Document of The World Bank FOR OFFICIAL USE ONLY Report No. 3868-TH STAFF APPRAISAL REPORT THAILAND LIQUIFIED PETROLEUM GAS PROJECT May 24, 1982 Energy Department (Petroleum Projects) East Asia Pacific Regional Office 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 From July 1981 1 Baht = US$0.043 23 Baht = US$1.00 FISCAL YEAR October 1 to September 30 WEIGHTS AND MEASURES bpd = Barrels per day MMSCFD = Million standard cubic feet per day tcf = Trillion cubic feet (1012) toe = Tonnes oil equivalent (10.415 x 106 kcals) bbl = Barrels (approximately 6.6 barrels per tonne fuel oil) Btu = British Thermal Unit - a unit of heat equal to 0.25 K calories psig = pounds per square inch (guage) PRINCIPAL ABBREVIATIONS AND ACRONYMS USED BMTA = Bangkok Mass Transit Authority CDC = Commonwealth Development Corporation DMR = Department of Mineral Resources DPCU = Dew Point Control Unit EGAT = Electricity Generating Authority of Thailand IFCT = Industrial Finance Corporation of Thailand LNG = Liquified Natural Gas LPG = Liquified Petroleum Gas MEA = Metropolitan Electricity Authority MKT = Marketing (Oil Distribution and Supply) IUnit (PTT) NEA = National Energy Administration NESDB = National Economic and Social Development Board NGOT = Natural Gas Organization of Thailand NPPC = National Petroleum Policy Committee OECF = Overseas Economic Cooperation Fund (Japan) OFO = Oil Fuel Organization ONG = Natural Gas Operations Unit (PTT) PEA = Provincial Electricity Authority PTT = Petroleum Authority of Thailand PVC = Polyvinyl Chloride SAL = Structural Adjustment Loan SGV = Sycip, Gorres, Velayo & Co. TORC = Thailand Oil Refining Company FOR OFFICIAL USE ONLY THAILAND LIQUIFIED PETROLEUM GAS PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. ENERGY SECTOR ................................................ 1 Introduction . ....1. Energy Resources ........................................ 1 Energy Demand Patterns .................................. 3 Thailand's Energy Future . .. 4 Institutional Framework .................................6 Government Policies ..................................... 7 Energy Planning .......................... 7 Energy Conservation ................................. 8 Pricing Policy ...................................... 8 Bank Participation In The Sector . . . 10 II. LPG MARKET .................................................. 12 Background .................................................. 12 LPG Consumption ..... ................................... 12 LPG Demand Projections to 1990 . . . 13 Domestic LPG Supply and Development Prospects...*...... 14 LPG Market ............................................. 15 LPG Pricing ......... .................................... 16 Utilization of Ethane and Propane for Petrochemicals...17 III. THE PROJECT ......... .. 18 Background... . . ... 18 Gas Reserves, Supplies and Demand .....................18 Project Objectives ..18 Project Description ..... . 19 Project Implementation and Schedule ..21 Project Costs ..... 23 I. Gas Plant (Table) ...24 II. LPG Bulk Storage and Distribution (Table) .. 25 III. Studies and Technical Assistance . .26 This report has been prepared by Messrs. E. Daffern and S. Moussa and Mesdames. S. Shum and R. Vedavalli of the Energy Department and is based on an appraisal mission to Thailand in November 1981. 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. Table of Contents (continued) Page No. Project Financing Plan . ...... . ..................... 27 Procurement and Disbursement . . ......................... 28 Reporting Requirements . . .30 Training .... 30 Ecology and Safety ..... . ..31 Physical Risks ...32 IV. THE BORROWER .. ...................... 32 Petroleum Authority of Thailand .32 Experience and Training .33 Accounts, Audit and Insurance .33 V. FINANCIAL ASPECTS .35 Introduction ..... 35 Past and Present Finances ..... 35 Future Finances .... 37 Revenue Position .....38 (a) Natural Gas Operations Unit . .. 38 (b) Marketing (Oil Distribution and Supply) Unit...... and Bangchak Refinery ...., 39 Liquidity Position ..... 39 Funds Flow ....40 Capital Structure ..... 41 VI. ECONOMIC ANALYSIS .42 Introduction ......................... . 42 Economic Benefit Streams ................... 42 Cost Streams ........................ 43 Economic Risk . . . ............. 43 Project Profitability .... ................... . 44 (a) Economic Rate of Return ...44 (b) Net Present Value ...44 (c) Payback Period ...44 Qualitative Benefits ............ 44 VII RECOMMENDATIONS .......45 Table of Contents (continued) ANNEXES Glossary 1.01 Natural Gas Reserves 1.02 Projected Natural Gas Supply 1982-1990 1.03 Potential Demand and Supply of Natural Gas 1.04 De)zind and Supply for Energy 1980-1990 1.05 Eastern Seaboard Development Plan 1.06 Energy Sector 2.01 Demand for LPG (1981-1990) 2.02 PTT's LPG Market Share 3.01 Project Description 3.02 Construction Schedule 3.03 Studies 3.04 Disbursement Schedule 3.05 Financing Plan for Gas Plant Contract 4.01 PTT Organisation Chart 5.01 PTT Income Statements (FY80-81) 5.02 PTT Balance Sheets (FY80-81) 5.03 Notes and Assumptions on Financial Statements 5.04 PI'T Capital Expenditure (FY82-90) 5.05 PTT Projected Income Statements 5.06 PTT Projected Balance Sheets 5.07 PTT Projected Sources and Uses of Funds 5.08 ONG Projected Income Statements 5.09 ONG Projected Balance Sheets 5.10 ONG Projected Sources and Uses of Funds 5.11 MKT Product Volume Prices and Margins 5.12 MKT Projected Income Statements 5.13 MKT Projected Balance Sheets 5.14 MKT Projected Sources and Uses of Funds 5.15 Statement of Corporate and Financial Objectives 6.01 Economic Analysis 7.01 Selected documents and data available in the Project File Map IBRD 16244. THAILAND I. ENERGY SECTOR Introduction 1.01 Until the initial supplies of natural gas became available to the domestic market in September 1981, Thailand had been almost completely dependent on imports for its petroleum requirements. Oil products consumption at 200,000 barrels/day accounted for about 72% of Thailand's 1980 total energy requirements and 99% were imported either as crude or products. The oil import bill at 58,700 million baht ($2,560 million) represented 44% of export earnings, and left the Thai economy vulnerable to future movements in world energy prices. 1.02 Despite this heavy dependence on imported oil there are a number of encouraging developments which give grounds to expect an improvement in Thailand's energy prospects in the future. On the demand side, the growth of energy consumption has started to fall in relation to GDP and is now at 1.2:1, following regular increases in energy prices; demand has (at least temporarily) levelled off for most major oil products. On the supply side the series of discoveries in the Gulf of Thailand has resulted in establishing large natural gas reserves. Exploration activity has increased, and in the past year modest discoveries of oil have been made. 1.03 The availability of sizeable volumes of natural gas will have an important structural impact on Thailand's energy situation during the 1980s. Natural gas not only will replace large quantities of fuel oil consumed in the generation of thermo-electric power but will also open up the possibility of expanding and upgrading the market for natural gas to the petrochemical and fertiliser industries and eventually the consideration of gas export options. At the same time the displacement of fuel oil will have important implications for Thailand's future refinery investment program which will need to be aimed at reducing petroleum product imbalances resulting from the growth of naturaloas in the domestic market. The extraction of liquified petroleum gas (LPG) - from the gas stream, the subject of the proposed Bank loan, will bring further benefits to the economy by substituting for imports, stemming the consumption of diesel and kerosene through expansion of LPG supply into the transportation and residential sectors, and by providing valuable feedstocks upon which to base a petrochemical industry. Energy Resources 1.04 Indigenous resources have accounted for 25-30% of total energy 1/ Natural gas contains methane, ethane, propane, butane and small amounts of liquid hydrocarbon products forming natural gasoline. Propane and butane may be recovered as individual products or mixed together as liquified petroleum gas (LPG). -2- consumption during the second half of the 1970's with fuelwood/charcoal, hydroelectricity, bagasse and lignite typically forming 13%, 7%, 7% and 3% respectively. There are minor exports of fuelwood/charcoal and minor imports of hydro and coal. Domestic oil production is negligible, but recent discoveries give hope that significant reserves may be detected. Both hydro and lignite have significant potential for increase, and as referred to above, the potential role of natural gas is substantial. (a) Non-hydrocarbon Resources 1.05 Total hydroelectric potential on Thailand's rivers is about 8,010 MW of which two-thirds appear to be economic. Of this 1,341 MW I' are in operation and 2,000 MW are planned for the 1980s. Development of the potential on the international rivers (Salween and Mekong), about 25,000 MW, must await international agreements. The major lignite prospects are at Mae Moh with reserves of 650 million tons. Mae Moh is being developed through IBRD/ADB assistance. The other lignite reserves, Krabi and L2 together 120 million tons, are relatively small. Likewise the geothermal -7 and uranium reserves appear to be small. Fuelwood/charcoal reserves, although large, are becoming difficult to exploit because of deforestation. (b) Hydrocarbon Resources 1.06 Exploration for hydrocarbons is running at a high level (15 to 20 wells per year) and gas reserve figures are frequently being revised upwards. Particularly significant are the Union Oil _/ and Texas Pacific4/ gas reserves in the Gulf of Thailand, reflecting maturity in the drilling there. Shell and Esso (Khorat) have onshore licences where the first results are beginning to be known. Four 5/ other licences have been awarded in recent months. In view of the drilling activity there is every reason to expect known reserves to increase. 1.07 Up to June 1981, 78 exploration and delineation wells had been drilled in the Gulf of Thailand, of which 41 showed significant accumulations of natural gas and condensate and 4 have indicated small deposits of crude oil. Proven and probable gas reserves amount to 20 trillion cubic feet (tcf), of which 4 tcf are proven, (see Annex 1.01), and could ultimately sustain production of over 3,000 million cubic feet per day (MMSCFD), equivalent to 27 1/ Excluding Nam Ngum in Laos, which is mainly for Thai needs. 2/ Being investigated with Bank technical assistance. 3/ Union Oil operates in two groups, with Seapec and Moeco. 4/ Texas Pacific, Canadian Superior and Highland. 5/ Esso (Udong), Pecten, Philips, TerraMarine. Triton's earlier concession is suspended pending establishment of the joint Thai/Malaysian authority, and Amoco and Sun concessions are suspended pendlng resolution of the offshore boundaries with Kampuchea and Vietnam. -3- million tons of oij1equivalent per year, for about 20 years. A group of twelve gas fields - discovered by Union Oil have estimated reserves of 11 tcf (2.6 tcf proven), approximately 425km. offshore. The first natural gas came onshore from Union Oil's Erawan field in September 1981 and is flowing at 160 MMSCFD, equivalent to 1.5 million tons of oil per annum; before the end of 1982 throughput will have reached 250 MMSCFD. Negotiations between PTT and Union Oil for a second contract have recently been finalised, covering a further five fields and an additional 300-400 MMSCFD. The Texas Pacific group has discovered a further 9 tcf of natural gas some 200 km. south of Union's discoveries. Consideration is being given to the possible export of this gas. 1.08 Onshore there are three small oil fields in the Fang 2/ area of northern Thailand which are yielding about 15,000 tons per year, the 1981 Shell discovery in the northern plains - possibly 300,000 tons by 1985 rising to 500,000 tons/year by 1990, and some 1 tcf of gas indicated by Esso in the North East. Ultimate figures could be much higher, but it is premature to speculate by how much. Oil shale reserves are known to exist at Mae Sot, near the Burmese border, and amount to 2,500 million tons. They are being investigated with assistance from the German government. Other known oil shale reserves are small. 1.09 Given the high success ratio Thailand is reviewing its licensing arrangements and tax system and is considering changing to a production sharing basis. The decision on whether to adopt new legislation is expected during 1982. Energy Demand Patterns 1.10 Over the last 20 years commercial energy consumption (petroleum, hydro and lignite) has increased on average by 12% per annum from 1.1 million tons of oil equivalent (toe) in 1960 to 11.0 million toe in 1980. CDP has increased over the period by 7.5% per annum. The energy/GDP growth relationship has fallen from 1.85 to 1 in the early period to 1.2 to 1 over the last five years, attributable primarily to the sharp increases in the price of energy. Petroleum has provided 60-70% of total energy supply over the last decade. 1.11 The other major energy source, fuelwood and charcoal, has declined in importance as people have shifted to other fuels and as wood sources themselves have become depleted and scarce. The difficulty of gathering fuelwood has become an important problem, particularly in the northeast. 1.12 Thailand's commercial energy statistics give a reasonable guide to the use being made of energy, although recent trends are distorted through mixing of products. Transportation consumes 31% of total consumption, a figure which makes it a target for conservation. Electricity consumes 22% and 1/ Erawan, (first contract), Platong, Pladang, North Pladang, Satun, Baanpot, (second contract), Chakawan, Trat, Jakrawan, Funan, Pakarang and Kaphong. 2/ Ministry of Defence fields. - 4 - substantial steps are being taken by the power sector towards substituting fuel oil with lignite, natural gas and hydro power. 1.13 Fuel oil, diesel and gasoline together represent 37% of total petroleum products consumption. For the time being some 95% of products are imported, mainly fuel oil, LPG and diesel, whereas other refinery products are broadly in balance. Over the past ten years demand for fuel oil and LPG has been growing more strongly than other products. Consumption patterns will change as natural gas is introduced in large quantities (particularly replacing fuel oil) and as the Government takes further steps to influence petroleum demand through pricing and other measures. Table 1.01 Consumption Of Primary Energy In Thailand 1970-1980 (million metric tons of oil equivalent) Average Annual 1970 1975 1980 Increase Energy Petroleum Products 4.5 (61%) 7.5 (65%) 10.2 (73%) 8.5% Hydroelectricity 0.5 (7%) 1.0 (9%) 0.4 (3%) * Coal/Lignite 0.1 (2%) 0.2 (2%) 0.4 (3%) 15% Other 2.3 (30%) 2.8 (24%) 3.0 (21%) 3% Total 7.4 (100%) 11.5 (100%Ko) 14.0 (100%) 6.6% *1980 affected by drought Thailand's Energy Future 1.14 The structural transition to a completely different energy economy started when natural gas came on stream in the third quarter of 1981. The large gas reserves have opened up the possibility of much greater energy independence, with gas and gas products being used over time for power generation, industry and as fuel for motor vehicles and fishing boats, cooking and lighting; furthermore gas can be used as feedstock for a fertiliser and petrochemical industry and could possibly be exported. The introduction of natural gas as a fuel is however bringing potential problems of refinery imbalances whose resolution will require important investment decisions in the near term. Sufficient gas has already been found to provide for Thailand's projected gas needs for the next two decades. In the short term gas will primarily be used as a substitute for fuel oil in the power sector. Studies have recently been carried out to investigate new markets such as the LPG- markets covered by the proposed project. In this fluid environment energy balance forecasts are inevitably tentative but it is reasonable to assume as shown below that the availability of natural gaK will result in a leveLing of oil imports which would have major balance of payments implications. Table 1.02 Domestic Energy Production and Energy Import Forecasts (million tons oil equivalent) 1980 1985 1990 Growth Domestic Production Oil 0.02 0.30 0.50 38% Gas and Gas Liquids - 2.55 6.50 - Lignite 0.35 1.30 2.90 24% Hydro 0.32 1.25 2.10 21% Non-commercial fuels 3.00 3.45 3.70 2% Imports (net) Oil 10.11 9.20 9.95 - Coal 0.06 - - - Hydro 0.12 0.60 0.55 16% Total Consumption 13.98 18.65 26.20 6.5% 1.15 One of the important consequences of the development of Thailand's indigenous energy is the effect on the refinery products balance. Gas, lignite and hydro all displace fuel oil particularly in power generation and inrindustry. To a lesser extent gas and LPG will also displace gasoline and smaller quantities of kerosene and diesel. A Bank-financed study, carried out by Lummus (consultants, USA) evaluated the implications of natural gas on the refinery expansion program. The results of the study indicate the need for enhancing diesel capacity and minimising gasoline production. 1.16 The Bank's latest forecast of refinery balance and imports and exports is as below: Table 1.03 Thailand's Refinery Balance (thousand tons/year) 1980 1985 1980 1985 1990 Refinery Output Exports _(+YTImports7(-)/c LPG 125 153 -115 - /a Gasoline 1,352 1,437 -303 -73 763 Kerosene/jet fuel 866 986 -124 -314 -484 Diesel 2,432 2,726 -1,128 -954 -1,574 Fuel Oil 2,386 2,546 -1,299 +46 +546 7,161/b 7,848 -2,969 -1,295 -1,875 /a see Table 2.04. 7b Production of bitumen, plant fuel and refinery losses amount to 582,000 tons a year in 1980 and 630,000 tons/year in 1985 and 1990. /c Exports and imports are based on refineries operating at a percentage of capacity comparable to that of 1980, when Bangchak operated at about 75%. -6- The Bank's more detailed supply and demand projections, yPich are set out in more detail in Annex 1.04, are based on recent PTT, NEA - , Shell and Esso projections and exclude the possible expansion of the TORC refinery. These projections take account particularly of the experience of 1980 and 1981 (when gasoline, kerosene, and diesel consumption fell), and the expected substi- tution of LPG for various fuels over the next ten years. They are also based on production of 800 MMSCFD of natural gas by 1990. The projections show that the most significant imbalance is a deficit of diesel supplies and kerosene. An appropriate solution could be construction of conversion facilities. An alternative worth considering is arranging suitable medium-term purchase contracts. Other measures such as price incentives, c~7servation and use of alternative fuels in buses, local trucks and pick-ups - are also desirable to reduce diesel oil demand and to encourage LPG to substitute for kerosene. With the refinery configuration indicated, production and consumption of other refinery products will come close to being in balance. The immediate decisions are important, as surplus gasoline is already forcing lower refinery runs which in turn are increasing the importation of diesel and fuel oil; in the longer term the problems of an unsuitable refinery configuration could inhibit petroleum substitution. A study on petroleum prices, including the implications on refinery balances, is to be undertaken as part of the structural adjustment loan and is referred to further in paragraph 1.24. This study is expected to recommend price measures, including better refinery margins for diesel oil, to help ensure that future refinery investments more closely match the national needs. Institutional Framework 1.17 The energy sector organization in Thailand is complex. Although NESDB (Prime Minister's Office) and NEA have responsibility for overall planning and investment decisions, they are not in a position to exercise close coordination. The energy planning and energy policy formulation functions are scattered among several Government ministries and agencies. In addition several committees have been set up to deal with energy and petroleum related policies. This makes it difficult to control and co-ordinate energy sector activities and policies in a systematic manner, with a consequential risk that they may not be effectively integrating their plans and policies. The Government is aware of the problem and has, as a first step selected NEA to undertake, in consultation with other concerned agencies, the responsibility of monitoring energy sector studies in progress, evaluating those which are completed, proposing appropriate recommendations for implementation and identifying areas for further investigation. The NEA will complete the initial stock-taking of these studies and prepare, by September 1982, a medium-term energy strategy to achieve the plan objectives and targets. Subsequently, this mechanism for policy co-ordination will be retained on a continuous basis so that changes in the energy sector are taken into account in further strategy formulation and implementation. 1/ National Energy Administration, a part of the Ministry of Science, Technology and Energy. 2/ A component of the project (see Chapter 3). -7 1.18 Government departments. The Department of Mineral Resources (DMR) of the Ministry of Industry handles all technical and legal aspects of all minerals including oil and gas exploration and exploitation licensing arrangements and is also responsible for non-power lignite mining. The Ministry of Industry is also responsible for setting ex-refinery prices and taxation policy, and for PTT. The Ministry of Commerce sets margins between ex-refinery and retail prices and sets minimum oil stocks. The Ministry of Defence has its own energy department and its own energy activities include management of small oilfields and a small refinery at Fang and ownership and operation of the BangChak refinery. (According to the PTT Act (as amended) the remaining Ministry of Defence energy assets will transfer to PTT in 1985). The Ministry of Science Technology and Energy is responsible for NEA and for non-conventional energy. The Prime Minister's office and the Cabinet take a direct interest in determining retail prices of petroleum products. The Prime Minister's office is also responsible for the Electricity Generating Authority of Thailand (EGAT), the largest state-owned enterprise. In addition to power generation, EGAT is responsible for exploration and development of lignite for use in power plants. Retail distribution of electricity under the Metropolitan Electricity Authority (MEA) and the Provincial Electricity Authority (PEA) are controlled by the Ministry of Interior. Other institutions involved include the Budget Bureau, controlling budgetary aspects of locally funded costs. 1.19 Petroleum Sector Organization. The private sector has had a major role in the exploration, refining and marketing of oil products in Thailand. The only major state enterprise in the oil and gas sector is PTT which is responsible for natural gas transmission, LPG and petrochemicals, and is a major refiner and marketer. (See Chapter 4 for more details on PTT). The roles of the public and private sectors have historically been complementary, there being little competition surrounding their respective roles in the sector, although the division is breaking down rapidly in refining and marketing. Further discussion of the exploration and production, refining and marketing activities of the sector is given in Annex 1.06. 1.20 A National Petroleum Policy Committee (NPPC) was appointed in March 1981 by the Cabinet. Its function is to set policies and targets for the development of the-petroleum industry and the pricing of petroleum products. The NPPC has the authority to appoint sub-committees as it deems necessary. It is chaired by the Prime Minister, with the assistance of a Deputy Prime Minister acting as Deputy Chairman. It has 15 other permanent members, representing the principal Government departments and public energy corporations. The various functions of the NPPC subcommittees and other committees in the sector are described in Annex 1.06. Government Policies (i) Energy Planning 1.21 The Government attaches high priority to formulating an integrated and consistent strategy for energy development in Thailand. The major goals of the fifth development plan emphasise the need for a decline in petroleum imports, both by demand management and conservation measures, reducing domestic energy use and increasing the domestic supplies of alternative energy sources like natural gas, lignite, and hydro power. The plan stipulates -8- further that the Government will support research and development in new domestic energy resources, especially renewable resources such as geothermal, solar, alcohol and wind. However, these are not expected to have much impact on the structure of domestic energy production before 1986. 1.22 A number of technical and policy related studies, many of them in connection with various Bank projects, have been undertaken. The Bank's energy sector review, the gas utilization study and the long-term refinery expansion study have all been completed. The refinery study has enabled proposals by the TORC group to be put into the proper context, and is expected to lead to a satisfactory refinery configuration. The gas utilization study confirmed the gas separation plant project and outlined the basic considerations for the petrochemical study which is now in progress and the recently completed ammonia study. An energy master plan study (UNDP/ADB) is ex)ected to consolidate much of the above. The Bank has also recently coripleted an alcohol fuel study. A pipeline strategy study (Italian Go-ernment) is examining pipeline options for the offshore gas. Policy studies required include three interrelated pricing studies for natural gas, petroleum and lignite (the latter two will be undertaken under previous loans, the former discussed further at para 1.28), a gas purchasing strategy and gas resources studies (to pass the purchasing choice to the Government rather than leaving the initiative with the producers) and studies on LNG export and on the feasibility of gas supplies to small users along the pipeline route. Other studies required including specific studies on LPG and pre-feasibility studies for PTT's investment program are outlined more fully in Chapter III and Annex 3.03. (ii) Energy Conservation 1.23 The Government has already taken a number of steps to reduce energy consumption directly, especially during peak hours. Concerned agencies are preparing policy and program proposals to induce energy conservation in transport, industry and households. A program of public education is being developed to encourage households to save energy. Agencies such as the NEA, the Ministry of Industry, and the Industrial Finance Corporation of Thailand (IFCT), are individually and co-operatively collecting technical information, operating and expanding pilot schemes, and seeking external assistance for the design and implementation of energy conservation programs. To strengthen these efforts further the Government will conduct a study to assess the existing incentives for industrial energy conservation as provided by various agencies and will implement appropriate recommendations in 1982. _'. The subject cuts across the energy and industrial sectors and involves a large number of planning and implementing agencies. (iii) Pricing Policy 1.24 Retail prices of petroleum products except for gasoline and diesel continue to be subsidised, creating distortions in the market and inefficiency, as well as financial pressures on the Oil Stabilisation Fund. The Government, in its letter of development policy, under SAL, has reiterated 1/ Covered under SAL. -9- its resolve to continue implementing frequent adjustments in energy prices to reflect cost changes. The relative price structure of petroleum products has over-encouraged substitution of gasoline by imported, subsidised LPG in cars and pick-ups and has been a significant factor in the shift of small trucks to diesel use. Major changes are needed involving cuts in gasoline taxes and significant increases for diesel. With a view to correcting the relative structure of petroleum products prices both at ex-refinery and retail levels, the Government will (as mentioned above) undertake a study to analyze the efficiency, revenue, and financial and conservation implications of the existing and alternative price structures, and plans to initiate appropriate changes in the price structure in 1982. A second phase of the study will integrate its findings with those of the lignite and gas pricing studies. The Ministry of Finance will be the lead agency responsible for co-ordinating and reviewing the study. The timetable and terms of reference were finalized during SAL negotiations. 1.25 (a) Consumer Prices. Most energy conservation is likely to occur as a result of appropriate policies on petroleum product prices, which also serve the purpose of resource mobilization. Since 1979, significant efforts have been made to adjust domestic prices of petroleum products. By March 1981, petroleum product prices had been increased to 220% of 1973 levels (60% increase in real terms). Current Thai retail prices are shown below: Table 1.05 Petroleum Product Prices in Thailand (Unit $/gallon) Petroleum Product Import Marketing Total Retail Subsidy/a Price Margin Delivered Price ($gallon) ($million) (NQv.81) Cost LPG 0.84 0.16 1.00 0.89 0.11 17 Gasoline 1.00 0.08 1.08 1.88 (0.80) (472) Kerosene 110 0.07 1.17 1.01 0.16 14 Diesel 1.07 0.07 1.14 1.22 (0.08) (88) Fuel Oil 0.74 0.02 0.76 0.72 0.04 41 /a Includes contributions to/from the Oil Fund and taxes. For diesel oil the contribution to the Oil Fund is negative. 1.26 (b) Taxes and the Oil Stabilization Fund. Two taxes, an excise tax and a business/municipal tax, are levied on petroleum products. The taxes are levied primarily on the sale of gasoline and are very much lower for other products. In 1980, the revenue from both taxes as a percentage of total tax revenue averaged 16%, derived mainly from gasoline and diesel. The petroleum products pricing study under SAL will include an examination of both taxation and the Oil Stabilization Fund (below). 1.27 The Oil Stabilization Fund was set up in 1974 when the Government collected the oil companies windfall profits arising from higher retail prices of the "old cost" oil stock, and is levied on retail sales of petroleum - 10 - products. In 1975, the Government began to collect money for the Oil Stabilization Fund from oil users by adding it as a positive or negative component of the retail price, with a view to using the Fund as a price stablization mechanism. For most of 1980 and 1981 more was taken from the Fund than was put in, such that it became heavily in debt. By early 1982 the Fund was more than $125 million in debt, principally to PTT. The Government intends, as a short-term solution, to refinance the Fund through borrowing to pay off the Fund's debts. The medium term financial position of the Fund seems to be acceptable in view of the recent decline in international petroleum product prices which are enabling the Fund to make a profit each month. The future need for the Fund is not obvious. The position will be carefully monitored and will be reviewed by the pricing study discussed above. The implications of the Fund's deficit on PTT's financial condition are discussed in Chapter V. 1.28 (c) Natural Gas Pricing. The two gas purchase agreement (Union and PTT) are satisfactory to both parties and will yield acceptable profits to each. Both relate gas price to estimated cost and are escalated according to a number of factors including fuel oil. The present gas sale agreement between EGAT and PTT bases price on production cost plus a transportation margin, with a floor price linked to Singapore fuel oil prices. In view of the uncertainties of the oil market the price basis is fixed for three years (to 1984 only), although it was EGAT's intention to continue on the same basis if still appropriate. To determine the appropriate rationale for pricing natural gas in all uses (such as power generation, petrochemicals and fertilizers), assurances were obtained that the Government will undertake a natural gas pricing study, to be completed not later than March 31, 1983. The Bank will wish to review the study with the Government with a view to implementation. Bank participation in the sector. 1.29 The Bank has been associated with Thailand's program to exploit the natural gas discoveries in the Gulf of Thailand since mid-1976. At that stage there were no precedents for a developing country contracting with a foreign operator for the offshore purchase of gas. The Bank's initial role centered on identifying and coordinating basic studies and activities necessary for project preparation, assisting with terms of reference for consultants to carry out such studies, and advising the Government in setting up a national gas entity responsible for the construction and operation of a gas pipeline and distribution system. The first stage of optimisation, studies and design was financed through an engineering loan (SIOTH), subsequently a $107 million loan for financing the gas pipeline was approved in December 1979 (1773TH). The Bank has since assisted PTT through close supervision of the studies and the work of a number of consultants, throughout construction of the natural gas pipeline and the guarantee period into the early stages of operation. The project became operational on time and within budget. 1.30 Bank staff participated from the early stages of the LPG project particularly (a) discussions on selecting the optimum plant size; (b) drafting of terms of reference and reviewing more recent consultants proposals for the gas separation plant; (c) defining the approach to procurement and supervision of construction; (d) analysing cost estimates and choices of alternative plant components; (e) assisting PTT with financial and economic analyses; - 1 1 - (f) defining marketing needs and supporting PTT in the necessary research; (g) the role of private enterprise and co-ordination with their plans and (h) safety standards. The Bank was instrumental in reviewing earlier consulting work which led to better plant specification and a saving of $130 million on the project cost, and has since played a pivotal role in the market development and safety efforts. 1.31 In relation to the power and lignite subsector, the Bank has made eleven loans to EGAT and its predecessor totalling $542 million to help finance power plants and transmission facilities and two loans totalling $100 million to PEA to finance Accelerated Rural Electrification Projects. The first seven EGAT projects have been completed satisfactorily. Good progress is being made with the other EGAT loans and the PEA loans. A further loan was made to EGAT in June 1980 for lignite production. Two project performance audit reports have been prepared in respect of EGAT's operations, both favourable. 1.32 Over the last six years, the Bank has built up an effective working relationship with PTT; and also with the Government ministries and agencies responsible for the development of Thailand's indigenous energy resources, and with the two successful oil companies. The loans have been the basis for substantial cofinancing. In view of the major impact of Thailand's energy and industry on the medium term balance of payments, and the size of public and private energy related investment in these sectors (together more than $4 billion this decade, in addition to power) it is important that during the coming years the Bank and IFC continue to be closely associated with Thailand's industrial and energy strategies. - 12 - II. LPG Market Background 2.31 Thailand's planned gas separation plant and the proposed Esso refinery expansion are expected to increase the availability of domestic LPG supplies starting from mid-1983. An important aspect of the Government's energy strategy is to reduce the dependence on oil imports by substituting indigenous fuels. Future indigenous LPG supplies are expected not only to eliminate LPG imports (which are currently at 35% of LPG consumption) but also to meet the growing LPG requirements in the domestic sector, and gradually to su'lstitute for diesel oil impor:s in the industrial and mass transport sector. After meeting the domestic requirements surplus LPG will be exported, for which several overseas companies have been expressing strong interest. Both the import substitution and the export of surplus LPG will help Thailand contain its net oil import bill. LPG Consumption 2.02 Historically, LPG consumption in Thailand has, on average, increased by 14.2% per annum, and the demand rose from less than 50,000 tons in 1970 to almost 200,000 tons in 1980. Demand for LPG did not show any absolute decline during 1973-74 despite the 112% increase in prices, and the demand is in effect constrained by supply rather than price. The following table shows historical LPG consumption in Thailand between 1971-81. Table 2.01. LPG Consumption (1971-81) ('000' tons) 1971 % 1980 % 1981 % Rate of Growth 1971-80 Residential Sector 53 100 156 74 131 57 12.7 Industry - 27 13 44 19 - Transport - 27 13 55 24 - Total 53 100 210 100 230 100 14.2 2.03 In Thailand LPG is primarily used as a cooking fuel in the 'residential' sector, mainly urban households and commercial establishments such as hotels and restaurants in Bangkok. LPG consumption in the residential sector expanded from 53,000 tons in 1971 to 156,000 tons in 1980 and then decreased to 131,000 tons in 1981 because of a shortage of supplies. By 1980 the industrial and transport sectors each formed 13% of total LPG consumption. In 1981 the transport sector share rose sharply to 24% of total LPG consumption. Nearly 50% of the increase in transport demand was accounted - 13 - for by use of LPG in taxis, with LPG diverted from residential use. LPG Demand Projections to 1990 2.04 With the B nk's assistance PTT used a local private voluntary organization, PDA 1 , to undertake an urban/rural household energy survey, concentrating on LPG use and potential markets and based on present prices. Based on these results and other information, the basic projections developed joLntly by PTT and the Bank are given below: Table 2.02 Projected LPG Demand 1980-1990 ('000' tons) 1980 1985 1990 Rate of Growth Actual _ Residential Sector 156 200 325 7.6 Industrial Sector 27 55 85 12.5 Transport Sector 27 210 390 25.0 Total 210 465 800 14.1 The intersectoral rates of growth will differ and reflect the slower growth in the residential sector (7.6%) and moderate rates of growth in industrial LPG consumption (12.5%) and a sharp increase in the transport sector. LPG consumption in the residential sector is expected to double to 325,000 tons by 1990. 2.05 The Government's objectives in the residential sector are the substitution of LPG for fueiwood/charcoal and supplying LPG to the rural population. Although LPG compares favourably with fuelwood/charcoal in cost per effective BTU, the initial investment required to purchase cylinders and appliances (about $50 per household) will present difficulties for low income rural households. In order that this constraint should not present a serious obstacle to the penetration of LPG in the domestic sector, PTT intends to conduct pilot marketing studies in semi-urban and rural areas to determine appropriate cylinder sizes and methods of deposit payment on easy installments (administered outside of PTT) for both cylinders and appliances. These studies will also test the accuracy of the market survey conducted by PDA to plan development of future investments in domestic marketing. 2.06 Thailand's transportation sector currently consumes 31% of total petroleum products in the form of gasoline and diesel. By 1990 the government expects a significant surplus in gasoline and a deficit in diesel, and - consequently wishes to encourage propane/LPG substitution to reduce the size of the diesel deficit. Further price incentives may be required and this is being addressed under the SAL petroleum pricing study. Although the market is already undergoing conversion of gasoline-engined pick-ups and trucks to LPG, 1/ Population and Community Development Association. - 14 - this substitution will stem further acquisition of diesel-engined pick-ups and trucks in the future. The major penetration in the transport sector will come from the gradual replacement (during the normal replacement cycle) of diesel- engined buses and local trucks with vehicles using propane/LPG fuels. About 50% of the diesel consumption in the transport sector is mainly in the metro and inter-city bus fleets. The Bangkok Mass Transit Authority (BMTA) is planning to demonstrate the use of propane/LPG in a number of buses in order to gain operational and maintenance experience consistent with Thai environmental conditions. The proposed Bank loan will finance PTT's purchase of five LPG fueled buses to conduct this demonstration, and a LPG fueled truck for in-city deliveries. 2.07 The current composition of residential LPG demand is split 60:40 between Bangkok and other parts of Thailand. In the eighties the availability of LPG from the gas separation plant is expected to satisfy not only Bangkok demand but will also improve its access to up-country urban, semi-urban and outlying rural areas of Thailand. In the industrial sector LPG is presently used mainly in the plateglass, glass bottle and ceramic industries. Industrial LPG use in these and in new uses such as tobacco curing and tapioca processing are expected to increase in step with planned annual growth rates of about 12%. In the transport sector, LPG demand in the eighties is expected to rise sharply. The high rate of growth in the transport sector reflects the continuing trend of increasing substitution of gasoline in taxis/cars and pick-ups to LPG. Strong efforts will be made to introduce LPG to bus fleets, and the possible financial constraints on the bus companies will be examined further as the project develops. Depending on pricing policy, LPG use is expected to substitute for gasoline and diesel in about 35% of pick-ups and about 80% of the mass transit authority bus fleet and intercity bus fleet, resulting in transport LPG consumption of about almost 390,000 tons by 1990. 2.08 The composition of LPG demand in the transport sector is given in Table 2.03 below: Table 2.03 LPG Demand In Transport Sector 1980-90 (000) tons 1980 1981 1985 1990 Actual Prelim. Estimate Taxi 20 45 90 95 Pick-up/small trucks 7 10 95 200 Metro bus - - 15 50 Intercity bus - - 10 45 Total LPG consumption 27 55 210 390 Domestic LPG Supply and Development Prospects 2.09 The projected indigenous LPG supplies from the proposed gas separation plant, addition of a second gas separation plant and planned local refineries' expansion in the eighties represent a combined availability of LPG - 15 - supplies that will not only substitute for imports of LPG and diesel fuel but will also generate an export surplus. Current plans for expansion and debottlenecking of the Esso refinery are expected to increase LPG supplies from refineries from the present 130,000 tons to 190,000 tons by 1985. When the planned first gas separation plant has built up to full production, around 1985, it is expected to process 350 million SCFD of natural gas, generating about 460,000 tons of propane and LPG. In line with Thailand's policy to substitute its natural gas for imports of petroleum, a second gas separation plant is planned and, when constructed will generate another 400,000 to 460,000 tons of indigenous LPG supplies by about 1987. A further gas supply contract may be required if the second LPG plant is the same size as the first. The following table gives the forecast propane/LPG supply/demand balance in the eighties. Table 2.04 Propane/LPG Supply/Demand Balance (000 tons) Propane/LPG Supplies Imports (-) Year Refineries Gas separation Total Demand Exports(+) plant 1980 130 130 210 -80 1985 190 460 650 465 +185 1990 190 920/a 1,110 800/b +210 to 310 /a Second gas separation plant to be in operation also processing 350 MMSCFD natural gas /b Excludes expected petrochemical demand for propane which could absorb up to 100,000 tons, depending on plant configuration. 2.10 Assuming that both the planned refinery expansion and the gas separation plant are on time, Thai propane/LPG supplies will exceed the demand in 1985 by 185,000 tons. Propane surplus to Thailand's requirements will be exported. PTT has had discussions with a number of interested LPG importers and will seek firm bids later in 1982. LPG Market 2.11 Two marketing companies, Shell and Esso, supplied more than 86% of the LPG market in 1980, while the remaining market was supplied by Summit (6%) and the publicly owned government distribution company, PTT's MKT (8%). PTT's share increased to 4/2°t in 1981. PTT's share of the market is forecast to increase through the growth in public sector sales, particularly the planned substitution of propane/LPG for diesel oil in the publicly operated metrobus and inter-city bus companies. Although private companies' aggregate sales will continue to increase, their relative share will decline, to approximately 64% of the market by the end of the decade. The projected LPG market share is given below. - 16 - Table 2.05 Public/Private Share of LPG Market (000) tons Public sector (%) Private sector (%) Total 1981 22 (10) 208 (90) 230 1985 125 (27) 340 (73) 465 1990 290 (36) 510 (64) 800 2.12 By 1984, after the completion of the gas separation plant, PTT will emerge as the major supplier of bulk LPG for the Thai market and may also be the largest distributor. The projected demand resulting from the penetration of LPG in new markets requires the provision of adequate and reliable transport, storage and distribution facilities. By end 1984 PTT will have 6 bulk storage installations distributed over the marketing centres in Thailand. Propane and LPG will be transported in bulk from the terminal in Laem Chabang to the storage installations by rail, road and barge. All marketing companies including MKT will purchase propane and LPG from these installations for further distribution to consumers in the domestic, industrial and transport sectors. The private marketers are keen to secure their supplies and expand their markets. Availability of LPG on equal terms from the proposed bulk storage installations (to be covenanted under this loan) will encourage them to undertake the required investment in the LPG market. LPG Pricing 2.13 Pricing of LPG supplies derived from imported crude oil in local refineries and from imports is based on import parity. The cost of LPG distribution and marketing, ranging between 20 and 25% of the ex-refinery prices, is not fully reflected in the sales price to consumers. Government is currently subsidizing LPG cost at the rate of 1.54 baht per kg for domestic supplies and 2.79 baht per kg for imported LPG. 2.14 With the commissioning of the gas separation plant a new source of domestic LPG supplies will become available. The most appropriate basis for pricing LPG from the gas separation plant is its economic value, which at the margin is the net export price about $315/tonne at present (somewhat lower than present ex-refinery prices). At the same time LPG from refineries will continue to supply a significant percentage of domestic LPG consumption (30% in 1985 declining to 20% in 1990) which should be priced the same as gas separation plant LPG. On this basis, Thailand will have the opportunity to eliminate retail subsidies and reduce prices. Tentative prices have been calculated for the financial projections included in Chapter 5, and fit well with estimated costs and the present scheme. Costs of transport and bulk storage are about $40/tonne, giving an ex-bulk price of about $355/tonne. Future supplies from the proposed bulk storage installations will introduce common LPG prices thus eliminating differences in various parts of the country. Prices at this level are competitive with diesel and give a wide margin compared with gasoline, further encouraging substitution, particularly gasoline. Higher prices which would discourage gasoline substitution would also be prohibitive as a diesel substitute and as a charcoal substitute. As supplies that will not only substitute for imports of LPG and diesel fuel but will also generate an export surplus. Current plans for expansion and debottlenecking of the Esso refinery are expected to increase LPG supplies from refineries from the present 130,000 tons to 190,000 tons by 1985. When the planned first gas separation plant has built up to full production, around 1985, it is expected to process 350 million SCFD of natural gas, generating about 460,000 tons of propane and LPG. In line with Thailand's policy to substitute its natural gas for imports of petroleum, a second gas separation plant is planned and, when constructed will generate another 400,000 to 460,000 tons of indigenous LPG supplies by about 1987. A further gas supply contract may be required if the second LPG plant is the same size as the first. The following table gives the forecast propane/LPG supply/demand balance in the eighties. Table 2.04 Propane/LPG Supply/Demand Balance (000 tons) Propane/LPG Supplies Imports (-) Year Refineries Gas separation Total Demand Exports(+) plant 1980 130 130 210 -80 1985 190 460 650 465 +185 1990 190 920/a 1,110 800/b +210 to 310 /a Second gas separation plant to be in operation also processing 350 MMSCFD natural gas /b Excludes expected petrochemical demand for propane which could absorb up to 100,000 tons, depending on plant configuration. 2.10 Assuming that both the planned refinery expansion and the gas separation plant are on time, Thai propane/LPG supplies will exceed the demand in 1985 by 185,000 tons. Propane surplus to Thailand's requirements will be exported. PTT has had discussions with a number of interested LPG importers and will seek firm bids later in 1982. LPG Market 2.11 Two marketing companies, Shell and Esso, supplied more than 86% of the LPG market in 1980, while the remaining market was supplied by Summit (6%) and the publicly owned government distribution company, PTT's MKT (8%). PTT's share increased to i/51 in 1981. PTT's share of the market is forecast to increase through the growth in public sector sales, particularly the planned substitution of propane/LPG for diesel oil in the publicly operated metrobus and inter-city bus companies. Although private companies' aggregate sales will continue to increase, their relative share will decline, to approximately 64% of the market by the end of the decade. The projected LPG market share is given below. - 16 - Table 2.05 Public/Private Share of LPG Market (000) tons Public sector (M) Private sector (M) Total 1981 22 (10) 208 (90) 230 1985 125 (27) 340 (73) 465 1990 290 (36) 510 (64) 800 2.12 By 1984, after the completion of the gas separation plant, PTT will emerge as the major supplier of bulk LPG for the Thai market and may also be the largest distributor. The projected demand resulting from the penetration of LPG in new markets requires the provision of adequate and reliable transport, storage and distribution facilities. By end 1984 PTT will have 6 bulk storage installations distributed over the marketing centres in Thailand. Propane and LPG will be transported in bulk from the terminal in Laem Chabang to the storage installations by rail, road and barge. All marketing companies including MKT will purchase propane and LPG from these installations for further distribution to consumers in the domestic, industrial and transport sectors. The private marketers are keen to secure their supplies and expand their markets. Availability of LPG on equal terms from the proposed bulk storage installations (to be covenanted under this loan) will encourage them to undertake the required investment in the LPG market. LPG Pricing 2.13 Pricing of LPG supplies derived from imported crude oil in local refineries and from imports is based on import parity. The cost of LPG distribution and marketing, ranging between 20 and 25% of the ex-refinery prices, is not fully reflected in the sales price to consumers. Government is currently subsidizing LPG cost at the rate of 1.54 baht per kg for domestic supplies and 2.79 baht per kg for imported LPG. 2.14 With the commissioning of the gas separation plant a new source of domestic LPG supplies will become available. The most appropriate basis for pricing LPG from the gas separation plant is its economic value, which at the margin is the net export price about $315/tonne at present (somewhat lower than present ex-refinery prices). At the same time LPG from refineries will continue to supply a significant percentage of domestic LPG consumption (30% in 1985 declining to 20% in 1990) which should be priced the same as gas separation plant LPG. On this basis, Thailand will have the opportunity to eliminate retail subsidies and reduce prices. Tentative prices have been calculated for the financial projections included in Chapter 5, and fit well with estimated costs and the present scheme. Costs of transport and hulk storage are about $40/tonne, giving an ex-bulk price of about $355/tonne. Future supplies from the proposed bulk storage installations will introduce common LPG prices thus eliminating differences in various parts of the country. Prices at this level are competitive with diesel and give a wide margin compared with gasoline, further encouraging substitution, particularly gasoline. Higher prices which would discourage gasoline substitution would also be prohibitive as a diesel substitute and as a charcoal substitute. As - 17 - referred to above, LPG prices are already being studied with a view to rezonciling the conflicting objectives. Utilization of Ethane and Propane for Petrochemicals 2.15 Gas utilization studies by Davy McKee and Chem Systems (UK and US) have identified economic uses for 300-350,000 tons p.a. of ethane and propane from the gas separation plant in the production of ethylene and propylene known as olefins. The main derivatives of olefins, such as low and high density polyethylenes (LDPE/HDPE), polypropylene (PP), and ethylene glycol (EG), would be the nucleus of potential petrochemical industries that would improve the economic value of the gas separation plant products. The olefin derivatives are used to manufacture plastic films for general purpose bagging and sheeting, injection and extrusion moulding for containers and piping, wire and cable insulation etc. Thailand's demand for these products, growing at an annual rate of 8%, will absorb the full production of commercial size plants and will result in substitution of imports. The Government is aware of the value added benefits of an olefin complex and has decided to undertake a study of an entire petrochemical complex. This study is expected to be complete by end-June 1982. PTT expects to undertake a basic engineering study for the construction of an ethylene plant, to be completed by June 30, 1983. 18 - III. THE PROJECT Background 3.01 The Bank participated in the financing of the natural gas development project (1773-TH) which became operational in September 1981. The main objective of the project was to construct a natural gas pipeline from the offshore Erawan field in the Gulf of Thailand to the Bang Pakong and South Bangkok power plants. The proposed gas plant is intended to be the first of a series of major projects which will bring the full benefit of gas to Thailand. PTT has presented to the Bank a feasibility study for the gas plant and LPG distribution and has requested Bank involvement in their financing. The project was appraised during March to November 1981. Gas Reserves, Supplies and Demand 3.02 Gas supplies for the proposed gas separation plant will come from six of the Union Oil Group's 12 gas fields in the Gulf of Thailand. Sufficient gas has already been contracted for a second (smaller) gas separation plant. Proven reserves of natural gas can support production greater than the pipeline capacity. The first natural gas supply contract, for Union Oil's Erawan field will be able to supply an average of 250 MMSCFD from the fourth quarter of 1982, and the second contract up to 400 MMSCFD, from five other Union fields from mid 1985. In view of the importance of this second contract for plant operations, ratification of the second Union Oil contract will be a condition of effectiveness of the loan. 3.03 Demand for natural gas will be in excess of supply throughout the 1980's. The second gas purchase contract has been agreed, providing supplies close to the pipeline carrying capacity, (about 700 MMSCFD with full compression.) For a third contract PTT will need simultaneously to identify firmly and receive commitments from new customers, design and commit a new pipeline, and negotiate and finalize a contract with a gas supplier; this is likely to take some time. In the meantime a long term pipeline strategy study for offshore gas is already under way. PTT's overall projections provide for two gas separation plants operational successively in 1984 and 1987 with possibly a third plant in the early 1990's. Project Objectives. 3.04 The efficient use of natural gas is the main objective of the project. The gas separation plant will extract about 30% of the heat content of the gas. Propane/LPG from the gas separation plant will substitute LPG imports and ensure a reliable supply, as well as meeting future growth. LPG self sufficiency and export of propane will improve the foreign exchange balance. Five LPG bulk storage marketing (Map IBRD 16244) installations will be constructed in Thailand in up-country provincial and rural areas to make it available to rural and provincial consumers as well as additional storage in Bangkok and at the plant site in Rayong. Sale of LPG for cooking will reduce the usage of charcoal and fuelwood which is contributing to deforestation. The project will make available the country's gas resources to people outside 19 - the Bangkok area. LPG use as an automotive fuel will significantly reduce gasoline and diesel consumption and pollution. 3.05 Of the other products extracted, the ethane is a suitable feedstock for olefin-based petrochemical plants to produce polyethylenes and polyvinyl- chloride (PVC). Extraction of ethane will also improve propane recovery. The CO2 in the gas is removed in the process of recovering the LPG which results in upgrading the heating value of the sales gas and prevents corrosion in the pipeline network. The natural gasoline can be used as a refinery feedstock. The residual from the process is a natural gas stream roughly equal in heat content to the inlet gas, but without the corrosive properties. Project Description 3.06 The gas from six Union Oil fields will be transported to shore in a 425 km 34" submarine pipeline financed by the Bank under the Second Natural Gas Development Project (1773-TH). The gas reaching the shore will be treated in a dew point control unit (DPCU) to remove the condensate by sub-cooling. The proposed project will separate ethane and heavier hydrocarbons from the gas stream and then market these products. The main components are the following: (i) A gas separation plant to recover ethane, propane, LPG and natural gasoline. The liquid hydrocarbons (propane, LPG and natural gasoline) will be transported to the Laem Chabang terminal; (ii) Bulk storage and distribution installations to distribute propane and LPG in the domestic market; and (iii) Studies and technical assistance relating to LPG marketing, petroleum sector investments, energy policy and other aspects of PTT. Each of these project components is described below. 1. The Gas Plant 3.07 The gas separation plant will be located at Rayong and will have a capacity of 350 MMSCFD. The feed gas will be treated to reduce carbon dioxide (C02) content to avoid freezing and precipitation of C02 in the refrigeration section of the plant as well as to upgrade the calorific value of the gas. The treated gas will be subsequently dehydrated for processing in the refrigeration and fractionation sections. Ethane, propane and LPG are separated in the liquid phase at low temperatures attained by turbo-expansion and recycle refrigeration. The dry gas is then compressed and injected in the transmission line for distribution to power stations and industrial consumers. Further details of plant design and related facilities are given in Annex 3.01. 3.08 The plant site in Rayong will be equipped with storage facilities for propane, LPG and natural gasoline. These products will be pumped in three separate pipelines to the marine and distribution terminal at Laem Chabang 60km north of Rayong, and natural gasoline on to the TORC refinery. The Laem - 20 - Chabang terminal has storage facilities and a jetty both for domestic LPG distribution (small tankers of 5000 DWT) and for exporting propane and LPG in refrigerated tankers up to 75,000 M3. II. LPG Bulk Storage and Distribution 3.)9 PTT will construct 5 regional bulk storage installations plus those at Laem Chabang, Rayong and Bangkok, covering the whole of Thailand's distribution centres. These installations are planned to be completed progressively by 1984 PTT will be responsible for LPG transport from the terminal at Laem Chabang to the regional bulk storage installations. LPG will be transported by barge, rail and road depending on the available infrastructure at the bulk storage locations. Marketing companies (including MKT) will provide operational storage, cylinder filling and transport facilities to distribute the LPG to domestic consumers, filling stations for vehicles and industrial users. III. Studies and Technical Assistance 3.10 The project includes major technical assistance and studies in general policy areas and on overall technical issues, assistance in direct support of this project, both in LPG marketing and use , and in training (the latter is included in Parts I and II above), in pre-feasibility studies for the major items in PTT's investment program, and in support of its administration and planning. The requirements are summarised below. (i) Policy and overall technical studies 3.11 As discussed in chapter I, a number of studies are required on pricing issues. In respect of natural gas, the pricing study and the proposed study on small scale use will complete the overall studies on gas utilization. An LNG export study is required as part of the gas strategy in view of the strong gas reserve position. The Government and PTT have been responding to proposals by various producers for the sale of gas, but have not been in a position to take the initiative in deciding from which fields they wish to purchase gas, or in deciding any priority or strategy among the various offers. To put itself in a suitable position PTT should obtain independent studies of the gas reserves in each significant structure and should update these when new information comes available. The study currently underway on alternative pipeline systems for offshore gas will need to-be continued and completed. Drawing on the above and the LNG study, PTT should prepare a gas purchasing strategy, with the help of consultants, which would take account of the probable economics of various fields, the pipeline implications, diversity of supply among producers, fields and pipelines, flexibility, competition, joint benefits with LNG, and longer term alternative sources and demands. The policy and strategy studies to be financed by the Bank will require 250 man months of consultancy assistance. Except for updates on gas reserves, all will be completed during 1983 and 1984. (ii) Project related studies 3.12 Following the completion of the fuel utilization survey carried out by the Population and Community Development Association (PDA) PTT will conduct pilot marketing studies in representative samples of semi-urban and rural - 21 - areas covered by the survey. The study which will be carried out by local consultants for a duration of one to three years will be monitored by a marketing consultant. The consultant will coordinate, analyse and report the results of the study to plan future marketing requirements. A total of 400 man months input is expected including 10 man months expatriate assistance. 3.13 The proposed loan will finance the purchase of 5 LPG fueled metrobuses and trucks including spares and the technical assistance to advise on the safety requirements and operating and maintenance facilities. The demonstration has started for both urban and inter-urban bus operation and will be completed by end 1983 during which experience gained will assist in future replacement of diesel fueled buses by LPG fueled buses. (40 man- months). (iii) Investment related studies 3.14 PTT has a major capital investment program amounting to $2.5 billion over the next seven years. Pre-feasibility studies are required on a number of the proposed investments to determine the most appropriate sizing, timing and configurations. Projects to be studied include the natural gas pipelines, products pipeline, crude oil storage and the second LPG plant. The studies to be financed by the Bank will in total require 160 man-months of consultancy effort and will be undertaken as required from 1983 through 1984. (iv) Other assistance 3.15 PTT has need of assistance in introducing the concept of manpower planning and longer term staff recruitment and development, so that the various projects in its corporate plans can be evaluated properly. PTT is also in need of a review of its management information needs and the work flow within its administrative set-up, with a view (if appropriate) to setting up a co-ordinated workflow and management information system. Total consultancy input is estimated at 125 man months and the tasks should be completed in 1984. Project Implementation and Schedule (a) Gas Plant 3.16 PTT has decided to proceed with the execution of the gas separation plant, pipelines and export facilities on a lump-sum turnkey basis. Initial work, including an assessment of alternative plant sizes, was undertaken by Fluor. Subsequently Linde AG. of West Germany was selected from five international consulting firms to prepare the technical specifications and tender documents, assist in prequalifying engineering contractors, analyze bids and assist in negotiating the contract with the successful bidder, through until contract award. Important alternatives were examined with Bank staff during preparation of the specifications. Phase II of Linde's contract covers the project management which includes reviewing the contractor's designs and detailed engineering, supervision of construction, training and takeover until commissioning by the contractor. 3.17 The following schedule represents the important milestones in the implementation of the gas plant. The schedule is considered reasonable. - 22 - (i) Prequalification of engineering contractors (completed) October 1981 (ii) Issue tender documents (completed) November 1981 (iii) Bid opening (completed) March 1982 (iv) Bid evaluation, contract negotiations and award August 1982 (v) Mechanical completion August 1984 (vi) Start-up and commissioning Nov/Dec. 1984 Seven experienced contractors from five countries submitted bids and all are capable of completing the work on time, (Annex 3.02). When the plant comes onstream the gas supply will be only 250 MMSCFD. Special measures will be taken to test the operating capability of the plant at full flow rate. The expected date for the next gas supply is mid 1985, and until that time the plant will operate below capacity. (b) Bulk Storage and Distribution Centers 3.18 PTT will engage consultants to provide technical services required (a) for the construction of five new bulk storage and distribution centres and for reinforcement in Bangkok and distribution from Rayong and Laem Chabang and (b) for the rail loading facilities. These consultants will carry out: (i) studies as required for site selection, (ii) prepare basic designs and tender documents to invite engineering contractors to bid for the detailed design, supply and construction of these installations, (iii) prequalification of contractors, and (iv) provide technical assistance for bid evaluation, project management and supervision, training and start-up. The studies would be undertaken by consultants whose qualifications, experience and conditions of employment would be satisfactory to the Bank and PTT. Contractors will prepare the detailed design. Selection of consultants (covered by a condition of effectiveness) will be completed by August 1982, although contract signature may take up to three months longer, and the basic design should be completed by November and bid openings are expected by March 1983. PTT proposes to proceed with two (or more) lump sum turnkey contracts covering the storage and rail facilities respectively. Contract awards should be July. Operation will coincide with the separation plant in late 1984. 3.19 The Government will need shortly to issue a first notification to all the distributors of the availability of LPG on equal terms. The issue of such a notification will be a condition of effectiveness. Subsequent to this notification a second notification will be issued upon completion of PTT's consultant's design of LPG storage facilities specifying the location of the bulk storage centres and the services provided. Subject to the above the private marketers are expected to play a full role in LPG market development. Assurances were obtained at negotiations that the issuance of this second notification would be made by February 1, 1983. As a precautionary measure against possible delays or changes in the private marketers' plans, assurances were obtained from PTT that it will review the companies' plans with the Bank by July 1983, with a view to taking such remedial measures as are necessary. (c) Studies 3.20 The project schedule for the various studies has been outlined in - 23 - paragraphs 3.11 to 3.15 above. Further details are in Annex 3.03. Project Costs 3.21 Total project cost is $600 million, including $48 million in taxes and $52 million in capitalized interest and fees is as follows: $ million L.C. F.C. Total Gas plant 117 146 263 LPG storage/distribution (PTT) 32 46 78 LPG distribution (private) 42 58 100 Studies 2 7.7 9.7 Inventory 8 - 8 Contingencies Physical 18 38 56 Price 15 18 33 Interest during construction: Bank financed - 5 5 Other 20 26 46 Front end fee - 1.3 1.3 254 346 600 The gas separation plant complete with the transfer pipelines, distribution terminal and export facilities is estimated to cost on an all-in basis (including taxes and interest during construction) US$320 million of which US$183 million (57%) represents the foreign currency component. The US$320 million includes a 10% physical contingency which was applied to all costs. The cost estimate for the major part of the work (plant, pipelines and terminal) is based on the fixed price bids already received and includes an estimated $27.0 million in bidders provision for price escalation, included in the table below on a line by line basis as per the bids. Other costs are in 1982 US dollars with the foreign cost element escalated at the rate of 8% for 1982, 8% for 1983, 7.5% for 1984 and 7% for 1985 while local costs were escalated at the rate of 12% for 1982 and 1983, 10% for 1984 and 9% for 1985. Project engineering management, construction supervision and start-up technical assistance costs have been estimated at US$12 million which is in the normal range of costs for this type of contract. The Linde contract provides for 840 man months at an average direct cost of US$7,700 per man month and US$11,900 per month including all costs. 3.22 The cost estimate takes into consideration that the contract will be awarded in August 1982 and mechanical completion will be after 24 months (August 1984). Liquidated damages for late completion are provided under the contract at the estimated daily loss to PTT, up to a maximum of about six months delay. Any delay will not affect greatly the costs, being a lump sum fixed price contract, but it will reduce the benefits. 3.23 The following table gives the breakdown of the estimated costs for the gas plant (including transfer pipelines and the marine terminal). - 24 - I. Gas plant / Baht, Millions /a US$ Millions F.C. L.C. Total F.C. L.C. Total 1. Detailed Engineering and Procurement 363.4 18.4 381.8 15.8 0.8 16.6 2. Materials and Equipment (i) Gas separation plant 1322.5 446.2 1768.7 57.5 19.4 76.9 (i ) Transfer pipelines 193.2 82.5 273.7 8.4 3.5 11.9 (iii) Terminal and export facilities 648.6 264.5 913.1 28.2 11.5 39.7 Sub-Total 2164.3 791.2 2955.5 94.1 34.4 128.5 3. Construction (i) Gas separation plant 234.6 434.7 669.3 10.2 18.9 29.1 (ii) Transfer pipelines 20.7 186.3 207.0 0.9 8.1 9.0 (iii) Terminal and export facilities 85.1 561.2 646.3 3.7 24.4 28.1 (iv) Housing 25.3 234.6 259.9 1.1 10.2 11.3 Sub-Total 365.7 1416.8 1782.5 15.9 61.6 77.5 4. Owner's Costs (i) Land acquisition and Right of Way - 105.8 105.8 - 4.6 4.6 (ii) Start-up expenses 11.5 57.5 69.0 0.5 2.5 3.0 (iii) Spare parts, chemicals 115.0 - 115.0 5.0 - 5.0 (iv) Linepack and sundries 69.0 46.0 115.0 3.0 2.0 5.0 (v) Training 32.2 4.6 36.8 1.4 0.2 1.6 (vi) Administration expenses 27.6 220.8 248.4 1.2 9.6 10.8 Sub-Total 255.3 434.7 690.0 11.1 18.9 30.0 5. Project Engineering and Management 213.9 25.3 239.2 9.3 1.1 10.4 6. Contingencies (i) Physicas 460.0 138.0 598.0 20.0 6.0 26.0 (ii) Price b- 34.5 103.5 138.0 1.5 4.5 6.0 Total 3854.8 2930.2 6785.0 167.7 127.3 295.0 7. Interest during construction (i) Bank financed 57.5 - 57.5 2.5 - 2.5 (ii) Other 299.0 218.5 517.5 13.0 9.5 22.5 Total cost including interest 4211.3 3148.7 7360.0 183.1 136.9 320.0 a/ 1.0 US$ = 23 Baht. b/ excludes price escalation built into the fixed price bid. Note: Taxes and customs duties amount to $30.5 million. - 25 - 3.24 The marketing and distribution of LPG to meet future consumption in new areas up to year 1986 will be shared by PTT and the private companies. The private sector share will be US$145 million and will cover operational storage, cylinder filling, service stations, transport units and cylinders. PTT's LPG bulk storage and distribution costs have been estimated in 1982 prices by PTT and the mission at US$115 million using price contingencies at the rate of 8% for 1982, 8% for 1983, 7.5% for 1984 and 7% for 1985 for foreign costs and 12% for 1982 and 1983, 10% for 1984 and 9% for 1985 local costs and physical contingencies of 15%. The cost estimates will be confirmed by the consultant; until that time the financing plan will be kept flexible. Details are as follows: II. (a) LPG Bulk Storage and Distribution (PTT) Baht Millions US$Millions F.C. L.C. Total F.C. L.C Total 1. Detailed engineering and procurement 96.6 6.9 103.5 4.2 0.3 4.5 2. Materials and Equipment (i) Storage tanks 347.3 71.3 418.6 15.1 3.1 18.2 (ii) Filling stations 124.2 58.2 179.4 5.4 2.4 7.8 (iii) Vehicles 144.9 46.0 190.9 *6.3 2.0 8.3 (iv) Cylinders 239.2 204.7 443.9 10.4 8.9 19.3 Sub-Total 855.6 377.2 1232.8 37.2 16.4 53.6 3. Construction (i) Storage Tanks 13.8 75.9 89.7 0.6 3.3 3.9 (ii) Filling Stations 4.6 48.3 52.9 0.2 2.1 2.3 (iii) Buildings and infrastructure 11.5 128.8 140.3 0.5 5.6 6.1 Sub-Total 29.9 253.0 282.9 1.3 11.0 12.3 4. Owner's Costs (i) Land acquisition - 48.3 48.3 - 2.1 2.1 (ii) Administration - 48.3 48.3 - 2.1 2.1 'iii) Training 2.3 2.3 4.6 0.1 0.1 0.2 Sub-Total 2.3 98.9 101.2 0.1 T7 74' 5. Project Engineering and Management 73.6 11.5 85.1 3.2 0.5 3.7 6. Contingencies (i) Physical 172.5 126.5 299.0 7.5 5.5 13.0 (ii) Price 163.3 112.7 276.0 7.1 4.9 12.0 Total 1393.8 986.7 2380.5 60.6 42.9 103.5 7. Interest during construction (i) Bank financed 57.5 - 57.5 2.5 - 2.5 (ii) Other 98.9 108.1 207.0 4.3 4.7 9.0 Total Cost including interest 1550.2 1094.8 2645.0 67.4 47.6 119.0 Note: Taxes and customs duties amount to $7.6 million. - 26 - II. (b) LPG Distribution (Private Sector). The Bank's estimate of the corresponding private sector investment has been developed in the light of discussions with the major distributors and information provided by them, and compares closely with experience in other countries. It is prepared on a basis comparable to that for PTT. Baht Millions US$ Millions F.C. L.C. Total F.C. L.C. Total 1. Detailed Engineering and procurement 128.8 9.2 138.0 5.6 0.4 6.0 2. Materials and Equipment (i) Storage tanks 266.8 50.6 317.4 11.6 2.2 13.8 (ii) Filling stations 172.5 94.3 266.8 7.5 4.1 11.6 (iii) Vehicles 299.0 73.6 372.6 13.0 3.2 16.2 (iv) Cylinders 333.5 250.7 584.2 14.5 10.9 25.4 1071.8 469.2 1541.0 46.6 20.4 67.0 3. Construction (i) Storage tanks 18.4 85.1 103.5 0.8 3.7 4.5 (ii) Filling stations 9.2 82.8 92.0 0.4 3.6 4.0 (iii) Buildings and infra- structure 13.8 158.7 172.5 0.6 6.9 7.5 41.4 326.6 368.0 1.8 14.2 16.0 4. Owner's Costs (i) Land acquisition - 64.4 64.4 - 2.8 2.8 (ii) Administration 2.3 71.3 73.6 0.1 3.1 3.2 2.3 135.7 138.0 0.1 5.9 6.0 5. Project Engineering and management 85.1 18.4 103.5 3.7 0.8 4.5 6. Contingencies (i) Physical 230.0 138.0 368.0 10.0 6.0 16.0 (ii) Price 218.5 126.5 345.0 9.5 5.5 15.0 448.5 264.5 713.0 19.5 11.5 31.0 Sub-total 1777.9 1223.6 3001.5 77.3 53.2 130.5 7. Interest during construction 195.5 138.0 333.5 8.5 6.0 14.5 1973.4 1361.6 3335.0 85.8 59.2 145.0 III. Studies and Technical Assistance 3.25 The cost of the various studies is summarised below: US$ million F.C. L.C Total (1) Policy and overall technical studies 2.0 0.7 2.7 (gas pricing, small scale use, LNG, gas reserves, purchasing strategy) (2) Project related studies and assist- 1.1 0.4 1.5 ance (LPG marketing, LPG demonstration, operational assistance) (3) Investment related studies 3.0 0.5 3.5 (Pre-feasibility studies for gas pipelines, product pipeline, crude oil storage, second LPG plant as necessary). (4) Other assistance 1.6 0.2 1.8 (Manpower planning, management information and work flow) (5) Contingencies Physical 0.5 0.1 0.6 Price 0.5 0.1 0.6 Total 8.7 2.0 10.7 This component represents a major element of the project. An estimated 600 man-months of expatriate consultants services will be needed to complete all the studies at an average cost of almost US$12,000 per man month, plus 400 man months of local consultants at $500 per man month. For further details see Annex 3.03. - 28 - Project Financing Plan 3.26 The total estimated cost of the project, including taxes and interest during construction, is $600 million equivalent and is expected to be funded as follows: Financing Plan (US$ million) Foreign Local Total % Total IBRD 90* - 90 15 Commonwealth Development Corporation (CDC) - 25 25 4 OPEC Special Fund 20 - 20 3 Export Credits 68 12 80 13 OECF 65 - 65 11 Commercial 18 112 130 22 Government - 35 35 6 PTT cash generation (for inventory) - 10 10 1 Private Sector Share 85 60 145 24 346 254 600 100 * including $1.3 million front-end fee The gas plant is to be jointly financed from all the sources listed above, with the exception of the OPEC Fund money. All prequalified bidders for the gas plant are from countries with strong export credit facilities and the contractors have ensured the availability of $80 millions in export credits. The Government and PTT confirmed the acceptability of this practice with the appropriate export credit organizations, and all bidders responded. Credit terms will not be taken into account in the bid evaluation. A provisional fiaancing scheme for the gas plant is at Annex 3.05. It will, however, have to be kept flexible until the bid amount is finalized and the foreign and lo2zal components are known with certainty. 3.27 The proposed Bank loan of $90 millions (including $1.3 million front end fee) would represent 15% of the total project cost and would be used to finance 25% of the total foreign exchange cost. This would include interest during construction on the Bank loan estimated at $5 million in order to help alleviate PTT's short term liquidity problems (para. 5.05). The loan would be made to PTT on standard country terms. 3.28 The Government has agreed to provide about $110 million in equity, of which $35 million is for this project and $75 million for general purposes. $75 million of this has already been agreed by the Cabinet.Satisfactory progress is being made with all the cofinancing, and meetings have been held to agree provisional administrative arrangements. The CDC loan has been approved in principle and is expected to be considered for formal approval in May. Agreement in principle has been reached with OECF and for the initial $60 million of commercial loan (yen syndication) and the latter should be - 29 - arranged during June. The Japanese Export Credit 1/ was signed in 1979. OPEC Special Fund have agreed at staff level and the credit will probably be formalised in June. (PTT will, however, seek OPEC agreement to using the funds to finance cylinders and vehicles, rather than merging the funds with those of the Bank). Effectiveness of OECF, export credits, CDC and the first year's requirement of commercial funds--$60 million of yen syndication (or equivalent from elsewhere-- will be necessary for effectiveness of the Bank loan. A further $70 million of commercial credit will need to be raised in two tranches in 1983 and 1984 and the OPEC Fund money mid 1983. These are dealt with through dated covenents. Procurement and Disbursement 3.29 The gas plant contract includes facilities for gas treating, ethane and heavier hydrocarbon recovery, transfer pipelines and an export terminal with storage and LPG bulk distribution facilities. In view of the complexity and the need for the timing of each activity to be coordinated throughout, the work will be constructed on a turn-key basis where the detailed engineering, all equipment and materials and the construction of the plant and other facilities will be provided through a single contract. Likewise the bulk storage and distribution and rail loading facilities will be handled through one or more turnkey contracts secured in a similar manner to the gas plant contract. 3.30 In respect of the gas plant contract the Bank has reviewed (i) the general format of advertisements, (ii) the prequalification questionnaire and the method of evaluation, (iii) the selection and prequalification of contractors, and (iv) the bidding documents, including instructions to bidders, general conditions of contract and technical specifications. The Bank has reviewed the bid evaluation procedures, and will review the evaluation and contract before award. A comparable review will be undertaken for the LPG storage and distribution contracts. 3.31 Except as below, all works and goods financed from the proceeds of the proposed loan will be procured through international competitive bidding in accordance with the Bank's guidelines. The borrower will furnish the Bank with all the documents required prior to the application for withdrawal of funds to verify their consistency with Bank guidelines. Consulting and training services would be engaged in accordance with Bank guidelines for use of consultants. Some local procurement up to $100,000 per contract and $2 million in total will be permitted for miscellaneous supplies and equipment for the gas plant etc. 3.32 To avoid delay in completion of the project and so as to firm up the cost estimates some advance contracting was necessary. Consultants (Linde) were appointed after considerable consultations with the Bank. Retroactive financing is expected to be limited to consultant's fees, about US$4 million. Total consultancy contracts awarded prior to Board 1/ The three leading bidders for the gas plant contract are Japanese,(bid opening was March 1). - 30 - consideration amount to about US$11 million. Contract award for the gas plant will be shortly after Board presentation. 3.33 The items against which the Bank loan will be disbursed are those important to the success of the project and to the formulation of a coherent energy strategy, and, in respect of the plant - to fill the foreign exchange gaps. The disbursement of the proposed loan will be as follows: (a) 100% of foreign expenditures for (i) engineering and project management services; (ii) initial payments for the gas separation plant, and the remaining payments once export credits for the gas separation plant and OECF funds for the marine terminal and transfer pipeline have been exhausted (Bank financing would thus represent about 16% of total costs for this component); (iii) the contract(s) for construction of PTT's LPG storage and distribution facilities; and (iv) training; (b) 100% of the cost of studies and technical assistance not financed from other sources; (c) 100% of foreign costs, 100% of ex-factory costs or 75% of total costs (representing the estimated foreign exchange component) of miscellaneous equipment and materials in respect of the gas plant; (d) amount due against interest and other charges on the loan accrued on or before July 31, 1984; and (e) the front end fee. The disbursement profile specifically reflects this and the expected pattern for the various project components. Further details of the anticipated cofinancing arrangements are given in Annex 3.05. Disbursement of the loan proceeds is expected to be completed by the end of 1986 (see Annex 3.04) and the loan closing date is June 30, 1987. Allocations by category are given below: US$ million (a) Engineering and project management for gas plant and LPG storage and distribution 13.5 (b) Construction contract - Gas plant 25.5 (c) Construction contract - LPG storage and distribution 26.2 (d) Training 1.5 (e) Studies and technical assistance including LPG buses/trucks 8.0 (f) Gas plant - miscellaneous equipment and materials 2.0 (g) Interest during construction 5.0 (h) Front-end fee 1.3 (i) Unallocated 7.0 90.0 Reporting Requirements 3.34 In view of the importance of completing the project on schedule PTT has agreed to institute a system of reviewing the work progress with regular reports to PTT management. PTT will submit to the Bank technical progress reports with cost estimates, expenditures and disbursements, and management and operations at one to three monthly intervals. During negotiations, agreement was reached on the format and frequency of progress reports to the Bank, and the implementation of a satisfactory project control system. Training 3.35 The consultants will prepare by January 1983 a training program covering the various major options for plant operation according to factors - 31 - such as (i) lower capacity due to insufficient feed gas (ii) no ethane recovery, (iii) normal and emergency shutdowns, and (iv) safety precautions for purging and start-up. The organization and manpower planning for both the construction and operating phases will be prepared based on planned numbers and desired qualifications. Training will start by July 1983. In accordance with the contracts, maintenance personnel will start their training at the manufacturers of major equipment during fabrication and shop testing. They will follow up during construction until testing and mechanical completion. Suppliers of critical materials and equipment will extend their services beyond the guarantee period as necessary to complete the on-the-job training. The consultant's technical assistance will involve class-room training of operating personnel on process flow diagrams and plant scale models. Process description and design philosophies will be explained and demonstrated. The training program will be reviewed by the Bank before implementation. 3.36 The contractor will provide training facilities for senior personnel at similar process plants already in operation abroad to prepare them for taking over the plant after completion of construction. 3.37 Although training will progress in line with the construction of the plant, provision will be made in the contracts for some technical assistance to be provided by the contractor and consultants in the early days of starting up. This will continue for sometime thereafter until the plant operation becomes stable and satisfactory for reliable takeover by PTT personnel. 3.38 Training for marketing operations will include visits to LPG marketing organisations abroad to study safety rules and regulations, transport scheduling, cylinder filling and inspection and marketing techniques. Senior expatriate advisors will be assigned for on the job training in operational activities until the transfer of technology is well conceived by MKT personnel. Ecology and Safety 3.39 The gas separation plant is located away from residential and agricultural areas. The flue gases from boilers and flare stacks are free of sulphur. The only undesirable effluent is carbon dioxide (CO2) which is disposed of in the atmosphere and it can be controlled by dispersion at altitude so as to maintain allowable concentrations at ground level. The quantity involved will not cause a problem and already PTT is studying the utilization of C02 in other chemical plants such as soda ash. 3.40 Like many industrial plants, gas separation is potentially hazardous and strict rules and regulations will be implemented to avoid explosion due to possible leaks. The world-wide safety record is good and no particular danger is foreseen. Gas detectors with alarms and inert gas purging are standard design features, to avoid loss of life and damage to property. Where accidents do occur they are usually related to human error and faulty equipment, which is being addressed through good training and proper management. 3.41 LPG can be dangerous if handled carelessly. If the LPG escapes from storage installations it can both explode and ignite, and could cause loss of life. Consequently storage installations will be constructed far enough away - 32 - from habitations and proper safety and maintenance procedures will be implemented. 3.42 LPG distribution and use is becoming common in urban areas in Thailand but less so in rural areas where householders will need to learn to exercise due care. Safety campaigns and advertising will be frequently administered both in urban and rural areas using all means of communications. Use of LPG in transport units has already been implemented in the taxi fleet of Bangkok. The Government has issued appropriate safety regulations. 3.43 A marked environmental improvement will be noticed when electric power stations convert from presently used high sulphur fuel oil to sweet (sulphur free) natural gas. The same applies to buses and trucks when LPG gradually replaces diesel fuel in Bangkok, a factor important for better living in the metropolis. Physical Risks 3.44 The project will be subject to the risks generally associated with gas separation plants and LPG storage and distribution and all practical measures are being taken to alleviate or minimize them. These risks include explosion and leaks and the discharge of relatively small quantities of CO9. Experienced consultants have been appointed for the project and only qualified contractors with extensive experience will be employed to construct the plant and the export facilities. As outlined above, safety features to minimise the risks are a standard part of the design. 3.45 The plant will initially be supplied with gas from one field through one pipeline. There is a risk of physical interruption of supplies through a pipeline failure, for which inspection and preventive maintenance will be implemented. More serious is the risk of damage to the central production platform, which is a remote possibility. When the second gas supply contract comes into effect after 12 months operation this becomes a less serious risk. - 33 - IV. THE BORROWER Petroleum Authority of Thailand (PTT) 4.01 The Bank loan will be made to PTT with the guarantee of the Kingdom of Thailand. PTT was established in December 1978 by the Petroleum Authority of Thailand Act, and became operational in July 1979. PTT's objective is to engage in and promote the petroleum business, including related petroleum and petrochemical activities. It is under the control of the Ministry of Industry. 4.02 PTT's Board of Directors is appointed by the Council of Ministers. The Board comprises a chairman (the Prime Minister) and eleven other directors. The Governor of PTT, who is its chief executive officer, is a Director and Secretary of the Board. The Ministries of Defense, Finance, Commerce, Industry and the Juridical Council each appoint one director and there are five from other sources. PTT also has an executive committee chaired by a minister of the Prime Minister's office, who is also a member of the main Board. The executive committee meets frequently and is empowered to take decisions on certain investments, contracts, staffing and other operational matters. 4.03 In view of the rapid growth in its activities PTT underwent a major reorganization mid-1981. Under the Governor it will have seven Deputy Governors responsible for Technical and Planning, Natural Gas Operations, Marketing, Logistics and Refining, Finance, Administration and Special Affairs, three Assistant Governors (Technical and Planning, Finance and Administration), thirty-three department directors, ninety-two divisional directors and chiefs, and about three thousand staff (excluding TORC). The organization chart is set out at Annex 4.01. About two-thirds of the senior positions have been filled. 4.04 At present, PTT operates as a single legal entity with no subsidiaries. The three major operational arms of PTT --gas pipelines, marketing and (to some extent) refining-- have all been transferred from other organizations, and the gas plant is the first major activity breaking completely new ground. The natural gas pipeline construction was transferred to PTT from a state enterprise, the Natural Gas Organization of Thailand, (NGOT), in July 1979, and PTT has completed the construction and successfully brought the pipeline into operation. The major part of the oil marketing operations were tranWferred from another state enterprise, the Oil Fuel Organization (OFO) - in September 1979, and the balance transferred from the Summit Corporation early in 1981. PTT,is in the process of overhauling and rationalizing its products distribution activities. The third major - operational activity is refining. The Bangchak refinery was formerly leased to the Summit Corporation and taken back by the Government early in 1981.. Bangchak is owned by the Ministry of Defense and will be operated by it at least until 1985 with advice from consultants and PTT is responsible for 1/ Part of the Ministry of Defense. - 34 - logistics, marketing and finance. The TORC refinery reverted to the Government in 1981 under the terms of its last expansion permit. It is being operated by TORC personnel and is planned to be expanded as a joint venture between TORC and PTT. In addition to the above, PTT has a small exploration department which continues to seek exploration concessions from the Department of Mineral Resources (DMR). It is currently negotiating for a share in developing the onshore Shell oilfield. 4.05 The Natural Gas Operations Unit (ONG) will be responsible for the gas separation plant and export facilities. ONG was responsible for the construction of the natural gas pipeline and is now charged with its operation. The construction went well with few significant hitches and provided valuable experience for the staff. Many of the staff have now been assigned to pipeline operations, others will become responsible for the construction of the gas plant. ONG has almost 200 employees, of whom about half came from NGOT when it was absorbed into PTT three years ago. The staff are well-educated, performed competently through the pipeline construction, and are quickly learning pipeline operations. Given the training program (para. 3.35) and operating and maintenance arrangements, no particular difficulties are anticipated for the construction and operation of the gas separation plant and export facilities. 4.06 The Marketing (Oil Distribution and Supply) unit (MKT) will be responsible for the bulk distribution of LPG and bulk storage at the up- country storage centres. It will also be responsible for filling, distribution and marketing of PTT's LPG sales to transport, industry and households. The PTT (and MKT) experience of LPG handling is relatively limited. Its association with the former Summit operations is recent, and LPG formed only a minor part of the OFO operations. Nevertheless, MKT has handled the market growth over the last year satisfactorily, and now has 50 staff engaged solely in LPG marketing. The bulk distribution and storage of LPG needs care rather than mastering of technical complexities. NKT will engage a number of new, well-educated staff to strengthen the management of its expanding responsibilities in LPG activities. Taken together with on-the-job training from contractors and consultants, MKT is expected to perform satisfactorily in bulk LPG distribution and storage, as well as retail marketing. Experience and Training 4.07 PTT's top management is experienced in business and management but has only limited petroleum experience. The middle management is generally young, keen and well educated but in many cases with relatively little experience. In accordance with the provisions of the Natural Gas Development Project (1773-TH), theoretical and on-the-job training has been given for the natural gas operations and in accounting and finance. In addition, training is planned for the operation of the gas plant and LPG distribution (3.35), as provided by the proposed LPG project. Apart from specific instances associated with new projects, PTT's future needs are practical, on-the-job experiences rather than making much use of further training courses. Accounts, Audit and Insurance 4.08 PTT maintains separate accounts of each of the major activities, namely ONG and MKT and separate records in respect of its Bangchak refinery activities. ONG's financial accounts are modelled on US gas utility - 35 - principles and accounts have been satisfactorily prepared for the last three fiscal years. However, there appears to be inadequacy in the accounting system at the Marketing (Oil Distribution and Supply) unit (MKT), especially in regards to accounts receivable, billing and the control system. 4.09 In accordance with the provisions under the Natural Gas Development Project (1773-TH), competent financial consultants, Sycip, Gorres, Velayo & Co.(SGV) have been engaged to assist PTT in the maintenance of its accounts and in internal auditing. Specifically, the consultants have completed a review of MKT's accounts and implementation of the recommended improvements, including training, is now in progress. The consultants are also assisting ONG to strengthen its accounting system in the light of the expanding operations of natural gas. In addition, the consultants are undertaking the internal auditing of PTT as an interim step before the company can build up its own staff for internal control. During negotiations PTT agreed to continue employing competent financial consultants until completion of the above. 4.10 In so far as the Bangchak refinery is concerned, PTT manages the finances on behalf of the Ministry of Defense who owns the refinery. PTT records all the transactions pertaining to the refinery on a cash basis under the Bangchak account. Consolidated PTT does not include Banchak's operating results (which are reported by the Ministry of Defense) but includes all the liabilities incurred on behalf of the refinery. 4.11 In accordance with the standard practice in Thailand for state enterprises, external audit is undertaken by the National Audit Office. The audited accounts of PTT, the Natural Gas Operations unit, MKT and, relevant records pertaining to Bangchak refinery will be submitted to the Bank within six months after the end of each financial year. 4.12 PTT will carry adequate third party insurance in respect of its LPG facilities in line with industry and Thai practice. The contractors will be responsible under the contracts for contractor's risk and project related insurance. PTT already has comprehensive insurance covering its other risks in line with normal Thai practice. PTT will arrange for safety inspections of all pipelines, pressure vessels etc. - 36 - V. FINANCIAL ASPECTS Introduction 5.01 PTT was established to engage in and promote a full range of petroleum and petrochemical activities. While PTT's major activities are not organized under separate legal entities, each of them is a separate accounting unit and is managed on a profit-center basis. 5.02 PTT's operating results have been dominated by the Marketing (Oil Distribution and Supply) unit (SIKT). At present, the overall financial position of PTT is weak, especially in regards to liquidity (para. 5.05). Nonetheless, given appropriate remedial measures, it can improve its present position substantially. The Natural Gas Operations Unit (ONG), the core operating arm of PTT, started operation from the beginning of FY82. ONG is forecast to have a major impact on PTT's overall profitability, while MKT and Bangchak refinery transactions will continue to have a significant impact on the turnover and cash flow position. Subject to taking the remedial action outlined below, PTT is projected to develop and maintain a satisfactory financial position. Past and Present Finances 5.03 PTT's consolidated finances over the last two years are summarized below and shown in detail in Annex 5.01 and 5.02. (In million US$) FY1980 FY1981 (estimated) Revenues 1,165 1,179 Net Income 28 (43) Current Assets 406 641 Total Assets 653 1,085 Current Liabilities 411 758 Long-term debt 160 301 Total Equity 82 26 Operating Ratio 0.97 0.99 Current Ratio 0.99 0.85 Receivables Turnover (days) 88 96 Debt/Equity Ratio 67/33 92/8 5.04 In FY80, PTT's operating income was. deTived solely from its marketing-arm, MKT, which reported net income of $28 million. However, it had to incur substantial short-term debt to meet the liquidity needs arising from slow turnover of its receivables. This was mainly due to the delayed payments by EGAT, and to a lesser extent, the Oil Stabilization Fund. Moreover, the inadequacy of MKT's accounting, billing and control system hindered effective management of its accounts receivable (para.4.08). In addition to financing - 37 - working capital, short-term debt was incurred to bridlye finance the construction of the natural gas transmission system._ As a result, the current ratio was slightly less than 1.0, reflecting the weak cash flow position of PTT. 5.05 In FY81 consolidated PTT suffered a net loss estimated at $43 million mainly as a result of a foreign exchange loss on oil trading by MKT and high interest expenses. MKT continued to draw down substantial credit lines to finance its receivables. While EGAT had begun to make timely payments to MKT fo- fuel oil supplies, the receivable from the Oil Stabilization Fund had accumulated by early 1982 to a high level of $125 million. The Bangchak refinery also imposed major strains on PTT's cash flow position, including a permanent working capital requirement in the order of $300 million. The further weakening of PTT's liquidity position was indicated by the current ratio which fell to 0.85. PTT's debt/equity ratio increased from 67/33 in FY80 to 92/8 in FY81, reflecting the drawdown of long-term financing for the construction of the gas transmission system. Total liabilities, 70% of which were current, reached $1.1 billion by end FY81, as compared to an equity base of only $26 million after the net loss. 5.06 Both the Government and PTT are aware of the need to strengthen the company's financial position, especially its liquidity. A special subcommittee had been set up to consider various remedial measures. The proposal of the subcommittee has received Cabinet approval and the principal terms are outlined as follows: A. PTT would seek commercial financing of $200 million, interest and principal on which would be paid by the Government for PTT to pay the lenders. Of this amount, $125 million represents the payment of the Oil Fund's indebtedness to PTT in FY82, while the balance ($75 million) represents equity injection into PTT. The $75 million would initially be an interest free loan and would be converted into equity in line with payments by the Government to PTT equivalent to the principal. B. For purposes of compliance with the regulation for crude and products reserves, the inventory of MKT and Bangchak refinery can be consolidated, resulting in a lower level of required inventory for overall PTT. The above action plan is satisfactory in alleviating PTT's short-term liquidity problems. However, it is inadequate to strengthen the company's finances over the balance of the 1980's. During negotiations the Bank reviewed and agreed with Government and PTT a comprehensive set of measures including A and B above and also provision to build up PTT's equity base to 1/ While satisfactory funding arrangements had been made to finance the natural gas transmission system, delayed effectiveness of two long- term loans necessitated bridge financing in excess of $40 million. - 38 - cushion unexpected losses by retaining 1/ not less than 90% of its net income, (par. 5.12), and standards set out below in regards to PTT's liquidity position (para. 5.09), debt service coverage (para 5.15) and overall debt position (para 5.15). Policy in respect of margins and agreed action relating to Bangchak are set out in paragraph 5.08. The $200 million referred to will be available in May and will therefore be a condition of effectiveness. Future Finances 5.07 In the light of the steps as outlined above to strengthen the company's finances, PTT's financial position is projected to be satisfactory throughout the forecast period at least in respect of the activities currently in operation or firmly planned. Financial projections over FY82-90 are shown in Annex 5.05, 5.06 and 5.07, with detailed assumptions in Annex 5.03. During negotiations Government agreed that it would review with the Bank, from time to time, natural gas pricing policy, PTT's corporate plans and development programs and the financial position of PTT. Discussions on petroleum pricing policy will follow from the SAL process. The longer term corporate and financial objectives of PTT are already covered by the statement of corporate and financial objectives agreed under 1773TH, nonetheless, during negotiations, assurance were sought and given by PTT that the agreed corporate and financial objectives would also be applied to its transactions in respect of Bangchak refinery and to joint ventures. (See Annex 5.15 for amended policy statement). 1/ The Petroleum Authority of Thailand Act stipulates that all of PTT's net income after appropriation for reserves is to be remitted to the Government. - 3 - Revenue Position 5.08 Consolidated PTT's projected operating results are summarized as follows: FY 82 84 86 88 90 Sales - Volume Natural gas (MMCF) 47,450 98,915 167,900 202,940 202,940 LPG (000 tons)/! 50 92 295 542 542 Propane (000 tons) -- 43 219 442 442 Ethane (000 tons) -- -- -- 355 355 Natural Gasoline (000 tons) -- 17 82 164 164 Revenues (million US$) 1,478 2,026 2,840 3,908 4,529 Net income (million US$) Gas and LPG extraction 21 166 191 228 264 Petroleum Products marketing 3 36 15 30 21 Other (6) (6) (83) (103) (176) Total 18 196 123 155 109 Operating Ratio 0.94 0.88 0.88 0.90 0.92 /a Includes bulk and retail LPG sales. (a) Natural Gas Operations Unit (ONG) Financial forecast of ONG is shown in detail in Annex 5.08, 5.09 and 5.10. Before the gas plant begins operation end FY84, ONG will only have two customers, namely EGAT (the major consumer) and Siam Cement. Satisfactory gas sales contracts have recently been concluded with both customers, and adequate margins are provided between the purchase price of Union gas and the selling prices. However, the gas price to EGAT will have to be renegotiated in FY84 and it has been assumed in the financial forecast that renewal will be made on comparable terms. The Government has confi med its intentions to price natural gas on the present basis-1 when the pricing aspects of the contract are renewed. PTT's first contract with Union Oil provides for a maximum average daily gas supply of 250 MMSCFD. At this level of gas sales, ONG is projected to perform satisfactorily, providing the renegotiated gas price to EGAT 1/ Natural gas to EGAT is presently based on production cost plus an agreed transportation margin. Escalation provisions are related to cost of gas and increased operating costs. There is a fall-back provision related to Singapore fuel oil movements. The Siam Cement contract is broadly similar. - 40 - maintains an adequate margin. Given the second gas supply contract which was recently concluded with Union Oil and provides for an additional gas supply of up to 400 MMSCFD, the revenue position of ONG is expected to be substantially enhanced by the planned investments in gas and gas derivative projects (para. 5.11). The first unit of gas plant (the proposed project) is projected to yield a DCF financial rate of return of 30% in real terms. The operating ratio of ONG is forecast to be about 0.8, reflecting the composite operating efficiency of gas pipelines and gas plants. ONG's annual return on revalued net fixed assets is expected to increase from 14% in FY82 to about 19% in FY90, depending on the timing of the next major gas pipeline. During negotiations, PTT agreed that it will revalue its fixed assets annually for all its operations for the purposes of measuring achieved rate of return on revalued fixed assets (see also the statement of corporate objectives, Annex 5.15). (b) Marketing (Oil Distribution and Supply) unit and Bangchak refinery Financial forecast of MKT is shown in detail in Annexes 5.11, 5.12, 5.13 and 5.14. The major factors affecting the revenue positions of MKT and the Bangchak refinery are the stipulated margins and interest expenses. Provided that adequate margins are maintained as well as reduction in interest expenses by decreasing short-term debt (para. 5.09), both MKT and Bangchak refinery should have a satisfactory financial position. In so far as Bangchak is concerned, PTT acts as the banker and substantial short-term borrowings will continue to be incurred on behalf of the refinery. During negotiations, the Government restated its current policy in respect of products pricing which includes adequate margins for refining and marketing, and which are sufficient to enable both MKT and Bangchak refinery to achieve financial soundness. PTT agreed to put forward proposals by June 30, 1983, recommending solutions to the problems related to its role in respect of Bangchak, and the Government agreed to cause PTT to come up with an earlier solution should this be necessary. Liquidity Position 5.09 Liquidity will remain a major concern for PTT. To ensure the financial soundness of the company, it is imperative that the turnover of its sizeable receivables be monitored closely and maintained at an acceptable level. Towards this end, PTT has recently engaged financial consultants to assist in the strengthening of MKT's accounting, billing and control system (para. 4.09). In addition, the plan to strengthen PTT's finances is expected to include measures which would alleviate the company's presently weak cash flow position including refinancing the Oil Stabilization Fund and retention of a major portion of net income. Furthermore, equity injection is proje-cted to help finance the project and a portion of the permanent working capital needs. Based on appropriate remedial measures and receipts of payments at the contracted trade terms, the liquidity position of PTT is projected to be reasonably satisfactory. During negotiations PTT agreed to maintain a current ratio of at least 1.0. - 41 - Funds Flow 5.10 Consolidated PTT's projected funds flow from FY82-86 is summarized below: (In million US$) ONG MKT Others Total % Net Income before interest 948 189 (46) 1,091 37 Depreciation 217 48 18 283 9 Internal Cash Generation 1,165 237 (28) 1,374 46 Le .s: Net income to Govt. - - (42) (42) (1) Internal cash retained 1,165 237 (70) 1,332 45 Loans 802 155 465 1,422 48 Government Contributions 127 80 - 207 7 Total Sources 2,094 472 395 2,961 100 Investment Program 1,105 188 496 1,787 60 Debt Service 608 170 419 1,197 40 Working Capital Increase 381 114 (518) (23) (-) Total Uses 2,094 472 395 2961 100 Debt Service Coverage 1.9 1.4 - 1.1 5.11 PTT's total investment program is projected to have reached $3 billion by 1990. The planned investment schedule is presented in detail in Annex 5.0. From FY82 through 86, investments include the proposed LPG project - , second unit of gas separation plant, LPG retail distribution, natural gas pipelines to transmit additional gas supplies from offshore fields, a petroleum products pipeline and strategic storage for crude oil. In addition, a joint venture arrangement has been planned for the investment in an ethylene cracking plant, with PTT participating in 48% of the equity. The investment program from FY87 to FY90 includes LPG distribution, and a natural gas pipeline to the south. The investment program appears sensible and will enhance PTT's long-term profitability, although a more prudent financial approach would suggest slowing down the program. This aspect is being considered by the Thai authorities. 5.12 Provided that accounts receivable turnover is maintained at the contracted trade terms, ONG can generate substantial surplus cash which can meet a reasonable portion of the local currency requirements of investments. The Government has agreed that PTT should retain no less than 90% of its net profits as well as the $75 million equity, unless PTT can finance out of its surplus funds from operation 30% of its capital expenditure, based on a forecast of average annual investment for the next three years. Cash required for debt services (both long and short term) including interest during construction, all taxes and customs duties as well as working capital 1/ ONG will be responsible for the gas plant while MKT will be in charge of LPG bulk storage and distribution. - 42 - requirements have to be covered by internally generated cash before applying the 90% retention calculation. During negotiations PTT also affirmed that surplus funds from each of its operational units would be applied for other purposes only after ensuring sufficient funds for that unit, including the coverage of operating costs, debt service and contribution to a reasonable portion of future investments. (A comparable agreement relating to ONG, now superseded, was included in 1773-TH). 5.13 While PTT is a relatively new company, it has had no difficulty in raising funds in the foreign capital markets. It is envisaged that PTT will continue to get access to suppliers' and buyers' credits, and financing from commercial banks and development institutions to fill the financing gap, especially in meeting foreign currency requirements. Capital Structure 5.14 The financial forecast indicates that PTT's debt/equity ratio can be reduced steadily from the present high level of 92/8 to 74/26 in 1985 and, 51/49 in 1990. PTT's surplus funds from operations are projected to finance up to 30% of its capital expenditure and, accordingly, 90% of its net profits are forecast to be retained by PTT throughout the forecast period. 5.15 Reassurances were obtained from PTT that no long-term debt will be incurred by PTT without prior agreement by the Bank, unless agreed forecasts show that the debt service coverage of consolidated PTT will be at least 1.2 times for FY82 through FY85 and 1.5 times thereafter, and this will replace the corresponding agreement relating to ONG in the loan agreement for 1773TH. Furthermore, with the view towards controlling short-term debt, PTT agreed that total liabilities/equity ratio would be decreased from the present high level of 98/2 to at most 90/10 for FY83 and 84, 85/15 for FY85 and 86, and 70/30 thereafter. - 43 - VI. ECONOMIC ANALYSIS Introduction 6.01 The primary justification of the project is the savings which will accrue to Thailand by upgrading the use of its natural gas from a replacement for fuel oil, enabling import substitution and exports of LPG/propane, and providing the basic feedstock for petrochemical industry. Thailand's foreign exchange position will be enhanced and the benefits of the gas will become more widely available. 6.02 The LPG will be used in households, hotels, restaurants, and industry and as an automotive fuel. The gas separation plant will initially displace imported LPG and will provide exports for a few years, subsequently a further gas separation plant will be required or Thailand will have to revert to imports of LPG. 6.03 LPG for motor fuel is planned as a major substitutor for diesel, and also will be used to substitute for gasoline. The diesel substitution is part of the overall supply/demand strategy. Natural gasoline from the plant can be used with little modification as a motor fuel. It will, however, be taken to the TORC refinery by pipeline for blending. 6.04 In addition to the gas separation plant, Thailand's gas utilization strategy entails the construction of a steam cracker to produce ethylene and propylene which are feedstocks for olefin-based petrochemical plants. Ethane will be produced from the gas separation plant to serve as feedstock for the steam cracker which is planned to become operational in 1987. Some propane may also be required as feedstock for petrochemical industries. As a result, virtually all of the propane production from the proposed project is expected to be domestically consumed after 1987. A second gas separation plant is planned for 1987 and a third gas separation plant may be required in the early 1990's. Economic Benefit Streams 6.05 The benefits of the project are derived from the extraction of heavier hydrocarbons from the gas stream, including the production of LPG, propane, ethane and natural gasoline. In addition, condensate from the dew point control unit will be stabilized by processing through the gas separation plant and the recovered natural gasoline will serve as refinery feedstock. The benefits of import substitution for LPG/propane and diesel are valued at estimated CIF Bangkok prices with adjustment to the quantities for relative efficiency, while LPG and propane exports are valued at estimated FOB Bangkok prices. Stabilized natural gasoline is valued at FOB Bangkok naphtha prices. As ethane is not traded internationally, its value is estimated by adjusting upward the value of alternative feedstock for the steam cracker i.e. naphtha, to reflect the higher value of ethane. Charcoal prices vary according to season and location, but approximate to LPG prices (PDA study). For the calculation of economic return on investment, the following prices have been used: - 44 - (1982 prices) $/ton $/million Btu Domestic LPG/Propane As imported LPG/propane substitute 350 7.4 As imported diesel substitute 380 8.8 As charcoal substitute 350 7.4 Export LPG/propane 315 6.6 Ethane 340 6.9 Natural Gasoline (stabilized) 305 6.6 Cost Streams 6.06 In addition to the capital expenditure for the gas plant, the cost streams include the value of the feed gas, condensate from the dew point control unit and operational costs. Up to about 1990, the alternative use of natural gas is to replace fuel oil and the economic cost of the feed gas is taken at $5.2/MMBtu ($220/ton) FOB Bangkok, a figure which is slightly high in view of the continuing fall in world oil prices. From 1991, gas supply will exceed domestic demand and the value of the gas will fall to LNG netback or economic production cost. Conservatively, we have taken $3.5/MiBtu thereafter (1982 prices). Unstablized condensate has been valued at fuel oil equivalent. Economic Risk 6.07 The major economic risk faced by the project is a permanent reduction in the premium value of the LPG compared with use as a boiler fuel. The risk only exists to 1990, beyond that time the value of the gas as a boiler fuel falls substantially, (see para 6.06) such that there is a wide safety margin ensuring the plant profitability through the 1990's. Until 1990, however, the price differential will be sensitive to movements both in fuel oil prices (the normal comparator for natural gas value) and diesel prices (the normal comparator for LPG). Given that fuel oil is expected to be in surplus in South-east Asia through the 1980's and diesel is expected to be in short supply from time to time, the likely movement in their prices is a tendency to widen the differential. The two are related over the medium term through refiners ability to crack fuel oil into diesel and other components, such that if the prices get too far apart additional cracking facilities will be built, thus narrowing the gap again. If on the other hand the gap narrows, refiners will stop cracking fuel oil and the price of fuel oil will fall, thus ensuring an adequate margin. Short-term fluctuations around these relationships are inevitable, both for fuel oil/diesel and natural gas/LPG --based on past relationships the (spot) price of LPG is currently low compared with diesel prices in South-east Asia. Nevertheless, given that such distortions can last for a number of years, current fuel oil, LPG and diesel prices have been used for the economic evaluation. Other economic risks exist but are relatively minor-- see sensitivity analysis below. - 45 Project Profitability 6.08 (a) Economic Rate of Return. Based on the assumptions noted above, the internal rate of return on the project is 29%. The results of sensitivity analyses performed are summarized as follows: Economic Rate of Return Base Case 29 Case I Value of benefits increased by 10% 47 Case 2 Cost of feed gas increased by 1O% (i.e. a reduction in the margin by about one-third) 13 Case 3 Cost overruns 20% 25 Case 4 No ethane extraction 21 The results of sensitivity analysis indicate that the economic rate of return is sensitive primiarily to the price differential between LPG and fuel oil, and is somewhat less sensitive to other factors, the most important of which is the value of ethane extraction. It is fairly insensitive to the capital cost of investment. 6.09 (b) Net Present Value. At a discount rate of 12%, the average net annual savings from the project are estimated at $58 million. The net present value throughout the project life is $409 million. 6.10 (c) Payback Period. On an undiscounted basis the pay-back period after start-up is three years. At a discount rate of 12%, the pay-back period is five years which is satisfactory. Qualitative Benefits 6.11 Bank staff have already assisted PTT in the approach to selecting consultants, designing studies, costing projects, in bid specification and evaluation, safety standards and market surveys, with a view to greater self- reliance in future. Substantial transfer of technology to Thai nationals is envisaged in view of the project component which provides for engineering consultancy services, including a training program for PTT's staff, and also from the pilot LPG marketing efforts. Moreover, the project provides for the distribution of LPG. thereby bringing the benefits of the natural gas project directly to the Thai population in both urban and rural areas. In addition, in promoting the substitution of wood and charcoal by LPG as a cooking fuel, the project helps to alleviate the problem of deforestation in Thailand. Furthermore, the use of LPG in vehicles is expected to reduce air pollution in urban areas, especially in Bangkok, although no attempt has been made to quantify these benefits. - 46 - VII. RECOM4ENDATIONS 7.01 During negotiations assurances were obtained from the Government that: (a) it would provide about $35 million in the form of equity towards the project, in addition to the $75 million below (para. 3.28); (b) it would exempt PTT from contribution of 90% of its net income unless PTT's self/financing ratio exceeds 30% (para 5.12); (c) it would confirm that PTT's renegotiated gas price to EGAT would be on comparable terms with the provisions of the existing contract (para 5.08); (d) it would review with the Bank, from time to time, the pricing policy for natural gas, as well as the financial position of PTT (para. 5.07); (e) it will refinance the Oil Stabilization Fund and ensure the Fund pays its obligations to PTT (para. 5.06); (f) it will provide $75 million equity for PTT, (para 5.06) (see (c) above) (g) it will reduce the required inventory for crude oil and products by consolidating MKT and Bangchak requirements (para. 5.06). (h) it will commission a study on natural gas pricing to be completed in 1983 (para 1.28). (i) if necessary it will cause PTT to come forward with recommendations to deal with Bangchak problems (see 7.02(o) and para 5.08) 7.02 Assurances were obtained from PTT that: (a) Studies would be carried out in accordance with terms of reference and a time schedule satisfactory to the Bank; as detailed in Annex 3.03. b) consultants will be required to prepare a suitable training program for LPG operations. PTT will forward this to the Bank for review. PTT will commence implementation of its training program by July 1, 1983 (para. 3.35); (c) a progress report in an agreed format would be forwarded to the Bank at agreed intervals and a project control system would be implemented (para. 3.34); - 45 - Project Profitability 6.08 (a) Economic Rate of Return. Based on the assumptions noted above, the internal rate of return on the project is 29%. The results of sensitivity analyses performed are summarized as follows: Economic Rate of Return (%) Base Case 29 Case 1 Value of benefits increased by 10% 47 Case 2 Cost of feed gas increased by 10% (i.e. a reduction in the margin by about one-third) 13 Case 3 Cost overruns 20% 25 Case 4 No ethane extraction 21 The results of sensitivity analysis indicate that the economic rate of return is sensitive primarily to the price differential between LPG and fuel oil, and is somewhat less sensitive to other factors, the most important of which is the value of ethane extraction. It is fairly insensitive to the capital cost of investment. 6.09 (b) Net Present Value. At a discount rate of 12%, the average net annual savings from the project are estimated at $58 million. The net present value throughout the project life is $409 million. 6.10 (c) Payback Period. On an undiscounted basis the pay-back period after start-up is three years. At a discount rate of 12%, the pay-back period is five years which is satisfactory. Qualitative Benefits 6.11 Bank staff have already assisted PTT in the approach to selecting consultants, designing studies, costing projects, in bid specification and evaluation, safety standards and market surveys, with a view to greater self- reliance in future. Substantial transfer of technology to Thai nationals is envisaged in view of the project component which provides for engineering consultancy services, including a training program for PTT's staff, and also from the pilot LPG marketing efforts. Moreover, the project provides for the distribution of LPG, thereby bringing the benefits of the natural gas project directly to the Tlai population in both urbaa and rural areas. In addition, in promoting the substitution of wood and charcoal by LPG as a cooking fuel, the project helps to alleviate the problem of deforestation in Thailand. Furthermore, the use of LPG in vehicles is expected to reduce air pollution in urban areas, especially in Bangkok, although no attempt has been made to quantify these benefits. - 46 - VII. RECOMMENDATIONS 7.01 During negotiations assurances were obtained from the Government that: (a) it would provide about $35 million in the form of equity towards the project, in addition to the $75 million below (para. 3.28); (b) it would exempt PTT from contribution of 90% of its net income unless PTT's self/financing ratio exceeds 30% (para 5.12); (c) it would confirm that PTT's renegotiated gas price to EGAT would be on comparable terms with the provisions of the existing contract (para 5.08); (d) it would review with the Bank, from time to time, the pricing policy for natural gas, as well as the financial position of PTT (para. 5.07); (e) it will refinance the Oil Stabilization Fund and ensure the Fund pays its obligations to PTT (para. 5.06); (f) it will provide $75 million equity for PTT, (para 5.06) (see (c) above) (g) it will reduce the required inventory for crude oil and products by consolidating MKT and Bangchak requirements (para. 5.06). (h) it will commission a study on natural gas pricing to be completed in 1983 (para 1.28). (i) if necessary it will cause PTT to come forward with recommendations to deal with Bangchak problems (see 7.02(o) and para 5.08) 7.02 Assurances were obtained from PTT that: (a) Studies would be carried out in accordance with terms of reference and a time schedule satisfactory to the Bank; as detailed in Annex 3.03. b) consultants will be required to prepare a suitable training program for LPG operations. PTT will forward this to the Bank for review. PTT will commence implementation of its training program by July 1, 1983 (para. 3.35); (c) a progress report in an agreed format would be forwarded to the Bank at agreed intervals and a project control system would be implemented (para. 3.34); -47- (d) audited accounts of Consolidated PTT, ONG and MKT and for Bangchak transactions would be submitted to the Bank within six months after the end of each financial year (para. 4.11); (e) it would revalue fixed assets annually for all of its operations (para. 5.08); (f) it would maintain a current ratio of at least 1.0 (para. 5.09); (g) 4t would maintain total liabilities/equity ratio at a maximum level of 90/10 for FY83 amd 84, 85/15 for FY85 and 86 and 70/30 thereafter (para. 5.15). (h) no long-term debt would be incurred by consolidated PTT without prior agreement by thc Bank unless a debt service coverage of at least 1.2 times would be achieved for FY82 through FY85 and 1.5 times thereafter (para. 5.15); (i) surplus funds from each operation would be applied for other purposes only after ensuring sufficient funds for that unit (para. 5.12); (1) insurance and inspection will be arranged by PTT and contractors in line with normal practice (para. 4.12); and (k) it will continue to engage financial consultants to assist with its accounting and internal audit (para. 4.09). (1) it would notify all the LPG distributors of the location of bulk LPG distribution centers upon completion of consultant's design study on bulk LPG distribution facilities; and notification would be issued by February 1, 1983 (para. 3.19); (m) it will review private marketers plans for LPG distribution with the Bank by July 1983, with a -view to remedial action if appropriate (para 3.19). (n) it will make proposals to the Government not later than June 30, 1983 with a view to protection against adverse financial consequences from the Bangchak involvement (para 5.08)e (o) it will raise a further $35 million conmmercial loan by September 30, 1983, and $35 million about September 30. 1984, and will obtain an OPEC Fund loan of $20 million by July 1, 1983 (para 3.28). (p) it would observe and implement sound corporate and financial policies (para 5.07 and Annex 5.15). 7.03 Conditions of the loan effectiveness are: (a) effectiveness of loans with CECF, CDC, for the first $60 million of Commercial loan and the exporL cred4t agreements (para. 3.28); -48- (b) consultants for designing the LPG storage and filling facilities have been issued a letter of intent by PTT (para. 3.18); [signature of the contract will be by October 31, 1982] (c) the LPG distributors have been notified in writing that LPG will be available to all on equal terms (para. 3.19). (d) that PTT shall have been paid the $200 million promised by Government (para 5.06) (e) that the second Union Oil contract is ratified (para 3.02). 7.04 Subject to agreement and assurances reached on the above, as set out in the draft legal documents, the project is suitable for a Bank loan of $90 million (including a $1.3 million front end fee) for a period of 20 years including 5 years grace with the guarantee of the Royal Thai Government. Retroactive financing of up to $4 million is recommended. - 49 - GLOSSARY Natural gas - a gaseous mixture of hydrocarbons, consisting mainly of methane togetner with ethane, propane, butane and natural gasolines. The natural gas can be used as boiler fuel or various components can be extracted and balance used as fuel. Liquified natural gas: - natural gas cooled to a liquid state as LNG for economy of sea transport. May consist of all the typical components of natural gas or may have some of the natural gas liquids extracted. Methane: - the lightest component of natural gas. Used for boiler fuel but may also be used as feedstock for ammonia, methanol and other products. Ethane: - normally gaseous, may be liquified or compressed for pipeline transport. Used as petrochemical feedstock for polyethylenes, PVC etc. Ethane is rarely exported. Propane: - normally gaseous but liquified for pipeline transport or distribution in bottles. Used for petrochemicals (eg polypropylene), for industrial heat or as motor fuel. Butane: - gaseous but becomes liquid under slight pressure. Used for cooking, lighting, for industrial heat, for blending with gasoline or, in hot countries, as a motor fuel. Liquified petroleum gas: - a mixture of propane and butane, (LPG) typically ranging from 30/70 to 50/50. Liquid at a lower pressure than propane and hence safer. Used in domestic applications and as a motor fuel. Natural gasoline: - a mixture of natural gas liquids heavier than butane. Used as a gasoline blending feedstock in refineries. Ethylene i normally a gas, obtained by cracking ethane or light hydrocarbons at high temperature. It is a liquid at -1030C and used as base material for the production of polyethylenes (plastic films and containers). Propylene - normally a gas, obtained by cracking propane or light hydrocarbons at high temperature. It is a liquid at -460C and used as base material for the production of polypropylene (plastics). Anrex 1.01 Nacural C-as Reserves Coccess4ona,re Field or Racoverable Reserve (Tr7) Source c'uL uc r e Prove ProbabIe 17o:al U.c-on 5il -r ra wa ' l58 0.>32 .130 -D & M - PaLatong ,61 5 35 .96 -D & M - Satun 0. 12 3 .05 . -7 -PTT - Baa rpot 0.08 (>76 G 34 -PTT -ladanc! N. P1adan,g 0C0.4 (>61 . 065 -PTT - Karnbong 0I13 (>23 0, 36 -D & M Jakrawan 00,05 1.00 1.05 -PTT - Other Gas Structures /a _ 2.17 2_17 -Union Sulb-T Otal 2.61 8.39 100 Texas 3acir' Fc - B 1.38 5.62 , -D & M, TP - 17-E-1 - 2.00 0 0O -TP Sub- -Total 1,33 7.62 c o0 o-tal ,lb 4 ., 0 i6.0 O -0 /a Pakarang5 Chakawan, 7rat, Funan. /b Excludes Esso s onshore discovery, estinmated a, I 'L tIf. THAILAND Projected Natural Gas Supply 1982-90 (MMSCFD) UNION 1982 1983 1984 1985 1986 1987 1988 1989 1990 Erawan 130 250 290 290 250 250 250 250 250 Platong Pladang/N. Pladang - - - - 150 350 400 400 400 Satun Baanpot 5 Subtotal 130 250 290 290 400 600 600 650 650 Texas Pacific - - - - 150 142 142 142 142 Total 130 250 290 290 550 742 792 792 792 _ _~~~~~~~~~~~ THAILAND POTENTIAL DEMAND & SUPPLY OF NATURAL GAS (MMSCFD) Demand Total es s Net Fiscal supply EA e Year EGAT Industries _ Potential DemalLd Gas Plants Sponge Poo Chao Demand inexcass &Petro Fertilizer Soda Ash Iron Methanol Cement Siiog Phrai Total of pipeiine chemical & Others & Bang Plee Ind. capacity ___________ _______ _ _______ ____________ (local supplies) ._ca acit 1982 130 130 _- - - 130 - 130 1983 250 250 - _ _ _ _ 37 _ 37 287 -37 250. 1984 290 309 62 - - - _ 37 - 99 408 -118 290 1 985 290 419 115 30 5 10 - 42 24 226 645 -335 290 1986 550 411 204 46 1.0 15 40 42 36 393 804 -254 550 1987 742 423 214 56 15 20 80 79 49 593 936 -194 742 1988 792 446 214 61 15 20 80 85 50 529 975 -183 792 1989 792 450 214 61 15 20 80 85 53 535 985 -193 792 1990 792 450- 214 61 15 20 80 97 55 552 1,002 -210 792 _ _ _ _ _ _ .1 _ _ ___ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ THAILAND Demand and Supply for E,,ergy 1980-1990 (in '000 tons crude oil equivalent) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Energy Demands Oil Products LPG 240 270 310 - 375 460 510 585 650 720 800 880 Gasoline 1,655 1,530 1,500 1,580 1,545 1,510 1,570 1,630 1,712 1,756 1,800 Kerosene/jet kerosene 990 1,079 1,190 1,215 1,265 1,300 1,325 1,360 1,374 1,424 1,470 Diesel 3,560 3,325 3,500 3,655 3,675 3,680 3,795 3,910 4,024 4,140 4,300 Fuel oil 3,685 3,756 3,000 2,750 2,600 2,500 2,75 2,150 2,100 2,030 2,000 TOTAL Products 10,130 9,960 9,500 9,575 9,545 9,500 9,450 9,700 9,930 10,150 10,450 Natural gas/liquids - 200 1,583 2,285 2,550 2,550 4,900 6,500 6,500 6,500 6,500 Coal/lignite 410 670 980 1,000 1,140 1,300 1,530 1,700 2,100 2,470 2,900 llydro 440 890 1,062 1,120 1,295 1,850 1,990 2,140 2,300 2,490 2,650 Non-commercial fuels 3,000 3,080 3,170 3,260 3,350 3,450 3,500 3,550 35000 TOTAL. Demand 13,980 14,800 16,295 17,240 17,880 18,650 21,370 23,590 2430 25,260 26,200 Energy Supply Domestic Production Crude 15 15 15 15 15 300 310 320 350 375 500 Natural gas and - 200 1,583 2,285 2,550 2,550 4,900 6,500 6,500 6,500 6,500 gas liquids Lignite 350 670 980 1,000 1,140 1,300 1,530 1,700 2,100 2,470 2,900 Hydro 320 770 942 1,000 1,175 1,250 1,390 1,540 1,700 1,890 2,100 Non-commercial fuel 3,000 3,080 3,170 3,260 3,350 3,450 3,500 3,550 3,600 3,650 3,700 TOTAL Production 3,685 4,737 6,690 7,560 8,230 8,850 11,630 13,610 14,250 14,885 15,700 Imports (net) Oil 9,980 9,945 9,485 9,560 9,530 9,200 9,140 9,380 9,580 9,7)5 9,950 Coal 60 - - - - - - - - - Ilydro _120 120 120 120 120 600 600 600 600 600 _50 TOTAL Supply 13,980 14.800 16,295 17,240 17,880 18,650 21,370 23,590 242430 2560 26,2 5a4 ANNEX 1.05 Page 1 ot 2 Eastern Seaboard Development Plan The Government of Thailand has decided to encourage the Eastern Seaboard area (Sattahip, Rayong, Chonburi) as the location of of its major new energy-based industries, providing a focal point for growth outside of Bangkok. The area is ideally located with good access to the sea, proximity to the energy supplies, substantial areas of flat land, sufficient labor, good communications under construction, and yet within 100 kilometers of Bangkok. The gas pipeline system financed under Loan 1773TH runs through the area and has provision for offtakes for industrial, commercial and domestic supplies. The Bank is also financing a regional planning study of the Eastern Seaboard (being conducted by Coopers and Lybrand) which will identify the infrastructure required to support industrial development and associated urbanization. A technical assistance project being prepared for possible Bank financing will support the design of infrastucture for the first phase of the the regional program. The region is relatively well endowed with infrastructure to support the proposed industries. Sattahip port will be developed as a commercial harbour to serve the planned projects. Power supply is available and fresh water will be piped to the gas separation plant for Dok Drai reservoir with ample capacity for future water demand. On behalf of PTT, Davy McKee have recently completed a gas utilization study recommending appropriate uses for the gas likely to be brought ashore during the 1980's. The principal options for the decade are (i) A gas separation plant complex, probably comprising two units in the 1980's each processing 350 MMSCFD of gas, with provision for a third unit. The first of these units is the subject of this project. (ii) An olefins complex comprising of a core unit to produce ethylene and propylene which will feed dowstream low and high density polyethylenes, polypropylene and ethylene glycol units. (iii) A fertilizer complex to produce ammonia and its derivatives (Urea, NPK) for which a contract award has recently been determined. (iv) Methanol and related chemicals with a possibility of using methanol as a cutter stock in gasoline and diesel vehicles. Other industries such as soda ash are under study for incorporation in the overall development program. Total investment would be about US$3 billion. If all of these industries are developed Thailand will need a major reinforcement of its offshore pipeline system, or to cut back on supplies to EGAT. There is sufficient time to delay this decision until after key decisions have been taken on the major new industrial uses (See also Annex 1.03 for the supply/demand balance. IFC and PTT are jointly studying the olefins petrochemical complex with a view to determining the most beneficial products and appropriate configuration, taking into account wider factors such as the energy balance for olefins feedstock. One of the key objectives of the study is to determine how best to ANNEX 1.05 - 55 - Page 2 of 2 make the development suitable for private sector investment, both as a joint venture partner in the ethylene cracker and to undertake the whole of the downstream investment. All the possible investments have been studied a number of times over the last four years. The Davy McKee study is the first independent comprehensive study. Both IFC and IPD expect to give advice and technical assistance as part of their normal lending operations for a number of these projects. In respect of planning and coordinating the overall urban and industrial infrastuctural needs, the Bank is working closely with the Eastern Seaboard Committee and is preparing a technical assistance project. - 56 - Annex 1.06 Page 1 of 2 Energy Sector National Energy Board Committee The committee was formed under the act establishing the National Energy Administration. It is comprised of representatives of the principal public sector agencies in the energy sector (NEA, PTT, EGAT, MEA, PEA, Ministry of Finance, Ministry of Industry, NESDB, Ministry of Defense. It is chaired by a deputy prime minister. There are thirteen subcommittees, including natural gas pricing policy, petroleum planning, power and the energy master plan. National Petroleum Policy Committee (NPPC) NPPC currently has two sub-committees, chaired by members of the NPPC. (a) Sub-Committee on Supply Planning, Pricing and Compensation of Petroleum Products. Its main functions are to carry out studies and propose policy measures pertaining to: (i) the supply, production, import and export of petroleum products to meet present and future demands; (ii) the pricing of petroleum products, and (iii) the collection and disbursement of funds into and out of the Oil Stabilization Fund. (b) Sub-Committee on Refinery Expansion. Its main functions are: (i) to determine the criteria and conditions for modifying or expanding existing refineries or establishing new refineries to increase the refining capacity of the nation; and (ii) to monitor the technical, economic, financial and legal aspects of refinery operations, including the conduct of contract negotiations with oil companies involved in, or requesting to carry out, refinery operations in Thailand. (c) Sub-Committee on Oil Procurement and Distribution. Its main functions are to study the logistics of oil procurement and distribution and to recommend appropriate policy measures. Other Committees in the Energy Sector. There are several other committees playing a salient role in the energy sector: - two committees appointed by the National Economic and Social Development Board (NESDB) (a) to assess the economic benefits of LPG (now completed); and (b) to assess the proposed liquified natural gas exports; - a power sector policy development committee chaired by a Deputy Prime Minister, two sub-committees on electricity tariffs and one on nuclear power. - a foreign loan committee - a committee to plan development of oil and natural gas discovered in northeast and north Thailand, including follow up work. The Committee is to be headed by the Deputy Minister of Industry and DMR to provide secretarial services. - 57 - Annex 1.06 Page 2 of 2 Sectoral Organisation Exploration and Production. All exploration and production is by foreign oil companies (excepting the 300bpd of oil from Ministry of Defense areas at Fang). Two overseas groups, those headed by Union Oil and Texas Pacific, are active in the Gulf of Thailand in the search for oil and gas, and have found substantial gas reserves. Six other foreign oil companies, have licenses onshore and offshore. The Government has options to take an equity interest in several of the more promising prospects, but to date has not done so. Refining. There are three major refineries, each of about the same size (after the ongoing Esso expansion) and one minor refinery. The Thailand Oil Refining Company (TORC) is expected to become a joint venture between Shell, Thai private interests and PTT. The BangChak refinery is owned by the Government and operated by the Ministry of Defence and PTT. The wholly-owned Esso refinery will constitute 35% on completion of debottlenecking. Fang refinery (Ministry of Defence) has 1% of total capacity. Marketing. Retail oil product marketing is in the hands of essentially the same organizations as refining, plus Caltex. Shell, Esso and PTT are the largest retailers supplied respectively by the TORC, Esso and PTT (BangChak) refineries. All natural gas transmission and marketing is being handled by PTT. - 58 - ANNEX 2.01 Page 1 of 1 THAILAND DEMAND FOR LPG (1981-1990) (In 000 tons) Year Domestic Industry Vehicles Total 1981 131 44 55 230 1982 146 46 93 285 1983 164 48 130 342 1984 183 50 185 418 1985 201 55 211 467 1986 222 60 250 532 1987 244 66 280 590 1988 268 73 314 655 1989 295 80 350 725 1990 325 85 390 800 - 59 - ANNEX 2.02 Page 1 of 1 THAILAND PTT's LPG Market Share (000 tons) Domestic and Industry Vehicles Year Total PTT Share Total PTT Share Total 1981 175 18.0 10% 55 4.0 7% 9.5% 1982 192 36.0 19% 93 14.0 15% 17.5% 1983 212 44.0 21% 130 22.0 17% 19.0% 1984 233 51.0 22% 185 46.0 25% 23.0% 1985 256 64.0 25% 211 63.0 30% 27.0% 1986 282 73.0 26% 250 91.0 36% 31.0% 1987 310 84.0 27% 280 108.0 39% 33.0% 1988 341 95.0 28% 317 128.0 41% 34.0% 1989 375 109.0 29% 350 147.0 42% 35.0% 1990 410 123.0 30% 390 166.0 42% 36.0% - 60 - ANNEX 3.01 Page 1 of 7 Project Description I. Gas Plant 1.1 The gas plant project consists of the following main sections: - gas separation plant at Rayong - Product transfer and Water Pipelines - Marine Terminal at Laem Chabang The natural gas from different fields in the Gulf of Thailand is transported through a 34" submarine pipeline to the gas separation plant located at Rayong, about 30 km east of Sattahip. The gas passes a slug catcher and is split into two streams. One stream is treated in a dew point control unit to obtain pipeline quality of sales gas and then sent to the Power plants. The other stream will be used as the feed for the gas separation plant together with the pentane plus condensate from the dew point control unit. In the gas separation plant the natural gas streams will be treated to eliminate C02 and water and subsequently be separated into ethane, propane, LPG, natural gasoline and sales gas. The ethane will be used as feed stock for an ethylene plant to be built adjacent to the gas separation plant at a later date. Until then it will be combined with the sales gas to be used in the power plants near Bangkok. The propane, and LPG products will be transported by pipelines over a. distance of approximately 60 km to the marine terminal at Laem Chabang. The natural gasoline product pipeline goes via the marine terminal and hasa branch connection to the TORC refinery. The propane product is used for local consumption and the surplus for export. Later, part of propane production will be fed to the ethylene plant. LPG will be used for domestic consumption either from the truck and barge loading station of the marine terminal and the truck loading station of the gas separation plant or from the future railroad loading station on the way to the terminal. The railroad loading station shall be able to receive the LPG from both the gas separation plant and the marine terminal. The natural gasoline will be processed and blended into motor gasoline in the existing TORC refinery near the marine terminal. The main characteristics of the overall project are shown on the block flow diagram (Page 7). Included in the project are new housing areas to be built near the gas separation plant and near the Marine Terminal for the accomodation of the - 61 ANNEX 3.01 Page 2 of 7 operating staff of PTT. 1.2 The proposed project shall include the following facilities: (i) Gas Separation Plant The gas separation plant will consist of the following: (a) Process Units - CO removal; using Benfield process (two parallel trains) De ydration - Refrigeration (turbo expander, demethanizer) - Fractionation (ethane, propane, LPG, natural gasoline) - Product storage for propane, LPG, natural gasoline - Truck loading station for propane and LPG - Sales gas compression (gas-turbine driven) and waste heat recovery - Refrigeration unit (propylene-propane cycle) (b) Utilities Generation or Supply and Distribution Systems: - Raw water Supply and Treatment - Potable Water - Demineralization Unit - Condensate System and Treatment - Cooling Water System and Treatment - Steam Generation and Distribution - Fire Fighting System - Instrument and Plant Air Generation and Distribution System Fuelgas System Inertgas System Electrical System, including Emergency Power (c) Offsite Facilities: - Safety System - Security - Waste Water Treatment and Sewages - Sanitary Water System - Storage Facilities for Waste Oil, Chemicals and Fuels - Communication System - Flares and Stacks (d) Buildings: - Office Building - Control Building - Office and Repair Workshop - Warehouse - Canteen - Clinic - Fire Fighting Building - 62 - ANNEX 3.01 Page 3 of 7 Garage for Ambulance Guard Houses Main electrical Substation 1 Electrical Substation 11 Compressor Building Analyzer Building Water Treatment Building with Laboratory Truckloading Shed Truckloading Operation Building Parking Sheds 1.3 Tranfer Pipelines The transfer pipelines are described below: (a) 8"- Propane Pipeline The propane pipeline runs from the gas separation plant to the marine terminal. (b) 10"- LPG pipeline The LPG pipeiine runs parallel to the C3 pipeline from the gas separation plant to the marine terminal. One intermediate loading station for trains and one for trucks shall be considered for future. The necessary branch connection shall be installed. (c) 4"- Natural Gasoline Pipeline The natural gasoline pipeline runs parallel to the propane and LPG pipeline to Laem Chabang with a branch line which terminates at the TORC Refinery. 1.4 Marine Terminal The marine terminal consists of: (a) Storage and Loading Facilities - Refrigerated storage for propane and LPG (2-45,000 M3 each) - Pressurized storage for LPG (2-4,000 M3 each) - Refrigeration System - Truck loading station for propane/LPG - Loading for propane and LPG on the Jetty - Piping system from the tankfarm to the Jetty (b) Utilities Generation or Supply and Distribution Systems: - Raw Water Supply and Treatment - Potable Water - Cooling Water System and Treatment - Fire Fighting System - Instrument and Plant Air Generation and Distribution System - 63 - ANNEX 3.01 Page 4 of 7 Fuelgas System Inertgas System Electrical System, including Emergency Power (c) Offsite Facilities: Safety System Security Waste Water Treatment and Sewage Sanitary Water System Storage Facilities for Waste Oil, Chemicals and Fuels Communication System Flare System (d) Buildings: - Office Building - Tankfarm Control Building with Laboratory - Garage for Ambulance Cars - Fire Fighting Building - Substation - Wotkshop - Warehouse - Canteen - Truckloading Shed - Truckloading Operation Building - Three Guardhouses - Jetty Control Building Jetty Pumphouse - Metering Building - Parking Sheds 1.5 Housing Housing shall be built near the gas separation plant and near the marine terminal to accommodate the operational staff of PTT. The housing areas shall be provided with all supplies of utilities and disposal facilities including the necessary treatment systems. Access roads to the houses and to the public road system shall be part of the facility. II. The LPG Distribution System 2.1 LPG and propane will be transported from the terminal at Laem Chabang to provincial centers in Thailand to meet future market demand in the domestic, transport and industrial sectors. Bulk storage installations will be constructed in the following locations: - Bangkok - Khon Kaen - Lampang - Nakorn Sawan - 64 - ANNEX 3.01 Page 5 of 7 - Surat Thani - Songkhla - Chon Buri Bangkok, Surat Thani and SongKhla installations will receive LPG/propane by barge ranging from 500 to 2,000 DWT while the other installations will be by road tankers and, where the rail sidings are constructed, at a later date by rail tank wagons. 2.2 The Bulk Storage installations will have the following facilities: - receiving headers - pressurised spherical tanks - pumping stations for transferring LPG/propane to marketing depots - filling headers and loading arms - fire fighting system with water supply - administration building - control and operation building 2.3 PTT will provide marketing depots in the vicinity of the Bulk Storage installations and at distribution centers. Private marketing companies will also provide similar facilities for retail marketing. These depots will receive LPG/propane from the Bulk Storage installations by tank lorries or short pipelines if distance warrants it. The marketing depots will generally consist of the following: - loading and unloading arms - operational storage tanks between 100 and 200 M.tons - cylinder filling stations with all their auxiliaries like cylinder testing and painting, storage sheds and fork lift trucks - pumping stations - fire fighting equipment and water supply - administration buildings 2.4 LPG/propane production of the gas separation plant amounts to 460,000 tons per year. Additional transport units will be required gradually starting from 1984. It is foreseen that for every 100,000 m.tons marketed, the following facilities and transport units would be required by both PTT and the private sector, assuming that domestic consumption in provincial areas will be 60% of total consumption. No: - Barges 1000 DWT 1 500 DWT 1 Road Tankers, bulk 20 tons 20 8 tons 16 - 65 - ANNEX 3.01 Page 6 of 7 No. - Trucks, for cylinder distribution 35 - Cylinders 12.5 kgs 800,000 5.0 kgs 200,000 50.0 kgs 50,000 - Cylinder filling machines (one shift operation) 2,500 cylinders per day 6 BLOCK DIAGRAM GAS SEPARATION PLANT PIPELINE PIPERINL . GAS SEPARATION PLANT TERMINAL ETHANE FOR FUTURE ETHYLENE COMPLEX UNITS --- NATURAL 2I PRAN GAS FEED ~~~~~~~~~~~~~~~~~~~~~~PROPANE CONTF ) L U NIT W w _ _I DEHYDRIAT ION HREC SER _ FRiAC NATIN LPG NATURAL GASOLINE CONDENSATE SALE SFAS| EFHIG ERATION C OMPRESSION UNIT SALES GAS World Bank - 23591 PETROLEUM AUTHORITY OF THAILAND LPG PLANT, STORAGE AND DISTRIBUTION CONSTRUCTION PROGRAMME 1981 1982 1983 1984 ____ __ ~ ~A .J___ _ 1. GAS SEPARATION PLANT - SELECTING CONSULTANT - PREPARATION OF BID DOCUMENTS AND PREQUALIFYING ENGINEERING CONTRACTORS _ _ - CONTRACTOR'S BIDS - BID ANALYSIS AND CONTRACTING - DETAILED ENGINEERING, PROCUREMENT AND CONSTRUCTION - - - - - - - START-UP AND COMMISSIONING II. LPG BULK STORAGE AND DISTRIBUTION - SELECTING CONSULTANT - PREPARATION OF BID DOCUMENTS ANp PREQUALIFYING ENGINEERING CONTRACTORS -CONTRACTORS BIDS 4 - BID ANALYSIS AND CONTRACTiNG - DETAILED ENGINEERING, X PROCUREMENT AND CONSTRUCTION m - - - - - COMMISSIONING - - - .. _ - - World Bank-23649 - 68 - Annex 3.03 Page 1 of 5 Thailand - LPG Project Studies and Technical Assistance A. Policy and Overall Technical Studies 1. Oil and Gas Reserves The planning and development of future industries based on natural gas depends on the size of Thailand's discoveries and their estimated reserves. PTT and the Department of Mineral Resources have limited capabilities to interpret and assess such hydrocarbon potential and reserves. The Bank loan is proposed to finance the services of a consulting firm (30 man-months) which will review available data and report on the activities and findings of operating companies. The report will assess existing reservoirs and review production levels. The consultant will follow up at regular intervals and update the data on the qualitative and quantitative behaviour of the reservoirs and recommend any corrective downstream operations where oil and gas are utilized. The study will start in 1982 and will cost approximately $500,000 including other expenses like lab work and use of computer models. It is expected to be completed within 8 months. 2. Gas Pricing Study The price of gas purchased under the present agreements with Union Oil is at the production platform and PTT is responsible for its transport offshore in the Gulf of Thailand and onshore to power stations and industrial consumers. The cost of gas from PTT should as a minimum reflect the purchase price from Union Oil plus the return on PTT's investment in the transport pipeline system. The difference between gas sales price to consumers and gas cost to PTT represent their profit margin to finance future investment. Gas sales price is governed by the price of fuel the gas will substitute, considering any additional expenses in the conversion process of old installations. To avoid lengthy negotiations between PTT and consumers basic criteria should be studied to reach a price level satisfactory to Government, PTT and its customers and will serve the government to use the pricing study in the control of the tariff structure and end product prices. The Government will assign a consultant to carry out the study which is expected to start in 1982 and will take 25 man-months. The study will be integrated with the Petroleum Products Pricing study under the structural adjustment loan. 3. Gas Purchasing Strategy The government and PTT have been responding to proposals by various producers for the sale of gas, but have not been in a position to take the initiative in deciding from which fields it wishes to purchase gas, or in deciding any priority or strategy among the various offers. To put itself in - 69 - Annex 3.03 Page 2 of 5 a suitable position PTT should obtain independent studies of the gas reserves in each significant structure and should update these when new information comes available. The study currently underway on alternative pipel'ne systems for offshore gas will need to be continued and completed. Drawing on the above and the LNG study, PTT should prepare a gas purchasing strategy, with the help of consultants, which would take account of the probable economics of various fields, the pipeline implications, diversity of supply among producers, fields and pipelines, flexibility, competition, joint benefits with LNG, and longer term alternative sources and demands. The policy and strategy studies to be financed by the Bank will require 250 man months of consultancy assistance. Except for updates on gas reserves, all will be completed during 1983. 4. Small Scale Natural Gas Use All natural gas is currently used for power and major industrial users, and the gas utilization study also concentrates on large scale use. It is unlikely that domestic and small scale industrial and commercial use will be economically feasible in most of Bangkok because of the numerous canals and the high water table, taken together with low consumption per customer. It is, however, possible that direct use of gas would be sensible in other places close to the transmission system where distribution would be easier, e.g. Chon Buri and Phatthya, and the new housing for the gas-based industries. A study is required on the technical, economic and financial feasibility of supplying gas to small scale users in selected parts of Thailand. The study would be undertaken during 1983 and would require 20 man-months of consultancy. 5. LNG Exports NESDB has already studied the possibility of LNG exports as has a local commercial group interested in promoting them. Given the rapid increase in proven and probable reserves and the relatively limited domestic uses, it is now appropriate to study the circumstances and conditions under which LNG exports should be considered. The results of the study will be fed into the overall gas purchasing strategy study, and may appropriately be combined into that study. The study would be undertaken in 1983, and would require 120 man- months of consultancy. 6. Gas Pipeline Options An Italian Government financed study is being undertaken by Snam Progetti on the pipeline options for gathering and transmitting offshore gas. The study is looking at alternative possibilities, including land-based routes, for taking the gas to the market, and is considering the advantages of diversity in transmission lines. The study will be completed during 1982, and will be an important source of information for the gas purchasing strategy study. [This study is excluded from the legal requirements relating to approval, completion, etc.]. - 70 - Annex 3.03 Page 3 of 5 B. Project Related Studies and Assistance 7. LPG Pilot Marketing PTT has completed, with Bank financing, a sample survey of fuel utilization in a number of semi-urban and outlying rural areas in Thailand. The Population and Community Development Association (PDA), a local organization, has carried out the survey and completed their report which estimates the LPG annual market potential for household use at approximately 150,000 tons by the year 1990 if marketing facilities are made available to supply and service these areas. This is in addition to the existing household market in Bangkok and major provincial cities. To provide storage and distribution facilities for marketing these quantities, and due to the costly investments which amounts approximately to US$50.0 million for each 100,000 tons of LPG marketed domestically, it was necessary that a pilot marketing study be conducted to test the accuracy of the findings of the PDA report. The pilot marketing study will start in the second quarter 1982 on a number of representative samples in the different communities surveyed. Distribution facilities will be maintained and marketing results will be recorded for a period of time ranging between one and three years. The reported findings would cover, (i) the consumption per unit of household, (ii) the size of cylinder and the type of appliance, (iii) the percentage of potential LPG users in each community and their income levels, and (iv) the safety record and the acceptance level. PTT will engage a number of local consultants for pilot marketing, estimated at 390 man-months, together with a foreign consultant at 10 man months to monitor the work, to coordinate, analyze and report the results of this study which will be the basis for developing the size of the bulk storage installations and the respective transport and distribution systems. 8. LPG Bus Fleet and Truck Fleet Demonstration and Operational Assistance Diesel oil consumption in Thailand exceeds production from refineries. To meet this demand it will be necessary to install expensive fuel oil conversion units to produce diesel oil. The transport sector accounts for 50% of the total diesel oil consumption and any fuel savings in this sector will reflect on the balance of payments. LPG has been successfully used in bus and truckfleets in some countries and possible LPG substitution in diesel fueled buses and trucks in Bangkok and elsewhere would improve Thailand's shortage of diesel fuel. The proposed Bank loan is expected to finance the purchase of a number of LPG fueled buses and trucks to demonstrate their use in the Thai environment and study the operational and maintenance problems. Future conversion to LPG fueled buses and trucks in Bangkok will depend on the results of this demonstration. This demonstration will cost approximately $1.0 million to purchase 5 LPG fueled buses and one truck complete with spares in addition to the technical assistance required to consult BMTA on the specification, safety features and operating criteria of the LPG fueled buses. It is expected that full replacement of the existing diesel driven buses operating in Bangkok would take about seven years. - 71 - Annex 3.03 Page 4 of 5 C. Investment Related Studies 9. Crude Imports and Port Facilities The crude refining capacity of Thailand will shortly reach 210,000 bbls/day (10 million tons per year). PTT will study imported crude supply in VLCC's (very large crude carriers) to save on transport. The storage required to receive crude transported by the VLCC-s would be increased and will maintain the strategic storage needed to meet supply fluctuations. A consulting firm will be invited to perform the study and prepare a feasibility report. The consultants' work will cover the site selection with the port facilities having sufficient draught to accommodate the VLCC-s and the comparison of freight charges for crude tankers. The consultant is expected to prepare the conceptual design with possible alternatives to estimate investment costs and calculate the economic and financial rates of return for the project. The work will start in 1982 and will be completed within 6 months. The consultants' fees is estimated to be $500,000 which includes 40 man-months' remuneration plus additional costs of drafting, travel expenses and subsistence. 10. White Products Pipeline Transport There are two refineries in Laem Chabang (Esso and Torc) with a total installed capacity of 110,000 bbls/day and planned for expansion (Esso) to 130,000 bbls/day in 1985. If TORC expansion goes ahead the capacity will be close to 200,000 bbls/day. The white products from the two refineries are transported by barges and trucks which in the future will be costly and inadequate. It is therefore required to study other modes of transport particularly by pipelines. The future LPG quantities of PTT can partly be added to the quantities of white products to be transported using a multiproduct pipeline system. PTT will invite a consulting firm to study the feasibility of this project for possible implementation with the development of the refining capacity in the area. The work will start in 1983 and will be completed in 12 months. It will cost approximately $1.3 million which covers the work of the consultants in identifying terminals for existing and future products storage, carry out route survey and prepare the conceptual engineering design for cost estimate. 11. Petrochemicals IFC (World Bank Group) are currently assisting in the analysis of the alternative petrochemical configurations covering the proposed ethylene cracker and downstream plants. Conclusions from this study willl be available mid 1982. It will be followed by detailed feasibility studies, the most urgent of which is that for the PTT/private sector joint venture ethylene cracker. The work on the detailed feasibility study will start about third quarter 1982 and will be completed by June 30, 1983. - 72 - Annex 3.03 Page 5 of 5 D. Other Assistance 12. Manpower Planning PTT is expanding rapidly in both the scale of its operations and the areas of activity. Recruitment has been difficult and significant gaps are beginning to appear both in planning and operations. So that PTT can identify the needs in good time, plan its recruitment and training, and ensure the flow of sufficient graduates and experienced personnel, it needs to develop a manpower planning system based on its immediate and planned operations. The study should be undertaken and implemented during 1983 and will require 50 man-months of consultancy. 13. Management Information System PTT has a good information system on the national petroleum situation, but is relatively weak at making use of in-house data for information and control. Much of the data is used for operations without taking advantage of the wider possibilities of use. a review is now required of the information flow within PTT with a view to instituting, if appropriate, a management information system. The work would be undertaken during 1983/84 and will require 75 man-months of consultancy. - 73 - Annex 3.04 Disbursement of Bank Loan IBRD Fiscal Year US $ Millions: Quarter: Cumulative: 1982/1983 quarter ending: Sept. 30, 1982 Dec. 31, 1982 13.2 13.2 March 31, 1983 1.9 15.1 June 30, 1983 3.5 18.6 18.6 1983/1984 Sept. 30, 1983 8.0 26.6 Dec. 31, 1983 11.0 37.6 March 31, 1984 12.5 50.1 June 30, 1984 10.0 60.1 41.5 1984/1985 Sept. 30, 1984 7.0 67.1 Dec. 31, 1984 6.0 73.1 March 31, 1985 5.0 78.1 June 30, 1985 5.0 83.1 23.0 1985/1986 Sept. 30, 1985 3.5 86.6 Dec. 31, 1985 3.2 89.8 March 31,1986 0.1 89.9 June 30, 1986 0.1 90.0 6.9 Total: 90.0 Annex 3.05 Page l of 1 FINANCING PLAN FOR GAS PLANT IBRD EXIM Total Foreign Cost Gas Separation Plant (a) on notice of award 4.25/a - 4.25 (b) on signature of contract 4.25 _ 4.25 (c) next 5% 4.25 - 4.25 (d) export credits - 68.0 68.0 (e) balance 9.25 - 9.25 22.0 68.0 90.0 Transfer Pipelines/Marine Terminal IBRD OECF TOTAL (a) initial funding - 65.0 65.0 (b) balance 8.0 - 8.0 8.0 65.0 73.0 Local Cost EXIM CDC Other/b Total Gas Separation Plant (a) on notice of award - - 2.5 2.5 (b) on signature of contract - - 2.5 2.5 (c) next 5% - - 2.5 2.5 (d) export credits 12.0 - - 12.0 (e) balance - - 29.9 29.9 12.0 - 37.4 49.4 Marine Terminal/Transfer pipelines (a) first 15% - - 13.1 13.1 (b) next - 25.0 - 25.0 (c) balance - - 49.5 49.5 25.0 62.2 87.,6 /a initially commercial, refinanced IBRD /b includes Government contribution to taxes and duties. PETROLEUM AUTHORITY OF THAILAND ORGANIZATION CHART | BOARD OF DIRECTORS TT SUBCOMMITTEES E- -1-T. l-T I GOV_ RNO DEPUTY GOVNRDEUY GOVEDEPUTY GVERNORrDPUYGVRO DEPUTY GOVERNOR GOVER DEPUTY GOVERNOR DEPVERNO VERNOR DEPUTY GOVERNOH REPKTY NATUTY G AS LGI STICS AND REFINING T MARETN T ATIL A SPECIAI AFFAIRS L' TECHNICAL AND PLANNING FINANCE _ ADMINISTRATION (M OPERATIO ________j __RANOCHA MTI OPERATONG SUPPLY AND FACILITIESl PERSONNEL' STATE AND STATE NN,NADMINISTRATION OFFICEOFINTERNALpANDFACILiTIES| POLICY AND PLANNING F C NE | AV |ATE L OPFRATION PLN NANG MARKTING PLANNING ADMINISRTINETEPIENAE ADMRKTN OFFICE OF INTEYAL DEPARTMENT EPARTMENT OEAYMN ALU AF DAATE EPARTMENT ARTMENT EPAR NPAMRETNT DEPARTMENT SUPPLY AND TERMINAL ~~RESEARCH AND ACONIN OMOIYRTAIL AND REGIENAL MARKETINGMANENC COMPUING OJPERATION DEVELOPMENT DEPARTMENT PROCURVMENT SAE S ENGINEERING DPTE - SERVI.CEV ENE DEPARTMENTDARMT DEPARTMENT DEPARTMENT DI11- ___ DEPARTMENT_ I I I --, _FENORMATIorX r EN r _ _ PLRADUCTION AND BUDG ET _ GENERAL NPARGETN PLANNING PIPELIE OPERAT IONPANG _____ I _. _ _1 OA__ I_I CT DEPARTMTI DEPARTMENT DEP AR NT LEGAL AFFAIRS G EPRMEN DE T DEPARTMENT _PETROLEUM PRCUREMENT CONSTRUCTION 8 AND CONTRACTS | 1 D.EPARTMENT T- E P TDEPARTMENT Wo.Id B-1k - 23592 76 ANNEX 5.01 Page 1 of 1 THAILAND PETROLEUM AUTHORITY OF THAILAND Income Statement For the Year Ended September 30 (US$ million) 1980 1981 (Estimated) Revenues Sales 1,145 1,179 Other Income 20 15 Total Revenues 1,165 1,194 Expenses Cost of Sales 1,077 1,136 Depreciation 2 2 other Expenses 45 39 Total Expenses 1,124 1,177 Income before Interest & Foreign Exchange Loss 41 17 Foreign Exchange Loss - 22 Interest 13 38 Net Income 28 (43) - 77 ANNEX 5.02 Page 1 of I THAILAND PETROLEUM AUTHORITY OF THAILAND BALANCE SHEET/a (As of September 30) (in US Million $) 1980 1981 (Audited) (Estimated) Assets Fixed Assets (Net) 18 17 Work in Progress 214 396 Total Net Fixed Assets 232 413 Other Assets 15 31 Current Assets Bangchak refinery/b - 181 Inventories 83 134 Accounts Receivable 197 182 Receivables from Oil Fund 70 94 Cash 18 27 Other Current Assets 38 23 Total Current Assets 406 641 Total Assets 653 1,085 Liabilities and Equity Equity Capital 8 7 Retained Earnings/C 74 19 Total Equity 82 26 Liabilities Long-term Liabilities/-C 160 301 Current Liabilities Short-term Debt 81 397 Accounts Payable 134 195 Other Current Liabilities 196 166 Total Current Liabilities 411 758 Total Liabilities 571 1,059 Total Liabilities and Equity 653 1,085 /a Foreign exchange rate at Baht 20.5:US$l forFY80 and Baht 23:US$l for FY81. /b About 50% of Bangchak refinery's account was crude in FY81. The MKT indebtedness to Bangchak has been netted out. /c Adjusted to reclassify provision for pension fund and deferred losses from deposited and borrowed petroleum from retained earnings to long- term liabilities. - 78 - Annex 5.03 Page 1 of 4 THAILAND LPG Project Notes and Assumptions on Financial Statements 1. PTT-s fiscal year runs from October 1 in the year concerned through the following September. I. Consolidated PTT 2. Consolidated PTT includes (i) Natural Gas Operations Unit (ONG); (ii) Marketing [Oil Distribution and Supply Unit] (MKT); (iii) certain aspects of Bangchak refinery; and (iv) headquarters and others. In so far as Bangchak refinery is concerned, PTT does not keep the accounts of fixed assets and Bangchak-s operating results are not included in consolidated PTT which, however, includes all liabilities incurred on behalf of the refinery. 3. Capital expenditure of $250 million per year has been assumed from FY88 to FY90 to provide for unidentified projects. II. ONG A. Natural Gas Pipeline Operations 4. Selling Price ($/MMBtu) EGAT Contract FY82 FY83 FY84 FY85 FY86 FY87 FY88 FY89 FY90 4.17 4.17 4.37 4.61 4.86 5.15 5.46 5.79 6.14 The above prices are estimated according to the provisions of PTT's contract with EGAT. Siam Cement's gas demand is expected to be very low, totalling only 30 MMSCFD from FY83 to 85 and 40 MMSCFD thereafter and priced above the EGAT price. 5. Cost of Gas ($/MMBtu) including escalation Union Erawan Contract FY82 FY83 FY84 FY85 FY86 FY87 FY88 FY89 FY90 2.49 2.35 2.55 2.79 3.04 3.28 3.55 3.83 4.14 Union Second Contract FY82 FY83 FY84 FY85 FY86 FY87 FY88 FY89 FY90 2.49 3.03 MT 3.66 4.00 4.36 4.7T1 577 57 79 - Annex 5.03 Page 2 of 4 Texas Pacific Proposal FY82 FY83 FY84 FY85 FY86 FY87 FY88 FY89 FY90 2.82 3.21 3.51 3.83 4.T0 4.43 T. 5.16 5.58 The above cost of gas is estimated by the existing contract provisions in the case of Union (both Erawan and Second contracts) while the purchase prices from Texas Pacific (TP) are based on the proposals by TP. In practice, further Union Gas or Esso gas may be contracted before Texas Pacific. 6. Calorific valtues of gas have been estimated as follows: Btu/MCF Union Erawan 1058 Union second contract 1114 Texas Pacific 899 7. Gas Availability. Total gas supply from Union Oil and Texas Pacific is assumed as follows: (in M1ISCFD) FY82 FY83 FY84 FY85 FY86 FY87 FY88 FY89 FY90 130 250 290 290 550 742 792 792 792 8. Operating Cost Assumed to be 0.2% of total capital cost of pipelines and escalated by local inflation rate assumed as follows: FY82 FY83 FY84 FY85 FY86 and thereafter 12% 12% 10% 9% 8% 9. Operating Days. Assumed to be 365 days. 10. Depreciation. Assumed 20 years asset life. Depreciation expenses are on a revalued assets basis. 11. Trade Terms (i) Accounts receivable - 45 days of sales. (ii) Accounts payable -60 days of capital expenditure, 25 days of feed gas cost and 30 days of operating costs. 12. Interest Expenses. Assumed at 16% for commercial borrowings. Interest during construction has been capitalized. 13. Revaluation Rate. Revaluation of assets is assumed to be at international rate i.e. 10.5% in FY80, 9% in FY81, 8% in FY82 and FY83, 7.5% in FY84, 7% in FY85 and 6% thereafter. - 80 - Annex 5.03 Page 3 of 4 B. Gas Separation Plants Operations 14. Selling Prices ($/ton) Propane LPG Natural Gasoline Ethane 315 315 305 340 The above prices are in 1982 price terms and are escalated annually by the international inflation rate as noted above. No change is assumed in real prices. 15. Feed Gas Costs. Same as pipeline operations. 16. Operating Costs. Five percent of total capital costs escalated by local inflation rate estimated at 9% in FY85 and 8% thereafter. 17. Depreciation. Fixed asset life has been assumed to be 15 years. Depreciation expenses are on a revalued assets basis with the fixed assets being revalued according to projected international inflation rate. 18. Financing Plan. (For first unit and export. facilities, including interest during construction) Sources Amount Interest Grace (US$ million) Period Maturity (year) i) World Bank 40 11.6 5 20 ii) CDC 25 12.75 5 20 iii) Exim Bank 80 7.75 3 13 (iv) OECF 65 4.25 10 30 (v) Commercial 80 10.00 6 12 (vi) Government 30 Total 320 19. Trade Terms. Assumed to be the same as pipeline operations. 20. Inventories (a) Volume LPG - 7 days of projected domestic national demand Propane - 20 days of production (b) Value Cost of feed gas III. MKT and Bangchak Refinery 21. Existing petroleum product prices and marketing margins are escalated by international inflation rate. 22. LPG bulk distribution margin has been assumed at $40/ton and escalated by international inflation rate. 23. Intercompany transactions, namely, Bangchak refinery and LPG supplies from ONG, are assumed at domestic market prices, i.e. national ex-refinery - 81 - Annex 5.03 Page 4 of 4 prices, ex-LPG plant prices for bulk distribution ($315/ton) and ex-bulk prices for retail distribution ($355/ton). 24. Trade Terms (days) MKT Bangchak Refinery i) Accounts Receivable 45 57 ii) Accounts Payable 57 30 The above trade terms are based on existing agreements with suppliers/customers. 25. Financing Plan. (For bulk LPG Storage distribution, FY82-85) (US$ million) World Bank 40 OPEC Fund 20 Commercial 50 Government 5 Total 115 THAT IEAND Petroleum Authority o1 Thailand Capital Expenditure /a (FY82-90) (in current million USS) 1982 1983 1984 1985 1986 1987 1988 1989 1990 Total Natural Gas Pipeline Projects/h 1. Union Satun to existing line (with on-shore compressor) 2 40 58 9 - - - - - 109 2. Union Erawan to Khanom - - - - 52 196 - - - 248 3. Texas Pacific to Union Erawan (with offshore compressor) - 38 215 87 - - - - - 340 4. Pipeline to Phoo-Chao Area - 22 8 - - - - - - 30 Sub-total 2 100 281 96 52 196 - - - 727 Gas Plant Projects 1. First Unit & Export Facilities 33 182 80 - - - - - - 295 2. Second Unit - - - 77 144 - - - - 221 Sub-Total 33 182 80 77 144 - - - - 516 Others 1. Strategic Storage - 64 177 80 - - - - - 321 2. Petroleum Produicts Pipeline Distribution - 1 1 10 25 30 25 10 - 102 3. LPG Marketing & Distribution - 5 10 10 10 10 12 10 12 79 4. BIllk LPG - 25 50 25 25 50 25 - - 200 Suh-Total - 95 238 125 60 90 62 20 12 702 Joint Venture Ethylene Cracking plant /c - 1 10 70 92 25 - - - 198 Total 35 378 609 368 348 311 62 20 12 2,143 /a Projects identified by PTT, excludes interest during construction. /b Union Erawan pipeline not included. /c PTT's 48% share. PETROLEUM AUTHORITY OF THAILAND(PTT) CONSOLIDATED INCOME STATEMENT (IN US MILLION DOLLARS) 1982 1983 1984 1985 1986 1987 1988 1989 1990 SALES (000 TONS) NATURAL GAS (MMCFD) 130 250 271 215 460 506 556 556 564 LPG 50 66 92 252 295 542 542 542 543 PROPANE - - 43 175 219 428 442 442 442 ETHANE - - - 355 355 355 355 NATURAL GASOLINE - - 17 68 82 164 164 164 164 SELLING PRICE (S/TON) _____________________ NATURAL GAS ($/MMBTU) 4.17 4.17 4.37 4.61 4.86 5.15 5.46 5.79 6.14 LPG - - 366 391 415 440 466 494 524 PROPANE - - 366 391 415 440 466 494 524 ETHANE - - 395 422 448 475 503 533 565 NATURAL GASOLINE - - 354 379 402 426 451 478 507 REVENUES NATURAL GAS 209 403 495 414 934 999 1,163 1,?34 1,327 LPG 21 30) 81 169 215 366 404 449 496 PROPANE - -- 16 68 91 188 206 218 231 ETHANE - - - - 168 178 189 201 NATURAL GASOLINE - - 6 26 33 70 74 79 83 c PETROLEUM PRODUCTS DISTRIBUTION 1,248 1,350 1,428 1,501 1,567 1,728 1,883 2,026 2F191 TOTAL REVENUES 1,478 1P783 2,026 2,178 2,840 3,519 3,908 4,195 4Y529 EXFPENSES COST OF GOODS SOLD 1,330 1,536 1,697 1t813 2t307 2,863 3,225 3,494 3,804 OPERATING COST 30 32 38 54 64 80 86 92 98 OTHER EXPENSES 6 6 6 6 6 6 6 6 DEPRECIATION 26 29 37 66 125 165 201 222 242 TOTAL EXPENSES 1,392 1,603 1,778 1,939 2,502 3,114 3,518 3,814 4,150 INCOME BEFORE INTEREST 86 180 248 239 338 405 390 381 379 INTEREST 68 46 52 84 215 231 235 259 271 NET INCOME 18 134 196 155 123 174 155 122 108 OFERATING RATIO 0.94 0.90 0.88 0.89 0.88 0.88 0.90 0.91 0.92 PETROLEUM AUTHORITY OF THAILAND(PTT) CONSOLIDATED BALANCE SHEET (IN US MILLION DOLLARS) - 84 - Mnx 5.06 1982 1983 1984 19B5 1986 1987 1938 1989 1990 ASSETS REVALUED GROSS FIXED ASSETS 498 538 927 1,157 2,196 2,649 3,122 3,442 3,654 LESS ACCUMULATED DEPRECIATION (38) (69) (108) (172) (291) (452) (652) (873) (1,119) NET REVALUED FIXED ASSETS 460 469 819 985 1,905 2,197 2,470 2,569 2,535 FROJECTS IN FROGRESS 39 440 766 986 344 340 112 - - TOTAL NET REVALUED FIXED ASSETS 499 909 1,585 1,971 2,249 2,537 2,582 2,569 2,535 OTHER ASSETS 34 35 45 115 207 232 482 732 982 CURRENT ASSETS INVENTORIES 185 198 214 229 242 269 297 323 352 OTHER CURRENT ASSETS 21 21 21 21 21 21 21 21 21 ACCOUNTS RECEIVABLE 177 188 189 187 273 250 283 292 318 CASH (2) 21 84 101 137 244 267 277 279 SUBTOTAL 381 428 508 538 673 784 868 913 970 BANGCHAK ACCOUNT 340 325 309 294 279 263 248 233 219 TOTAL CURRENT ASSETS 721 753 817 832 952 1,047 1,116 1,146 1,189 TOTAL ASSETS 1,254 1,697 2,447 2,918 3,408 3,816 4,180 4,447 4,706 LIABILITIES AND EQUITY CAPITAL 129 158 209 210 214 230 230 230 230 RETAINED EARNINGS 33 156 339 488 600 759 902 1,015 1,116 REVALUATION RESERVE 71 108 157 200 321 465 630 805 985 TOTAL EQUITY 233 422 705 898 1,135 1,454 1,762 2,050 2,331 WORLD BANK/OPEC LOAN 102 129 176 198 191 177 163 148 135 CDC LOAN - 7 25 25 24 23 21 19 17 EXIM BANK LOAN 106 133 157 137 117 97 77 57 37 OTHER BORROWINGS 141 280 606 898 1,077 1,071 1,104 1,096 1,080 OTHER LIABILITIES 44 44 42 45 51 56 63 74 84 TOTAL LONG-TERM LIABILITIES 393 593 1,006 1,303 1,460 1,424 1,428 1,394 1,3S3 CURRENT LIABILITIES CURRENT PORTION,LONG-TERM DEBT 12 22 40 55 124 221 241 235 228 SHORT TERM LOAN 21 51 51 51 51 51 51 51 51 ACCOUNTS PAYABLE 255 284 336 317 359 403 450 484 524 SUBTOTAL 288 357 427 423 534 675 742 770 803 BANGCHAK ACCOUNT SHORT-TERM LOAN 281 261 241 221 201 181 161 141 121 ACCOUNTS PAYABLE 59 64 68 73 78 82 87 92 98 SUBTOTAL 340 325 309 294 279 263 248 233 219 TOTAL CURRENT LIABILITIES 628 682 736 717 813 938 990 1,003 1,022 TOTAL LIABILITIES 1,021 1,275 1,742 2,020 2,273 2,362 2,418 2,397 2,375 TOTAL LIABILITIES AND EQUITY 1,254 1,697 2,447 2,918 3,408 3,816 4,180 4,447 4,706 ===== ===== ===== ===== ===== ===== ===== ===== ====z=: DEBT EDUITY RATIO 0.71 0.65 0.65 0.65 0.64 0.59 0.56 0.53 0.50 TOTAL LIABILITIES/EQUITY 0.86 0.80 0.76 0.74 0.74 0.70 0.68 0.66 0.64 CURRENT RATIO 1.15 1.10 1.11 1.16 1.17 1.12 1.13 1.14 1.16 FETROLEUM AUTHORITY OF THAILANOtJTf) CONSOLIDATED SOURCES AND APPILICATIONS OF FUNDS (IN US MILLION DOLLARS; 1982 19930 1984 19805 1986 1987 1988 1989 1990 SOURCES INCOME BEFORE INTEREST 86 180 240 239 338 405 390 381 379 DEPRECIATION 26 29 37 66 125 165 201 222 242 TNTERNAL CASH GENERATION 112 209 202 305 463 570 591 603 621 LE.SS:NET INCOME TO GOVERNMENT 1 11 13 6 11 16 12 9 S NET INTERNAL CASH RETAINED 111 198 272 299 452 554 579 594 613 W1FPLD BANK/OPEC DRAWDOWN 2O 27 50 30 3 - - - - CliPC O1RAWDOWN -- 7 18 F:YIM BANK DRAWDOWN 31 40 40 - - - - - - nTHER BORROWINGS 40 149 346 320 271 180 240 190 177 -IT LOAN - 30 - - - - - -- - GOVTI CONTRIBUTIONS 122 29 51 1 4 16 - - - INCREASE IN ACCOUNTS PAYABLE (78) 29 52 (19) 42 44 47 34 40 BANGCHAK ACCOUNT1 INTERNAL CASH 40 50 53 56 57 60 61 63 65 SIT lOAN -- - -- - - - - - - INCREASES IN A/P (47) 5 4 5 5 4 5 5 6 TOTAL SOURCES 247 564 886 692 834 858 932 886 901 APPLICATIONS CAFITAL EXPENDITURE 91 380 608 360 348 311 312 270 262 INTEREST ON BORROWINGS 114 105 151 209 261 273 295 309 317 LOAN REPAYMENT:WORLD BANK/OPEC - - - 3 7 11 14 14 14 CDC -- - - - - 1 2 2 2 EXIM BANK - 12 12 16 20 20 20 20 20 OTHER BORROWINGS -- - 10 21 28 92 185 205 199 SIT LOAN 148 20 20 20 20 20 20 20 20 TOTAL DEBT SERVICE 262 137 193 269 336 417 536 570 572 INCREASES IN CASH (22) 23 63 17 36 107 23 10 2 INCFEASES IN ACCOUNTS RECEIVABLE (99) 11 1 (2) 86 (23) 33 9 26 'INCREASES IN INVENTORIES 51 13 16 15 13 27 28 27 28 BANGCHAK ACCOUNT (36) - 5 33 15 19 - - 11 TOTAL AFFLICATIONS 247 564 886 692 834 858 932 886 901 'l'TAL DtEBT SERVICE COVERAGE 0.97 1.69 1.57 1.20 1.43 1,40 1.12 1.08 1.11 L, I DEBT SERVICE COVERAGE 2. 64 2.71 2 . 09 1 .43 1.62 1. 53 1. 19 1.14 1.16 PE'TROLEUM AUTHORI'IY OF THAILANB(PTT) NATURAL GAS OPERATION(ONG) INCOME STATEMENT (IN US MILLION IIOLLARS) 1982 1983 1984 1985 1986 1987 1988 1989 1990 SALES (000 TONS) NATURAL GAS (MMCFD') 130 250 271 215 460 506 556 556 564 L,PG - - 44 204 247 494 494 494 495 PROPANE - 43 175 219 428 442 442 442 ETHANE - - - - - 355 355 355 355 NATURAL GASOl,INE 17 68 82 164 164 164 164 SELLING PRICE ($/TON) NATllRAL GAS ($/MMBTU) 4.17 4.17 4.37 4.61 4.86 5.15 5.46 5.79 6-14 LPG 3- - 365.72 391-32 414.79 439.68 466.04 494.01 523.66 PROFANE - 365.72 391.32 414.79 439.68 466.04 494.01 523.66 ETHANE - -- 394.74 422.38 447.71 474.57 503.03 533.22 565.22 NATURAL GASOLINE - -- 354.11 378.90 401.62 425.72 451.25 478.33 507.03 REVENUES NATURAL GAS 209 403 495 414 934 999 1f163 1,234 1s327 LPG - - 16 80 102 217 230 244 259 PROF'ANE - - 16 68 91 188 206 218 231 ETHANE - - - - - 168 178 189 201 NATURAL GASOLINE - - 6 26 33 70 74 79 83 TOTAL REVENUES 209 403 533 588 17160 1,642 1,851 1,964 2,101 EXPENSES COST OF GAS 125 227 284 311 724 1,121 1,313 1,419 1,545 OPERATING COST 3 3 7 21 23 36 40 43 46 r EPRECItTION 22 24 32 54 ,85 100 128 ,_135 143 TOTAL EXPENSES 150 254 323 386 832 1v257 1,481 1,597 1,734 INCOME BEFORE INTEREST 59 149 210 202 328 385 370 367 367 INTEREST 38 40 44 67 120 132 142 122 103 NET INCOME 21 109 166 135 208 253 228 245 264 OF'ERATING RATIO 0.72 0.63 0.61 0.66 0.72 0.77 0.80 0-81 0.83 PETROLEUM AUTHORITY OF THAILANI'(PTT) NATURAL GAS OPERATION(ONG) BALANCE SHEET (IN US MILLION DOLLARS) 1982 1983 1984 1985 1986 1987 1988 1989 1990 ASSETS REVALUED GROSS FIXED ASSETS 449 485 870 965 1,597 17954 29348 2,484 2,628 LESS ACCUMULATED DEPRECIATION (22) (47) (79) (132) (214) (311) (435) (566) (704) NET REVALUED FIXED ASSETS 427 438 791 833 1,383 1.643 1,913 1.918 1,924 PROJECTS IN PROGRESS 39 343 419 633 306 265 - - - TOTAL NET REVALUED FIXED ASSETS 466 781 1,210 1,466 1,689 1,908 1,913 1,918 1,924 INVENTORIES - - 2 4 5 12 14 15 17 ACCOUNTS RECEIVABLE 26 50 66 75 146 211 237 252 270 CASH 15 38 130 156 312 502 670 878 1,119 TOTAL CURRENT ASSETS 41 88 198 235 463 725 921 1,145 1,406 TOTAL ASSETS 507 869 1,408 1,701 2,152 2,633 2,834 3,063 37330 LIABILITIES AND EQUITY CAPITAL 50 77 126 126 130 146 146 146 146 RETAINED EARNINGS 21 130 296 431 639 892 1,120 1.365 1,629 REVALUATION RESERVE 49 90 150 238 333 443 578 718 867 TOTAL EQUITY 120 297 572 795 1,102 1,481 1,844 2,229 2,642 WORLD BANK/OPEC LOAN 102 122 139 142 133 123 113 102 93 CDC LOAN - 7 25 25 24 23 21 19 17 EXIM BANK LOAN 106 133 157 .137 117 97 77 57 37 OTHER BORROWINGS 141 220 393 499 631 639 506 381 262 TOTAL LONG-TERM LIABILITIES 349 482 714 803 905 882 717 559 409 CURRENT PORTION, LONG-TERM DEBT 12 22 38 46 49 144 164 158 151 SHORT TERM LOAN - ACCOUNTS PAYABLE 26 68 84 57 96 126 109 117 128 TOTAL CURRENT LIABILITIES 38 90 122 103 145 270 273 275 279 TOTAL LIABILITIES 387 572 836 906 1,050 1,152 990 834 688 TOTAL LIABILITIES AND EQUITY 507 869 1,408 1,701 2,152 2,633 2,834 3,063 3,330 RETURN ON AVERAGE REVALUED ASSETS(%) 14.22 23.90 21.09 15.10 20.79 21.41 19.37 19.16 19.10 FEIROLEUM AUTHORIFY OF THA1LAND(PTT) NATURAL GAS OPERATION(ONG) SOURCES AND AF'FLICATIONS OF FUNDS (IN US MILLION DOLLARS) 1982 1983 1984 1985 1986 1987 1988 1989 1990 SOURCE', INCOME BEFORE INTEREST 59 149 210 202 328 385 370 367 367 l'EFPRECIA'TION 22 24 32 54 85 100 128 135 143 INTERNAL. CASH GENERATION 81 173 242 256 413 485 498 502 510 WORLD BANK/OFEC DRAWEDOWN 20 20 20 10 - - - - - CDC DIRAWDlOWN -- 7 18 - EXIM BANK DRAWDOWN 31 40 40 - - OTHER L/T LOAN 40 89 191 125 151 120 - _ S/T LOAN - - - - - - GOVT CONTRIBUIIONS 47 27 49 -- 4 16 - - - INCREASE IN ACCOUNTS F'AYABLE 5 42 16 (28) 39 30 (16) 9 11 TOTAL SOURCES 224 398 576 363 607 651 482 511 521 co, AFF:'LICATIONS CAPITAL EXPENDITURE 91 284 360 174 196 196 - - - INTEREST ON BORROWINGS 42 55 84 114 137 144 142 122 103 LOAN REPAYMENT:WORLD BANK/OPEC - - - 3 7 9 10 10 10 CC - - - 1 2 2 2 EXIM BANK - 12 12 16 20 20 20 20 20 OTHER BORROWINGS - 10 19 19 19 112 132 126 S/T LOAN 58 - - - TOTAL DEBT SERVICE 100 67 106 152 183 1.93 286 286 261 INCREASES IN CASH 7 23' 92 26 156 190 168 208 241 INCREASES IN ACCOUNTS RECEIVABLE 26 24 16 9 71 65 26 15 18 INCREASES IN INVENTORIES -- - 2 2 1 7 2 2 1 TOTAL. AF'F'LICATIONS 224 398 576 363 607 651 482 511 521 >S llEBT SERVICE COVERAGE 1.93 2.58 2.28 1.68 2.26 2.51 1,74 1.76 1.95o PETROLEUM AUTHORITY OF THAILAND(PTT) MARKETING UNIT(MKT) FROLDUCTS----VOLUME,F'RICES,MARGINS 1982 1983 1984 1985 1986 1987 1988 1989 1990 RFETAIL SALES VOLUME LPG (000 TONS) LP. -- HOUSEHOLDS 34 40 50 57 66 75 86 98 LFG -- INDUSTRY 9 10 11 14 16 18 20 23 25 IF:t -T'RA N S PORT 14 22 46 63 91 108 128 147 166 Tl:TlAL LFG 50 66 97 127 164 192 223 256 289 GASOLINE (MIL-LION LITRES) 590 621 607 593 617 640 670 687 704 .JET FUEL. 113 115 120 125 130 135 138 145 150 KEROSENE 150 153 160 165 170 175 178 185 190 DiESEL 1,440 1,500 1,510 L,510 1,557 L,604 1,650 1,700 L,770 FUEL OIL 2,020 1,850 1,750 1,680 1,460 1,500 L,540 1,490 1,470 F'R I C'E I (;C $ G /T CN) I H C U- HOUSEHOL.L,S 423 457 491 525 557 590 626 663 703 LPG INDlUSTRY 411 444 478 511 542 574 609 645 684 c I F R i'F;fANSFO R T 411 444 478 511 542 574 609 645 684 GiAE4SOL. INE ($,'LITRE) 0.50 0.54 0.'58 0.62 0.65 0.69 0.73 0.78 0.82 JF:-I FUEL 0,32 0.35 0.37 0.40 0.42 0.45 0.47 0,50 0.53 ~~~~~~~NE 8:~~~~~~~~~~~~~~~ ~~8.1 8q~ 8:~~ 8:~~ 8 . 0,4 12 0. 44 +RtSEE ° * 8't 8 337 8s 8.4375 o 8 48 8050 0.53 FUEL OIL 0.19 0.21 0.2 0.24 0.25 0.27 0.28 0.30 0.32 GROSS MARG I N 1I:: G T 0 N l-G HOCUSEHO)L,D S 91 98 106 113 120 1 27 135 143 151 FP(.i INDiUSTRY 79 86 92 99 105 111 118 125 132 LFG VEHICLES 79 86 92 99 105 111 118 125 132) GASOI.JNE($/I TRE) 0.02L 0.022 0.024 d.O25 0.027 0.029 0.030 0.032 0.034 .JE:T F'UEL 0C.070 0.075 0.081 0.086 0.092 0.097 0.103 0.10'i 0.116 F EROSENE 0.017 0.019 0.020 0.021 0.023 0.024 0.025 0.027 0.029 - I E. S E L.. 0 015 0.016 0.017 0.018 0.019 0.020 0.021 0.023 0.024 FUEL O11L 0.004 0.005 0.005 0.005 0.006 0.006 0.006 0.007 0.007 PETROL.EUJM AUTHORITY OF THAILANDL(PTT) MARKIETING UNIT(MKT) INCOME STATEMENT (IN Mi1L.LION lUS EiOLLARS) 1982 198 3 1984 1985 1986 1987 1988 1989 1990 F;E: VEN UES FRETAIL. L PG .1 30 47 66 89 1I1 136 166 198 E UI K L.GF'G M R6 :i: N J 4 4 17 1 6 15 14 TOT!A. I. LEG' 2 1 30 47 70 93 1 28 152 181 2 1 27 ii H F. : ETF'EPOL p(E IM PFRODIUCTS 1 220 1 321 17 397 1L 471 1t 538 1 , 684 17838 1 9880 2. 1 44 T I I-l ER R E VEN 2 E C 28 29 31 26 2g 2S 29 31 33 TOTAL REVENUES 1 269 12 ,Y380 1 t 4 7 '; 17 5 67 t 656 1 839 2 019 2 t192 2 3 8 9 I. X'EN S ::3 C, OST OF GOODC)OCS SiOL.ID 1t2 05 1, ; 309 1 u 3 9;; 1 483 1i s 63 1 7 21 12 I I 890 9 7 051 29 2 34 'F-.i IN INt AD CO11M coST 27 29 31I 33 3J8.j 3 7 3 9 41 43 D:E F. ",EC'IAT: ON C!' 4 5 5 - .) 2S 34 45 55 TO)TAL.. EXPENSES iY236 1 343 17431 1 528 1,i620 17786 1 7963 2:77137 27332 NE:IT INCOt:ME DEFJORE INTER:ElS'3T 33 37 4< 39 36 53 56 c5 ;;' 7 I N 7 E: P E S 30 6 8 1 7 2 1 3 6 3 6 36 N E: T I NMC O M E 3 3 1 36 2 1 i 3 0 30 1'9 21 ()F'PRATING RZATIO 0.97 0.97 0.97 0.98 0.98 0.97 097 0.97 0+.98 PETROLEUM AUTHORITY OF THAILAND(FPTT) MARgk&E UYAT(KT) BAA"E S^EET (IN US MILLION DOLLARS) 1982 1983 1984 1985 1986 1987 1988 1909 1990 A S SETS REEVALUED GROSS F'IXED ASSETS 49 53 57 192 238 312 368 528 570 LESS: ACCUMULATED DEPRECIATION (16) (22) (29) (40) (59) (85) (118) (160) (215) NEI' REVALUED FIXED ASSETS 33 31 28 152 179 227 250 368 355 WORN IN PROGRESS - 33 101 12 38 75 112 - - TOI'AL REVALUEDl F'IXEli ASSETS 33 64 129 164 217 302 362 368 355 OTHER ASSETS 12 12 12 12 12 12 12 12 12 CURRENT LIABILITIE'S TNVENTORIES 185 198 212 225 237 257 283 308 335 OTHER CURRENI' ASSETS 21 21 21 21 21 21 21 21 21 ACtCOUNTS RECEIVABLES 151 163 1'75 193 205 238 259 279 302 CTASH 3 10 9 14 13 2 2 23 60 TOTAL. CURRENT ASSETS 360 392 417 453 476 518 565 631 718 T'OTAL ASSETS 405 468 558 629 705 832 939 1,011 1,085 LIABILITIES s EQUITY CAF'ITAL 79 81 83 84 84 84 84 84 84 FRETAINEDL EARNINGS 33 64 100 122 137 167 197 216 237 REVALUATION RESERVES 22 24 29 38 47 60 77 98 118 TOI'AL EQUII'Y 134 169 212 244 268 311 358 398 439 LONG-TERM LOAN - 22 55 70 102 154 181 177 171 OTHER LIABILITIES 22 22 20 23 29 34 41 52 62 CURRENT FORTION,L/T LOAN - - 2 9 11 13 13 13 13 S/I LOAN 21 51 51 51 51 51 51 51 51 ACCOUN'TS FAYABLES 228 204 218 232 244 269 295 320 349 TOTAL CURRENT LIABILITIES 249 255 271 292 306 333 359 384 413 TOTAL LIABILITIES 271 299 346 385 437 521 581 613 646 TOTAL LIABILITIES & EQUITY 405 468 558 629 705 832 939 LO'LL 1,085 CURRENT RATIO 1.45 1.54 1.54 1.55 1.56 1.56 1.57 1.64 1.74 RETROLEUM AUT'IIRITY OF THAILAND(PTT) MARK;E'ING UNIT(MKT) SOURC'ES ,ND USES OF FUNDlS (IN US tILLION rIOLLARS) [1982 l,':;'3 1984 1985 1986 1987 1988 1989 1990 SOURfiCE S' :[NCOME BEFORE INTEFREST 33 2 44 39 36 53 56 55 57 hDLI ' EllFPREC'IATION 4 5 5 12 2_2 28 34 45 55 INTER;NAL CASH GENERATED, 37 2 49 51 58 81 90 100 112 WORLD BlAl NK0PEC EIRAWIIOWN - 7 30 20 3 - - - - OTHE:R L/T BORROWINGS -- 5 5 5 40 65 40 10 7 I';/T L O A N - 0 - - - EQUITY 75 2 2 1 - - - -- rINC'REASES IN A/F (83) (24) 13 14 12 25 26 25 29 TOTAL SOURCES 29 72 99 91 113 171 156 135 148 hPPLICATr [ONS C'APITAL EXPENDITURES - 1 61 36 60 90 62 20 12 INTEREST 30 8 13 17 21 28 34 36 36 WORLD BANK/OPEC REPAYMENT - - - - - 2 4 4 4 OTHER LOAN REPAYMENT -- - - 2 9 9 9 9 9 S/T REPAYMENT 70 - -- - - - - - - TOTAL DIEBT SERVICE 100 8 13 19 30 39 47 49 49 INCREASES IN INVENTORIES 51 13 14 13 12 20 26 25 27 INCRE'ASES IN A/R (125) i3 12 18- 12 33 21 20 23 INCREASES IN CASH 3 7 (1) 5 (1) (11) - 21 37 T'OTAL AF'F'LICATIONS 29 71 99 91 113 171 156 135 148 DEBT SEFR.VICE COVERAGE 1.23 5.25 3.77 2.68 1.93 2.08 1.91 2.04 2.29 - 93 - ANNEX 5.15 CORPORATE AND FINANCIAL STATEMENT (Schedule 6 of Loan Agreement) 1. In the carrying out of its operations in accordance with Section 4.01 of this Agreement and the provisions of the PTT Act, the Borrower shall earn a reasonable rate of return on its fixed assets as revalued annually. 2. The Borrower shall (i) conduct the affairs of each of its operational units in such manner that financial, pricing and economic policies of each such unit will be determined independently and (ii) ensure sufficient cash flow to each such unit to enable it to meet its operating and maintenance costs and debt service needs. 3. The Borrower shall restrict its borrowing or increase its profits, as appropriate, to ensure tha for each fiscal year of the Borrower its financial cash generation before payment of interest on loans will cover the Borrower's debt service requirements by a margin comparable to that for industry generally and will cover capital expenditures to the extent they need to be financed from income. 4. The Borrower shall prepare, on an annual basis, a five year corporate plan including, among others, Borrower's investment program, a forecast of its profitability, the projected balance sheets and cash flow, a justification for its major investments, together with the details of its pricing, economic and financial policies. The Borrower shall upon the Bank's request, promptly furnish such plan to the Bank for its comments. 5. The Borrower shall cause such of its subsidiaries (as defined in Section 5.02 (c) of this Agreement) as may be agreed to between the Bank and the Borrower to observe the obligations of the Borrower set forth in this Schedule to the extent to which such obligations shall or can be applicable thereto, as though such ogligations were binding upon such subsidiary. KTNGDIOM OIF THAIIANDI PFTROL.EtLJM AUTHORITY OF THATI.ANO(PTT) GAS SFPARATION F:lANT PROJFCT ECONNnmc ANALYSTS (IN 1982 I1S MTIlION DOLLARS) 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 PRODUICTION DRY GAS(MMCFD) - - 53.8 215.0 260.0 232.0 232.0 232.0 232.0 232.0 232.0 232.0 LPG(O00 TONS) - - 51.3 205.2 247.6 247.6 247.6 247.6 247.6 247.6 247.6 247.6 PROPANE(OOO TONS) - - 45.7 182.9 220.8 220.8 220.8 220.8 220.6 220.6 220.8 220.8 ETHANE(OOO TONS) - - - - - 354.8 354.8 354.8 394.8 354.8 354.8 354.8 NATURAL GASOLINF(OOO TONS) - - 17.0 68.0 82.1 82.1 82.1 82.1 82.1 82.1 82.1 82.1 BENEFIT DRY GAS - - 113.8 471.2 589.4 498.4 514.5 530.6 546.6 562.7 385.9 401.9 LFPG 17.1 ~~mn fl 00510.510. 109.8 113.1 116.4 119.9 IMPORTED LPG SUBSTITTIITON - 7662, 90.2 }02 10355 1066 10998 113.1 t116.4 119.9 EXPORT - - 17.1 10.7 6.6 - - - - - - - PROPANE - - 16.9 67.1 82.9 86.1 89.3 92.7 96.4 99.3 102.2 105.3 IMPORTET DITESFI SUBSTTTIJTION - - 12.8 3,.6 44.7 51.9 59.3 67.2 76.t 78.4 80.7 83.2 EXPORT/PPETROCHFMICAl. INDUSTRY - - 4.1 -.5 38.2 34.2 30.0 25.9 20.3 20.9 21.5 22.1 ETHANE - - - - - 139.8 144.0 148.3 152.8 t57.4 162.1 166.9 NATURAL GASOIINF - - .5. 2 . 7 28.2 29.0 29.9 30.8 31.7 32.7 33.7 34.7 TOTAL BENEFIT - - 193,3 63'i.2 797.3 893.8 881.2 909.0 937.3 965.2 800.3 828.7' COSTS CAPITAL EXPENDITURE 25.0 164.0 64.0 VARIABLE COST FEED GAS COST - - 141.8 Su/.3 733.2 757.6 782.1 806.5 831.0 855.4 586.6 611.0 CONDENSATE COST - 2 .1 8.4 8.4 8.4 8.4 8.4 8.4 8.4 6.4 8 .4 OP'ERATING COST- - 3.2 1.2.7 12.7 12.7 12.7 12.7 12.7 12.7 12 .7 12.7 TOTAI, VARIABIF COST - - 147.1 608.4 754.3 778.7 803.2 827.6 R52.1 876.5 607.7 632.1 TOTAL COST 25.0 164.0 211.1 608.4 754.3 778.7 803.2 8?7.6 852.1 876.5 607.7 632.1 NET SAVINGS (25.0) (164.0) (57.8) 29.8 43.0 75.1 78.0 81.4 85.?2 8.7 192.6 196.6 MC H ACC NPV SAVINGS (22.3) (153.0) (194.1) (167.1) (1,355, (91.0) (50.0) (1?20) ?3.3 55.9 114.9 168 6 PAYBACK PEROTD (DISCOUNTED AT 1,2%) 5.0 YFAR RETURN ON INVFSTMFNT = 29.227% KINGRTOM OF THATI..ANTI FETROl FUM AU!THORITY OF THATXIAND (F'TT GAS SFF'ARATION FlANT PRO,lFCT ECONOMIC ANALYSIS (]N 1982 ll8 MT I TON rOLI ARS) 1994 1995 1996 1997 1998 1999 PRO LJ C TI ON DRY GAS(MMCFD) 232.0 232.0 232.0 232.0 232.0 174.0 LPG(OOO TONS) 247.6 247.6 247.6 247.6 247.6 185.7 FROPANE(000 TONS) 220.8 220.8 220.8 2?0.8 220.8 165.6 ETHANF(000 TONS) 354.8 354.8 354.8 354.8 354.8 266.1 NATURAL GASOLINF(000 TONS) 82.1 82.1 82.1 82.1 82.1 61.6 BENEFIT DRY GAS 410.0 41.8.0 434.1 442.1 450.2 349.7 LF'G 123.5 127.? 1.31.1 135.0 139.1 107.4 IMPORTED L.PG SUBSTITIITTON 123.5 127.2 131.1 135.0 139.1 107.4 EXFORT - FROPANE 108.5 1.11.7 15.1 118.5 122.1 96.9 IMFORTFD DIESEL. SUBSTITUJTION 85.7 88.2 90.9 93.6 96.4 96.9 EXF'ORT/PPETROCHFMICAl INrIlISTRY 22.8 23.5 24.2 24.9 25.7 - ETHANE 1.71.9 177.1. 182.4 187.9 193.5 149.5 NATURAL GASOLINF 35.7 36.8 37.9 39.0 40.2 31.1 TOTAL BENEFIT 849.6 870.8 900.6 922.5 945.1 734.6 COSTS CAF'ITAL EXPENDITURE VARIABLE COST FEED GAS COST 623.2 635.4 659.9 672.1 684.3 531.6 CONDENSATE COST 8.4 8.4 8.4 8.4 8.4 6.3 OF'ERATING COST 12.7 12.7 12.7 1.2.7 12.7 9.5 TOTAL VARIABlF COST 644.3 656.5 .681.0 693.2 705.4 547.4 TOTAL COST 644.3 656.5 681.0 693.2 705.4 547.4 NET SAVINGS 205.3 214.3 219.6 229.3 239.7 187.2 ACC NF'V SAVINGS 218.6 265.0 307.4 346.9 383.7 409.3 PAYBACK PFROTP (DISCOUINTED AT 12%) 96 - Annex 7.01 Page 1 of 2 SELECTED DOCUMENTS AND DATA AVAILABLE IN THE PROJECT FILE A. The documents below relate to the second natural gas pipeline project, and are useful background for this project. - NEA Energy Statistics 1977 - Thai Petroleum Legislation Petroleum Act 1971 Petroleum Act 1973 Petroleum Income Tax Act 1971 Ministerial Regulations - Petroleum Authority of Thailand - Act 1978 - Sofregaz (consultants, France) Gas Market Studies (1978) - DeGolyer and MacNaughton Reserve Estimates for four gas fields - Fluor (consultants, USA) Pipeline Optimization Study - NGOT Accounts 1978, 1979 - OFO Ac.counts 1978 - Chase Manhattan Financial Reports (1978, 1979) B. Studie!s fngnar -d u. .-e secc pipeline projec: - Lummus (consultants, U A) Refinery Expansion i198L) Market (1981) - Davy McKee (consultants, UK) Gas Utilization Stucy (1982) C. Documents relating to LPG project - NEA Thailand Energy Situation (1980) Oil and Thailand (1979, 1980) - PTT LPG Market Development (1981, 82) Survey on Gas Use for Automobiles (1981) Overview of Development Projects (1980, 1981) Feasibility Study on Gas Processing (1980) Performance Test of LPG (1981) Financial Statements (1979, 80) Transmission System, PTT Manpower and Mobilization Requirements (1980) - R. Rose (consultant, Singapore) LPG Study (1981) - Population and Community Development Association (PVO, Thailand) Fuel Utilization Survey (1981) - Chiyoda (Consultants, Japan) LPG Extraction Plant Feasibility Study (1980) 97 - ANNEX 701 Page T5--2 - Fluor (Consultants, USA) PTT Training Program - Management Orientation (1980) Optimization study (1980) Gas Separation Plant Cost Update (1981) - Williams Brothers (Consultants, U.S.A.) Natural Gas Transmission and Distribution Projects (1.981) - Main (Consultants, U.S.A.) Power Development Plan (1981) - New Zealand Transmission Co. Inc. (Consultants, New Zealand) Motor Vehicle Conversion (1981) I I 1" ~~~~~~~ ~~~~~~~~~~~~~~~BLRMOA 21-> 7 t~~~~~~~AO PEOPLE'S DEM. REP a,n ~A I I~~~~~~~~~~~~~~N aRS Ha, SN '1- -~~~~~~~~~~~~~~~~~~~~~~~~~SIGP(? -B~ ~ ~ ~ ~ O T rL_,o TA j1~ - is" OPT"' ' DIeAOHB/~~~~~~~~~4 C,~~~~~P 1 x '' V C; \~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ CENTI4AIL >' Sea - -~~~~~~~~~~'P h 10"~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~2 if ~~~~~~~THAILAND - ~,LIQUIFIED PETROLEUM GAS PROJECT ENERGY I PROPOSED BULK ST-RADE AREAS 10o" / /0IPRODCIAL BOUNDARIES /~~~..J 0o~~~~~g ------ ~~~~~REGIONAL ROU-SARIES 1 04" '196$ - - - ISTEENATIONAL BOENDAR ED BANGOKS BA'NGSTE`POWER PLANT I N B~~~~~~~~~~~~~~~~~~~~~~~~AA OONA POAES PLANE PLANTLS A PTaRS"RB J Na ~~SD,5 Th--.T1a SOLAIPL I'l SEPOC N OPERAT ON DENTER GA0 APIPELINE 6" \EO ~~~~~~~~POWER PAINTS aT-aaA~g TORORPSEY S-W.PE OIM RHAO I A R ~ C. ~~> TES1AIEIL.. O'PI\O TERMINA 0 50 100 200C Sa1. ,Ra0 SD 10RLS\N'l'olEOLES\a, I . ISANSPER ' if 1C ' C -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~N 9r~~~~~~~~~~~~p'C