Western gas development project
Report No: ; Type: Report/Evaluation Memorandum ; Country: India; Region: South Asia; Sector: Oil & Gas Exploration & Development; Major Sector: Oil
                                                           & Gas; ProjectID: P009896


December 29, 1995

India: Western Gas Development Project (Loan 2904-IN)

The Implementation Completion Report on the India Western Gas Development project (Loan 2904-IN, in the amount of
$295 million, approved in FY88), was prepared by the South Asia Regional Office. The Borrower's comments on the ICR
are included. The loan, which was fully disbursed, was closed on June 30, 1994, the original closing date.

The project objectives were: (i) to support the rapid development of proven gas reserves in western India; (ii) to help
identify further reserves; (iii) to encourage expansion of the gas market to effectively utilize the gas produced; and (iv) to
support longer term least-cost development planning of gas supplies and utilization planning to ensure gas is used in sectors
that yield the greatest economic benefits. The project components supporting these objectives were: (a) Phase II
development of the South Bassein gas field, to increase production from 10 MMCMD to 20 MMCMD; (b) the laying of a
gas pipeline to utilize the Heerat oil field's flared gas; (c) Phase I development of the Gadhar field; (d) the evaluation of the
reserves of the Tapti and Hazira fields for future development; and (e) gas utilization and production optimization studies.

The project surpassed its original gas development objectives. The re-estimated economic rate of return is 94 percent,
significantly above the appraisal estimate of 72 percent. A detailed reevaluation of the Tapfi and Hazira fields showed that
the full appraisal costs would be much higher than funds available. The National Oil and Gas Corporation therefore agreed
to include these fields in its recent private participation promotion program. Licensing contracts for these fields are currently
under negotiation. The project was less successful in its institutional development components. Studies to promote long
term planning were not implemented. An initial "rolling" three year utilization plan was initiated, jointly, by India's gas
producing and distributing enterprises, but was later dropped. Some initial efforts were also made to raise gas prices to their
economic opportunity cost, but this too was not sustained in the face of subsequent devaluations of the Rupee.

The Operations Evaluation Department (OED) rates the project outcome as satisfactory (versus highly satisfactory in the
ICR) because the sector institutional development component failed to generate any meaningful results. As in the ICR,
sustainability is rated as likely. Institutional development is rated as negligible (versus partial in the ICR) because of lack of
progress on gas utilization rationalization and pricing reforms described above. OED rates Bank performance as
satisfactory.

The most significant lesson to be drawn was that the use of contracted private sector suppliers of specialized services (in this
case well drilling services) rather than using exclusively in-house facilities can improve a project's technical performance
and cost effectiveness. Contracting out should be encouraged whenever feasible. A second lesson is that a more concerted
effort needs to be made to gradually introduce a market based system for gas utilization.

A follow-up Gas Flaring Reduction project (Loan 3364) was approved in FY91. Its covenants focused attention on gas
policy areas where compliance had been weak, including gas pricing policy and gas supply and utilization planning.
However, monitorable indicators of progress were, apparently, not included in the project design.

The ICR is good. There is a full discussion on how the follow-up project has incorporated many of the lessons learned in
this project, and on the Bank dialogue with the Government on gas utilization planning and gas pricing reform.

No Audit is planned.