Document of The World Bank FOR OFFICIAL USE ONLY Report No.: 17954 IMPLEMENTATION COMPLETION REPORT REPUBLIC OF EQUATORIAL GUINEA SECOND TECHNICAL ASSISTANCE PROJECT FOR THE PETROLEUM SECTOR (Credit No. 2408 - EG) June 5, 1998 Energy Unit Infrastructure Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (As of January 20, 1997) Currency Unit = CFA Franc (CFAF) US$1.00 = CFAF 520 CFAF 1 million = US$1,923 FISCAL YEAR OF BORROWER January 1 - December 31 ABBREVIATIONS AND ACRONYMS Bcpd Barrels of Condensate Per Day Bopd Barrels of Oil Per Day Bpd Barrels Per Day LPG Liquefied Petroleum Gas MMcf Million Cubic Feet MME Ministry of Mines and Energy (formerly Ministry of Mines and Hydrocarbons) MMH Ministry of Mines and Hydrocarbons PSC Production Sharing Contract Vice President . Jean Louis Sarbib Technical Manager Mark Tomlinson Country Director : Serge Michailof Task Manager : Angel Baide FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT REPUBLIC OF EQUATORIAL GUINEA SECOND TECHNICAL ASSISTANCE PROJECT FOR THE PETROLEUM SECTOR (Credit No. 2408 - EG) Table of Contents Page Preface Evaluation Summary i-iii PART I. PROJECT IMPLEMENTATION ASSESSMENT 1 I. PROJECT BACKGROUND 1 II. STATEMENT AND EVALUATION OF OBJECTIVES 3 III. ACHIEVEMENT OF OBJECTIVES 4 IV. MAJOR FACTORS AFFECTING THE PROJECT 7 V. PROJECT SUSTAINABILITY 8 VI. BANK PERFORMANCE 9 VII. BORROWER PERFORMANCE 9 VIII. ASSESSMENT OF OUTCOME 10 IX. FUTURE OPERATION 10 X. KEY LESSONS LEARNED 10 This document has a restricted distribution and may be used by recipients only in the performance of utheir ofricial duties. Its contents may not otherwise be disclosed without World Bank authorization. Table of Contents (continued) PART II. STATISTICAL ANNEXES Page Table 1: Summary of Assessments 12 Table 2: Related Bank Credits 13 Table 3: Project Timetable 14 Table 4: Credit Disbursements: Cumulative Estimates and Actuals 14 Table 5: Key Project Implementation Indicators 15 Table 6: Project Operation Indicators 15 Table 7: Studies in the Project 16 Table 8: Project Costs and Financing 17 Table 9: Economic Costs and Benefits 17 Table 10: Status of Legal Covenants 18 Table 11: Compliance with Operational Manual Statements 19 Table 12: Bank Resources: Staff Inputs 19 Table 13: Bank Resources: Missions 20 PART III. OTHER ANNEXES A. Aide Memoire of ICR Mission. 21 B. Borrower's final evaluation report. 32 Map: IBRD 29416 IMPLEMENTATION COMPLETION REPORT REPUBLIC OF EQUATORIAL GUINEA SECOND TECHNICAL ASSISTANCE PROJECT FOR THE PETROLEUM SECTOR (Credit No. 2408 - EG) Preface 1. This is the Implementation Completion Report (ICR) for the Second Technical Assistance Project for the Petroleum Sector in Equatorial Guinea, for which a Credit 2408 EG in the amount of SDR 1.8 million was approved on July 2, 1992, and made effective on November 20, 1992. 2. The Credit was closed on the original closing date, June 30, 1997, and the last disbursement took place on December 9, 1997. No cofinancing was involved. 3. The ICR was prepared by Angel Baide (AFTG1) of the Africa Region, and reviewed by Noureddine Bouzaher (AFTG1), Eric Daffem (IENOG), Harald Burmeister (AFTS2), Renganaden Soopramanien (LEGAF), and Iain T. Christie (AFTP 1). The Borrower reviewed the draft ICR and informed the Bank it had no comments on it. 4. Preparation of this ICR was begun during the Bank's final mission from November 30 to December 14, 1997. It is based on the mission's findings and on material in the project file. The Borrower contributed by writing its own evaluation of the project's execution and initial preparation. A translation of the Borrower's report is included as an annex to the ICR. IMPLEMENTATION COMPLETION REPORT REPUBLIC OF EQUATORIAL GUINEA SECOND TECHNICAL ASSISTANCE PROJECT FOR THE PETROLEUM SECTOR (Credit No. 2408 - EG) Evaluation Summary Introduction i. The World Bank has assisted oil sector development in Equatorial Guinea since 1981. First, the Bank was executing agency for two UNDP grants to promote exploration, and then it financed with the same objective a First TA Project which closed in December 1989. The Second TA Project for Petroleum was declared effective in November 1992, three years after the first had closed. In between those two dates, the Government signed Production Sharing Contracts (PSCs) in April 1990 and in June 1992, respectively for the Alba and the B Blocks, which would result in the current production of about 90,000 barrels per day (Bpd). The country's first hydrocarbon production began in December 1991, when Alba was put in operation with a production level of 3000 Bpd of condensate (later increased to 8000 Bpd). This event triggered the identification and preparation of the Second TA project. ii. The project focused on the Alba field operations, and was conceived as an instrument to redress a perceived imbalance between the Operator, Walter International, and the Government, and to correct deficiencies in the field's development plan, and in safety and environmental aspects of operations. The Government had negotiated Alba's PSC without any expert assistance, and the Government's share of field revenue was very low. The Government had later approved the field's development plan proposed by the operator without the benefit of an environmental impact assessment, and again without expert assistance to review the proposed reservoir depletion strategy and the use of the gas. The project would provide assistance to the Government in determining what the optimal development plan should be, and what improvements were needed in the operations, particularly concerning utilization of the gas, which was being flared, as well as safety improvements and environmental mitigation. This would provide the basis for negotiating the implementation of actions required with the operator during the discussion of the annual work programs the operator has to submit to the Ministry for review and approval. Project Objectives iii. The project objectives were to: (a) ensure that the Borrower received maximum and sustainable revenue from the production of the Alba field; (b) identify the most cost effective methods to utilize the associated gas from Alba; (c) minimize the risks for the environment of Alba's operations; (d) improve the efficiency of energy sector - ii - institutions; and (e) strengthen the capacity of the MMH to monitor the activities of oil companies, and to evaluate the supply and pricing systems for petroleum products. iv. To achieve these objectives, the project included studies on: Alba's operations; a revision of the oil exploration and production contractual framework; and improving energy sector organization. The project also included technical assistance to: monitor oil exploration and production activities; audit oil companies' financial operations; negotiate contracts with the oil industry; and implement the recommendations of the studies. The project also included training, rehabilitation of MME's building and provision of cars. Implementation experience and results v. Project objectives were partially achieved. The project financed technical assistance to monitor Alba's production and to audit financial operations, to set up reporting and filing systems, and to train MME's staff. In 1995, the Government requested a renegotiation of the Alba PSC, and consultants financed by the project helped in justifying the request and in preparing renegotiations. However, in 1996 the operator refused all changes and the Government decided not to insist for the time being'. vi. The project financed two studies of Alba's operations and an environmental impact assessment as well. NOMECO, the current field operator, which took over from developer Walter International in May 1995, is gradually implementing recommendations for safety and environmental protection improvements, and for full utilization of the gas that is currently being flared. By end 2000, all the gas will be used: an LPG production plant was put in operation end-1997; a 10-MW power plant to supply Bioco's grid is under construction; and a turn-key contract has just been signed for construction of a methanol plant to be commissioned end-2000. NOMECO has announced plans for gas re- injection, to maintain reservoir pressure, in connection with a planned expansion of operations. vii. In early 1995, oil was discovered in Block B by Mobil. The Zafiro-Topacio complex was developed and put in operation in only 18 months. Production began in September 1996 at 40,000 Bpd, and increased to 80,000 Bpd one year later. The project provided key assistance for the Government to maintain informed discussions on long- term development plans and on annual work programs with the oil companies during this period of very fast expansion. The project also financed assistance for the Government to monitor exploration and production activities in the country during this dynamic period, and to improve reporting and monitoring procedures. viii. The project financed a study on energy sector reorganization. One recommendation was adopted, aiming to allow coherent policy-making from within one single Ministry: to transfer electricity, formerly under the Ministry of Industry, to the After project closing, in March 1998, the Government successfully renegotiated the PSC for the B block, which was originally similar to Alba's PSC. The production of Block B is ten times that of Alba. - iii - Ministry of Mines and Hydrocarbons, which then became Ministry of Mines and Energy (MME). The Ministry did not implement recommendations to improve control of petroleum product distribution, for which assistance was foreseen under the project, or to improve commercial operations in electricity. In the case of electricity, implementation would have been supported by a follow on project that did not materialize. ix. A draft revised legal framework for hydrocarbons was prepared, but not finalized nor enacted. The Government continues to discuss the draft texts and is seeking further expert assistance. The project increased MME's technical capacity through training. The project also financed rehabilitation of the Ministry's building and acquisition of cars. x. One factor that interfered with smooth project implementation was the Borrower's reluctance to share information on oil sector operations because of confidentiality concerns. The Ministry was wary of the possibility that international consultants would leak sensitive information to oil companies with whom they might have ties, particularly those companies drilling across the disputed maritime borders with Nigeria and Gabon. As a result, consultants were not always given sufficient information to do their job properly. However, a relationship of trust gradually developed with one of the consultants financed by the project, which continues to be the Government's main advisor in the oil sector even after the project closed. This was beneficial for the project and for the country. xi. Another problem was the fact that the Borrower continuously fell behind in its payments to the Bank for previous credits, which resulted in frequent suspension of disbursements, disrupting project execution. The Borrower did not provide timely information to the Bank on implementation progress. Project management and project accounting were deficient. During project execution, only the accounts for the first year were audited. The rest of the accounts were audited only after project completion. Summary of findings, future TA and training, and key lessons learned xii. There was lack of commitment by the Borrower to some objectives, particularly, the improvement of petroleum product importation and distribution. The first TA project had identified problems, notably excessive import prices charged by the concessionnaire, that the second TA project was supposed to help correct. The Bank appears not to have correctly assessed Borrower commitment to certain objectives. Bank supervision was not fully effective. In particular it failed to react to the problem of overdue audit reports. xiii. The main lessons learned are: (a) the need for an unequivocal understanding of, and agreement on, project objectives; (b) the need for openness on the part of the Borrower in sharing sector information with the Bank and with consultants for assistance to be effective; (c) the need, when project management capacity is limited, to include assistance for this purpose in the project; and (d) the recognition that the modernization of MIvME's structures and systems should have been given a higher priority. IMPLEMENTATION COMPLETION REPORT REPUBLIC OF EQUATORIAL GUINEA Second TA Project for the Petroleum Sector Credit 2408-EG PART I: PROJECT IMPLEMENTATION ASSESSMENT I. PROJECT BACKGROUND 1. The World Bank has assisted oil sector development in Equatorial Guinea since 1981. Between 1981 and 1983, the Bank was executing agency for two UNDP grants to promote exploration; then, from 1983 to December 31, 1989, it financed the First TA Project for the Petroleum Sector (Cr. 1304 EG). The Second TA Project for the Petroleum Sector became effective on November 20, 1992, almost three years after the First TA Project had closed. In the period between those two dates, the Government signed two production sharing contracts (PSCs), one for the "Alba" Block and one for Block "B", that would result in the current hydrocarbon production of about 90,000 Bpd. These two PSCs determined the manner in which the Second TA Project was conceived and also the project's contribution to Equatorial Guinea's oil sector development. 2. The first PSC was signed with Walter International, an independent oil developer from Texas, in April 1990, and the start of production from Alba, in December 1991, was the event that triggered the identification of a second TA project. The project focused on ensuring sustainable development of the field and on maximizing revenue from Alba for the Government. The other PSC was signed with United Meridian Corporation (UMC) in June 1992, just as the Second TA Project was being sent to the Board. Because of that, the project documents do not mention the Block B contract. However, when in 1996-97 the Zafiro-Topacio complex in Block B was developed in record time by Mobil, the project provided critical assistance for the Govermnent to keep on top of events. This was one of the major benefits the project delivered for the country. 3. It seems clear in retrospect that the Bank saw the project as an instrument to redress the imbalance between Walter International and the Government in the Alba operation. First of all, the Government's share was well below the minimum practiced in neighboring countries, so there was a basis for the Government to try to negotiate a larger share. Secondly, the field had been shown to be marginal, and there were reasons to believe Walter International would try to minimize all costs, and favor a quick recovery of its investment. This might result in less than optimum field-development operations, shortening the field's useful life, reducing the total volume ultimately recovered from the reservoir, and increasing environmental risks. It was important, therefore, that the Government be able to determine independently the optimal development plan, and any environmental mitigation measures needed. Finally, to ensure it received the share it was due based on the PSC, the Government would need to exert close supervision of both physical and financial operations. The World Bank wanted to help the Government obtain adequate assistance and training for these tasks. -2 - 4. The Government, on the other hand, was very keen to ensure the success of the country's first production operation after almost two decades of otherwise fruitless exploration. Also, being aware of the marginal quality of the field, the Government may have been under the impression that the investment carried considerable risk . With the neighboring countries being already established oil producers, the Government probably felt it needed to offer contractual terms that would make Equatorial Guinea competitive. Furthermore, from the Government's point of view, the possibility the contract offers for the contractor to divert the potential Government share of oil revenue to reinvestment may not have been much of a problem, as it was consistent with the Government's desire to encourage further exploration. 5. Oil exploration in Equatorial Guinea increased considerably after 1980. In 1984, REPSOL (Spain) discovered the Alba gas-and-condensate field offshore the island of Bioco. A thorough feasibility study of Alba field development, completed in 1986, showed the field to be of marginal interest. REPSOL then lost interest in Alba, and the PSC was rescinded in February 1990. The feasibility study had estimated the investment needed for the simplest development scheme, with production only of condensate and flaring of all associated gas, to be of the order of US$350 million . It also had considered different possible uses for the gas after separation of the condensate, including production of liquefied petroleum gas (LPG), production of either methanol or ammonia, and reinjection to maintain reservoir pressure. The estimated rates of return were low, so the study concluded that, if the field was ever developed, the operator should try to minimize investment and operation costs and aim for fast product recovery. 6. In April 1990, the Government signed a new PSC for the Alba Block with Walter International which proceeded to develop on a shoe-string. According to the MOP, its investment was only US$36 million. Walter installed a 38-km long submarine pipeline, and built a condensate separation plant onshore Bioco. Production started in December 1991, initially at a level of 3,000 barrels of condensate per day (Bcpd), with flaring of the associated gas after separation of the condensate. In May 1995, Walter International sold all its rights to a consortium led by Houston-based CMS-NOMECO, which then became Alba's operator. Current production is about 6000 Bcpd and 2000 Bpd of LPG. About 80 million cubic feet (MMcf) of gas are flared every day. 7. Based on the PSC, the Government's take from Alba includes an off-the-top royalty of 10 percent of sales, and a share in the production increasing in steps as a function of the operator's rate of return. The contract allows the operator to recover a series of "oil costs", both investment and operation. When these costs cannot be compensated in a given year, they can be carried forward. After the first five years, the 2 Experience has shown the field to be larger than originally estimated. Walter International may have done a more exact assessment of the field's potential from the available data than the previous licensee. 3 The project's MOP gives the estimated development cost as US$150 million. This may be a revised estimate by REPSOL after the consultants delivered their final report. - 3 - Contractor pays income tax at a rate of 25 percent. The contract, which the Government negotiated without the benefit of any expert assistance, is very favorable to the Operator. 8. The key features of the PSC are that: (a) after royalty payment, all of the remaining revenue can be applied to recover oil costs; and (b) as long as the operator's rate of return does not exceed 30 percent, the Government's share in production is zero. Given that no boundaries are specified for the producing field within the licensed block, and the fact that blocks are huge, the operator, by re-investing enough oil revenue in new exploration, is able to keep its rate of return below the 30 percent threshold ensuring not only that the Government's share in production will remain at zero, but also that less income tax will be paid. The Bank thought the Government had a case to try to redress the imbalance with the project's help, and believed this also to be the Government's idea. 9. However, just as the project was being sent to the Board, the Government signed the PSC for Block B, again without the benefit of any expert assistance for negotiations. The terms of the contract were similar to those for Alba. This shows a disconnect between the Bank's and the Government's understanding of the project objectives. The activities in Block B, where oil was found in 1995, would result in a change of focus for the project from 1996 on. Investment by Mobil-UMC for the development of the Zafiro- Topacio complex was of the order of US$1 billion in only 18 months. The field was developed using cutting-edge technology. Current production is 80,000 barrels of oil per day (Bopd) with an increase to 120,000 Bopd projected in one to two years. II. STATEMENT AND EVALUATION OF OBJECTIVES 10. The project objectives were to: (a) ensure that the Borrower received maximum and sustainable revenue from the production of the Alba field; (b) identify the most cost effective methods to utilize the associated gas from Alba; (c) minimize the risks for the environment of Alba's operations; (d) improve the efficiency of energy sector institutions; and (e) strengthen the capacity of the MMH to monitor the activities of oil companies, and to evaluate the supply and pricing systems for petroleum products. 11. To achieve these objectives, the project included the following components: Part A Studies covering the following: (1) designing the most efficient way to develop the Alba field; (2) identifying the most cost-effective methods to utilize the products separated from the Alba flare; (3) assessing the environmental impact of Alba's operations and identifying appropriate measures to address problems detected; (4) revising the petroleum exploration and production contractual framework; and (5) improving the organization of the institutions involved in the energy sector. Part B Technical assistance for the following: (1) monitoring the production of Alba; (2) monitoring exploration activities carried out in the country; (3) reviewing audit reports on Contractor's expenditures; (4) evaluating the Contractor's development assets; (5) negotiating new contracts, or renewal of existing contracts with oil companies; (6) applying the recommendations of the Alba gas-utilization study; (7) applying the -4- recommendations of Alba's environmental-impact assessment; (8) applying the recommendations of the study on improving the energy sector's institutional framework; (9) establishing a data-filing and statistical system within the MMH; and (10) improving control of petroleum product supply, conservation, transport and distribution. Part C Training of MMH personnel, including scholarships, tuition, travel and subsistence for MMH Engineers. Part D Rehabilitation of the MMH building, and acquisition of two field vehicles. 12. The objectives were clear, and important for the country. They also were in agreement with the World Bank's implicit country assistance strategy. In view of the great increase in oil sector activities that later materialized, they now appear as too narrow, focusing as they did on the small Alba field. For the same reason, the project documents now appear as too ambitious when stating the objective of the project was to create capacity so that by the closing date the Government would not need any more external assistance. However, despite the narrow statement of project objectives, the project did respond to the actual needs as activities accelerated with the development and coming in line of the Zafiro-Topacio complex. The project financed key assistance for the Government to deal with Mobil-UMC concerning this important field, which now accounts for 90 percent of the country's oil production. III. ACHIEVEMENT OF OBJECTIVES 13. The objectives of the project were achieved partially. In some cases, it is not possible to say how much the project contributed to the attainment of the desired results, because implementation was done by Alba's operator, NOMECO, which has taken the initiative to upgrade its installations and operations to international oil-industry standards. However, the Government has used the studies and recommendations result of project- financed assistance in discussing with the operator the annual work programs. These work programs have been the vehicle for implementation of the recommended measures. (a. 1) Maximum revenue from the production of Alba Partially achieved The project financed technical assistance to monitor Alba's production as well as exploration in the Block, and to audit Alba's financial operations. Also, to set up reporting and data-filing systems, as well as related training for MME personnel. The project also financed assistance for discussions with oil companies on the application of tax provisions included in the PSC and in the tax code, when Alba's income tax holiday ended in 1996. In 1995, the Government requested NOMECO to renegotiate the financial and other clauses of Alba's PSC. The project had financed assistance to justify this request, including cash-flow simulations under different scenarios, and to prepare renegotiation. In May 1996, the Government informed the Bank that NOMECO had -5- refused all changes, and that the Government had decided not to insist, preferring to wait for a better moment . The Bank accepted the Government's decision when informed of it. (a.2) Sustainable revenue from Alba Partially achieved The purpose was to determine independently the optimal depletion strategy for the Alba reservoir, and to have the Operator implement that strategy in developing the field. The project financed two studies, one very brief, the other more extensive, to assess Alba's operations and to identify possible improvements. Both studies analyzed briefly the issues of reservoir life and total recovered volume under different depletion scenarios. The second study recommended a feasibility study of gas reinjection to maintain reservoir pressure. The operator has studied this, and has announced plans for gas reinjection (see next paragraph). NOMECO appears to be developing the field in an optimal manner. (b) Most cost-effective utilization of Alba's gas Partially achieved The studies mentioned in the preceding paragraph also dealt with possible uses of gas. Except for gas reinjection, most of the studies' recommendations have been implemented, or are being implemented by the Operator. By the end of year 2000, all gas presently being flared will be utilized: (i) an LPG production plant (2000 Bpd) was commissioned end-1997; (ii) a gas-turbine power plant (10 MW) to supply Bioco's grid is under construction; and (iii) a contract has been signed for construction of a methanol plant (2500 tons/day) to be commissioned by end-2000. Expansion plans, based on a reassessment of reservoir size, include gas reinjection to maintain reservoir pressure. (c) Mitigation of Alba's environmental risks Partially achieved The study financed an environmental impact assessment that identified deficiencies of the installations, and environmental risks, and made a series of recommendations for improvements. NOMECO has been gradually implementing those recommendations. (d) More efficient energy sector institutions Partially achieved The project financed a study on energy sector reorganization. The study was done in only three months, and its recommendations are of a general nature. It did not make any detailed recommendations on the proper organizational structure and systems needed to efficiently manage oil sector development based on the tasks to be accomplished. One of the study's recommendations, aiming to allow development of a coherent energy policy from within one single Ministry, was adopted: the transfer of electricity, until then under the Ministry of Industry, to the Ministry of Mines and Hydrocarbons, which after that became known as the Ministry of Mines and Energy (MME). 4 In March 1998, the Government successfully renegotiated the PSC for Block B, with a substantial improvement of conditions on all the same aspects it wants to correct in the case of Alba. -6 - The study also recommended improvements in commercial operations of electricity and petroleum-product distribution, and the dissolution of state-owned enterprises in both sectors. These recommendations were not implemented. Assistance to improve petroleum product distribution, but not to dissolve the state-owned company, was part of the project (see below). For electricity, implementation would have been supported by a follow on project identified in 1993. Preparation included a study on the rehabilitation and expansion of the country's power systems, financed by the petroleum project. This study included recommendations to improve power sector organization and institutionality. However, preparation of the new project was suspended in 1995, after suffering many interruptions. The project also financed assistance to revise and complete the legal and regulatory framework for hydrocarbons. MME, with consultant assistance, prepared a draft legal package, but the documents were not finalized. This work, including a revision of the model PSC, continues to be discussed by the Government, which is seeking further expert assistance to finalize the legal texts, and intends then to enact the revised legal framework. MME sought the advice and comments on this matter not only of the consultants hired for this specific purpose, but also of consultants working on other components. MME also consulted the oil companies, which responded by submitting a complete proposal for hydrocarbon regulations, with a strong engineering emphasis. Training provided by the project increased MME's capacity and efficiency. Rehabilitation of MME's building, and provision of cars also contributed to the objective. (e. 1) Greater capacity to monitor the activities of oil companies Achieved The project financed technical assistance for monitoring production and exploration activities. This assistance included on-the-job training. The project also provided other training seminars and courses, mostly within the framework of consulting contracts. These actions had a major impact on MME's capacity to monitor oil companies activities. The TA and training the project financed also enhanced the learning effects of the practical experience gained in recent years. (e.2) Greater capacity to evaluate supply and pricing systems for petroleum products Not achieved The project financed consultant services to help the Government correct problems in petroleum product distribution. A study financed under the First TA Project had found less than transparent procurement, and excessive CIF prices of petroleum products imported by the sole distributor, GE Total. However, the Government did not accept the consultants' recommendations, and activities under this component were suspended at the end of 1994. The most likely explanation is that the Government was not in a strong position due to its accumulated debt vis-a-vis GE Total. The Government has large arrears with GE Total, which is a joint venture of Total Afrique and the Government. -7 - IV. MAJOR FACTORS AFFECTING THE PROJECT 14. The major factors affecting project execution were: (a) the important oil discoveries and the rapid increase of exploration and production activities; (b) the professionalism and technical competence of the operators; (c) the inadequacy of Government and MME's bureaucracy to deal with a dynamic sector; (d) the Borrower's reluctance to share information with consultants and with the Bank because of confidentiality concerns; and (e) the equivocal agreement on objectives between the Government and the World Bank. 15. The rapid increase in oil sector activities put great stress on the Government's capacity to fulfill its responsibilities in terms of informed discussion of development plans, and close supervision of operations. This pressure contributed to the gradual development of a close working relationship with one of MME's consultants financed by the project. Once trust was established, this assistance was key in allowing MME to manage adequately a very dynamic period of sector development. 16. On the other hand, discussion with oil companies and supervision of their activities has been less difficult for the Government and its consultants on account of the professionalism and technical competence of both operators currently producing oil in the country. Since mid 1995, when NOMECO took over the Alba field, operations have been evolving towards international standards. NOMECO has gradually improved reporting procedures, safety, and environmental protection. As for Zafiro-Topacio, Mobil has developed the field with extraordinary attention to data gathering and analysis, seeking to determine the most efficient rate of production. Another factor deserving mention is the training of local technicians by the oil companies, which is an obligation in the respective PSCs but also is being undertaken with genuine interest by Mobil, UMC and NOMECO. 17. The Government's bureaucracy, including MME, is less than modem, and this interfered with project execution. MME's structure is top heavy, and tends to repress initiative and the flow of information. Even simple decisions are referred to higher management which find themselves overloaded, and information is compartmentalized, limiting effectiveness of the technicians that are in charge of supervising oil sector activities. This environment limited the effectiveness of consultants' work, as well as that of Bank supervision missions. The project also was affected by frequent and prolonged suspension of disbursements because the country fell behind in its payments to the Bank for previous credits . This, in particular, caused the interruption of preparation activities for the follow on project that was being considered in 1994-95. 18. Dealings with oil companies and information on oil operations were kept confidential, which means on the one hand that the Bank was not informed, but also that S During the 30-month period from January 1995 to the closing of the credit on June 30, 1997, the Bank suspended disbursements on five occasions, for a total accumulated duration of 1714 months. - 8- some consultants were not given sufficient information to do their job properly. This limited the effectiveness of the technical assistance the project financed. MME seems to have been wary of the possibility that international consultants would share sensitive information with oil companies with whom they might have ties, particularly those companies drilling across the disputed maritime borders with Nigeria and Gabon. In the area of work-program analysis and monitoring of physical activities, as already explained, the circumstances led to the gradual development of a relationship of trust with one of the consultants, which was beneficial for MME and for the project. 19. Another important factor affecting project implementation was the equivocal agreement on project objectives between the Bank and the Government which was a source of misunderstandings and friction. At the time of project preparation, the Ministry had agreed that one of the main uses of the TA provided by the project would be to seek increased revenue from Alba. Events showed the Government was actually ambivalent about following this strategy at a time when oil production was only beginning, and also that, given the country's circumstances at the time, the ability of obtaining up front cash had a higher value for the government than the promise of greater benefits in the future. V. PROJECT SUSTAINABILITY 20. Sustainability of the project achievements is likely. Only political instability could seriously threaten project sustainability. 21. The project helped the Government maintain control of oil sector development during a major expansion of operations, contributing to ensure the adoption of optimal long-term development plans. It helped organize data and establish monitoring and reporting procedures enabling MME to adequately monitor oil-sector activities. It built up capacity through training. These are all elements contributing to sustainability. 22. It is reasonable to expect that with increasing revenues, Government will gradually modernize, leading to more efficient management of oil-sector development. In this respect, a new program of technical assistance and training would contribute to sustainability. In view of the greatly increased oil revenue, such future assistance and training can be financed by the country itself. It is not clear at this point whether the Bank will have a role in assisting future oil sector development. 23. There is a clear incentive to improve sector management, and the Government appears committed to this goal. Indeed, better sector management means a greater share of oil revenue for the country over a longer period of time. However, sustainability will be threatened if oil revenue is perceived to benefit only an elite. In this sense, transparency in the flow of oil revenue from production to the treasury, and its use for increasing the general welfare, are essential to long-term sustainability of what the country has achieved with the help of external assistance under this and previous projects. -9- VI. BANK PERFORMANCE 24. The World Bank's performance was unsatisfactory. 25. The project was identified, prepared, appraised and negotiated in only four months, from February to May, 1992. This entailed some costs. The Bank appears to have underestimated the impact of the Borrower's uncertain commitment to objectives. The objective of increasing the Government's share of Alba's revenue seems to have been at odds with the Government's implicit sector development strategy and priorities. The Bank either ignored the dilemma this posed for the Government, or failed to correctly gauge the Government's lack of commitment. The Bank also ignored or failed to realize the pressures the Government would be facing to use the PSCs as a means to obtain immediate funds. 26. The successful exploration and development of new production, which gradually changed the focus from Alba, delayed detection of problems with achievement of project objectives as originally defined. This explains in part the disconnect between project ratings during execution and at project completion. Also, negotiation of an increased share from Alba could have been done in a relatively short time, as was the case for Zafiro-Topacio, after project closing, where the whole process took only four months. Time in the field suffered in part because of the disruption created by the Bank's reorganization in 1996, and the difficulties it brought about in organizing trips, combined with the implicit lower priority this project had on account of the small credit amount. Project supervision did not react in time to the problem of overdue audits and inadequate project accounting. The project would have benefited from assistance for project management which could have been financed by the Credit, but this possibility was never raised by supervision missions. VII. BORROWER PERFORMANCE 27. Borrower performance was unsatisfactory. 28. The Borrower needed and wanted the technical assistance and training the Bank's credit would finance, as well as the possibility it offered to promote the country's oil potential abroad, but was not committed to objectives aimed at redressing anomalies with the Alba operation and with petroleum product import and distribution. 29. The rigid hierarchical structures and procedures, the lack of incentives for individual initiative, the restrictions on the flow of information, interfered with efficient project execution. These problems were reflected in the arrangements (or lack thereof) for management of project finances. Project accounting was deficient. The accountant was never given all of the information on the project operations. Incomplete records were kept, making it impossible to determine the local contribution to project financing at project completion. The project's Special Account was opened in CFA Francs, which resulted in an exchange loss of close to US$24,000 when the Franc CFA was devalued. During the period of project execution, the project accounts were audited only for year - 10- 1993. Audit of project accounts was completed for the rest of the years only after the closing date. 30. The Borrower negotiated amendments to the PSCs for Alba and for Block B to get cash advances against future oil revenue. This seems to have had a higher priority than the long-term objective of maximizing revenue for the country. Because the deals struck for this purpose with the oil companies were at odds with the project objectives as agreed with the Bank, the Government chose to keep the Bank in the dark. The Government also limited information to its consultants. Progress reports were submitted only on a couple of occasions. In general, communication of information to the Bank was very deficient. MME did not authorize the consultants to send their reports to the Bank, because data on oil operations was considered confidential. One of the legal covenants in the Credit Agreement required that all oil revenue be entered into the Government's annual budget (into the treasury). It was not possible during project supervision to verify compliance with this covenant. VIH. ASSESSMENT OF OUTCOME 31. The project outcome is unsatisfactory. Although the project achieved important physical objectives during a critical period in oil sector development, it failed to achieve other important objectives: increased revenue from Alba, modernization of the legal framework, and improvements in petroleum product distribution. On the other hand, it is fair to say that the project was most probably a factor in allowing the Government to successfully renegotiate the PSC for Zafiro-Topacio in March, 1998. IX. FUTURE OPERATION 32. Oil activities in Equatorial Guinea are still growing. The type of support this project provided is even more important now, with the substantial increase in oil exploration and production taking place in the country. The experience gained and the know-how contributed by the project will be required and put to good use in the future. X. KEY LESSONS LEARNED 33. The following lessons can be learned from this project. (a) An unequivocal understanding of, and agreement on, project objectives are necessary for achieving those objectives. The Bank should not overestimate its leverage to get the Borrower later to go along with objectives the Bank considers desirable, but the Borrower is not committed to. (b) Openness on the part of the Borrower in sharing sector information with the Bank and with consultants is indispensable for technical assistance to be fully effective. (c) Proper arrangements for project management, including external assistance should have been a condition for effectiveness in view of limited local capacity. (d) The modernization of MME's structures and systems should have been given a higher priority during project design and execution. - 11 - PART HI: STATISTICAL ANNEXES Table 1: Summary of Assessment Table 2: Related Bank Loans/Credits Table 3: Project Timetable Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual Table 5: Key Indicators for Project Implementation Table 6: Key Indicators for Project Operation Table 7: Studies Included in Project Table 8A: Project Costs Table 8B: Project Financing Table 9: Economic Costs and Benefits Table 10: Status of Legal Covenants Table 11: Compliance with Operational Manual Statements Table 12: Bank Resources: Staff Inputs Table 13: Bank Resources: Missions - 12- Table 1: Summary of Assessments A. Achievement of Objectives Substantial Partial Negligible Not applicable (e (V) (e (V) Macro Policies El El Cl Sector Policies E] a E Financial Objectives Q 5 3 E Institutional Development 0 x E E Physical Objectives I E E E Environmental Objectives 0 l E l Public Sector Management E] x E E B. Project Sustainability Likely Unlikely Uncertain (1) (/) (/) Highly C. Bank Performance satisfactory Satisfactory Deficient Identification El x Preparation Assistance m 1 E Appraisal E El Supervision E El D. Borrower Performance satisfactory Satisfactory Deficient V) (V (/) Preparation El El Implementation l El l Covenant Compliance El E E. Assessment of Outcome satisfactory Satisfactory Unsatisfactory unsatisfactory El) El) El) - 13- Table 2: Related Bank Loans/Credits Loan/credit title Purpose Year of approval Status Preceding operafions 1. Petroleum Sector To assist the Govemment FY83 Closed Technical Assistance in developing the Project (Cr. 1304-EG) hydrocarbon resources of the country and to strengthen the technical capability of MMH staff. 2. Bank-executed To train the Ministry of FY83 Closed UNDP Grant Mines and Hydrocarbon (MMH) staff. 3. Bank-executed To attract oil industry in FY81 Closed UNDP Grant the exploration for petroleum of the country's sedimnentary basins. Following operations 1. 2. 3. - 14- Table 3: Project Timetable Steps- in Project Cycle Date Planned Date Actual/ Latest Estimate Identification (FEPS) February 1992 Preparation 1991 February 1991 to March 1992 Appraisal March 1992 Negotiations May 1992 Letter of Development Policy (if applicable) Board Presentation June 1992 July 2, 1992 Signing July 10, 1992 July 22, 1992 Effectiveness September 1992 November 20, 1992 First Tranche Release (if applicable) l Midterm review (if applicable) Not applicable Second (and Third) Tranche Release (if applicable) Project Completion December 31, 1996 June 30, 1997 Credit Closing June 30, 1997 June 30, 1997 Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual (US$ millions) FY92 FY93 FY94 FY95 FY96 FY97 Appraisal 0.10 1.05 1.75 2.20 2.43 2.43 Estimate Actual 0 0.15 0.40 1.43 1.93 2.47 Actual as % of 0 14.3 22.9 65.0 79.4 101.6 Estimate Date of Final December 9, 1997 Disbursement - 15- Table 5: Key Indicators for Project Implementation Key Implementation _ Indicators in President's Estimated Actual Report 1. Increase of long-term . . Oil revenue increased from government oil revenues. No estnates given, about US$3M/yr to about US$40M/yr. 2. Increased government No estimates given. From about US$3M/yr to revenue from Alba about 5 US$M/yr. production. 3. Oil companies operating No estimates given. Alba (NOMECO): improved according to international situation. industry standards. Block B (Mobil-UMC): yes 4. Government savings in No estimates given. No improvement. petroleum product procurement. Table 6: Key Indicators for Project Operation 1. Key Operating Indicators in President's Estimated Actual Report 1. MME carrying out its By 1995. Not yet achieved due to tasks by themselves. greatly increased exploration and production. II. Modified Indicators (if Applicable) l 1 . 2. 3. III. Modified Indicators for Future Operation (if applicable) 2. 3. - 16- Table 7: Studies Included in Project Study Purpose Status Impact 1. Designing most Give MME basis for Done. Has contributed to improved efficient way to discussing annual work operations. develop Alba field. programs with field operator. 2. Identifying the Give MME basis for Canceled, as Studies on use of gas most cost effective discussing annual work subject was contributed to projects for (a) methods to utilize the programs with field covered by LPG production (actual); products separated operator. (1), and also (b) electricity generation from Alba's flare. by previous (1999); (c) methanol studies. production (2000). 3. Assessment of Give MME basis for Done. Some measures have been Alba's environmental discussing annual work implemented. Others being impact. Identification programs with field gradually included in annual of mitigation plan. operator. work programs. 4. Revision of legal Modernize legal Draft legal Has served as basis for framework for framework for framework discussion both within petroleum exploration hydrocarbons. completed. government and with oil and production. companies. MME seeking further TA to finalize texts. Government intends to enact revised framework in 1998. 5. Energy sector Improve energy sector Done. Oversight of all of energy reorganization. organization. sector consolidated under MME. 6. Power sector To draft plan for power Done. Recommended gas-fueled rehabilitation and sector improvements. power plant for Bioco under development. construction. 7. Evaluation of To promote exploration Done. Two blocks offshore hydrocarbons onshore and offshore Rio Rio Muni recently licensed potential of Rio Muni Muni. to Triton. area. - 17- Table 8A: Project Costs Appraisal Esfimate (US$M) Actual (US$M) (including contingencies) Local Foreign Total Local Foreign Total Item Costs Costs Costs Costs 1. Consulting Services 0.40 1.60 2.00 N.A. N.A. 2.17 2. Training 0.55 0.55 0.25 0.25 1' 3. Building 0.11 0.11 0.12 0.12 Rehabilitation 4. Field Vehicles - 0.04 0.04 0.06 0.06 TOTAL COST 0.40 2.30 2.70 N.A. N.A. 2.62 1/ Part of the training was included in the consulting contracts. Table 8B: Project Financing Appraisal Estimate (US$M) Actual (US$M) Local Foreign Total Local Foreign Total Source Costs Costs Costs Costs IBRD/IDA 0.13 2.30 2.43 N.A. N.A. 2.62 Government 0.27 -- 0.27 0.3 (est) 0.30 TOTAL 0.40 2.30 2.70 N.A. N.A. 2.92 Table 9: Economic Costs and Benefits Not ApplicableI -18- Table 10: Status of Legal Covenants Agreement Section Covenant Present Original Revised Description of Comments type status fulfillment fulfillment covenant date date DCA 2.02 (b) I C Opening of Special Account was opened in CFA Account in US dollars. francs. Devaluation caused a loss of US$24,000. DCA 3.02 10 C Procurement governed by Schedule 3. DCA 3.03 (a) 4 C Open counterpart funding. DCA 3.03 (b) 11 Unknown From FY93 on, enter all oil No evidence of compliance revenues into annual could be obtained. budget. DCA 3.05 6 CP Alba field environment Study completed. No global assessment. Agreement on action plan and timetable. action plan and timetable. Recommendations are being gradually implemented within annual work programs. DCA 3.06 (a) 10 CP Submit a training plan. An incomplete program was submitted. DCA 3.06 (b) 10 CP Trained staff to remain in Because of rapid growth in assigned job. sector activity many trained staff had to be reassigned. DCA 3.07 9 CP Carry out in-depth review. In depth review carried out Submit report to Bank. jointly 5/96. Results in Aide- memoire. No borrower report DCA 4.01 (a) I NC Maintain records and Records are incomplete. accounts in accordance with Accounting information is sound accounting practices. dispersed. DCA 4.01 (b) I CP Audit accounts and furnish Only audit report for 1993 report to the Bank. was submitted. DCA 4.01 (c) I NC Maintain records for Records are incomplete. expenditures covered by SOEs. Enable Bank to examine records. Covenant types: 1. = Accounts/audits 8. = Indigenous people 2. = Financial perfornance/revenue generation from 9. = Monitoring, review, and reporting beneficiaries 10. = Project inplementation not covered by categories 1-9 3. = Flow and utilization of project funds 11. = Sectoral or cross-sectoral budgetary or other resource 4. = Counterpart funding allocation 5. = Management aspects of the project or executing 12. = Sectoral or cross-sectoral policy/ agency regulatory/institutional action 6. = Environmental covenants 13. = Other 7. = Involuntary resettlement 8. Present Status: C = covenant complied with CD = complied with after delay CP = complied with partially NC = not complied with -19- Table 11: Compliance with Operational Manual Statements Statement Number and Title Describe and comment on lack of compliance 1. OD 10.60 Only one audit report submitted during project Accounting, Financial Reporting and execution. Auditing 2. OD 12.20 Special account opened in CFA francs, not in Special Accounts US$, as established in DCA, which could exchange less of US$24,000. - when CFA franc was devalued. Table 12: Bank Resources: Staff Inputs Stage of Planned Revised Actual Project Cycle Pla med RveAtl Weeks US$ Weeks US$ Weeks US$ (thousands) Preparation to Appraisal 14.9 36.1 Appraisal-Board Negotiations through Board 2.0 4.8 Approval Supervision 69.6 198.2 Completion 13.1 TOTAL - 20 - Table 13: Bank Resources: Missions Perfomnance Rating Number Specilized Implemen- Develop- Stage of Month/ of Days in Staff Skills tation ment Types of Projet Cycle Year Persons Field Represented Status Objectives Problems Through Appraisal 2/92 2 20 E, EG Appraisal through 3/92 2 20 E, EG _ Board Approval Supervision 8/92 1 3 PS 1/93 1 5 PS 2 2 2/94 1 7 PS 2 2 10/94 1 7 PS S S 2/95 2 10 PE, PS S S 12/95 3 5* PE, ES, EE U S 5/96 2 10 PE, ES S S Completion 12/97 1 14 PE U U U (cons 2) * Meetings held in Washington with a delegation from MME, and with consultants from two consulting firns working in the project. - 21 - REPUBLIC OF EQUATORIAL GUINEA SECOND PETROLEUM TECHNICAL ASSISTANCE PROJECT PART III: Aide Memoire (World Bank mission of November 30 - December 14, 1997) 1. A World Bank mission composed of Angel Baide, Power Engineer and Task Manager, and of Karen Marie Pagh Nielsen and Fleming Ole Rasmussen, experts of the Danish company RAMBOLL, visited Equatorial Guinea between November 30 and December 14, 1997, to carry out the Implementation Completion mission for the Second Petroleum Technical Assistance Project. The project was closed on June 30, 1997, as specified in the Credit Agreement. The mission wishes to thank the authorities of the Ministry of Mines and Energy (MME) for their collaboration. 2. This mission had two main purposes: (a) to review with MME the most recent assistance provided under the project, especially by QUAD Engineering in connection with the development of the Zafiro-Topacio complex by Mobil; and (b) to make a joint analysis of Project execution and benefits, and to draw the lessons that can be derived for the future, as a basis for preparing the project's implementation completion report. In preparation for this analysis, MME had produced a draft version of its own report on project execution, which was discussed with the World Bank during the mission. 3. Using a Danish Trust Fund, the World Bank hired the Danish consulting company RAMBOLL to help in the supervision mission and to perform three specific tasks: (a) to make an independent evaluation of the execution and impact of the project; (b) to evaluate the present situation and needs of the hydrocarbon sector; and (c) to propose a new program of technical assistance and training. Recent developments in the sector 4. Since the last supervision mission in May 1996, sector activities have continued expanding at a rapid pace. At the end of 1996, the production of the Zafiro-Topacio complex (Block B), which Mobil had brought into production the previous September, reached 40,000 barrels/day. In September 1997, Mobil increased production to 80,000 b/d, the present level. By the end of November 1997, two drilling platforms, which are operating continuously in the block, had drilled a total of 15 exploration wells, eight of which had resulted in oil discoveries. The work program for 1998 submitted by Mobil includes installation of a new production platform that will make it possible to increase the Zafiro-Topacio output by a further 40 to 70,000 b/d. In addition, Mobil proposes to start water injection. An initial well for water injection was spudded during the mission. - 22 - 5. NOMECO has drilled three exploration wells in the Alba Block. One of them, Luba East, discovered gas and condensate, and another, Riaba (April 1977) struck oil. The LPG plant at Punta Europa, with a capacity of 2,000 b/d, came on stream in November 1997. With this operation, the volume of gas being flared was reduced by 10%. MME has entered into an agreement with NOMECO to build a gas-turbine power plant (2x5 .2 MW) at Punta Europa. The plant will be government-owned and its cost, estimated at US$11 million, will be classified as an operating cost for contract purposes (PSC). This plant will be brought into operation in 1999 and, at full capacity, will use approximately 2 % of the gas available. It will be operated by a private operator (which could be CMS, NOMECO's parent) and the electricity generated will be delivered for distribution to the system operator, SEGESA. The conditions of this sale have not yet been negotiated. Finally, after Government's approval, CMS formed a new company for methanol production. The 2,500 tons/day plant will be built at Punta Europa under a turnkey contract and will start operations at the end of the year 2000. The plant will use all of the gas still available. 6. UMC has drilled two exploration wells, one of which, Tsavorita (Block D), struck oil. MME, with assistance from QUAD Engineering, carried out various promotion activities. To this end QUAD updated on two different occasions in 1997 a promotional brochure it had first prepared in 1995. The promotion has produced positive results: in September 1997 the Government granted Triton, an American company, the first two blocks offshore Rio Muni. MME has also received applications from at least three companies for blocks to the southwest of Bioko, a zone where no exploration has taken place so far. Finalization of the project 7. The project closed on June 30, 1997, the date originally specified in the Credit Agreement. In accordance with the general conditions applicable to IDA credit agreements, the period up to October 31, 1997, was the grace period for requesting disbursements for services rendered prior to the closing date. MME submitted the last disbursement requests at the end of October and the respective payments were made in December 1997, after MME provided supplementary data requested by the Bank regarding the Special Account. As of the final closing of the credit, all the funds had been disbursed. Table 1 shows the breakdown by disbursement category of the original amounts and of actual disbursements under the credit. - 23 - Table 1. Disbursements by Category Cat. Description Original, Actual, SDR SDR 1 Consulting services 1,000,000 1,490,136.58 2 Training 400,000 172,750.98 3 Building rehabilitation 70,000 81,039.33 4 Vehicles 30,000 40,165.52 5 PPF refinancing 110,000 0.00 6 Unallocated 190,000 0.00 Exchange loss on Special Account 0.00 15,907.59 TOTAL 1,800,000.00 1,800,000.00 8. Since the beginning of 1995, QUAD Engineering's assistance, originally contracted for monitoring Alba Block activities, was increasingly oriented toward monitoring of Mobil's activities in Block B. From mid-1996 onward, QUAD Engineering's work was concentrated entirely on the monitoring of Block B's development. To formalize this situation, in October 1996 MME signed an extension of its contract with QUAD to cover inspection services for production and exploration in that block. Under this contract extension, QUAD assisted MME in the analysis of the work programs proposed by Mobil, in discussions with the operator, in the supervision of exploration and production activities, in the establishment of the pertinent monitoring systems, including reporting and data-recording systems, and in training of Ministry's staff. 9. This assistance, covering the development and startup of Zafiro-Topacio, was critical in enabling MME to conduct adequate negotiations with Mobil on field development plans and to monitor the intense operations. Following credit closing, MME is continuing to use QUAD Engineering's services for assistance in monitoring production and exploration activities. The relationship with QUAD has developed into a fruitful collaboration of great value for MME. The Ministry now relies on QUAD for advice on all aspects of petroleum activity. 10. For its part, Beicip-Franlab completed the report on the potential of the Rio Muni area after taking into account MME's comments and the discussion of the report in Malabo in May 1996. This report compiles the existing information and presents interpretations of the data. The report also recommends additional work (conversion of - 24 - seismic lines, detailed mapping of special areas, horizontal mapping, geochemical studies, modeling of the basin, etc.) that is needed to be able to make new interpretations of this zone's potential. Evaluation of the execution of the project 11. MME and the mission reviewed the project's design and execution. The project's objectives, as set forth in the Credit Agreement, are: (a) to ensure that Equatorial Guinea derives maximum and sustainable revenues from the Alba field's production; (b) to identify the most cost-effective methods for utilizing the gas from the Alba field; (c) to minimize hazards for the marine and land environment during the field's production; (d) to improve the efficiency of energy sector institutions; and (e) to strengthen MME's capacity to monitor oil companies' activities, and to evaluate the supply and price systems for petroleum products. 12. The project's components were classified in four parts, as follows: Part A: Studies; Part B: Technical Assistance; Part C: Training; and Part D: Rehabilitation of MME's building and procurement of two field vehicles. The way in which the different project components were executed is described below. Part A: Studies 13. Design of the most cost-effective method for developing the Alba field. BEICIP had completed a preliminary analysis on this topic at the beginning of 1993, financed by the World Bank under a public sector technical assistance project. BEICIP's work included preparation of terms of reference for technical assistance to MME in the analysis of the initial development program submitted by Walter International, the analysis and discussion of the work program submitted annually by the contractor, the supervision of development program implementation, and the monitoring of field production operations. QUAD Engineering then won the contract for the assistance specified in the BEICIP report when it was put out to bid. 14. Within the framework of that contract, QUAD made an evaluation of the field and of Alba production operations and submitted a report in February 1995. The study describes and makes recommendations concerning: (a) the Punta Europa condensate plant; (b) the production platform and the wells; and (c) the reservoir. Regarding the plant at Punta Europa the main recommendations are that an LPG plant be installed, together with a methanol plant, and use of the gas for electricity generation. As is detailed in the next paragraph, these recommendations are in process of implementation. As regards the reservoir, the study projects its useful life based on the rate of production and examines the effect of reinjection of the dry gas to maintain pressure. However, the study does not reach a firm conclusion on this important matter, and limits itself to recommending a feasibility study on reinjection. - 25 - 15. Most cost-effective methods for using the products stripped from the Alba gas. In view of the importance the Government attached to this study, it had intended to finance it before credit effectiveness, using a project preparation facility (PPF) for the purpose. Finally, however, the study, which was completed by Houston Associates in 1992, was financed under a Public Sector Technical Assistance project (Cr. 1489). The question of the use of the gas was also dealt with under the QUAD study of Alba operations referred to in paragraph 12. In light of these facts, no new study on utilization of the gas was financed under the Second Petroleum Technical Assistance Project. 16. Environmental impact of Alba production. In 1994, the Greater Caribbean Energy & Environment Foundation carried out a study on the environmental impact of Alba's operations. The report identifies a number of risks, for safety of persons and installations, and for the environment, due to deficiencies in the production platform, the condensate extraction plant, and the product loading platform, and recommends a package of preventive measures and corrective actions. The measures recommended are gradually being put into practice. So far, Alba's operator has improved the lighting on the production tower, built containment dikes around the condensate storage tanks, reduced leaks in the storage tanks, and installed lightning protection. The work program submitted to MME by NOMECO for 1998 includes installation of a fire prevention system. Some suggested measures, such as relocation of the loading platform to a less sensitive area, will have to be analyzed jointly with NOMECO. 17. In the course of their work in Equatorial Guinea, the Greater Caribbean consultants gave training in environmental questions and safety to three MME engineers. The report recommends fuller training for one or two persons. The report also recommends that the country enact a special law on emissions caused by mining and hydrocarbon operations. In this respect, within the component described in the next paragraph, the Hydrocarbons Regulations include a chapter on environmental questions, while in the institutional sphere, MME in 1995 established within its organization a section with specific responsibility for environmental matters. 18. Review of the legal framework for petroleum exploration and production. At the beginning of 1996, MME, with technical advice from BEICIP, completed a draft set of texts defining a revised legal framework for hydrocarbons in Equatorial Guinea. These texts consist of an amendment to the Hydrocarbons Law, Hydrocarbons Regulations, and a new model Production Sharing Contract as an annex to the Regulations. In April 1996, MME submitted the draft Hydrocarbon Regulations to the oil companies operating in Equatorial Guinea for review and comments. After incorporation of comments and harmonization of the component parts, MME was to submit the set of texts to the World Bank for comments by mid-1996. The intention was that the Government would subsequently submit the amendment to the Law to Parliament for its approval. The other documents would be issued as a decree by the Council of Ministers. In the end, this work was not completed within the framework of the project. The Government, however, is continuing with the analysis and discussion of the drafts and is seeking new technical assistance to complete the work. The mission - 26 - was informed by MME of the Government's intention to bring the new legal framework into effect and then to proceed to renegotiate the PSCs with NOMECO and UMC. In response to MME's request for comments, the oil companies proposed an exhaustive new set of hydrocarbon regulations. 19. Improvement for sector institution organization. In 1994, consultant Helmut Merklein carried out an energy-sector reorganization study. One of his recommendations, transfer of the Directorate General for Electricity to the Ministry of Mines and Hydrocarbons, was implemented at the end of 1994 on the basis of the preliminary report of August 1994 (the final report was delivered in January 1995). The Directorate General for Electricity was under the Ministry of Industry at that time. After the change, the Ministry of Mines and Hydrocarbons was renamed Ministry of Mines and Energy. More recently, MME established an Environmental Section. However, other changes are needed to enable MME to handle the growing volume of work efficiently and to reflect the greater relative importance that supervision of production and exploration activities is acquiring. 20. Evaluation of the potential of the Rio Muni region. This is a study not originally included in the project which MME asked BEICIP to do under the contract for monitoring of exploration activities. The study analyzed available maps and seismic data and constitutes an independent assessment of the zone's potential. It identifies geological structures particularly in the promising offshore areas, and was intended to be used as a tool for distribution of blocks, and for adjusting the respective contracts to area potential. The study recommends additional seismic exploration that could be carried out under a technical working agreement. MME declared itself dissatisfied with the results, because in its opinion the study did not contribute anything new. BEICIP, on the other hand, insists that although the study was done in a bare three months, it contains original interpretations of the available information. 21. Study on rehabilitation and expansion of the electrical systems. This study, also not originally included in the project, was assigned to consultant Alfonso Posada who submitted his report in September 1994. It shows that the least-cost option for expansion of electricity generation capacity on Bioko is utilization of a part of the Alba gas, and also identifies rehabilitation works needed in Malabo and Bata distribution networks. The report was intended to serve as a basis for the preparation of a new project in the electricity sector. However, it proved impossible to proceed with preparation of that new operation, mainly on account of the continuous suspension of disbursements by the World Bank in response to the country's payment arrears. As noted in paragraph 13, construction of a gas-fired power station is in progress. - 27 - Part B: Technical Assistance 22. Supervision of Alba field production. In August 1993, MME signed a contract with QUAD Engineering for monitoring of Alba field production activities. QUAD provided geologists and reservoir engineers for this work. To ensure technology transfer, monitoring was done jointly by QUAD experts and national technicians. During their time in Equatorial Guinea at the beginning of 1995, QUAD's experts organized a training seminar for MME's technical staff. At the beginning of 1995, MME asked QUAD to assist, under the Alba production monitoring contract, with the supervision of Mobil's exploration operations in Block B, as explained in the next section. 23. Monitoring of exploration activities. In October 1993, MME signed a contact with Beicip-Franlab for monitoring of exploration activities in the country. Under this contract, BEICIP provided experts in 1994 for the monitoring of exploration performed by Walter International in the Alba Block, and by UMC in Block B. The services were interrupted at the end of 1994 due to a suspension of disbursements by the World Bank because the country had fallen into arrears with payments owed to the Bank. As a result of this situation, MME asked QUAD to assist with the supervision of Mobil's exploration activities in Block B, which were beginning to intensify. Indeed, BEICIP had decided that it could not provide the necessary services without a guarantee of timely payment. 24. Between February and July 1995, while the suspension of disbursements remained in effect, QUAD provided technical specialists for monitoring Mobil-UMC exploration that resulted in the discovery of the Zafiro-Topacio complex. MME then decided to entrust QUAD with the task of assisting it henceforth in supervising all exploration activities in the country. This decision was formalized in 1996 by means of an extension to QUAD's contract. After the replacement of BEICIP by QUAD in the supervision of exploration activities, MME asked BEICIP to carry out under its contract for monitoring exploration activities, the study on the potential of Rio Muni mentioned in paragraph 19. The intensity of Mobil's exploration and production operations in Block B imposed an exceptional burden on MME's technical staff responsible for analyzing the development plans proposed by Mobil and responding to those plans, together with monitoring of operations. In these tasks, MME relied primarily on QUAD's technical support, as explained above. 25. Auditing of Alba's financial operations. For this purpose, MME also signed a contract with Beicip-Franlab, which has audited, together with Equato-guinean personnel, the accounts of Walter International and those of UMC. The contract centers on identifying "oil costs" and classifying them into recoverable and nonrecoverable. Under the same contract, the consultant assisted MME in calculating income tax payable by Alba's operator beginning in 1996. The contract also required BEICIP to audit the project accounts and prepare the respective audit reports. As of December - 28 - 1997, however, only the accounts of the first year of execution of the project -- 1993 -- have been audited. 26. Valuation of Alba's investments. MME did not contract specific consultancy services for this purpose, which is important for the calculation of depreciation and taxable income. Beicip-Franlab has done some work in this field under the contract mentioned in the preceding paragraph. However, unambiguous determination of the amounts invested seems to have always been difficult, owing to inadequate accounting data provided by Alba's contractor. 27. Advisory services in contractual matters and negotiations. Beicip-Franlab was to provide these advisory services under the same contract of February 1994 that includes review of the legal framework. The main objective was to increase the Government's share of Alba's revenues, by means of an amendment to the financial clauses in the production sharing contract. This objective could not be achieved. The plan was to hold preparatory sessions in BEICIP's offices in Paris, followed by the renegotiation that was also to take place in Paris as a neutral venue. However, the plan was not put into practice. The date of the negotiations was postponed many times. BEICIP was only invited to provide written comments, and did not receive all the information it had requested for preparing the renegotiation. 28. MME initiated discussions with NOMECO, the new operator of Alba, in July 1995 in the United States, without its consultant being present. Although these negotiations were supposed to be conducted within the framework of the project, MME did not inform the World Bank either. Subsequently, in part at the Bank's insistence, MME invited BEICIP to participate in talks at NOMECO's headquarters in Houston in December 1995 and January 1996, but those talks were not conclusive. Later NOMECO rejected all proposed amendments suggested by MME. In May 1996 MME informed the Bank that it had decided to temporarily suspend its efforts to negotiate with NOMECO, since it believed its position would be strengthened once Mobil started production of the Zafiro and Topacio fields. 29. However, the Government has, in fact, renegotiated its contracts with both UMC and NOMECO, but in terms that appear to be financially neutral, and which are equivalent to advancing revenues to the Government in exchange for a reduction of future revenues. In other words, these renegotiations have still not resolved the basic problem in the terms of the contracts. 30. During the mission, MME informed the Bank that the Government had officially notified Mobil-UMC of its intention to renegotiate the contracts for Blocks B and C. According to MME, before undertaking the renegotiation, the Government wants to finalize and enact the revised legal framework for hydrocarbons. The RAMBOLL experts gave MME advice concerning the legal framework, particularly as regards the financial clauses of the model production sharing contract, as well as on block sizes and organization of bidding rounds. - 29 - 31. Implementation of the recommendations of various studies. The project envisaged technical assistance to implement recommendations of the following studies: (a) use of the Alba field gas; (b) environmental impact of the Alba operations; and (c) improvement of the institutional framework of the energy sector. However, no technical assistance was contracted for those purposes. As noted earlier, the recommendations on use of the gas and mitigation of the environmental impact are being gradually implemented within the framework of the work plans discussed each year by Alba's operator with MME. 32. Establishment of filing and statistical system in MME. QUAD helped MME catalogue and organize the technical information available on hydrocarbons. QUAD also organized for MME a system for recording technical data routinely supplied by contractors and provided training for Ministry technical staff in its use and maintenance. BEICIP also did some work in this field. However, a complete data organization and storage system will require greater resources. For a number of years now MME has entrusted the safekeeping of the bulk of existing data to QUAD, which keeps it in a rented storage facility in London. Another portion of data is kept in Geneva, Switzerland, under safekeeping by the consulting firm Petroconsultants. MME informed the mission about a project currently under preparation, with UMC assistance, to build an information center in Malabo. The center would store information in digital form, and on paper, and would also have a section to store drilling cores. 33. Control of supply and distribution of petroleum products. The intention of this component was to improve the Government's control of the supply and distribution of petroleum products in Equatorial Guinea, but the original situation remains practically unchanged. A 1989 study by consultant William G. Matthews, under the First Petroleum Technical Assistance Project, identified a lack of transparency in product procurement by the concessionnaire GE Total. Product CIF prices are considerably higher than the average for the region. In 1994 MME contracted consultants Purvin and Gertz, and also again W. G. Matthews. Both consultants participated in discussions with TOTAL in Paris. Purvin and Gertz prepared a draft agreement revising the terms of supply, but the matter was not taken any further. The Government's position is weakened by its substantial arrears with GE Total. Part C: Training 34. The project financed training for the Ministry's personnel, including technical aspects and English. Most of this training was carried out within the framework of the contracts with QUAD and Beicip-Franlab. This at least partially explains the cost overrun in the "Consulting Services" disbursement category. The training provided took the form of seminars in Equatorial Guinea, courses in the consultants' headquarters, and on-the-job training. The main actions in this respect were provision - 30 - by BEICIP of training in acquisition, processing and interpretation of seismic data; exploration techniques and exploration records; field geology and geophysics; and drilling and production engineering. BEICIP also provided training in business accounting and auditing. 35. QUAD provided training in exploration geology and geophysics, and in seismic correlation, structural mapping and seismic stratigraphy. The overall effect of training, together with the joint work with the consultants, has been an increase in the knowledge and experience of MME's personnel. However, the rapid increase of petroleum activity in the country, combined with the growing importance of supervision of production and exploration, is creating new training needs. Part D: Rehabilitation of the MME building and procurement of vehicles 36. The project financed the rehabilitation of the MME's building in Malabo and acquisitioning of two field vehicles. Final Report prepared by the Ministry 37. MME and the mission discussed a draft final project report prepared by the Ministry. The Ministry subsequently sent the final version of the report to Washington, where it was received on December 28, 1997. The report describes the goods and services financed by the project, with special emphasis on QUAD's assistance in the development of the Zafiro-Topacio complex and in staff training. MME considers the project had positive results for the country, especially by providing technical assistance and training at a decisive juncture for the development of the national petroleum industry. The report also notes that relations with the World Bank deteriorated after the change of Task Manager at the beginning of 1995, but then returned to normal in the final stage of project execution. 38. From the Bank's standpoint, project execution revealed that there had been no clear agreement on its objectives. This led to misunderstandings, which were complicated by inadequate communications. The Bank feels it did not receive sufficient information from MME and its consultants for proper monitoring of the project and for effective collaboration in the sector. The effectiveness of technical assistance provided to MME was sometimes limited by MME's reluctance, due to confidentiality concerns, to share with its consultants information on the petroleum sector and on its dealings with oil companies. This attitude is inconsistent with the country's need to obtain adequate technical assistance for oil sector development. - 31 - Compliance with Credit Covenants 39. In accordance with Section 3.03(b) of the Credit Agreement, the Government was to enter into its annual budget, starting with fiscal year 1993, all revenues derived from the exploitation of the Alba field and other hydrocarbon accumulations. The Bank was unable to obtain data that would confirm compliance with this covenant. 40. Project accounts and audit reports. The project accounts were deficient, mainly because the accountant did not receive all the necessary information. Only the accounts for fiscal 1993, when the activity was very limited, were audited by BEICIP and the relevant report was not received by the Bank until May 20, 1996. January 31, 1998 - 32 - REPUBLIC OF EQUATORIAL GUINEA Ministry of Mines and Energy PART III Final Report of the SECOND PETROLEUM TECHNICAL ASSISTANCE PROJECT (Credit 2408-EG) December 1997 -33 - TABLE OF CONTENTS PART I 1. BACKGROUND 2. PROJECT OBJECTIVES AND DESCRIPTION 3. PROJECT COST AND FINANCING 4. PROJECT UNIT IN THE MINISTRY OF MINES AND ENERGY 5. PROJECT EXECUTION 5.1 CONSULTING SERVICES 5.2 TRAINING 5.3 REHABILITATION OF MME BUILDING 5.4 VEHICLES 6. SERVICES COMPANIES PART II 7. EVALUATION OF PROJECT FROM BORROWER'S PERSPECTIVE -34- PART I 1. BACKGROUND Once the First Petroleum Technical Assistance Project financed with Credit 1304-EG was completed and in view of the increase in the exploration activities of the operating oil companies and concession-holders, together with the startup of production from the Alba field by Walter International Guinea Ecuatorial, Inc. in December 1991, a new project was immediately identified, its objectives being focused almost entirely on development of the Alba field. The new Credit Agreement in respect of the Second Petroleum Technical Assistance Project between the Republic of Equatorial Guinea and the International Development Association (IDA) was signed on July 2, 1992, and became effective on November 20 of the same year following its ratification by the Office of the President of the Republic of Equatorial Guinea and the pertinent Legal Opinion. For the implementation of the new project, the World Bank granted the Republic of Equatorial Guinea Credit 2408-EG in the amount of SDR 1,800,000; this amount was used in full during the execution of the project, which was closed on October 31, 1997. 2. PROJECT OBJECTIVES AND DESCRIPTION 2.1 OBJECTIVES The purpose of implementing the Second Petroleum Technical Assistance Project was: a) To ensure that the Government obtains maximum revenues on a sustainable basis from exploitation of the Alba field; b) To identify the most cost-efficient methods for utilizing the gas from the Alba field; c) To reduce the hazards to the marine environment to a minimum; d) To improve the efficiency of the energy sector institutions, strengthen the capacity of the Ministry to supervise the activities of the oil companies and to evaluate the pricing system for oil products. 2.2 PROJECT DESCRIPTION The project in itself comprised four important parts: A. Carrying out studies on the following aspects: A. 1 Design of the most effective way of exploiting the Alba field. A.2 Identification of the most cost-effective methods in terms of the products that are stipped and not flared in the Alba field. -35- A.3 Environmental assessment. A.4 Review of the contractual framework regarding petroleum exploration and production. A.5 Improvement of the organization of the institutions involved in the energy sector. B. Technical assistance in the following areas: B..1 Supervision of the Alba field production operations. B.2 Supervision of the exploration activities carried out in the country. B.3 Negotiation of new contracts. B.4 Creation of a statistical and data-recording system in the Ministry of Mines and Energy. B.5 Supervision of petroleum product supply, storage, transportation and distribution activities. B.6 Other. C. Training of Ministry of Mines and Energy staff, including scholarships and enrollment fees. 3. PROJECT COST AND FINANCING The total cost of the project was estimated at SDR 1,800,000, equivalent to US$2,622,200, broken down over six categories as described below: 3.1 BREAKDOWN BY CATEGORIES The following table shows the categories that were financed with the Credit to which this report relates, the allocation of the funds and the percentages of expenditures authorized. ALLOCATION CATEGORY DESCRIPTION IN SDR PERCENTAGE OF EXPENDITURES 1 CONSULTING SERVICES 1,000,000 100% OF FOREIGN EXCHANGE EXPENDITURES AND 26% OF LOCAL CURRENCY 2 TRAINING 400,000 100% OF FOREIGN EXCHANGE EXPENDITURES 3 BUILDING 70,000 100% OF FOREIGN EXCHANGE EXPENDITURES 4 VEHICLES AND PARTS 30,000 5 P.P.F. 110,000 6 UNALLOCATED 190,000 7 TOTAL 1,800,000 -36- 3.2 UTILIZATION OF CREDIT FUNDS AS OF OCTOBER 31, 1997 3.2.1 CONSOLIDATED FIGURES USS % Amount disbursed 2,622,200 100%/O Requests under consideration 0 0 Balance to be disbursed 0 0 TOTAL 2,622,200 100% 3.2.2 BREAKDOWN BY CATEGORIES; POSITION AS OF OCTOBER 31, 1997 CATEGORY DESCRIPTION AMOUNT AMOUNT BALANCE AS OF |_________ |____________ ALLOCATED WITHDRAWN Oct. 31, 1997 1 Consulting Services 1,494,665.98 2,172,709.12 -678,043.14 2 Training 564,956.09 241,945.45 323,010.64 3 Building 103,304.06 106,516.50 -3,212.44 4 Vehicles 43,014.86 57,077.64 -14,062.78 5 P.P.F. 152,171.80 0.00 152,171.80 6 Special Account 1,247.00 43,952.02 -42,704.28 7 Unallocated 262,842.20 0.00 262,842.20 TOTAL j 2,622,200.00 2,622,200.00 0.00 VERY IMPORTANT NOTE: THIS TABLE WILL BE VALID ONCE THE FINAL AUDIT OF THE CREDIT IS COMPLETED. 4. PROJECT UNIT IN THE MINISTRY OF MINES AND ENERGY In order to implement one of the recommendations of the consultant Helmut A. Merklein, who carried out a study on energy sector organization within the framework of the component aimed at improvement of the organization of sector institutions, on August 8, 1994, the Government of the Republic of Equatorial Guinea issued Decree No. 100/1994 which removed responsibilities concerning electricity from the Ministry of Industry and Small and Medium Enterprises and transferred them to the Ministry of Mines and Energy. From that moment considerable changes were implemented in the project unit, as a result of which, combined with the return to the country of a significant number of technical specialists following their graduation from foreign universities, the Department of Mines and Energy is now staffed as follows: H.E. Juan Olo Mba Nseng Minister of Mines and Energy and Authorized Government Representative H.E. Miguel Abia Biteo Boriko Secretary of State for Mines and Project Coordinator H.E. Francisco Mabale Nseng Secretary of State for Energy - 37 - M.I. Crist6bal Mafana Ela General Secretary for Mines and Energy M.I. Miguel Angel Ondo Angue Director General for Mines and Hydrocarbons, and Project Manager M.I. Marcos Mba Ondo Director General for Energy M.I. Atanasio Ela Ntugu Nsa Regional Delegate for Mines and Energy in Bata Mr. Fidel Obama Asumu Section Chief for Exploration and Reserves Mr. Jose Luis Alfaro Musa Section Chief for Production and Marketing Mr. Domingo Mba Esono Section Chief for Planning and Statistics Mr. Jose Mba Abeso Section Chief for Mines and Quarries Mr. Manuel Mbana Ngua Chief of Technical Office, Regional Delegation Mr. Santiago Mba Ebana Section Chief for Environment Mr. Pelayo Nguema Sima Section Chief for Administration; etc. (the original report includes another 39 names). 5. PROJECT EXECUTION 5.1 CONSULTING SERVICES AND STUDIES 5.1.1 BEICIP-FRANLAB After Credit 2408-EG became effective, the first consulting company to sign a contract for provision of technical services with the Ministry of Mines and Energy was the French company "BEICIP-FRANLAB". This company signed a total of three contracts for the purposes and on the dates listed below: -38 - (1) October 1993. Contract for services re monitoring of exploration and development activities. (2) February 23, 1994. Contract for provision of consulting services re: a) negotiation with oil companies; b) oil and gas contract matters; c) tax matters. (3) July 23, 1994. Contract for provision of consulting and audit services. These services included: a) the accounting aspects of the exploration and production activities, exploration contracts, production audit and financial notification of the oil companies operating in Equatorial Guinea; b) training for accounting and financial matters; c) audit of project accounts and of the accounts of the oil companies and recommendations concerning an accounting system and preparation of the pertinent implementation program. Although it was not originally included among the studies to be made in the context of Credit 2408- EG, at the request of the Ministry of Mines and Energy BEICIP-FRANLAB made an evaluation of the hydrocarbon potential of the Rio Muni sedimentary basin in the mainland region. All the tasks assigned in accordance with the terms of reference were performed by the consulting company, with the exception of what could not be covered by the Credit because the funds budgeted had been exhausted. 5.1.2 QUAD CONSULTING LTD. On August 23, 1994, the Ministry of Mines and Energy signed a contract for provision of services for supervision of petroleum exploration operations with Quad Consulting Ltd. of the United Kingdom. However, in view of the importance of the question of technical information coupled with the rapid development and production of the Zafiro field, the Ministry expanded the technical services to be provided by Quad to include the cataloguing and organization of the technical information on hydrocarbons owned by the Government of Equatorial Guinea, together with the monitoring and supervision of exploration for and production and marketing of hydrocarbons, for which purpose Amendments 1 and 2, respectively, were signed. It should be noted that the cataloguing and organizing of technical information has been completed as regards the information available in the companies' headquarters and from the preceding project; the same work now remains to be done in the Ministry's headquarters, where a project has already been designed, with assistance from UMC, for a small information facility. -39- It is also important to note that Quad assisted the Ministry in decisionmaking concerning production from the Zafiro field; in this specific case special mention should be made of: a) the assistance furnished to the Ministry as regards the presentation made by Mobil on August 14, 1996, concerning the proposed activities for Zafiro production, and its comments on the position the Ministry should adopt in that connection; b) summaries of the geological reports on the Zafiro 1 and 2 wells, etc.; c) proposal for the production studies and the Bioko offshore reservoir. Although Credit funds have been exhausted, the consulting work is being continued at the Ministry's request pending a new technical assistance project. 5.1.3 Dr. Helmut A. MERKLEIN The consultant engaged for the study on organization of the energy sector signed a contract for provision of services with the Ministry of Mines and Energy. Following intensive work in Equatorial Guinea in January 1995 he submitted a technical report with the recommendations that culminated in the promulgation of Decree 100/94 already mentioned in paragraph 4. The report in question is still being used as a reference by the Ministry in discussions for the purpose of making a detailed analysis of how best to implement the other recommendations. 5.1.4 Mr. Alfonso POSADA This consultant was hired to make the study on the rehabilitation and expansion of the electrical systems and submitted a report in September 1994. The Ministry of Mines and Energy is currently in the final phase of implementing the consultant's recommendations to the effect that the least-cost option for expansion of electricity- generating capacity on the island of Bioko is to use part of the gas from the Alba field now being flared at Punta Europa (see paragraph 7.1). 5.1.5 GREATER CARIBBEAN ENERGY & ENVIRONMENT FOUNDATION, INC. In 1993 two consultants from this foundation made a study of the environmental impact of production of gas and condensate from the Alba field. The Ministry took good note of the content of their report on the possible hazards for the safety of persons and of installations, especially in light of possible deficiencies in the production platform, and for the environment, and the recommendations submitted to mitigate those hazards. In addition to studying these recommendations, the Ministry made a proposal for improvements to CMS-Nomeco, which presently has a project underway to install a fire-prevention system and improve the situation of the condensate storage tanks. The other recommendations are still under detailed study. -40 - 5.2 TRAINING OF MINISTRY OF MINES AND ENERGY STAFF One of the main objectives of the Second Petroleum Technical Assistance Project was to increase the Ministry of Mines and Energy's technical capacity so as to enable it to supervise the exploration and production activities. The transfer of technology from the consulting companies to the Ministry's technical staff designated as counterparts during the execution of the project was one of its most important achievements. Certain technical specialists participated actively in courses and seminars, as detailed below: TRAINING UNDER THE DIRECTION OF BEICIP-FRANLAB a) Training in seismic data acquisition and processing by Charles Peyssonneaux between April 4 and 9, 1994, in Malabo and Bata. b) Training in oil exploration by Laurent Sage in Malabo between May 18 and 28, 1994. c) Training of three technicians in drilling and production. This training was conducted at Beicip-Franlab headquarters and was tied in with the project to evaluate the hydrocarbon potential of the Rio Muni sedimentary basin in the mainland region. d) Two economist-accountants, Messrs. Marcelino Owono and Jose Ela Oyana, were trained at Beicip in business accounting and auditing. e) Technology transfer and training in geology and drilling engineering were provided to the Ministry staff present in the platform through the entire work period of the Beicip-Franlab engineers between September 6 and October 9, 1994, during the drilling of the Dorado 1 well. f) Exploration courses in Paris with emphasis on record-keeping, adapted to the requirements of the Ministry of Mines and Energy, between October 24 and 28 and seismic data courses between November 7 and 9, 1994. g) Courses in hydrocarbon deposit geology and geophysics on November 14 - 18, 1994. h) Technology transfer in interpretation of seismic data from the periods between courses; and i) The Ministry engineers Maximo Mba Obiang, Pastor Adjaba, Domingo Mba Esono and Leoncio Abeso were trained from October to November, 1994. UNDER THE DIRECTION OF QUAD CONSULTING j) From February 22 to June 26, 1995, three technicians from the Ministry--Domingo Mba Esono, Jose Mba Abeso and Maximo Mba Obiang-- attended training courses in English and also in the preparation of some seismic data interpretation projects and document preparation for area promotion in the offices of Quad Consulting Ltd. - 41 - k) Petroleum negotiating skills, finance, accounting and management: Mr. Miguel Abia Biteo Boriko and Fidel Obama Asumu, April 17-30, 1995. 1) English course, February 5 through March 28, 1996, in England, for seven staff members of the Ministry of Mines and Energy. m) Marketing course, in Quad, for Jose Luis Alfaro Musa, July 1996. 5.3 REHABILITATION OF HEADQUARTERS BUILDING On September 17, 1993, the "Carlano" construction company signed a contract with the Ministry of Mines and Energy for rehabilitation of the Ministry's headquarters building, which was constructed under the First Petroleum Technical Assistance Project funded with Credit 1304-EG. The contract included installation of air conditioning and fan systems and rehabilitation of the furnishings in general and of the conference room in particular. The work was done in 1993-94. 5.4 VEHICLES In accordance with the budget assigned to this category by the World Bank, the Ministry purchased two Toyota vehicles to cover project needs. These vehicles were used by the Ministry staff during the project under review. 6. OIL COMPANIES Once Alba field production started, and in accordance with the general plan drawn up by the Ministry of Mines and Energy, a campaign was immediately launched to promote unallocated areas for continuous hydrocarbon exploration, which attracted the interest of a number of internationally known companies such as CMS-Nomeco, Mobil, United Meridian International Corporation and Triton, which has acquired concessions in Equatorial Guinea, and others that are still seeking more deep-water concessions. It should be noted that the Credit was useful in this respect for financing the support services furnished by the consultants. 6.1 CMS NOMECO As noted in the introduction, the design of the Second Petroleum Technical Assistance Project focused largely on supervising production of the Alba field, which has been producing gas and condensate ever since Walter International Equatorial Guinea, Inc. started exploitation of the field at an initial rate of 3,500 b/d. The present operator of the block is CMS Nomeco Guinea Ecuatorial, Inc., an American oil company based in Houston, Texas, which has acquired all of Walter International's rights and obligations. Over the past few years, CMS Nomeco Guinea Ecuatorial, Inc. has expanded the capacity of the plant at Punta Europa up to an average daily output of 6,500 b/d of condensate. In addition to the production of condensate and as a result of the studies made on use of the Alba gas flared at Punta Europa, some of this gas is now being used for local consumption. -42 - The plant to produce LPG for export, with a 2,000 b/d capacity, under construction since 1995 has now been completed. The methanol plant is in the design phase. The rest of the gas will be used for electricity generation in a 2 x 5.2 MW plant. Financing for this project is in process of being arranged. 6.2 MOBIL GUINEA ECUATORIAL This Dallas-based American oil company owns a 75% share and UMC 25%. It is the present operator of Block B. With its aggressive exploration work and the discovery of the Zafiro field it has put itself in first place among the oil companies operating in Equatorial Guinea, with a current average production of some 80,000 b/d of crude oil. It is also pressing ahead with further exploration and posting promising results. For supervision of the production operations the Ministry has received consistent support from the Quad consultants under the Credit forming the subject of this report. 6.3 UMC GUINEA ECUATORIAL An American company headquartered in Houston, UMC Guinea Ecuatorial is the present holder of Blocks C and D and is currently continuing exploration in this areas. 6.4 TRITON GUINEA ECUATORIAL This company recently signed a production-sharing agreement with the Ministry of Mines and Energy covering Blocks F and G in the Rio Muni sedimentary basin in the mainland region. In the second half of 1997 and in accordance with the work program submitted to and approved by the Ministry it has been carrying out a seismic campaign in the above-mentioned blocks. PART II 7. EVALUATION OF THE SECOND PETROLEUM TECHNICAL ASSISTANCE PROJECT FROM THE BORROWER'S PERSPECTIVE This part of the final report describes the respective roles performed by the Ministry of Mines and Energy and the World Bank during the execution period of the Second Petroleum Technical Assistance Project, the impact of the relations between the two institutions and the opinion of the Ministry concerning the results achieved thanks to said project. 7.1 THE ROLE OF THE MINISTRY OF MINES AND ENERGY During the execution of the Second Petroleum Technical Assistance Project within the framework of Credit 2804-EG, which becamne effective on November 20, 1992 and was completed on October 30, 1997, the end of the grace period allowed by the Bank, the role played by the Ministry of Mines and Energy was a particularly important one and can be summarized as comprising three separate components: -43 - a) executing agency of the project for the borrower; b) coordinator of all the studies made by the consultants; c) source and supplier of data. As regards the design of the project and the preparation of the preliminary reports, the Ministry's technical staff participated actively by providing every type of information needed for the successful performance of these tasks. In its capacity as beneficiary, the Ministry took pains throughout the project to provide the moral, material and technical support required by the consultants involved in the project for the successful performance of their work. On various occasions the Ministry facilitated entry into and departure from the Republic of Equatorial Guinea for all who needed assistance in that respect. Utilizing the advice received from the different consulting firms, the Ministry took advantage of various international fora devoted to the oil industry to promote the areas still available for concessions. This has served to prompt interest on the part of major oil companies in applying for areas that are still open, including those in deep water, with the result that production-sharing contracts have been signed with some individual companies. With respect to the World Bank's supervision missions, the Ministry believes it has performed its assigned role by always providing the customary full support as regards the furnishing of information on the progress of the project. However, despite the efficient performance of its function during the execution of the project in terms of the achievement of the present objectives, it is acknowledged that there were delays in sending the quarterly and annual progress reports because the increase in exploration and production activities took up the entire time of the technical staff concerned. These complications have since been resolved and operations are progressing normally. 7.2 EVALUATION OF THE ROLE PERFORMED BY THE WORLD BANK In the opinion of the Ministry of Mines and energy, the part played by the World Bank in ensuring correct execution of the Second Petroleum Technical Assistance Project was DECISIVE. 'The Ministry accordingly commends the entire leadership and management of the World Bank in general for their readiness to support the Ministry at so decisive a juncture for the development of the petroleum industry by approving implementation of a new project that has produced, within the bounds of the possible, some impressive results. The Ministry further recognizes the support it has received from the Bank staff with responsibility for Equatorial Guinea in the design of the new project and the selection of consultants possessing appropriate experience and expertise. The unity of views between the Ministry and the Bank regarding the importance of basic and continuous training of the Ministry staff to equip them to accomplish the project's objectives served to further promote the understanding between the two institutions, and the interest, diligence and thoroughness with which the Bank approached this topic was appreciated and praised by the Ministry authorities. Special mention should be made in this connection of the Bank's initiative in incorporating into the project certain studies the conclusions and recommendations of which were adopted by the Government of Equatorial Guinea, a specific instance being the concentration of all energy-related questions and responsibilities in one single ministerial department, namely the Ministry of Mines and -44 - Energy. Finally, the Ministry wishes to express its appreciation of the grace period allowed by the Bank to facilitate a more transparent conclusion of the project. 7.3 RELATIONS BETWEEN MINISTRY OF MINES AND ENERGY AND WORLD BANK DURING THE PROJECT EXECUTION PERIOD In general, the relations between the Ministry of Mines and Energy and the World Bank during the execution of the Second Petroleum Technical Assistance Project were excellent, although it should be noted here that those relations passed through three important stages: a) Initial stage of project This stage was characterized by outstandingly good relations during the design process of the new project. The officials designated by the Bank at that time worked hard to create a climate of understanding and cooperation that enabled the preparation of the first studies. In addition to their energetic approach to the project itself, they evidenced a concern for and dedication to the interests of the Republic of Equatorial Guinea in general and of the Ministry of Mines and Energy in particular. b) Intermediate stage In this stage the relations between the Ministry and the Bank underwent a significant crisis, with a total absence of the elements which had contributed to the previously prevailing climate of understanding. It is important to note two specific occurrences which, in the Ministry's opinion, could have brought about the deterioration in relations, namely: 1. The replacement of the previous task manager, whose gifts had been major factors in the previous stage, by a new official with responsibility for petroleum matters who displayed little interest in and support for the project, leading to a situation of isolation and lack of information between the Ministry and the Bank. 2. The Ministry, with the aim of improving the impaired relations and in light of the urgent situation regarding production of the Zafiro field, sent a high-level delegation to visit the World Bank headquarters. This delegation, which was headed by the Minister himself, was not received by the Bank authorities concerned, which was perceived as a slight to the Ministry. c) Final stage A stage characterized by normalization of Ministry-Bank relations, which lasted through completion of the project. This report recommends scrupulous observance of the two institutions' administrative hierarchies in the future. -45 - 7.4 ACHIEVEMENTS DURING THE EXECUTION OF THE SECOND PETROLEUM TECHNICAL ASSISTANCE PROJECT It can be affirmed without fear of contradiction that the project amply covered the main objectives proposed in its identification phase and set forth in the credit agreement. Although not all of these objectives were met, this was not due to lack of interest on the Ministry's part but rather to prudence and budget cutbacks. The following accomplishments are deserving of mention: a) Thanks to the study made by the consultant Helmut Merklein on improvement of the organization of the sector institutions, the recommendations of which underscored, inter alia, the need for transfer of all energy-related responsibilities to the present Ministry of Mines and Energy, the Government promulgated Decree No. 100/1994 already referred to in paragraph 4. b) The studies made to determine the most cost-effective method of developing the Alba field and the environmental impact of production of the field, served as basic background documentation for the Ministry in formulating and presenting measures for improvement in the field's production. c) The evaluation made of the potential of the Rio Muni sedimentary basin, together with the advice provided by the consultants on exploration, led to our presence at major petroleum industry events to promote areas open for concessions, as a result of which various production- sharing agreements have been signed and current production has been stepped up. d) Regarding training of technical staff, the Ministry is most satisfied with the positive effect of the project. The staffs knowledge and experience in the sphere of petroleum have been considerably broadened as a result of project-financed training activities; however, it must be noted that there has been a rapid surge in sector activities giving rise to an increased requirement for technical personnel (engineers and inspectors), thereby creating some urgent training needs that will be analyzed in a separate document. e) All existing petroleum and mining data were identified with a view to organizing a computerized records system in the very near future. f) With technical assistance from legal specialists draft versions have been prepared of an amendment to the Hydrocarbons Law and of its implementing regulations and have been submitted to the Ministry's senior authorities for study and approval prior to submission to the Government in 1998. g) Despite the fact that the study of the most cost-effective methods of utilizing the products stripped from the Alba gas was not made, the Ministry was able to use the studies made during the first project, as a result of which the gas flared at Punta Europa will now be used: (1) As gas for household use for local consumption (2) For conversion into LPG for export (plant completed) (3) For generating electricity (project underway and in an advanced stage) (4) For conversion into methanol for export (project in an advanced stage). -46 - Notwithstanding all these achievements, we want the Bank to understand that it would be a mistake to think the Ministry has no interest in renegotiating the contracts already in existence and signed with the companies. In the specific case of the production-sharing contract between the Government of the Republic of Equatorial Guinea and Walter International, now CMS-Nomeco, top- level meetings have been held on two occasions at which the Ministry put forward concrete proposals; however, the company's reaction has always been negative, so the Ministry has concluded it would be preferable first to complete the legal framework and then to open the relevant negotiations. CONCLUSIONS It is important to recognize that the design and implementation of the Second Petroleum Technical Assistance Project was 80% centered around exploitation of the Alba field. The field's initial production averaged 3,000 b/d, but petroleum activity in Equatorial Guinea has greatly intensified over the past two years, reaching very high levels according to available data, and the demand for deep-water areas is growing steadily. Moreover, the number of technical personnel has increased considerably and appropriate skills and expertise are now required to supervise all this activity. Consequently: 1. Technical assistance is immediately needed to advise the Ministry in all aspects connected with the industry. 2. Also urgently needed is a program of basic and advanced training concentrating on: (a) knowledge of English for all, as the industry language; (b) exploration, production, marketing and environmental questions; (c) administration and management. The above are all needed to ensure the sustainability of the positive impact of the Second Petroleum Technical Assistance Project. MAP SECTION IBRD 29416 1 O, CLSOWSE SECOND PETROLEU PRODUCING OIL FIELDS Tsavarila 1A-~~~~~ * Oouala.o C ICENSED ARESlAS14 I AMEROON 0~~~~~~~~~~~~~~~~~*3 R I // ;*,,M N --~~~~~~~i *: > >.o:: to:*oL* /: /:t (7/::2X f:0 :l::tr 70:t::'-= AI:, CHAD~~~~~~~~~~~~~~~C FASO ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~I j8i~~! / '-"~~~CENTRAL / / ,/ ~AFRICAN § i/ ROMMA DEM. REP. '~~' 4 G A BON ONO OF CONGO 0~ 100 *ANGOLA- I oodr MAY 1998