance themomentum towards more liberalized sector development and pricing (para. 35).

BANK PERFORMANCE

29. Project Identification, Preparation and Appraisal Assistance. The Bank's performance inhelping the Borrower identify, prepare and appraise the Project was satisfactory. The SAR wasthorough, with considerable attention to linking sector strategy to the various project components.It also took sufficient account of factors to minimize risks that could impede the achievement of theProject's objectives. However, inclusion of some provision to streamline decision-making onprocurement and avoid some of the procurement problems that delayed the implementation of theProject would have been desirable.

30. Supervision. Bank supervision of the Project overall was satisfactory. Most of thesupervision missions focused on project components for enhancing gas production anddistribution. This was reasonable since the bulk of the investment cost was in these componentsand GOIUONGC took actions on pricing and sector planning outside the scope of the Project.Furthermore, the Bank had a good working relationship with ONGC on the technical aspects of theProject.

BORROWER PERFORMANCE

31. GOI was the Borrower for the Project and ONGC was the Implementing Agency.ONGC's performance in executing the technical aspects of the Project was satisfactory, but wasweak in certain areas of project management. Furthermore, since during most of the Project'simplementation period ONGC was a commission of GOI, not a separate corporation, ONGC did

8

not have sufficient independent authority to follow all of the Bank's guidelines governing projectexecution. The performance of GOI was not fully satisfactory, mainly because of its excessiveinterference in project management and related decision-making, especially in the area ofprocurement.

32. Project Identification. Preparation and Appraisal. The performance of ONGC in projectidentification, preparation and appraisal was satisfactory. However, there was about a three-yeartime lag between project identification and preparation because of GOI delays in granting ONGCapproval for the Project. This was due to GOI's preoccupation with the concurrent HBJ gas-pipeline project.

33. Project Implementation. ONGC's performance in executing the physical componentsoverall was satisfactory. ONGC complied with project covenants governing its financial viability,but the performance of ONGC in overall project management could have been better. A two-yearlag between project appraisal (1986) and effectiveness (1988) led to coordination problems becauseof ONGC's staff changes. ONGC did not designate a coordinator for the various physicalcomponents of the Project as the SAR specified. This omission resulted in some lack ofcoordination and unconsolidated reporting on the progress of the Project, which complicatedsupervision by the Bank. The performance of GOI was not fully satisfactory because of: (a)excess interference in project management and decision-making, especially in procurement matters;and (b) insufficient compliance with the covenant in the Loan Agreement governing regularreporting on gas development planning (Table 10). Notably, GOI's heavy interference in theprocurement process made it very difficult for ONGC to follow all of the Bank's procurementguidelines (para. 20).

ASSESSMENT OF OUTCOME

34. The outcome of the Project is highly satisfactory because it either met or exceeded itsproduction targets and is expected to result in greater economic benefits than originally anticipated.

FOLLOW-UP OPERATION

35. Given the success of the Project, the Bank launched a follow-up operation, the Gas FlaringReduction Project, begun in 1991. The Project's objective is to eliminate the flaring of largequantities of natural gas associated with oil production at the Bombay High oil and gas field (up to12 mmcm/d) by simultaneous recovery of the gas for transmission to consumers. This project isalso assisting ONGC in the construction of a second gas trunkline, which will allow ONGC torecover natural gas from other fields adjacent to the Bombay High field, as well as from the SouthBassein gas field. When completed, the project will allow ONGC to increase its natural gasproduction and transmission to onshore by about 25 mmcm/d. This gas recovery scheme also willallow ONGC to produce from more wells, which will increase its oil output bv about 3 mmt/y. Theproject's implementation is about 60 percent complete, taking account of components financed bythe Asian Development Bank and the Japan Export-Import Bank (J-Exim). The gas trunkline isexpected to be completed by mid-1995. Current plans indicate the onshore gas-receiving facility,an expansion of the Hazira gas processing complex, will be completed in 1996. Furthermore, thisproject is continuing the dialogue with GOI on greater liberalization of gas-market development andprivate sector participation in the oil and gas sector. Covenants are included to: (a) implement apolicy for linking gas pricing to international fuel oil prices; (b) review oil and gas fielddevelopments on a quarterly basis; (c) submit annual reports to the Bank indicating changes in gasallocations and their inputted or net-back values; and (d) establish a body in the Department ofPetroleum and Gas to monitor the implementation of gas supply and utilization plans.

36. For the Gandhar field, ONGC has obtained a loan from the Asian Development Bank(ADB) to implement a second phase of the field's development. The ADB-financed project isdrilling more gas-producing wells, expanding the field's gas-gathering system and extending the

9

PMP for the reservoir. At full development, the Gandhar field should produce as much as 10mmcnifd of gas and 2-3 mmnt/d of condensate and light oil. Furthermore, GAIL is preparing tobuild two LPG-recovery plants, each with a capacity of more than 200 mt/y, using gas from thisproject.

MAIN FINDINGS AND LESSONS LEARNED

37. The key lessons that emerged from the Project are the following:

* Careful field selection and preparatory work are important to project performance. Gasdevelopment work under the Project proved to be veiy cost-effective because of the Project's focuson well-established fields, which were subject to considerable advanced preparatory work byONGC. In particular, the use of an early-production system for the appraisal and developmentwork for the Gandhar field allowed ONGC to conduct a reservoir deliverability test which showedthat the field contained more petroleum liquids than ONGC had originally anticipated. The resultswere crucial to developing a program for optimizing resource recovery from the field. Notably, theuse of reservoir pressure maintenance and drilling programs improved the field's recovery of high-value liquid fractions along with the related gas.

* There is considerable industrial demand for gas. Prior to the Project GOI focLIsed primarilyon the potential use of gas as feedstock for fertilizer and petrochemical production. However, themarket development work which the Project promoted encouraged GOI to look to demand fromother sectors. As it turned out, there is considerable industrial sector demand for gas, especially inheat processing operations.

* 'There is a need to focus on the causes of procurement difficulties in India. The Project andpreceding Bank projects experienced delays as a result of GOI's cumbersome, bureaucraticprocurement process, which revealed GOI's unwillingness to relinquish direct control overONGC's procurement activities. Instead of focusing on the cause of the main procurementdifficulties, the Project and its predecessors concentrated on removing immediate bottleneckspreventing timely implementation of project components. Greater focus on the causes ofprocurement difficulties, instead of the mechanics to remove them, is required. Bank staffsupervising the Project could have focused more on the causes, but this would have involvedconsiderable supervision time on a problem which goes well beyond the scope of the Project andeven the oil and gas sector; it is a deep-rooted problem affecting most sectors of the economy.However, to minimize problems in the future, the follow-up Gas Flaring Reduction Projectincluded a covenant in the Loan Agreement to review the procurement process. Also, the Bankand GOI have agreed on standardized bidding documentation, which should help improve theprocurement process and reduce the likelihood of mis-procurement. Finally, since ONGC is nowa corporation instead of a GOI commission, it will have more independence in the conduct ofprocurement matters for ongoing and future Bank-supported projects.

* The use of technical assistance for onsite managerial and operational expertise can beextremely beneficial to project performance. Technical assistance helped ONGC improve itsperformance under the Project, especially in the area of onshore operations which had beenneglected for some time. In particular, the assistance resulted in the transfer of technology forsophisticated well-completion techniques and PMP in the Gandhar field.

* The coordination of a project's implementation work should receive high priority in projectpreparation and timing. During the preparation of the Project, ONGC organized a team of officersthat worked well together and were supposed to coordinate the implementation of the Project'scomponents, which were spread among several offshore and onshore areas. However, there wasa lag time of two years between the appraisal of the Project and the effectiveness of the relatedloan. During this period, most team members who participated in the preparation of the Projectwere relocated to other parts of ONGC. As a result, the Project experienced coordination

10

difficulties which could have been avoided by retaining the original group involved in projectpreparation and appraisal.

* There is a need for greater dialogue on market-based gas development planning. Morecommercialization of the gas sector and long-term policy dialogue on pricing outside the context ofa specific project are necessary to achieve greater efficiency and sustain some initial progress madein the move to market-based resource allocation. The follow-up Gas Flaring Reduction Projectcontains some covenants to support this transition (para. 35). In future projects, the Bank andGOI have to work out clear indicators of progress.

* Bank willingness to confront serious cases of non-compliance with Bank guidelines andproject covenants with the serious prospect of project cancellation is an effective tool of ensuringcompliance. After one case of mis-procurement under the Project, the Bank stressed to GOI theimportance of procurement guidelines by clearly indicating the Bank's willingness to cancel theentire Project if more cases of mis-procurement arose. This commitment on the part of the Bank toenforcing its guidelines was a key factor in encouraging GOI compliance throughout the rest of theproject. The Bank should maintain this stance in the on-going project.

11

PART II: STATISTICAL ANNEXES

Taht J; Suwmmary of Assessments

A. Achievement of Objectives Substantial Partial Negligible Not Applicable

Macroeconomic Policies * O OU

Sector Policies O *O

Financial Objectives * ° Li

Institutional Development * O Li

Physical Objectives * Li Li

Poverty Reduction O Li O

Gender Issues O i O A

Other Social Objectives O ° 0 X

Environmental Objectives * ° ° °

Public Sector Management ° ° ° A

Private Sector Development ° * ° °

Other (specify) ° ° ° X

B. Proiect Sustainability Likely Unlikely Uncertain

I * O

C. Bank Performance Highly Satisfactory Satisfactory Deficient

O * O

OU Li

OU Li

OU El

D. Overall Borrower Performance Highly Satisfactory Satisfactory Deficient

a * O

O * O

D * D

O * 0

E. Assessment of Outcome Highly Satisfactory Unsatisfactory HighlySatisfactory Unsatisfactory

* 0 0 0Source: Bank s[aff estimates.

12

Tab i :t i -_le Z0 Xe~W.& 0 J: R M i

Year ofLoan/Credit Title Purpose Approval Status

Preceding Operations.

I. Bombay High Offshore Development Development of Bombay 1981 CompletedLN 1925-IN High Field

2. Krishna-Godavari Exploration Exploration and appraisal 1983 CompletedLN 2205-IN onshore and offshore

3. South Bassein Gas Development Field development and 1983 CompletedLN 224 1-IN pipeline

4. Cambay Basin Petroleum Project Exploration and development 1984 CompletedLN 2403-IN of the Cambay Basin

Followinig Operations:

I. Petroleum Transport Onshore gas trunkline 1989 Canceled in partLN 3364-IN

2. Gas Flaring Reduction Project Infrastructure and gas 1992 On-goingLN 3364-IN pipelines Bombay offshore

Source: Bank Project Files.

Steps in Project Cycle Date Planned Actual Date

Identification 1/00/86 4/00/86

Preparation 2/86-5/86 6/86-10/86

Appraisal 6/1/86 11/1/86

Negotiations 3/1/87 11/17-11/23/87

Board presentation 7/1/87 2/2/88

Signing NR 4/21/88

Effectiveness NR 9/2/88

Project completion 12/31/93 9/30/92

Loan closing 6/30/94 6/30/94Source: Bank Project Files.NR = Not reported.

13

FY88 FY89 FY90 FY91 FY92 FY93

Appraisal Estimate 10 100 195 255 290 295

Actual 0 75.7 156.6 253.4 282.9 283.3

Actual as % of Estimate 0 76 80 99 97 96

Date of Final Disbursement: July 20, 1992

Source: Bank ILoan Department.

ir. - *, ? ? .- l. ri,piecT . .. U ,.

Key Implementation Estimated ActualIndicators in SAR/President's

Report

1. Sale of gas from the South 10 mmcmld by 1992 8.5 mmcm/d 1992. increasing toBassein field. 17.1 mmcm/d by 1997

2. Sale of gas from the Gandhar 1.0 mmcm/d for 1991 1.4 mmcmld by t991, increasing tofield. 5.5 mmcm/d by 1995

3. Production of liquids from the 1.3 mt/d 2.8 mt/d by 1991, increasing to 3.7Gandhar field. mt/d in 1993

4. Sale of gas from the Heera field. 0.8 mmcm/d by 1992 0.9 mmcm/d by 1992

5. Pre-develop of North Tapti and Completion of seismic work and Not implemented as part of theHazira fields. interpretation by 1992. project. a/a/ To be developed with the private sector.Source: SAR, President's Report, Project Files, and Bank Staff Estimates.

Table 6: Key Indicators for Project OperationNone Applicable

-t . -?- ( '6 g.flt ?t A ftq t < a fl..... , , ; ..- a,.4.: 5

Study a/ Purpose as defined Status Impact of Studyat appraisal

Gas marketing and long- Identify new gas markets Deleted from the Project at Not applicable.term gas sector and coordinate production the request of GOI.development planning. and market planning.

a/GOI prepared the study without project funds.Source: Bank Project Files.

14

Appraisal Estimate (US$mm) Actual/Latest Estimate (US$mm)

Local Foreign Local ForeignItem Costs Costs Total Costs Costs Total

South Bassein Platform 36.20 117.00 153.20 7.70 152.80 160.50

South Bassein Wells 42.30 61.40 103.70 28.10 38.80 66.90

Hazira Terminal 74.60 55.30 129.90 103.40 23.90 127.30

Heera/UranPipeline 5.50 104.60 110.10 31.00 80.50 111.50

Gandhar Wells 203.60 247.00 450.60 79.50 66.10 145.60

GandharFacility 53.80 8.00 61.80 36.20 4.90 41.10

N.Tapti/HaziraSeismic 1.00 7.00 8.00 0.00 0.00 0.00

N. TaptilHazira Wells 29.70 47.00 76.70 0.00 0.00 0.00

Studies 0.30 1.00 1.30 0.00 0.00 0.00

Base Cost 447.00 648.30 1095.00 283.70 364.40 652.90

Physical Contingencies 44.70 64.90 109.60 0.00 0.00 0.00

Price Contingencies 91.90 57.10 149.00 0.00 0.00 0.00

Total Project 583.60 770.30 1353.90 285.90 367.00 652.90

Source: SAR, ONGC and Bank Staff Estimates.

Appraisal Estimate (US$mm) Actual (US$mm)

Local Foreign Local Foreign

Source Costs Costs Total Costs Costs Total

295.00 295.00 68.30 215.00 283.00

Co-financing Institutions - - - -

Other External Sources - 475.30 475.30 - 150.20 150.20

Domestic Contribution 583.60 - 583.60 214.60 - 214.60

Total 583.60 770.30 1353.90 282.90 365.20 648.10Souirce: SAR, ONGC and Bank Staff Estimates.

15

Appraisal Estimate US$mm Actual US$mm

Category Local Costs Foreign Total Local Costs Foreign TotalCosts Costs

1. Process Facilities - 76.00 76.00 36.80 28.80 65.60

2. Pipeline Installation - 60.00 60.00 0.30 80.50 80.80

3. Drilling Materials & - 61.00 61.00 19.10 87.00 106.00Equipment

4. Drilling Services - 70.00 70.00 12.10 18.00 30.10

5. Seismic Surveys - 8.00 8.00 - - -

6. Engineering and Studies - 5.00 5.00

7. Unallocated - 15.00 15.00 - - -

Total - 295.00 295.00 68.30 215.00 283.30

Cancellation a/ (-) -11.70 -11.70

Adjusted Total - 295.00 295.00 68.30 226.70 295.00

a] Due to mis-procurement of the Hazira compression station.Source: SAR and Bank Staff Estimates.

.% ^' <(' 6 j,t, ~. K A,.

SAR Estimate ICR Re-estimateEconomic Rate of Return 72.0 94.0

Gas Production (bcm) 63.0 96.0Liquids Extracted from Gas (mmt) 11.0 15.0Condensate Production (mmt) 4.0 27.0Net Benefits (US $ billion) 2.7 5.4

Major Costs (US$mm)Capital Costs 613.8 535.0Operating Costs 594.0 312.0

Source: SAR, ONGC and Bank Staff Estimates.

Notes for Table 91. Costs and benefits expressed in constant 1987 US dollars.2. For the ICR re-estimate, foreign costs were deflated from current dollars using the MUV index for theappropriate year and local costs in Rupees were deflated using a weighted-average index for the manufacturingand services sector, as indicated by the Indian Country Programs Division.

16

Agreement Section Covenant Status Description CommentsType

Loan 2.02 (b) FIN Compliance ONGC shall maintain a special NoneAmended account in US$.

Loan 3.01 (b) FIN Compliance GOI re-lending to ONGC under Noneterms and conditions satisfactoryto the Bank (not less than 15%per annum repayment, within15 years including 5-year gracepefiod).

Loan 4.01 (b) AUD Compliance ONGC Audit including opinion Noneon SOE (due within 9 monthsof FY end).

Loan 4.01 (a) AUD Compliance Audit of Special Account (due Nonewithin 6 months of FY end).

Loan 4.02 (b) AUD Partial (a) ensure the timely offtake of GOI complied withCompliance gas by users along the HBJ part (a) but,

pipeline to absorb gas supply concerning part (b),under the Project; did not report on(b) report annually, to the Bank, marketon market development progress development andand plans for gas use over a future planningthree-year period. regularly and in the

manner stipulatedby the covenant.

Loan 4.03 FIN Compliance GOI to periodically review Noneprices of crude oil and naturalgas paid to ONGC with the aimof permitting ONGC tomaintain financial viability.

Project 3.03 M&O Complied ONGC shall take out insurance Noneagainst risks consistent withappropriate practice.

Project 4.01 AUD Complied ONGC Audit due within 9 None____________ (b) (ii) __________ __months of FY end.

Project 4.02 (a) FIN Complied ONGC shall (i) ensure cash Nonegeneration not less than 1.5 xdebt service; (ii) not incur anydebt that would increase theprincipal of aggregate debt togreater than 15 times equity; and(iii) maintain a ratio of currentassets to liability of not less___than 1-2 times.

Source: Loan and Project Agreements.AUD = Audit covenant.FIN = Financial covenant.M&O= Management and operations covenant.

17

Stage of Project Cycle Actual

Staff Weeks US$thousand

Through Appraisal 164.0 422.0

Appraisal-Board 12.1 33.0

Board-Effectiveness

Supervision 66.7 182.3

Completion 4.6 13.0

Total 247.4 650.3

a/ No dollar costs reported during the project cycle. No estimated or revisedestimates of staff weeks available.Source: Bank's time recording system (TRS).

Performance Rating

Stage of Month/ Number Days Specialized Implemen- Develop- Types ofProject Year of in Staff Skills tation ment ProblemsCycle Persons Field Represented Status Impact

Through Mar-86 6.00 18.00 TM, FA, CG, a/ a/ alAppraisal July-86 EC, PE, PR

Appraisal b/ b/ b/ b/ b/ b/ b/throughBoand

Approval

Supervision Dec-88 2.00 8.00 TM, G 2.00 2.00

Feb-90 4.00 10.00 TM, CG, EC. 2.00 1.00PR

Sep-90 1.00 7.00 TM 2.00 1.00

Apr-91 1.00 4.00 CG No rating NA

Oct-91 2.00 10.00 TM, CG 2.00 1.00

Oct-92 2.00 7.00 TM, CG 2.00 1.00

Sep-93 2.00 5.00 TM, CG 2.00 1.00

a/ Not applicable for the appraisal process.

b/ No missions during this period.

Special Staff Skills:TM Task Manager EC Economist PE Petroleum EngineerG Geologist CG Consult Geologist FA Financial AnalystPR Procurement Specialist

Source: Project Files and Bank Staff Estimates.

18

Appendix 1

Contribution of Borrower

(Prepared by the Borrower's Implementation Agency,the Oil & Natural Gas Corporation Limited)

.Y~~~~~~~~BMA REIOA BUIES ENROIL & NATURAL GAS CORPORAT7ON UM/TED

F 3 80lJB^~~~SMSY REGKLL 8tJSINESS CENTRE!IIUt 821. VASUOHMARA HAVAN. BANCAM EAST). BOMBAY.40 061.Phone: 6429971 Telex 011-71010 Fgx 0226400282

No .8BC/GM:F/C-7/94 December 22, 1994

Mr.H.Mcrsli,Sr.Petrcleum Engineer,Oil and Gas Division,Industry & Energy Department,World Bank,1818 H Street, N.W.Washington, D.C. 20433U.S.A.

Pe: Westerr Gas Develooment Project(Lo0n NC.2904-IN) - Submission of revised data recardingproject Completion Reoort

Dear Sir,

Kindly recall our discussion on 5th December 1994regarding the statistical data required to be submitted for thepurpose of Project Completion Report for WGDP. On the basis ofour discussion and your suggestions we have recast the statisti-cal information based on the format given in the Staff AppraisalReport prepared in January 1988.

I- may be noted that no expenditure has been incurr-don accout -h hazira and North Tapti fields per-aining to apprai-sal driiing and seismic survey.

It may also be noted that the ooerating cost of theproject has been considered for the incremental production of theprojects covered under the loan.

We are also including a write-up regarding the ProjectEvaluation pertaining to Heera, Gandhar and Hazira terminalfacilities. We shall be glad to provide you any further informa-tion in this regard.

Thanking you,

Yours faithfully,

/lCJQ Ca(M.K.Mukhopadhyay)

General Manager(F&A)

Poc, d. : j-rvn Rharab Tower-/i, 124. Connaught Circus. New ODh-1 1t0 001Fhone ' _' 'S. _ ; 2 .- arm: COMCONG TLL. 031t65261U4 Fax 01 1-3316413

20

HEERA-TRUNK PIPELINE (HUT) PROJECT:

ONGC had initiated advance procurement action in November 1987for the HUT project a component of 'Heera Phase II DevelopmentProject. Since the gas transportation system covered under theproject was indicated for possible financing by World Bank provi-sions were kept under the Bidding Documents accordingly besidespossibilities of other alternative financing arrangements.However World Bank intimated serious reservations on some of theBidding Document stipulations and the split up tendering method-ology followed by ONGC. The issues were discussed at higherlevels with the Bank, ONGC and the Govt. of India based on whichthe Bank agreed to finance both the oil and gas transportationsystems covered under ;he HUT Project for 2 components of worksi.e. Coating/wrapping and Laying of the pipeline. Linepipeprocurement was decided for financing by ONGC's own arrangements.The Bank identified minimum changes in the Bidding Documents forthe Coating and Laying to make the same acceptable to the Bank.All such changes were conveyed to the bidders and their confirma-tions for compliance obtained.

Stage approvals from the Bank during stage-1 and stage-2 evalua-tions were planned within 15 days but actually took more time.

The bidders maintained unacceptable deviations and these werewithdrawn after lot of discussion. This in turn delayed theprocess of evaluation.

Since, ONGC had to obtain final approvals of GOI including F.E.release before awards of works against the tenders, some delayswere experienced in these interactions also.

Above interactions with World Bank, bidders and GOI for thedifferent tenders of the project and the resulting impact on thetendering schedule of the respective tenders had to be reviewedand the overall tendering/implementation schedule had to berevised by ONGC envisaging project completion by 15.5.90 (withone month grace period) as against the original plan of 30.9.89.

Procurement guidelines of the World Bank have since been dis-cussed very much in detail and the ONGC's standard Bidding Docu-ments for projects being funded by World Bank were revised. Thesubsequent projects with financing from World Bank could as aresult be implemented much faster. With these changes, interac-tions with the bidders also are less and the time consumed insuch interactions has been minimised. Under the present arrange-ments ONGC does not require separate F.E. release from GOI andcan decide award of works after internal approvals only andtherefore the tendering period has also been reduced consider-ably.

21

By completion of HUT gas pipeline flaring of associated gas fromHeera, Ratna and Neelam fields has been reduced considerably.This pipeline is now being connected with Bombay High fieldthrough ICP-Heera trunk pipeline presently under implementationafter which it can transport upto 16 MMSCMD gas to the shoreterminal at Uran for processing/distribution to consumers.

By completion of HUT oil line expensive transportation of oilproduced from the Heera, Neelam and Ratna fields by tankers hasbeen stopped.

22

Gandhar Project

The monitoring of the Project by the Bank throughdiscussions with Bank Missions from time to time contributed toclose monitoring and control of the project implementation. TheBank have been helpful in their suggestions from time to time andalso the close monitoring and control led to project implementa-tion almost on time and its successful completion. Bank'sprocedures also helped in deciding the contracts on time andaward of work accordingly.

Close monitoring and interim review of the progressboth physical as well as financial was undertaken with a view totake corrective actions in time. Review meetings were regularlyheld with the Project Officers and also at the Regional level tomonitor the Western Gas Development Project. All these effortshelped in successful completion of the Project and full loanutilisation ahead of schedule.

The Bank made the observation about lack of productionoptimisation due to pressure maintenance in Gandhar. Pressuremaintenance in Gandhar got delayed due to poor injectivity of thewells because of formation damage around well bore.

Success was achieved by taking measures to improveformation injectivity and carrying out injectivity tests athigher pressures.

Water injection @ 8000 M3/d was achieved as on September 1993 andpresent rate of injection is 12500 M3/d as on 7th December 1994.

The regular water injection scheme ! 12000 M3/d hasbeen advanced and has been completed by mid December 1993 asagainst 1994-95 envisaged in the Gandhar Phase - II developmentFeasibility Report.

Pressure maintenance in Gandhar is being given utmostimportance.

Higher GOR wells have been closed and production stra-tegy is based on following considerations:-

i) Major oil production is taken from upper undersaturatedreservoir of Gandhar.

23

ii) High GOR wells of Gandhar are closed/put on restrictedwithdrawals depending on the order of GORs.

iii) Priority is given to produce oil wells lying inexploratory isolated areas.

The relationship between Bank and the Borrower duringthe evaluation and implementation of the project has been excel-lent. The experiences both of the Bank staff and that of theBorrower were so dovetailed as to result in comprehensiveevaluation of the project and implementation thereof. Periodicalmeetings and suggestions of the Bank Missions helped in closemonitoring and supervision of each of the components of theProject and its implementation on time successfully. Suggestionsfor improvement wherever necessary were debated and on that basison-the-spot decisions saved valuable time.

No Co-financing was involved in this project.

M/s.EIL were engaged as consultant for construction ofsurface facilities under Phase -I. The contractors were engagedboth for construction of surface facilities and drilling ofwells. The performance of EIL and the contractors was satisfac-tory.

A summation of the benefits of the project to theBorrower in both quantitati-ve and financial aspects are givenbel ow:

A. Quantitative:Appraisal CurrentEstimate estimate

Cumulative oil productionunto 2000 (MMT) 3.5 6.238

Cumulative gas productionupto 2000 (Million M3) 5329.50 4634.04

B. Physical Work

Description Appraisal Appraisal ActualEstimate EstimateAs per SAR as per loan

Agreement

Expl.Wells 33 40 40Dev. Wells 48 75 75

24

Hazira Onshore Terminal

During implementation of the Project, performance of the WorldBank remained fairly good and appreciable in terms of communica-tion and understanding the problems. The Bank had expressedtheir views in certain and definite terms while conveying theirsuggestions and approval for implementation of the projects. Afew cases where delays occured on account of clarifications ofBank's observations are compressors and Digital DistributedControl System.

Though the execution of project has been delayed, but it has beencompleted matching with the mutual demand build up of the down-stream consumers. As the project has been implemented in anumber of packages, there are lot of interfacing and coordinationproblems of various contractors and hence the number of packagesshould be minimised in future.

There was no other co finance in this project.

The role of consultant was to provide all assistance to theBorrower in the design and engineering for preparation of Bidpackages, evaluation and award of work to various contractors andthereafter supervision of contractors' work of residual engineer-ing, procurement, construction and completion of the project.The relationship between the contractors, the consultant and theBorrower was always cordial which resulted in the successfulcompletion of the project. However, the SBM component of theproject could not be completed and the contract had to be termi-nated in ;ew of the exorbitant price demanded by the contractorto meet the additional conditions imposed by GMB for laying ofoffshore-pipelines.

On successful completion of the project, the Borrower couldprocess additional gas and earhed a net revenue which have beendepicted in the financial statement submitted along with thisreport apart from having multiplier effect on various otherdownstream industries.

25

C. Financial Analysis

Appraisal ActualEstimate

Capital Cost (Rs. Million) 5662.80 3842.20

Financial Benefits:IRR 13.6% 53.78%

NPV @ 10% 473.98 1763.02(Rs.Million)

26

Appendix 2

Map of the Project Area

MAP SECTION

IBRD 19877R

INDIAWESTERN GAS DEVELOPMENT GUJARAT

PROJECT Baroda 22--22°

Project:

- - - 18 Inch Crude Oil Pipelines

*h ~ 20 Inch Natural Gas Pipelines GUJARA T DAHEJ Broach

A Kawas Terminal Extension 0

O Process Platforms

4. SBM OHfshore NGL Loading Point

Principal Fields

Potential Oil andJor Gas Reserves

Proven Oil Reserves land associated gas) KOSAMBA

Proven Natural Gas Reserves

Under Construction

* 36 Inch Natural Gas Pipeline .' A0

Surat

Fertilizer Plants l,Cr t A (Surat

* Process Platforms Hazi#

A Kawas Terminal - 21 21'

Existing. O~NORTH36 Inch Natural Gas Pipeline CENTRAL TAPTI

_- _ 26 Inch Natural Gas Pipeline TAPT1t 5 1

- - 30 Inch Crude Oil Pipelines

Distribution Lines

A Uran Terminal

* Process Platforms ESOUTH

4. SBM Offshore Gas Loading Point TAPTI------ Fault Liies

Isobaths in Fathoms

®) SSte or Union Territory Capitol

- -- - State or Union Territory Boundaries

- - - International Boundaries

DAHANU

2D- 20'/

SATELLITE ,, t/ MAHARASHTRASTRUCTURE 1,,5 TARAPUR

0 t0 20 30 40 55 0 r0

Kisrlest.re Do t; i ^BOMBA YHIGH ,

~~%~~~j~~A PANA

C*PA

' IJUTri 8ASSEIN MUMBAI_ 19' . (BOcMBAY) ts'

Uran

HEERA 0 Tha_ + _= O t 3 ~~~~~Tha

Th. b-ud.on.. -oor.- d-,-1,. noln nd on oh.,Ifoms.o_ -o rh. mpp do nor -pi on h. or of The Wor-d 5,0k

Op.onoJ noripoco..nr, aof sro- inso27r re onr 72 -' 3AlNA7

MAY 19.95

IMAGING

Report No: 14412Type: ICR