ktpr \*rl ut INI. Paraguay: Issues and Options in the Energy Sector ( ot4xr 1984 Report'of the Joint UNDP/World Bank Energy Sector Assessment Program Thi9, document 1ias a resiricted distribution. Its contents na'v not b}e d-iscifoser without authorization from the Government, the UNDP cr the W00)r:d Bank. :-. Y *, . ,; - ;Ji - - , ._. U.: .TT~~Te ; ' U JOINT UINDP/WORLD BANK ENERGY SECTOR ASSESSMENT PROGRAM REPORTS ALRFADY ISSUED Countrv Date llumber Indonesia -hover-ber 1981 5 4A 3-I T%n) Maur-it i us Dceccmber 193t1 35 1 0-AS K'en a '>hv 19892 3830-KE Sr i JanlT May 1 3 3792-CF ,.inba1-S.l I uric 1929 3765n-ZITM hi t i nle 1 R_ 3672-H A i'apua.l ':e^- r;u n.:*Tne I Q-,- o929 3",3-PNG. Thirunrtl?it .. urne 1,992 37782--, ' R-.:':nd a .. llr.e '9°, 3779-PRW; -.Jia'.,vad.t4l's OrictoDbur iQP' 3373-BD Zanbia ~~~~~anu~;±Zv L 93 ll-ZA T -,Ir- *enruar v S.9 3377-77 Boliv.ia pril 1a9 -°,3 7 9 -3 2 .: -21. d.une 1933 2 '4 -Fli So )I'flfl s 'a ;1 .T- nz' 13 4_ 4-01, S2 neg._ I !,s1'.- 192)3 41312-Sr i;l a n 1 - ;0 5 2'41 1- , :ia .. *2.3 - 9753 -r; r'.ust 3 4440-U;r i:enal r'rrt S-)+033 4474-NE!' Cnbiha ;'rTver. r 1933 '7/3-M Perlu T;j nva - y 1 4677 PE Costa -lica nunrv 984 465CR L,esot-'-ho .Ja n1;;l -; 1034 4676-LSf) t-evrh0i le- I'. v984 :;693-SEY 'jflrocc,C 'Ca r fl2< ; I'S7-MO Por t-l Aprilr 9. '1-9 . ger .T; 19 T642-NIP .t'.ll'opia .ulT 1984 i&741 aric the ,renad.ine Septenber 1984, 5103-ST St. L.u1cia seprenber 19P:4 51 1-SLI FOR OFFICIAL USE ONLY REPORT NO. 5145-PA PARAGUAY ISSUES AND OPTIONS IN THE ENERGY SECTOR OCTOBER 1984 This is one of a series of reports of the Joint UNDP/World Bank Energy Sector Assessment Program. Finance for the work has been provided, in part, by the UNDP Energy Account, and the work has been carried out by the World Bank. This report has a re- stricted distribution. Its contents may not be disclosed without authorization from the Government, the UNDP or the World Bank. ABSTRACT The main energy issues in Paraguay concern the formulation of a long-term strategy for expanding electricity utilization, problems arising from a growing imbalance in fuelwood supply and demand, high petroleum supply costs, and the need to achieve better coordination of overall energy policies. The availability of electric power has been assured thanks to new generating capacity from the 12,600-MW Itaipu hydroelectric project. The pace at which electricity demand will grow in Paraguay, however, will depend in large part on whether or not electricity-intensive industries-- for which the electricity price is frequently crucial--are established. In any case, good opportunities exist for accelerating electrification i2 the interior of the country. The issues in the fuelwood sector are of particular importance because of Paraguay's heavy dependence on that resource as a fuel. The likelihood of a serious supply problem in the future is masked by the overall abundance of fuelwood in the present. Indeed, the rate at which wood is being burned for land clearing is already becoming extremely serious, and the demand for charcoal anticipated by the country's new steel plant might well add to the problem. Paraguay is totally dependent on imports for petroleum and petroleum products. The main requirement in the petroleum subsector -- to reduce supply costs -- can best be approached by alternatives to domestic refining. A related issue concerns efforts to promote the search for hydrocarbons in Paraguay. Effective treatment of energy sector problems will require imr- proved government management of overall sector policies and activities. To achieve this, it would be appropriate to establish a Cabinet-level energy commission supported by a small technical secretariat to provide appropriate coordination of the energy sector. ACEPAR Acero del Paraguay S.A. ANDE Administracion Nacional de Electricidad APAL Alcoholes Paraguayos Ltda. BNF Banco Nacional de Fomento CODNAC Comision Nacional de Alcoholes Carburantes COSUDE Cooperacion Suiza para el Desarrollo DGRM Direccion General de Recursos Minerales ELETROBRAS Centrais Eletricas Brasileiras, S.A. GOP Government of Paraguay IB Itaipu Binacional IBR Instituto de Bienestar Rural IBRD International Bank for Reconstruction and Development IDB Inter-American Development Bank INC Industria Nacional de Cemento INTN Instituto Nacional de Tecnologia y Normalizacion MAG Ministry of Agriculture MPWC Ministry of Public Work and Communication NEC National Energy Commission OPEC Organization of Petroleum Exporting Countries PETROPAR Petroleos Paraguayos S.A. REPSA Refineria Paraguaya S.A. SEAG Servicio de Extension Agricola y Ganadero SFN Servicio Forestal Nacional SIDEPAR Siderurgica Paraguaya S.A. STP Secretaria Tecnica de Planificacion ABR.EVIATIONS B Billion = 109 14W Megawatt Btu British thermal unit MWh Megawatt hour bbl Barrel T Toni bd Barrel per day TOE Tons of Oil m3 Cubic meter Equivalent GW Gigawatt TWh Tera watthour GWh Gigawatt hour K Thousand kcal kilocalorie Kgoe Kilograms of oil equivalent kj Kilojoule km Kilometer kV Kilovolts kVA Kilovoltampere kW Kilowatt kph kilometers per hour kWh Kilowatt hour ln natural logarithm LPG Liquified Petroleum Gas LV Low Voltage m3st cubic meter stere or stacked wood (about 70% solid) mV Medium Voltage MVA Mega voltampere OJRRRICT EQUILVALNTS (1983) Official exchange rate US$1 - 126 guaranies Average effective exchange rate in 1983: 1US$ = 280 guaranies MERGr WONVE ORS FACTORS Petroleum Crude Oil 139 TOE - 1,000 bbl LPG 93 TOE - 1,000 bbl Gasoline 124 TOE - 1,000 bbl Kerosene & Jet Fuel 133 TOE - 1,000 bbl Diesel 139 TOE 1,000 bbl Fuel Oil 143 TOE m 1,000 bbl Ethanol 80 TOE 1,000 bbl Biomass Fuelwood 360 TOE 1,000 ton Charcoal 690 TOE 1,000 ton Bagasse 209 TOE 1,000 ton Coconut Shells 500 TOE 1,000 ton Coal 700 TOE 1,000 ton Electricity 86 TOE/Gwh This report is based on the findings of an energy assessment mission which visited Paraguay in December 1983. The full-time members were Bernard Zinuan (Mission Leader), Gabriel Sanchez-Sierra (Energy Planner), Miguel Bachrach (Economist), Hernan Garcia (Power Engineer), Alberto Brugisn (Rural Electrification Specialist), John Shillingford (Petroleum Specialist), and W. L. Bender (Forestry Specialis.t). The following consultants participated on a part-time basis: Tom Ritter (Petroleum Explorationist), Sergio Trindade (Energy Conservation Specialist), Fernando Lecaros (Power Economist), and Pedro Diaz de Souza (Steel Processing Specialist). lANaI OF (DNTDNTS Page SUMHARY AND RECOMMENDATIONS ........... ........... i I. ENERGY IN THE ECONOMY .............................. .......... 1 Country Background and Economic Situation ................. 1 Energy and the Balance of Payments ......................... 2 Energy Balance, 1982....................................... 3 International Comparisons ............. . ..... . 3 Economic Prospects and Energy Projections.................. 4 II. ENERGY DEMAND 1MANAGEMENTo . .. *5 * * .. so .... * ......... .. . ...... 7 The Structure of Energy Demand............................. 7 Energy in the Household Sector....o.o... o.................. 7 Energy in the Transport Sector......o......................... 9 Energy in the Industrial Sector.o.......................... 13 Recommendations ....... o.................O 17 II. ECRITY............. ......................... Background ....... m ......... m...... ............ .............. a... 19 Basic Resources and Existing Facilities ..................... 19 Electricity Growth and Demand Forecast..................... 20 Electricity Tariffs ..........55 ........ o................. 22 Expansion Program. ...... ........ .24 Alternatives for Increasing Use of Electricity for Productive Purposes........ .............................. 25 Electrification of the Interior............................ 25 Itaipu Status................................28..... * 28 Recommendations. ........................................... 32 IV. FUELWOOD AND CHARCOAL......................................... 33 Fuelwood Spl ..................... 33 Fuelwood Demand and Prices.................... ......... .... 36 Organization of the Sectore.............o . .... .......... 38 Financiel Constraints ......................................... 37 Manpower Constraints..................... ...........O.... 37 Reforestation Prcgrams ............. ....... .......... ...... . 38 Fuelwood Recommendations........................o.......... 39 Charcoal .............................................. 40 Supply and Demand .......................................... 40 Options for ACEPAR's Supply of Charcoal ..................... 41 Recommendations on ................. ....................... 42 V. PETROLEUM SUPPLY............................................. 44 Petroleum Product Prices........................... ........ 46 Petroleum Supply Issues and Options ........................ 48 Refinery and Petroleum Supply Options ...................... 49 Petroleum Product Storage and Inventories .................. 50 Organization Management and Financial Aspects (PETROPAR) ................................ 00* ....... 51 Recommendations** ..... ................................. eoe.. 51 VI. PETROLEUM EXPLORATION .....................*... 54 Overviewo..............*.......e**......*..&.......o.......*a... 54 Geology ..*...*9& &.9....v.so... o.e.o ...................... 54 Past Exploration ........... ........................ o ................ 55 Current Exploration and Outlook............................ 56 Petroleum Legislation...o.....*.*....**o ......*.. *...... 56 Organization of Petroleum Exploration and Requirements..... 56 Recommendations ........ .... .o....................................... 58 VII. RENEWABLE AND OTHER ENERGY RESOURCES............ 59 Ethanol Program..o .... .......................-.-.0 ec... 59 Recommendationss ............. 62 Methanol P.o p o s al..... 64 Solar Energy - Present Situation................-......... 64 Wind Energy........-e.......... 66 Wood Gasification... ......................... .a..o. 67 Sall Hdo68 Bimal y ............ ....*.........*........O..*. 68 VIII. ENERGY SECTOK CDORDINATION, INVESTMENT AND TECHNICAL ASSISTANCE ................. 69 Energy Sector Coordination and Management.................. 69 Energy Investment ........... .... ..... e................ 70 Technical Assistance Reqient..... 70 ANNEXES 1. Overall Energy Balance - 1982....................... 73 2. Overall Energy Balance - 1990 ..... ...... ... 74 3. Potential Energy Savings in Transport..............n 76 4. Potential Energy Savings and Inter-fuel Substitution in Industry.ut .... .... ................ ........ 77 5. Estimated Electricity Demand Growth (1983-1990)............... 78 6. Basis Used for Economic Evaluation of Electrification Projectsr............e c t s ................... 80 7. Itaipu - Generation Cost. ..c... ............... ..... * 83 8. Comparison Between Itaipu and Yacyreta Treaties............a 84 9. Preliminary Calculations for Fuelwood Reforestation Program.. .c.. e .... o ........ c ................ 86 10. Estimated Costs - Proposed Reforestation Program and Fuelwood Studieso.. ........................ 88 11. Cos.; of Charcoal Production for ACEPAR........................ 89 12. Alternative Sources for Charcoal Procurement by ACEPAR. c.................... ............ 90 13. Comparison between Diesel Oil and Gasoline Pricesi.......c.... 93 14. Petroleum Prices, Taxes, and Distribution Coststsee.cg. 95 15. Cost of Refinery Operation vs. Product Import Costs ................................................ 96 16. Calculation of 1982 Supply Costs for PETROPAR ................. 97 17. Petroleum Storage Capacity and Inventories .................... 98 18. PETROPAR Refinery Crude Slate ................................. 99 19. Exploration History Chart ....................... .... .... 100 20. Ethanol Tables ........................................... 107 21. Methanol Proposal ........................................... 110 22. Global Monthly Mean Solar Radiation . ............. 114 MAPS IBRD 14041: Country Map IBRD 18174: Petroleum Permits, Concessions, and Exploration Surveys IBRD 18240: Energy Resources IBRD 18241: Power and Potential Areas of Electrification System SUMMARY AND RECOMMENDATIONS 1. Paraguay has substantial, though diminishing, biomass resources, and it shares with Brazil and Argentina a vast hydroelectric potential, a large part of which has only been developed recently (see IBRD Map 18240). Despite the presence of these resources, Paraguay's per capita consumption of energy (500 kgoe) is low compared with the Latin American average (1,000 kgoe). The country relies heavily on biomass as a fuel for households and industry and it imports 100% of its petroleum requirements, mainly for transport and commercial farming. Main Energy Issues 2. Paraguay is confronted by the following principal energy issues: (a) the need to formulate a long-term electricity expansion strategy; (b) a growing demand-supply imbalance and waste in the fuelwood sector; (c) high petroleum supply costs; (d) petroleum exploration promotion; and teJ a lack of energy policy coordination 3. Resolution of these energy issues can only be achieved over a relatively Long period of time. Considering the Covernmenzt's awareness of the need to resoLve them, however, a good start can be made and mea- surable resuLts attained if a number of steps are taken. Chapter VIII of the report recommends technical assistance designed to help tackle some of the main issues, as well as to launch priority action programs. 4. Some of Paraguay's choices in che energy sector are affected by factors Like Itaipu electricity tariffs. the structure of which is regulated by an international creaLy and cannot be set unilaterally by Paraguay (paragraphs 3.35-3.39). :n addition, there are no known indi- genous hydrocarbon resources in the country. Despite these Limitations, options are available to heLp resoLve Paraguay's main energy problems. These are summarized below. Electric Power 5. Huge amounts of energy -- on the order of 6,300 MW -- from Itaipu will be available to satisfy Paraguay's generation needs for the foreseeable future (the country's peak electricity demand in 1982 totaled - ii - about 190 MW). Yacyreta, the forthcoming joint hydroelectric venture with Argentina with an initial installed capacity of 2,700 MW, is not expected to be needed for domestic consumption in Paraguay. In any event, the growth in the country's electricity demand will depend heavily on whether or not electricity-intensive industries -- for which the electricity price is frequently crucial -- are established. As indicated above, the Itaipu plant is not part of Paraguay's system; the tariff will be set in accordance with conditions stipulaced in the treaty between Paraguay and Brazil establi'shing Itaipu Binacional. Since some treaty provisions affecting tariff-setting are expected to be adjusted, it is not possible at this time to estimate the precise rate Level that will emerge. The assessment mission, however, has made a preliminary estimate for the Itaipu tariff in order to analyze the possible power sector development outlook for the country (paragraph 3.36). 6. It is important to note that a sizeable amount of Itaipu's energy will go unutilized during the first three to four years of opera- tion because of lower-than-expected demand in Brazil. At least for 1984, during which period the first 700-MW unit began operating under test conditions, ANDE must supply the load for testing purposes. The testing period for additional units will continue until about 1986, when the plant is scheduled to begin commercial operations. 7. The long-term issue will be how to maximize productive electricity use in Paraguay. The mission agrees with recent studies indicating that Large, electricity-intensive industries in Paraguay do not show promising prospects in the short or medium-term. 8. The outlook for electrification of the country's interior, however, is indeed attractive, especially in the Eastern Region of the country. And for the long run it seems clear that the most effective growth strategy for expanding electricity utilization in Paraguay lies in its application in agro-industry and househoLds in the country's interior. The assessment mission identified some 23 electrification projects in productive agricultural areas of the Eastern Region for which preliminary analyses indicated an economic rate of return of at least 12Z; these projects were verified as having the least-cost solution compared with other, local generation alternatives. 9. PreLiminary analysis shows that ANDE's tariffs are lower than estimated long-term marginaL costs. However, since the final outcome on the price of Itaipu energy will affect the analysis, a revision of the tariff level will be necessary when the price of Itaipu's electricity has been set. Fuelwood 10. Fuelwood, which accounts for 64% of total energy consumption in Paraguay, is the dominant fuel in the country. This situation reflects the hitherto plentiful supply of fuelwood and its substantial price advantage as compared with other sources of energy. The favorable supply - iii - of land with Paraguay's expanding agricultural frontier, particularly in the Eastern Region. About 159).000-200,000 ha a year, or 3-4Z of all economically exploitable forests, have been undergoing deforestation. 11. On the demand side, a related issue concerns the considerable amount of fuelwood waste, particularly in household cooking. The waste is more evident in the rural areas, where most cooking is done using open fires on the ground. Some stove trials are being carried out to correct this but with rather expensive units. A better option would be for the Government, through the Hinistry of Agriculture, to encourage and work with the private sector on a pilot program using efficient, but cheaper, stoves. Substantial fuelwood conservation also could be achieved if a way could be found to collect and sell the large amount of wood waste from the numerous small lumber mills in the country. 12. One other important factor could worsen the fuelwood situation. The national steel plant, ACEPAR, now nearlng completion, is designed to operate with charcoal blast furnaces. The plant's projected charcoal requirements, 130,000 tons a year at full capacity, would more than double domestic demand for this resource. ACEPAR plans to obtain a sub- s tant ial amount of the charcoal required from government-owned land some 300 km from the plant. 13. The assessment mission reviewed this situation with a view to minimizing its effect on deforestation and arriving at a least-cost solu- tion. In examining various alternatives, the mission concluded that ACEPAR's proposed solution would not be optimal. Preliminary mission estimates indicate that the trade-off between transportation and land costs favor producing charcoal closer to the plant. Also, the scale of operation for producing charcoal should be considered. The mission recommends that, before making a final decision, ACEPAR arrange for an independent study to examine these points. 14. In the face of rapid deforestation, Government's efforts in the subsector have been inadequate. Under Government-sponsored programs, only about 7,000 ha of land have been devoted to tree plantations since 1976, compared to an estimated need of about 5,300 ha per year over the next decade. Priority actions call for: (a) formulation of an effective long-term reforestation program; (b) a fuelwood conservation program, including the use of efficient stoves; and (c) measures by ACEPAR to minimize the impact of its charcoal production program on deforestation and fuelwood prices. Petroleum 15. The main issue in the petroleum subsector concerns the high cost of supply. As estimated by the assessment mission, Paraguay's total costs including petroleum acquisition and refining seem to be 2025% higher than internat ional norms indicated by published data covering world oil price developments (paragraph 5.12). -iv - 16. There does not appear to be any serious problems in petroleum product pricing. With the exception of domestic kerosene -- which is priced moderately below its opportunity cost -- petroleum-based fuels by and large reflect International costs. 17. Under present arrangements, about one half of the country's liquid fuel requirements are met by processing imported crude oil in PETROPAR's refinery to yield the products used in Paraguay -- mainly diesel oil and regular gasoline (mixed with domestically-produced ethanol). The balance of products required are imported. Given the extremely small size (7,500 BD) and limited flexibility of the country's refinery, it would be cheaper for Paraguay to import all petroleum products than to continue refining part of its needs. The mission based this conclusion on a preliminary analysis of several alternatives to present petroleum supply arrangements. 18. PETROPAR therefore should give priority consideration to either closing the refinery or placing it on standby to be used for blending, distribution and storage. In either case, all of Paraguay's demand for liquid fuels (except ethanol) would be met by petroleum product imports. The assessment mission recommends that PETROPAR review these options with the assistance of consultant specialists. This review should include examination of the economic feasibility of a product pipeline from the coast of Brazil, as outlined in Chapter V of this report. 19. In the meantime, in view of the persistence of relatively low petroleum product prices in the international market, PETROPAR should purchase a substantial part of its crude petroleum on the spot market rather than exclusively through term contracts. Spot prices for crude oil have been lower than official prices over the past several years. Paraguay would therefore very likely benefit by buying crude on the spot market as long as it continues to import and refine crude oil. 20. Paraguay also should accelerate efforts to attract private investment in petroleum exploration drilling. Large areas of the country remain unexplored and several oil industry specialists have indicated that further exploration would be worth undertaking. While Paraguay is still a high-risk investment area for petroleum, the geology of the country and the continued interest on the part of some oil companies warrant a modest exploration promotion program. Based on exploration data available in Paraguay or obtainable from the companies, it would be possible, with the help of an oil exploration consultant, for the Government to greatly improve exploration promotion efforts. Inter-fuel Substitution and Energy Conservation 21. The possible substitution of electricity for liquid fuels is a much discussed subject in Paraguay, but little action here can be expected over the near term. The prime topics mentioned are electrifi- cation of urban transport in Asuncion, and substitution of electricity for LPG used in cooking -- mainly in cities and towns, as well as for v diesel oil being used in thermal power installations. These substitution proposals, however, would represent relatively little in terms of total energy used in the economy or foreign exchange savings. 22. Paraguay fulfills the basic qualifications noted by the Bank concerning countries -eligiblek for sugarcane-based ethanol programs: it has surplus land, a favorable climate, and it produces sugarcane in surplus in most years. Expanding the Government's ethanol program to substitute for gasoline, however, must be viewed with some caution. The present ethanol program can be considered marginal on economic grounds, largely because of the unusually high capital investment costs in the past (para 7.5), the low productivity of cane growers, a lack of coher- ence in the Government's program, and problems in distillery opera- tions. Nevertheless, since substantial production capacity is already available, the program merits continuation at its present scale. In the meantime, the Government should focus on resolving the problems mentioned above; if enough progress can be achieved, the program would hold promise for further expansion. 23. Except for a few noteworthy cases observed in private industry, there is little in the way of energy saving activities being carried out or encouraged by the Government. The mission estimates that, overall, some 15% in energy costs could be saved in industry, based on energy audits. Other measures designed to conserve liquid fuels through the improved use of biomass by-products should be applied where residues are produced in the manufacturing process. Also, as mentioned earlier, the achievement of substantial energy savings in the use of fuelwood ought to be encouraged by the Government. Other Energy Resources 24. The opportunities for wide application of nonconventional energy resources are limited in Paraguay, and in view of the presence of important energy resources such as hydroelectric power and biomass, the development of nonindustrial sources should not be given priority among these. To the degree that nonconventional energy does warrant considera- tion, it would be suitable mainly in the Chaco, where the sparse popula- tion is very widely dispersed and not connected to the national electric- ity system. It is in this region of the country that experimentation and pilot projects in solar heating and drying, wind power, and wood gasifi- cation are being undertaken, albeit on a very modest scale. This work, which is being conducted by the Instituto Nacional de Tecnologia y Normalizacion (INTN), the Instituto de Ciencias Basicas, the National University, and the Fondo Ganadero, should be encouraged. Energy Sector Organization and Management 25. To address energy issues effectively, the Government should take steps to improve coordination of all sector matters. The creation of a new government ministry or separate agency would not be necessary. The mission recommends establishing instead a Cabinet-level national energy commission supported by a technical secretariat which would pro- vide economic and technical analysis for Government decision-making on energy policies, programs, and projects. I. ENERCY IN THE ECONOMY Country Background and Economic Situation 1.1 Paraguay is a landlocked country with an area of 406,752 km2 and a population of about three miLLion. Its most important natural re- sources consist of a large area suitable for agriculture, and the vast hydroelectric potentiaL of the Parana River. The country is divided by the Paraguay River into two well-differentiated regions (see IBRD Map No. 14041). The eastern part comprises 40% of the councry's total land area (98% of the land in crops) and holds about 97Z of the population. Development of the western part -- the Chaco -- has been limited by uneven rainfall which provokes alternating periods of drought and flooding. 1.2 Most of the Paraguayan popuLation (63%) live in rural areas, 1/ and agriculture is by far the major source of employment (about 45% of the total). CDP per capita is estimated at US$1,570 (1982) but poverty is still a significant phenomenon in ruraL areas: over half of rural families have per capita incomes of less than US$160. Nevercheless, due to plentiful agricultural resources, there is no evidence of widespread abject poverty or massive rural-urban migration. 1.3 Economic growth during the 1950s was slow, averaging 1.3Z a year between 1953 and 1960, but in subsequent years it has shown a clear tendency to accelerate. In the 1960s, the growth rate improved to 4.2% per annum, increased further to 7.1% during 1971-1975, and rose to about 10% during 1976-1981. Only since 1982 has rapid growth come to a haLt. GDP fell by 2% in 1982, and preliminary figures for 1983 indicate a further drop in GDP of about 5%. The main causes of the downturn have been the economic crises in neighboring Brazil and Argentina, two of Paraguay's main trading partners; overvaluation of Paraguay's currency; and culmination of construction of the 12,600 MW Itaipu hydroelectric project. 1.4 The most important sources of growth have been the rapid expan- sion of agricuLtural export earnings and, since 1976, the massive invest- ment associated with the Itaipu and Yacyreta hydroelectric projects. The agricultural sector, which accounts for 31% of GDP, is still the backbone of Paraguay's economy. Sixty percent of value added in industry is de- rived from processing agriculturaL products and 95Z of export earnings come from that source. The manufacturing seccor, which accounts for 1/ The 1972 Census defined as urban the population living in district capitals. The Secretaria Tecnica de Planification (STP) restricts the definition of urban co towns of more chan 2,000 inhabicants. Under this latter definition, 70% of the population was rural in 1980. about 16% of GDW, is highly dependent on agriculture; it has grown at about 4% per annum from 1973 to 1976, and at 11.5% from 1976 to 1981. The construction sector has been very dynamic, with growth rates of more than 30% since 1977 resulting from Itaipu-related activity, residential construction, and government investments in infrastructure. 1.5 The construction of Itaipu has played a major role in the evolution of the economy. With an estimated total cost of US$14 billion in 1983 prices (about three times Paraguay's GDP) and more than 10 years in construction, the project has provided employment at attractive salaries, stimulated the construction and manufacturing sectors, and generated substantial foreign exchange earnings for Paraguay. The use of electric power from Itaipu and the reallocation of employment as project construction draws to a close will be two key issues of importance to Paraguay's economic development. Energy and the Balance of Payments 1.6 The energy sector has played an increasingly important role in the Paraguayan balance of payments, both as a user and a source of foreign exchange. On the one hand, petroleum and other fuel-related imports have demanded an increasing amount of foreign exchange. Their share in total registered merchandise imports and exports moved up rapidly, as shown in Table 1.1. Table 1.1: RELATIVE IMPORTANCE OF FUEL IMPORTS 1970 1973-78 1979-82 As percentage of Total Imports 9.6 18.7 22.9 As percentage of Total Exports 9.6 19.1 37.6 Source: Country Economic Memorandum, IBRD, 1984. 1.7 On the other hand, net inflows related to the Itaipu and Yacyreta projects have been a substantial source of foreign exchange for Paraguay. These inflows grew from US$76.7 million in 1976 to US$296.3 million in 1979, representing 25.0% and 39.7% of official imports of goods and non-factor services during these respective years. In addi- tion, future revenues from Itaipu alone are expected to be very sub- stantial. 2/ Thus, developments in the energy sector have an important 2/ The net present value of the gains for Paraguay are estimated to be, on average, between US$470 and US$730 million, over the project's life (40 years). -3- influence on Paraguay's balance-of-payments position. Finally, it is important to note that, in the long run, the availability of vast amounts of energy from Itaipu at competitive prices (paragraph 3.38) could be important in stimulating development of electricity-intensive industries in Paraguay. Energy Balance, 1982 1.8 Biomass is by far the most important element of the energy balance in Paraguay. In 1982, the domestic production of primary energy was 1.1 million toe, of which 96% was biomass and 4% hydropower. Biomass energy sources meet about 72% of total energy demand: 90% of energy consumption in the industrial and residential sectors, and 12% of conr- sumption in the transport sector. Finally, imported energy consists of crude oil (197 ktoe), petroleum products (201 ktoe) and electricity (22 ktoe). A summary of Paraguay's energy balance is shown in Table 1.2. In 1982, the consumption of various fuels was distributed as follows: (a) biomass: 59% in industry, 39Z in households, and 2% in transport; (b) petroleum products: 52% in transport, 28% in agriculture, 14% in industry, and 6% in households; (c) electricity: 57% in households, 34% in industry, and 9% in agriculture. A detailed breakdown of the 1982 energy balance is presented in Annex 1. Table 1.2: SUMMARY ENERGY BALANCE, 1982 (thousand toe) Biomass Oil Electricity Demand 1,166 398 79 Domestic Supply 1,166 - 57 Imports - 398 22 Source: Mission estimates. International Comparisons 1.9 Paraguay uses relatively small amounts of commercial energy per unit of output compared with countries of similar per capita incomes. Two main factors explain this situation: first, most of Paraguay's GDP is related to the agriculture sector which consumes little commercial energy; and second, commercial energy prices have been high in Paraguay and may have restricted its use in the country. Table 1.3 also shows that GDP growth and the growth in energy consumption in Paraguay during 1970-80 were high in comparison to the other countries in the group. -4- Table 1.3: ECONOMIC GROWTH AND COMMERCIAL ENERGY CONSUMPTION 1970-80 Crowth Rates X Energy GDP/Energy GNP/Capita 1980 Consumption GDP Consumption (toe/US$ (US$,1980) miLlion CDP) Paraguay 1,140 139 8.8 8.6 .98 Costa Rica 1,390 268 4.9 5.8 1.18 Colombia 1,260 516 7.1 5.8 0.82 Dominican Republic 1,190 275 6.7 6.6 0.99 Source: World Bank, Energy Indicators. Economic Prospects and Energy Projections 1.10 The current recession in Paraguay is, to a Large extent, the ourcome of developments beyond the control of the Government. However, prospeccs for recovery have improved recently. The near-term outlook for world prices for cotton and soybeans has improved, stimulating a positive supply response. In addition, local industries producing consumption goods have been reactivated as the appreciation of the US dollar in the parallel market has shifted demand away from imports. Finally, the construction of the Yacyreta project is expected to pick up during 1984 and bring in net inflows of foreign exchange as well as induce multiplier effects throughout the economy. The prospects of recovery also would be enhanced if the Government were to implement policy recommendations on fiscal and exchange rate policy. 3/ 1.11 Given the levelling off of Paraguay's rate of growth, energy balance projections were prepared using two GDP growth rates: 3% and 5% per annum during 1982-90; since no substantial structural changes are expected during this period, it has been assumed that the distribution of energy demand between sectors would remain the same as in 1982, and that a sufficient supply of primary energy (biomass and hydropower) wouLd be available to meet projected demand. TabLe 1.4 summarizes the results, which are presented fully in Annex 2. 3/ See IBRD, Country Economic Memorandum, 1984. PARAGUAY ENERGY ASSESSMENT - ENERGY FLOW, 1982 (TOE x 103) :.i~~~~~~~~~~~3~~~~~ ~~~~ ~ ~ ~~PLANTS j il.- .j . - -(-- '.-.;' . -,.. P:dET ELECTRICI1l',l@t ALCOHOL 9 9 I_5W 1 TRANSPORTA- z~~~ I I o T SECTOR CHARCOAL_I- F ff--v=PANT 40 _ _;SECTORI ilil ---- - - * ~~~~~~~~~~~~~~~~~~~~RESiDENTLAL 1 _-- - - - . ~~~~~~~~~~~~COMMERCIAL & RJBLIC , 1 ta in.,. . !'*1' ' K - 7 , ~~~~~~~~~~~~~~~~~~~~~~~~~SECTOR 76 39 LOSSES 13 World Bonk-26248 -6- 1.12 In both scenarios Paraguay would be able to meet its 1990 elec- tric power demand with hydropower (Acaray and Etaipu) and, in addition, eliminate the need to rely on power imports and domestic thermal plants. Crude oil and petroleum products would continue to be imported at a cost of between US$173 million and US$207 million. These figures represent 15Z and 18Z of projected total exports, which is a considerably more com- fortable situation than the present one (see Table 1.1). Biomass wouLd still be a crucial source of energy in 1990. It is estimated that the country will be able to meet the demand for biomass, but deforestation will start to present serious problems unless reforestation measures are taken soon. 1.13 The Government is aiming at substantially higher growth rates than the 3-5Z assumed here. Higher growth rates would, of course, induce substantially higher leveLs of energy consumption. For example, a CDP growth of 8% p.a. from 1982-90 would increase the demand for hydrocarbons from 495 ktoe (base case) to 737 ktoe in 1990. To meet this new demand, energy imports would represent 23% of total registered exports. Clearly, such an increase would have serious repercussions for Paraguay's balance of payments. Table 1.4: SUMMARY ENERGY BALANCE, 1990 (thousand toe) Biomass Petroleum Electricity Base case (3% GDP Growth) Demand 1,596 495 150 Domestic Supply 1,596 - 150 Imports - 495 - High Case (5% GDP Growth) Demand 1,867 590 173 Domestic Supply 1,867 - 173 Imports - 590 - Source: Mission estimates. -7- II. ENERGY DEMAND MANAGEMENT The Structure of Energy Demand 2.1 In 1982, Paraguay consumed 1.5 miLlion toe of energy. Per capita energy consumption was about 500 kgoe, compared with a world aver- age of 1,500 kgoe and an average for Latin America of 1,000 kgoe. Bio- mass met about 72% of total demand, and commercial energy the remaining 28%. Because of the predominance of biomass in total demand, per capita energy consumption in urban areas is estimated to be only slightly higher than in rural areas. 2.2 Noncommercial energy consumption in Paraguay totalled 1.09 mil- Lion toe in 1982, represented by; fuelwood 89%, bagasse 4.3%, charcoal 3.7%, and other plant fuels 3%. Biomass accounted for more than 90% of energy consumption in the industrial and household sectors and 12% in the transport sector. 2.3 CommerciaL energy consumption in Paraguay amounted to 0.43 mil- lion toe in 1982 (diesel oil 54%, gasoline 18%, electricity 16%, and other petroleum products, 12%). The transport sector is the most impor- tant consumer of commercial energy (43%), followed by agriculture (26%), industry (17Z), and households (14%). The transport sector depends heavily on petroleum; 88% of its consumption is in the form of petroleum products, and the balance (12%) by fuelwood, which feeds the only wood- fired railroad in Latin APnerica. Energy in the Household Sector Energy Consumption 2.4 The household sector consumes about a third of all the energy used in Paraguay; its share has remained roughly constant over the 1976- 1982 period. By and large the most important source of energy for the sector is fuelwood, which supplies more than 80% of household energy needs (see Table 2-.1). Charcoal does not account for a major share of energy consumption. Thus, non-commercial sources of energy supply about 90% of total household consumption. 2.5 Electricity has become the second most important source of energy for the household sector in Paraguay. While stiLl relatively low, its share of household consumption has more than doubled during 1976- 1982, mostly due to the expansion of the distribution system. The com- bined share of LPG and kerosene has remained fairly stable during the period, the former tending to substitute for the latter in household consumption. The future share of LPG in household energy consumption may increase, as it was only introduced recently as a cooking fuel. Since LPG is an imported product, it wouLd be important to review the possibilities of substituting electricity for it. The World Bank has - 8 - prepared terms of reference for such a study under the Technical Coopera- tion Agreement of January L2, 1981, between the Government of Paraguay and the World Bank. Table 2.1: HOUSEHOLD ENERGY CONSUMPTION (% Distribution) 1976 1979 1982 Fuelwood 87.7 85.2 83.6 Charcoal 4.3 4.1 4.1 LPG - 0.9 1.6 Kerosene 4.2 4.4 2.5 Electricity 3.8 5.4 8.2 Total 100.0 100.0 100.0 Percent of Total Consumption 33.9 33.0 31.9 Source: Energy Balances, 1976-82. 2.6 On an energy basis, both fuelwood and charcoal are by far the cheapest sources of energy in Paraguay (Table 2.2), fueLwood being more than two and one-half times cheaper than charcoal, and the latter being three to six times cheaper than any other energy input used in the house- hold sector. The prevailing relative prices explain why fuelwood use is so widespread in the household sector. .Moreover, at least 50% of the fuelwood users obtain wood by direct appropriation. Table 2.2: COMPARISON OF ENERGY PRICES IN THE HOUSEHOLD SECTOR, May 1984 Price Ratio to US$/toe Fuelwood Fuelwood 32 1.0 Charcoal 83 2.6 Kerosene 310 9.7 LPG 533 16.6 Electricity (Residential) 495 15.4 Source: Mission Estimates. -9- Energy Conservation 2.7 Given the widespread use of fuelwood in household energy con- sumption and the long-run suppLy problems related to this source of energy, the possibilities for conserving in this area should be assessed. In this connection, it should be noted that most ruraL families cook by the three-stone fire. As this type of cooking wastes 90% or more of the potential fueLwood energy, substantial improvements in efficiency undoubtedly could be made. Fuelwood consumption probably could be reduced by 50% with the introduction of simple, efficient, cooking stoves. With these reductions, roughly e 8,600 would be saved per family per year. Any stove around that price probably could be introduced successfully in the country for families which purchase their wood in the open market. The Servicio de Extension Agricola y Ganadero (SEAC) has introduced some 5,000 "Fogon" stoves, which are too expensive for most rural families (˘ 13,000). For families that do not purchase their wood, special promotional efforts wouLd have to be devised to induce them to %jitilize efficient woodstoves. 2'.8 Experience in other countries has shown that it is easier to design a stove than to get it into widespread use. Therefore, the stoves should be tested in rural households before a large-scale promotional effort is conducted. Promotion should be done through SEAG - preferably using female home economists. Given their experience in this area, it would be very useful to have the input of rural women in designing and promoting the selected stoves. The mission recommends a preliminary survey on the attitudes of rural inhabitants towards collecting and using woodfuel as a first step toward promoting fuel-efficient cooking stoves. Energy in the Transport Sector 2.9 Highways are the predominant and fastest growing mode of transport in Paraguay. During 1975-1982, the extension of paved roads grew at 7.6% per annum, while the vehicle fleet grew at 13.8Z, to about 81,000 four-wheeLed vehicles by 1982. 4/ By far the largest increase occurred in the truck fleet, which grew at a 19% annual rate, reflecting the high growth of economic activity in Paraguay during this period. Water transport is the second largest mode of transport in Paraguay and the main mode of transport in foreign trade as measured by volume of cargo. 2.10 Rail transport in Paraguay is of limited significance, and has been declining as a source of freight transport during the last decade. 4/ The accuracy of statistics on the vehicle fleet are questionable because of the widespread use of non-registered cars and the operation of Brazilian trucks inside Paraguay during the harvest season of export crops. - 10 - The rail system does not seem to be very efficient in view of the poor state of rolling stock and infrastructure. However, the system does not consume liquid fuel since it runs on fuelwood. TabLe 2.3: COMPARISON OF ENERGY PRICES IN THE TRANSPORT SECTOR, May 1984 Price Ratio to US$/toe a/ Diesel Oil Diesel Oil 341 1.00 Jec Fuel 380 1.12 Regular Gasoline 708 2.08 Premium Gasoline 851 2.50 Fuel Oil 180 0.53 Ethanol Anhydrous 565 1.66 Straight Ethanol 419 1.23 Fuelwood 32 0.12 a! US$1 = 280 Cuaranies Source: Mission Estimates. Energy Consumption 2.11 The transport sector is the single most important user of imported energy in Paraguay. In 1982, liquid fuels used in transport consumed 41% of total commercial energy (excluding tractor consumption) and 53% of liquid fuels (entirely imported, except for ethanol) for all purposes. 2.12 The relative share of energy inputs in transport has changed considerabLy during 1976-1982. The mosc important change -- most likely stimulated by the evolution of relative domestic prices (Table 2.3) -- has been the increasing importance of diesel oil, which rose from about 33% of transport energy consumption to more than 40Z during this period. At the same time, the importance of gasolines has steadily decreased, from 47.4% to 35.4% during the same period (see Table 2.4). Other important changes are the significant presence of ethanol as a transport fuel in 1982 (4.1X of total toe), and the increased importance of jet fuel (from 2% to 6% of the total). Energy Conservation Possibilities in the Transport Sector 2.13 Energy conservation in the transport sector can be attained in two ways: (a) inter-fuel substitution, and (b) increasing efficiency. - 11. - Table 2.4: TRANSPORT SECTOR ENERGY CONSUMPTION (Z Distribution) 1976 1979 1982 Fuelwood 13.8 12.2 12.0 Casolines 47.4 45.7 35.4 Jet Fuel 2.0 4.7 6.0 Diesel Oil 34.4 36.5 41.8 Fuel Oil 2.4 .9 .7 Ethanol - - 4.1 100.0 100.0 100.0 Percent of total consumption 11.2 14.1 14.4 Source: Energy Balances, 1976-82. There are three main inter-fuel substitution alternatives in Paraguay: ethanol for gasoline; straight ethanoL for diesel; and electricity for liquid fuels in urban transport. Interfuel Substitution 2.14 Substitution of Ethanol for Gasoline. The partial substitution of ethanol for gasoline is already under way in Paraguay. Ethanol as a fuel had begun to penetrate the gasoline market in Paraguay in 1981. Two ethanol fuels are currently available: anhydrous ethanol blended with gasoline to make "alconafta" (20Z ethanoL, 80Z gasoline by volume); and hydrous ethanol, which consists of 962 ethanol by volume in water -- known as straight ethanol. An analysis of the program to produce ethanol for fuel use is presented in paragraphs 7.2 to 7.20. 2.15 Substitution of Diesel Oil. As noted earlier, the loww price of diesel relative to gasoline has favored market penetration of diesel in uses which might be best provided by other fuels, the main example being the substantial use of diesel-powered light vehicles. For the country as a whole, the net costs of using a diesel-powered fleet are the price differential between light vehicles of the same type minus the savings in fuels associated with diesel-powered light vehicles. In the case of Paraguay, the net economic cost of using diesel-powered light vehicles does not seem to be substantial, since the country imports less than 1,000 new cars a year. 2.16 Straight ethanol-fueled vehicles could be considered as an alternative to private transport with lower-cost fuels. The selling price of straight-ethanol vehicles is considerably lower than diesel- powered vehicles, and maintenance costs are probably also lower. There have been some measures to promote straight ethanol-fueled vehicles via - 12 - import duty reductions, and the reaccion of the public seems to have been favorable. 5/ 2.17 Substitution of Electricity for Liquid Fuels in Urban Trans- port. The idea of impLementing an electric urban transport system in Asuncion has been discussed for some time. Interest in the scheme is likely to be rekindled as Itaipu's power comes on stream during 1984. The economics of this project, as proposed, 61 are neither clear nor very promising. Uncertainties and obstacles include: the electricity tariff; the high capitaL cost and foreign exchange requirements; the minimum economic scale of operation; and the current social/economic organization of transport in Asuncion. A current proposal for an electric troLleybus system would require about US$40 million but would only save the equiva- lent of US$1.4 million/year in petroleum product imports. Consequently, the evidence indicates that the electrification of Asuncion's public transport could wait for many years. Increasing Efficiency in Fuel Use 2.18 Freight Load Management. Efficiency can be improved in many ways, but load is certainly a key factor. In particular, with encourage- ment by the Ministry of Transport and Communications, overall truck-load management could produce energy savings, especially in long-haul, one- way, international traffic. Measures to promote back-hauls could be implemented, for example, through systems for gathering and disseminating freight information. This could invoLve a clearinghouse of freight needs in Paraguay, in coordination with Argentina and Brazil. An increase in loads transported by truck axle would also improve energy efficiency, if compatible with the highway infrastructure limitation for handling heavier trucks. 2.19 General Measures. Other opportunities to increase energy effi- ciency relate to improvements in engine tuning and maintenance, as well as measures to promote rationalization of urban passenger traffic (i.e., parking costs and physical traffic restriction in urban areas) and a shift from private to public transport. 7/ A more detailed and Long-term 5/ Import taxes on straight-ethanol cars are only 302, compared to 130% for other cars. For recent years, Ehe Comision Nacional de Alcoholes Carburantes (CONAC) estimates that about 2,000 straight- ethanol cars have been brought into the country (about 6% of the 1982 light vehicLe fleet). 6/ BCEON: Area MetropoLitana de Asuncion - Estudio de Transporte Publico Urbano, Paris, 1983. 7/ Though unLikely, substantial energy savings could be achieved if the Paraguay work fcrce were to have continuous work hours, without a three to four-hour siesta break. - 13 - analysis would be required to introduce specific energy conservation provisions in these areas. 2.20 A preliminary estimate of the potential energy savings from the measures described above yields abouc 22 ktoe of short-term savings (Annex 3), or about 10% of liquid fuels consumed in transport. This estimate is tentative but shows the importance of taking steps to conserve fuel in Paraguay. Energy in the Industrial Sector 2.21 Industrial development in Paraguay is limited by the country's geographical location, its small market and narrow resource base, and the presence of larger, more industrially-developed neighbors such as Argentina and Brazil. Thus, apart from food processing, manufacturing is not likely to play a leading role in economic growth, and its medium-term development will continue to be based on a few selected Lines. The greatest opportunities lie in the processing of the country's ample supply of agricultural raw materials and livestock for domestic and export markets. 2.22 The industrial sector in Paraguay is highly dependent on agri- culture. Sixty percent of value added in industry is derived from the processing of agricultural products, and 90% of export earnings comes from the latter. In 1982, the gross value added of the ten largest plants in Paraguay represented 79% of value added for the whole sector. With the exception of printing, petroleum products, and non-metallic min- erals, all the top ten plants are related to processing agricultural raw materials or livestock. Energy Consumption 2.23 The heavy dependence of the industrial sector on agriculture is reflected in the fuels employed in industry, which are mainly from biomass: firewood, bagasse, coconut shells, and cotton residues. In 1982, biomass energy consumption accounted for 902 of total energy con- sumed in industry, and fuelwood alone represented 76%. Hydrocarbons and electricity contributed only 10Z of the total energy consumed in industry in 1982 (see Table 2.5). - 14 - Table 2.5: INDUSTRIAL ENERGY CONSUMPTION (Z Distribution) 1976 1979 1982 Biomass Energy Fuelwood 77.0 77.7 75.8 Bagasse 7.7 6.3 6.5 Plant Fuels a/ 3.2 3.7 4.5 Charcoal 2.8 2.9 2.8 Commercial Energy Diesel Oil 2.9 4.1 4.8 Fuel OiL 4.9 2.2 2.1 Electricity 1.5 3.1 3.5 Total 100.0 100.0 100.0 Z of Total Energy Consumpcion 50.4 46.9 46.6 a/ Coconut shells. Source: Energy Balances, 1976-82. 2.24 As in the case of the other sectors, relative energy prices largely explain the prevalence of biomass in energy consumption. As shown in Table 2.6, commercial fuels are, or. a toe basis, five to twelve times more expensive than fuelwood. It is also worth noting that electricity is the most expensive energy input in Paraguayan industry. Table 2.6: COMPARISON OF ENERGY PRICES IN THE INDUSTRIAL SECTOR, May 1984 Price Ratio US$/toe a! to FueLwood Fuelwood 32 1.0 Charcoal 83 2.6 Diesel Oil 340 10.6 Fuel Oil 180 5.6 Electricity (MV) 377 11.8 Others b/ - a/ US$1 = 280 Guaranies b/ Bagasse and coconut shells are consumed in agro-industries that generate them in the production process. Source: Mission estimates. - 15 - 2.25 Biomass fueLs in induscry are used for power generation as well as to supply thermal needs for raw materials processing and mechanical energy requirements. Visits to selected plants that consume biomass fuels as a major source of energy yielded the results depicted in Annex 4. Kanufactura Pilar, the Largest textile company in the country, consumes mainly fuelwood and diesel oil, but also cotton residues. The alcohol distilleries of APAL and Azucarera Paraguaya, the Largest pro- ducers of anhydrous and hydrous alcohol, respectively, use sugarcane bagasse and fuelwood. Azucarera Paraguaya, the largest sugar producer in the country, whose alcohol distillery is located next to the sugar mill, consumes a fair amount of fueLwood besides bagasse. Carlos Casado, the only tanin extract producer in the country and responsible for 3% of the total Paraguayan exports, uses diesel for power generation, and quebracho fiber left over from the extraction process for other fuel needs. CAPSA, the largest vegetable oil producer in Paraguay, uses electricity and residues from cotton and coconuts. Table 2.7: ENERGY CONSUMPTION BY SELECT INDUSTRIES IN PARAGUAY, 1983 Industry Wood Bagasse Diesel Oil Fuel Oil (tons) (tons) (m3) (m3) Manufactura Pilar Power generation 30,000 - 3,000 Thermal Requirements - - 280 30,000 - 3,280 Distileria APAL 300 72,000 - Azucarera Paraguaya 10,500 114,000 - Carlos Casado 64,000 - 1,440 CAPSA 41,000 - - INC (Cement Plant) Power generation - - - 7,200 Thermal Requirements - - - 15,000 Source: Mission estimates. 2.26 In 1982, fuel oil was mainly consumed by the country's only petroleum refinery (24.8 ktoe) and by a single industrial consumer, the Industria Nacional del Cemento (INC) (14.6 ktoe). Diesel oil in industry (34.3 ktoe in 1982) is chiefly used for power generation in locations not yet reached by the ANDE network or as a source of standby power. In most cases (INC in Vallemi, Manufactura Pilar, and Carlos Casado in Puerto Casado), power from such plants is also supplied to towns, villages, and to some public consumers such as hospitals, the army, and the police. Diesel oil is also used in the cotton-processing industry, where cotton bales are dried by hot air using diesel oil as fuel. - 16 - Possibilities for Energy Conservation 2.27 Mission visits to the main plarnts mentioned above suggest that there is considerable room for increasing efficiency in the use of fuels (commercial and bigmass) in Paraguayan industry. Specific cases have shown that with modest investments - mainly in the form of expert advice at the plant - considerable amounts of energy could be saved. In the case of hydrocarbons (e.g., diesel oil), this would result in direct sub- stitution for imported fuels. In the case of fuelwood such savings would curb the rate of deforestation. 2.28 Biomass. Industry consumed about 538,500 toe of fuelwood in 1982, out of a total voLume of all energy forms consumed by industry of 710,000 toe. In addition, 46,500 toe of bagasse and 32,300 toe of other vegetable residues were used in the sector. Brick-making alone consumed 120,000 toe of fuelwood in 1982. From plant visits and specific cases examined, the mission estimated that better housekeeping alone could save some 10-15% of biomass energy requirements. This has particular inportance for cases in situations where fuelwood has to be brought from increasingly longer distances. 2.29 Bagasse, coconut shells, and other biomass fuels are consumed in agro-industries that generate them in the production process; conse- quently, there is less incentive to increase efficiency. in this case, in view of the problems connected with either storage or commercialization of these residues. On the oEher hand, inefficienc operation of residue- fueled boilers has led, in some cases, to so much waste that substantial amounts of fuelwood had to be added to meet plant energy requirements. 2.30 In the case of Carlos Casado, plant requirements for power, mechanical, and thermal-process energy totaled 34 toe/day and were met by a combination of process residues (quebracho fiber), fuelwood, and diesel oil. The use of fuetwood (6.5 toe/day) has been entirely eliminated as a result of a six-month energy conservation program in the plant. Conse- quently, 16Z of the biomass that was consumed before the program has been saved. Furthermore, the plant now relies only on biomass produced by the process itself (quebracho fiber). The program consisted of simple house- keeping measures starting with an energy audit. The same company is considering investing US$1.5 million to replace old boilers with a new, more efficient, higher-pressure boiler plus a new back-pressure steam turbine and auxiliary equipment. The same amount of biomass that is-cur- rently used in the old boilers could, with the new system, yield an addi- tional 1,000 kW of capacity, which would place on standby the 500 kW diesel generator now used on base load. 2.31 In another case, Azucarera Paraguaya was to purchase a new, -more efficient boiler, estimated at US$2.3 million installed, which would eliminate fuelwood consumption. This would have saved, in 1983, some 3,800 toe of fuelwood (˘ 31.7 million at ˘ 3,000/ton) and also diesel oil used in hauling fuelwood to the pLant. - 17 - 2.32 Hydrocarbons. The national cement plant (INC) already has taken measures to save fuel oil by changing production from wet to dry process. Also, changes in refinery operations by PETROPAR -:ould perhaps save diesel oil used in fuel oil dilution by consuming mostly residual oil at higher temperature. Further opportunities to save diesel oil could result by improving the efficiency of biomass fuel use, thus reducing the diesel oil consumed in transporting fuelwood. Inter-fuel Substitution Prospects 2.33 Fuel Oil. INC, the major fuel oil consumer in Paraguay, is considering substituting imported coal and/or ethanol for fuel oil. How- ever, since the coal, like petroLeum, would be imported, the net foreign exchange effect must be analyzed. On first appraisal, it seems that the net effect would be limited. Substitution of ethanol for fuel oiL would also be hard to justify given the much higher value of ethanol as com- pared with coal or fuel oil. 2.34 Diesel oil. The major use for diesel oil in industry is power generation. The objective of bringing diesel power generation to standby status could be accomplished by: (a) extending ANDE's grid, and (b) increasing the efficiency of biomass boilers and steam power plants. Another important use for diesel oil is in the cotton industry where it is used for drying purposes. If biomass end-use efficiency is improved in this industry, it could be used as a source of heat to bring air to the desired temperature for drying cotton, thus reducing diesel oil consumption. 2.35 Annex 4 offers preliminary estimates of the potential for energy savings and interfuel substitution in industry in Paraguay relative to 1982 consumption. Recommendations 2.36 The first step in promoting energy conservation in industry is to establish energy balances at all levels of aggregation, starting with individual plants. By estabLishing energy inputs and consumption for each plant, it becomes possible to identify conservation opportunities, and once implemented, to measure the cost and effects of corrective mea- sures. In addition to the absence of an appropriate legislative and regulatory framework for energy conservation, there is a lack of financing, organization, and trained personnel. Consequently, the mission recommends: (a) DeveLopment of local capability to undertake energy audits and provide technical extension work for conservation programs; this could be developed at the Instituto Nacional de Tecnologia y Normalizacion (INTN), with some support from international agencies and biLateral sources. - 18 - (b) Promotion of detailed energy audits in industry with the support of the Union Industrial del Paraguay, INTN, and other public and private organizations. (c) Financing of energy conservation projects in industry, possibly via the Banco Nacional de Fomento, with support from interna- tional lending organizations or bilateral sources. (d) Promotion of energy demand management and conservation, at the policy level, by the proposed National Energy Commission (see Chapter VIII), and assignment of responsibilities to institu- tions from the public and private sectors in the pLanning and execution of energy conservation projects. (e) Implementation of specific energy conservation efforts through relevant agencies and private companies for pilot projects, training, education, and general dissemination of energy conservation information. - 19 - III. ELECTRICITY Background 3.1 Even though huge amouncs of energy from Iraipu will be avail- able for Paraguay's electricity expansion naeds, the pace at which electricity usage grows will depend heavily on whether or not electricity-intensive industries--for which the electricity price is frequently crucial--are estabLished. It is important to note that the electricity tariff for Itaipu is regulated by an international treaty and cannot be set unilaterally by Paraguay (paragraphs 3.35-3.39). As some provisions of the treaty establishing Itaipu Binacional will be adjusted, it is not possible to estimate the precise tariff that will emerge. However, the mission has made a preliminary estimate with which to analyze the possible power sector development in the country (paras. 3.38-3.39). 3.2 The electric power sector in Paraguay is run exclusively by the Administracion Nacional de Electricidad (ANDE). This company was created in 1949 and reorganized in 1964 as an autonomous, decentralized public utility. It has its own legal identity and financial independence, and maintains relations with the Government through the Ministry of Public Works and Communications (MPWC). ANDE is a well-organized, adequately run public utility and performance indicators show it to be fairly efficient (in 1982, the utility sold about 0.5 CWh per employee and it had 130 customers per employee). 3.3 In the past two decades, power development in Paraguay has been characterized by steady progress through: (a) a shift from thermal to hydro-generation with the development of part of the country's hydro resources; (b) the setting of adequate institutional and tariff policies; and (c) extension of service within the framework of a careful expansion policy. The start-up of the Acaray hydro DLant in 1969 permitted supply through hydro-generation, thus breaking ANDE's historic dependence on oil. The setting of adequate tariffs (paras 3.14-3.20) has permitted ANDE to maintain a healthy financial situation. The company growth has been rapid during the past 20 years, its policy of adding users has meant concentrating efforts to provide adequate service in Asuncion and its environs, where 872 of dwellings are now electrified, and 144 towns in the eastern region. Basic Resources and Existing Facilities Generation 3.4 Hydropower, Paraguay's most important commercial energy re- source, is mostly located in the Parana River Basin. Potential hydro resources are estimated at about 25,000 MW, with a possible generating capacity of about 125,000 GWh/year. Current installed hydro capacity and - 20 - average energy generation, however, total only 190 MW and 560 GWh respectively. 8/ This situation will change dramatically with the start- up of Itaipu. 3.5 The hydro plant on the Acaray River (190 MW) has been Paraguay's main source of supply during the past decade. However, it is not capable of meeting the country's expected increase in demand for the 1980s. The development of its vast hydro potential through bilateral agreements with neighboring countries is markedly changing the electric- ity situation in Paraguay through implementation of two large hydro pro- jects: Itaipu (12,600 MW), under a binational agreement with Brazil, and Yacyreta (2,700 MW), under a binational agreement with Argentina. Both projects will provide substantial foreign exchange earnings and also secure for Paraguay full hydro energy supply at least for the next 30 years. Two additional projects, also foreseen as international in character (Corpus, and a possible site downstream of Yacyreta), will complete the Parana River development. Other hydro resourcer in the country's western region on the Paraguay River are not yet considered economically feasible. Transmission and Distribution 3.6 ANDE's transmission system consists of a main network of 220 kV lines linking Acaray with Asuncion. This system is being expanded with the addition of lines from Encarnacion to Ayolas and Coronel Oviedo to Horqueta (IBRD Map 18241). A number of radial 66 kV lines complement the grid to provide service to the transformer stations which feed the dis- tribution networks. The system is complemented by the corresponding distribution facilities which cover the Asuncion area as well as about 120 towns in the country's interior. Service extension, during the past few years have required annual additions of about 500 km of primary and secondary distribution lines and feeders. Electricity Growth and Demand Forecast 3.7 In spite of high growth rates, per capita electricity consump- tion in Paraguay stands at only about 300 kWh/year, one of the lowest in Latin America. This is because consistent efforts towards electrifi- cation in Paraguay did not start until the 1960s. Net generation grew at an average rate of 9.7% between 1961 and 1971, and 15.5Z between 1971 and 1982. During these periods, annual increases as high as 20% were ob- served. Demand increase has slowed down in 1982 to 11% p.a. and to about 10% p.a. for 1983. 8/ In addition to the Acaray hydro station, ANDE also has kept its thermal units of Puerto Sajonia (34 MW), San Lorenzo (38 MW), and several small diesel units (totalling 7 MW), which are currently used during peak hours. - 21 - 3.8 Electricity service coverage has increased from 10.92 of the country's population in 1970, to about 35% in 1982. However, there is substantial room for expanding service, particularly outside the Asuncion area where electrification of some agro-industrial areas would have economic and financial justification (paras. 3.26-3.31). 3.9 Because of the low electrification coverage noted above, sub- stantial potential demand exists. ANDE's short-term (operational) forecast is based on a close follow-up of demand characteristics and growth for each substation. These projections give accurate results and are adequate in the short-term. Long-term forecasting, which is needed for development planning, is not a routine activity in ANDE, however. The latest long-term forecast study based on sectoral forecasting and econometric correlations was prepared in 1976 and needs updating. 3.10 Long-term forecasting is the most critical of ANDE's planning needs, particularly in view of the provisions in the Itaipu Treaty which require ANDE to provide to the binational entity, two years before the plant begins commercial operation, a 10-year projection of Paraguay's demand for Itaipu power. Paraguay is entitled to use up to one half of Itaipu's power and Brazil has agreed to use, in addition to its half share, the remaining part of Paraguay's share not required by ANDE. Nevertheless, once the 10-year forecast is approved by Itaipu Binacional, Paraguay must pay for declared power (with a 20Z margin), used or not, unless Brazil takes it. Several factors which would have an important influence on the forecast results remain uncertain, i.e., new possibili- ties for installation of electricity-intensive industries, and the price of the energy that would be charged to potential industrial consumers. 3.11 ANDE requires consultant services to prepare long-term fore- casts. Given the uncertainties associated with factors affecting demand growth, however, it is likely that ANDE will have to review its demand projections periodically. Consequently, it would be advisable for the company to create a small group within its planning unit for demand fore- casting. ANDE could take advantage of the next comprehensive demand forecast study, scheduled this year, to arrange for onr-the-job training for the proposed group. 3.12 A summary of ANDE's latest available operational demand fore- cast is presented in Table 3.1 below. Overall, it projects a relatively high rate of energy demand growth (16.3%) between 1983 and 1987. Taking into consideration the country's economic prospects 9/, the mission considers energy demand growth of about 10X to be more realistic (Annex 5). 9/ See Bank Economic Memorandum on Paraguay, Report No. 4751-PA, February 8, 1984. - 22 - Table 3.1: POWER DEMAND PROJECTIONS Energy Demand Peak Demand (CWh) (MW) 1982 915 190.6 1984 1,150 252.0 1987 1,830 376.0 Source: ANDE - Compilacion Estadistica. Electricity Tariffs 3.13 Electricity tariffs are established by ANDE on the basis of its operating budgec with a view to obtaining a financial rate of return of no less than 8% and no more than 10% on its revalued assets. If ANDE's profitability is above or below the limits described above, the differ- ences are credited or debited to a special account. By monitoring the cumulative balances in this accounc and comparing them with the company's medium-term expansion needs, ANDE determines the required amounts and timing of tariff adjustments. According to ANDE's Organic Law, changes in tariffs must be approved by the Administrative Council of the Company and submitted, through the Ministry of Public Work and Communications (MPWC), to the National Council on Economic Coordination 10/ for finaL approval. MainLy due to an effective tariff policy, ANDEs financial position is solid: it has very good short-term liquidity, a relatively low debt/equity ratio, and it has been able to fina:ce expansion largely through internal generation of funds. 3.14 Since 1964, ANDE has introduced significant increases in eLec- tricity tariffs only three times. The first was effected in 1976 and increased all rates by 27%. The second was introduced in 1977, as a result of ANDE's high operating costs during a prolonged drought which forced the company to rely on its thermal plants. The latest tariff adjustment was implemented in 1979 and increased all rates by 20%. 3.15 The basic conditions under which this tariff policy has oper- ated will change drastically in the future when incremental demand of the Paraguayan system will be served by Itaipu. Electricity tariffs in Paraguay will be determined by the tariff for Itaipu's power and cannot be expected to be especially low in the short and medium-term. However, in the long run Paraguay wilL have access to very low-cost electric 10/ A group of Cabinet Ministers headed by the President of the Republic and representing the main agencies concerned with economic policy. - 23 - energy which could open up interesting industrial alternatives for the country (see para 3.38). Tariff Structure 3.16 Basically, ANDE's tariffs include the following components: (a) Medium Voltage (MV): Substation deliveries at 23 and 6 kV, MV deliveries at 23, 13, and 6 kV with a dual tariff (i.e., energy and peak demand); MV deliveries with decreasing block tariffs (there are five categories according to the level of demand); and MV rural deliveries with decreasing block tariffs. (b) Low Voltage (LV). Industrial decreasing block tariffs; and residential and commercial tariff (this tariff applies an average charge according to each consumer's block, and average prices increase with consumption levels), public lighting, and other goverment uses. 3.17 Three main observations can be made with respect to ANDE's tariff structure: (a) a high-voltage tariff (220 kV, 66 kV) should be structured and offered at a reduced rate to industries located in the vicinity of Itaipu; (b) for MV (industrial) customers ANDE has correctly structured its tariffs according to voltage levels. However, given the demand characteristics, it should be feasible to provide a stronger incentive to reduce peak-load consumption by installing double-metering apparatus (peak and off-peak energy measurements); and (c) ANDE's residential tariffs presumably reflect an income redistribution objective through increasing average prices. The structure of these tariffs, however, creates distortions at the limit of each block and produces an incentive for consumers to reduce their marginal consumption at a cost that may far exceed the marginal benefits of energy conservation. Con- sequently, the mission recommends that ANDE review the tariff structure for the residertial sector. Tariff Levels 3.18 Table 3.2 presents the marginal cost of the service as esti- mated by the mission for different locations of the country; it also shows present tariffs. According to preliminary analysis, ANDE'S tariffs appear low for industrial and residential consumers. Rates are about 40% and 24% below marginal costs, respectively; however, considering that the price of Itaipu energy will be set by Itaipu Binacional and consequently affect the analysis, the mission recommends postponing revision of the tariff levels until the price of Itaipu energy has been established. 3.19 Given the availability of hydropower, very low per capita con- sumption, clear possibilities for productive uses, suppressed demand, ll/ 11/ For example, the use of electric stoves is very low in the country and even in the Asuncion area. - 24 - and ANDE 'S healthy financial position, any significant increase in rates should be accompanied by the establishment of an electric power develop- ment fund designed to help finance infrastructure facilities for electrification of the interior (para. 3.45). Table 3.2: ELECTRICITY TARIFFS Location Marginal Cost a/ Tariff b/ (mills/kWh) (mills/kwh) Southeast (HV) 22 Asuncion (HV) 31 _ Industrial (HV) 49 35 c/ Res idential (LV) 57 46 c/ a/ The long-run average marginal cost for Paraguay has been estimated with the assumption that the generation cost (including Itaipu) is equal to the LRAIC of the southern Brazilian grid (22 mills/kwh) plus transmission and distribution costs (para. 3.39). bi US$l - 0280 c/ Average tariff for 1982 Source: ANDE Expansion Programs 3.20 Given the prospects of abundant availability of energy from Itaipu and Yacyreta, ANDE's expansion program does not require additional domestic generating capacity and therefore is limited to transmission and distribution. The long-term transmission expansion plan is based on the following general framework: (a) the dbmestic network should be able to transfer total power available for Paraguay from Itaipu over a time horizon not yet defined (very long term); and (b) in the medium term, network expansion should be consistent with the time horizon-configura- tion in such a way that construction of the growing network will not coD- flic: with the final one. 3.21 For the medium-term period, as reflected in ANDE's expansion plan, solutions are in 220 kV from Itaipu to Asuncion, one double circuit (220 kV) Itaipu-Ayolas-AsuncLon, and a 220 kV network to the north. This expansion takes into account the long-term solution. ANDE's expansion program also considers provisions to conform a 220 kV belt around Asuncion. - 25 - Increasing Electricity Use for Productive Purposes 3.22 Several studies 12/ have been carried out in Paraguay regarding possible local uses for Itaipu's energy. These have focused on installa- tion of new industries and extending electrification to rural areas. ANDE's position is that any expansion should take place without inter- rupting its service, and that new projects be economically feasible. Industry 3.23 The ideas put forward for industry may be summarized in three groups: (a) industries which use local raw materials to produce for local consumption, thus reducing import needs (flour milling, fruits, vegetables, canning, and dairy processing); (b) industries which use local raw materials and would produce mainly for export (starch, paints, coffee, agglomerated wood, etc.); and (c) industries using either im- ported or local raw material with high electricity consumption, oriented also toward exporting (cellulose, aluminum, paper, etc.). 3.24 Most of the industries in group (a), above, require only a modest capital investment and are not sensitive to electricity prices because the electricity value added is low; most of these probably also would be economically feasible. Economic benefits of most industries in group (b) would be sensitive to the price of electricity and consequently could not be fostered before the Itaipu's energy price is set. Group (c) -- electricity-intensive industries -- seems to have very little prospect in the short and medium term. To compete in the international market they need cheap energy, below the probable lower bound of Itaipu's energy prices. They may become economically feasible, nevertheless, in the long term after the medium-term debts of Itaipu have been repaid. Electrification of the Interior 3.25 Present Situation. In spite of the vigorous expansion of the power system in the past decade, 62.4% of the electric service is concenr- trated in Asuncion and its environs, 37% in the Eastern Region, and only 0.6% in the Chaco. It is fairly clear that the electrification of small towns and villages in the Eastern Region should be given priority over rural expansion of the grid for electrification of the more sparsely populated areas of the interior. Towns without service in the vicinity of the existing transmission infrastructure and areas with good agro- industrial potential, especially in some zones of the Eastern Region, should be the focus of priorities for extending electricity coverage in the country. 12/ By UNIDO, French, German, Japanese, Swiss, and U.S. consultants in separate studies. - 26 - 3.26 Because of its large territorial extension and low population density, the Chaco is a region in which electrification through inter- connections to the main grid would not be economically feasible. Elec- trification of the few populated centers in this region would require the installation of small, isolated plants or the use of nonconventional energy resources. 3.27 For the purpose of analysis, the Eastern Region has been divided into four zones - Central, Alto Parana, Southern, and Northern (IBRD Map 18241). The Central and Alto Parana zones have a high concen- tration of economic activity, dwellings, and a fair level of electrifi- cation. In contrast, in the Southern and Northern zones of the region, in which good potential for development exists, the level of electrifi- cation is very low. This situation, along with the recent interconnec- tion of the southern and northern zones, makes this latter region very attractive for electrification purposes. Table 3.2: EASTERN REGION - SOCIOECONOMIC CHARACTERISTICS No. of No. of No. of Area Dwelli ngs Plants Electricity Users (Thousand ha) (1982) (1977) (1982) Central 4,093 223,228 1,592 50,464 Alto Parana 1,490 39,531 254 16,24 Southern 3,823 81,238 356 12,686 Northern 6,565 84,168 590 7,712 Total 15,971 428,275 2,792 87,106 Aource: Ministry of Agriculture, Milistry of Industry and Commerce, and ANDE. Preliminary Evaluation of Extension Projects 3.28 Fran available information in Paraguay it was possible for the assessment mission to identify and analyze 33 possible extension projects in the Eastern Region of Paraguay (IBRD Map 18241). These projects would include the construction of 675 km of 66 kV lines, 2,190 km of 23 kV dis- tribution lines, and 1,030 km of secondary distribution circuits at an investment cost of about US$71 million (mid-1982 costs). The mission made a preliminary economic evaluation of each extension project af ter verifying that each was the least-cost solution for the selected area compared to other local generation options (diesel and wood gasification plants). 13/ 13/ Some small and remote towns were identified where local generation could be the most economical solution. - 27 - 3.29 The preliminary benefit/cost evaluation indicates that 23 of the 33 projects evaluated have an 2stimated IRR higher than 12Z. The attractiveness of most of these projects stems from the fact that they are located in the best agro-industrial areas of the country and benefit from user concentration and proximity to existing and future electrical infrastructure. ANDE is already implementing about 20% of the priority projects identified by the assessment mission. A sensitivity analysis carried out for the main parameters (investment costs, energy cost, tariffs, and industrial benefits) showed that changes of about 20% did not modify the results in a significant manner. Table 3.3 shows the projects with an IRR higher than 12%; and Annex 6 presents the results in the case of the 33 extension projects analyzed and the basis used for their economic evaluation. 3.30 The estimated investment required for the projects with an estimated IRR higher than 12% is about US$47 million; they would benefit nearly 30,000 users and increase electrical service coverage in the Eastern Region from 21% to 26%. Electric service coverage would be increased considerably in the northern area, fran 10% to 24Z, and in the southern area from 16Z to 22Z. Financial Aspects 3.31 The financing of facilities beyond power transmission is crucial to the success of electricity-use expansion in Paraguay. ANDE's policy ensures appropriate user charges at this level. Therefore, institutionalization of a source of credit with terms and conditions for the users according to their economic capability is extremely important. Preliminary calculations have shown that in order to ensure ANDE's financial health, even for projects with an economic IRR higher than 12%, the company's participation should be no more than 50% of the investment. Consequently, it will be necessary to include other sources of financing such as the Banco Nacional de Fomento (BNF), which could provide adequate banking services and credit management, and also coordinate the defini- tion of priorities in the light of other investment options for the rural areas (para. 3.44). Itaipu Status 3.32 Background. With an estimated total investment cost of more than US$14 billion for an installed capacity of 12,600 KW and an esti- mated average production of 72,000 GWh a year, the Itaipu hydroelectric plant is colossal by any standards. Its impact on the Paraguayan economy has been important during the construction stage and will continue to be so during its operational life. . -28- Table 3.3: ELECTRIFICATION OF THE INTERIOR PROJECTS IN THE EASTERN REGION WITH IRR HIGHER THAN 12Z Potential Cost Per Zone Users Total Cost User (thousand US$) (US$) Central Caazapa 1A 1,386 2,620 1,470 Caazapa 2 1,693 4,330 2,000 Cordillera 1 153 380 1,940 Cordillera 2 148 330 1,720 Caraguazu 1 561 1,290 1,790 A. Parana A. Parana 3 322 930 2,250 South Itapua 1 926 2,400 2,000 Itapua 2 337 430 1,000 Itapua 3 896 1,940 1,690 Itapua 4 794 660 650 Itapua 5 513 1,080 1,640 Itapua 6 153 460 2,360 Itapua 7 123 410 2,620 Neembecu 1 968 2,050 1,651 North San Pedro 1 465 910 1,520 San Pedro 2 2,396 6,200 2,020 San Pedro 3A 1,971 3,090 1,225 San Pedro 3B 275 810 2,290 Concepcion 1A 5,208 3,300 500 Concepcion 1B 788 1,840 1,820 Concepcion 2 795 600 590 Amambay 1 7,209 6,810 740 Amambay 2 1,530 4,200 2,140 Total 29,610 47,070 Source: Mission estimates. 3.33 The project has entered the final execution stage: major civil works have been completed (dams and spillways) and most work is now being concentrated on the powerhouses and transmission facilities. However, a schedule for commissioning the 18 units (700 KW each) has been rescheduled partly due to the lower-thanr-expected demand increases from Brazil, but also because of financial difficulties of the project. Four - 29 - 50-cycle units are scheduled to be commissioned during 1984/85, and two 60-cycle units are scheduled to be commissioned in 1986, which will start the 'commercial operation' 14/ of the plant. 3.34 Construction delays in the transmission system in Brazil 15/ are a major bottleneck to plant operations and the testing of generating units. The first DC pole is scheduled to be commissioned by end-1984 and the 750 kV-AC system will only begin operations around end-1985 or early 1986. Power demand and tests of the first units therefore will be restricted to the Paraguay load, and technical difficulties for tests are expected as ANDE can only ioad around 30% of one unit during peak hours. 3.35 Ownership. Since the owner of Itaipu is a binational entity and since Brazil and Paraguay will have to purchase the energy from Itaipu Binacional, the power facility could well be considered exogenous to the Paraguayan power sector. The binational treaty stipulates that Itaipu sales are to be priced at a value that covers mainly principal and financial charges on debts incurred by Itaipu Binacional, and operating costs. Energy not used by Paraguay from its half share of Itaipu's power is subject to compensation and each country has the right to royalties, to be paid by Itaipu Binational. 3.36 Tariff. Itaipu's tariff cannot realistically be set according to treaty provisions until all units (18) will be operating. Since a sizeable part of Itaipu's debt is concentrated in short- and mediumrterm loans, current treaty provisions would require extremely high tariffs during the initial years of operation and lower prices in subsequent periods wben only debts with extended maturities remain. If the treaty stipulations were to be strictly adhered to and no refinancing were to become available, the iational response of ANDE would be to abstain from purchasing any power from Itaipu during the initial years of operation and to rely on imports from Argentina, Brazilian power sources other than Itaipu, or even domestic thermal generation. However, this scenario is unlikely to develop and it clearly points out that the Itaipu Binacional would have to refinance its loans in order to balance its flow of funds. 16/ In any case, Brazil has guaranteed, under a separate under- standing with Paraguay, to purchase any energy from Itaipu which becomes available and is not taken by Paraguay. 14/ 'Commercial operations' has been defined as the point in time when two 50-cycle units and two 60-cycle units will be in service. The Brazil electric system operates at 60 cycles; Paraguay's system operates at 50 cycles. 15/ 750 kV (HVAC) lines and two - 600 kV (HVDC) lines. 16/ As all Itaipu loans are guaranteed by the Republic of Brazil, such a policy would not adversely affect the Paraguay economy. - 30 3.37 Two methodologies could be used to set Itaipu's tariff. First, under a pricing policy which would consider Itaipu, ANDE, and ELETROBRAS as an integrated system, Itaipu Binacional should set tariffs at a level comparable to long-run average marginal costs for the Brazilian system (about 22 mills/kWh). Such a policy, which ignores borders, would geir- erate the correct economic incentives for using Itaipu energy but would certainly run into strong opposition and therefore have little chance of being implemented. The second, and more likely, course is for a tariff to be set which would be based on Itaipu assets, as shown in Annex 7. The mission estimated such a value to be around 30 mills/kWh. This level was unofficially confirmed in Paraguay as 'realistic'; it amounts to about 60% of the equivalent cost of generation with fuel oil. 3.38 In any event, in the long term the cost of Itaipu energy to Paraguay under the treaty would be on the order of 9-10 mills/kWh 17/. This estimation is based on hypothesis which may change in the future. 3.39 It is important to note that a substantial amount of Itaipu's energy will go unutilize3 during the first three to four years of opera- tions because of lower-than-expected demand in Brazil. At least for the rest of 1984, while the first 700 MW unit is operating under test condi - tions, ANDE must supply the load for testing purposes. The testing period for additional units will continue until about 1986, when Itaipu is scheduled to begin commercial operations. 3.40 Adjustment of the Treaty. An adjustment of the treaty is being carried out to take into account the need to replace the dollarigold parity standard that was initially stipulated. At this point, however, it is very difficult to foresee the basis for agreement. In any case, the mission has estimated that the total (40 years) revenues to Paraguay from Itaipu 18/ should vary from US$470 million to US$730 million (both at present value), depending on whether the terms apply to the original treaty or a new treaty similar to the Yacyreta agreement. For illustra- tive purposes, Table 3.4 shows the estimated revenues from 1986 until 1990. (Annex 8 presents the basic elements of Itaipu and Yacyreta treaties). Yacyreta 3.41 Although the Yacyreta project appears small in comparison with Itaipu, it is clearly sizeable in its own right. The initial installed capacity will be 2,700 MW, with annual generation estimated at 17,500 GWh. Total capital costs are estimated at about US$7 billion. 17/ In 1981 constant dollars. 18/ Until Paraguay would consume all its share in the year 2027. - 31 - Table 3.4: ESTIMATED REVENUES TO PARAGUAY FROM ITAIPU, 1986-90 (US$ miLlion) Terms of the Original Treaty Adjusted Treaty a/ 1986 17 39 1987 23 53 1988 33 76 1989 33 76 1990 33 76 al Assumed to be similar to the Yacyreta Treaty. Source: Mission estimates. 3.42 At present, expenditures on Yacyreta are mainly for site devel- opment and workers' housing and haze been relatively modest. Site con- struct ion is expected to begin in 1984; consequently, the first gener- ating units should be operational around 1990-91. 3.43 In contrast to Itaipu, energy from Yacyreta is not expected to be used for domestic consumption in Paraguay. In principle, it has been assumed that Itaipu would supply energy to Paraguay at lower cost than Yacyreta. Hence, all Yacyreta output is expected to be consumed by Argentina. In the foreseeable future, the benefits to Paraguay from Yacyreta will consist of the return on its share of capital and compen- sation payments for the use of electricity. Therefore, the price of energy from Yacyreta would not be a crucial issue for Paraguay in the short or even medium term, unless the Itaipu treaty arrives at tariff levels higher than the those under the Yacyreta treaty for a period of time in which from Yacyreta energy will be avaiLable. In such case, Paraguay may consider not using energy from Itaipu at all and, instead, purchase energy from Yacyreta. In that case transmission lines would need to be constructed to transmit the energy from Yacyreta to ANDE's main grid. Recommendations Electrification of the Interior 3.44 Based on its preliminary evaluation (paras 3.25-3.31), the mission recommends implementation of the proposed first-priority pro- jects, or those with IRRs higher than 12%. To define specific prior- ities, however, it would be necessary to carry out a feasibility study for electrification of the Eastern Region. Such a study should be done to complete idpntification of specific projects, standardize pre-design and cost estim&.:es, select the least-cost solutions, carry out detailed - 32 - project evaluation, and establish the most timely work schedule. It should also take into consideration the expected agro-industrial develop- ment of the country and use data from the 1981 Agricultural Census, the 1982 Population and Dwelling Census, and recently-produced topographic maps. ANDE and the main government agencies incerested in future pro- jects (mainly the Ministry of Agriculture) should conduct the study with the assistance of consultants. Electricity Tariffs 3.45 The mission recommends revisions in ANDE's tariff levels. Taking into account ANDE's healthy financial position and any tariff increase, the mission also recommends studying the use of eLectricity among low-income groups and the establishment of an electric power development fund to accelerate electrification for productive uses in the interior. Training 3.46 As Paraguay's hydropower availability increases with the imple- mentation of the Itaipu and Yacyreta plants, che country should seek ways to economically empLoy this new and plentiful resource as a substitute for imported oiL products. The implementation of any new concept in Paraguay would involve a "learning curve" period. To accelerate this process, a small cadre of young, talented staff could be selected to begin what could become the nucleus of a group specialized in electricity and other energy know-how appLications in Paraguay. This group could find an appropriate institutional base at ANDE. The process of shaping the cadre would include a variety of training and educational programs involving: (a) formal graduate education in Paraguayan and foreign uni- versities; (b) specific training programs in universities abroad; (c) personnel exchanges with appropriate power utilities including in some cases their research centers or institutes (e.g., EPRI in the USA; Hydro Quebec Research Center in Canada; COPEL in Brazil). - 33 - IV. FUELWOOD AND CHARCOAL Fuelwood Supply 4.1 Paraguay's plentiful forestland (34% of the land surface) masks an extremely uneven regional distribution of resources and a mounting deforestation probLem. Regional imbalances are such that the main con- suming centers have lost most of their Local forestry resources, and wood is being hauled from increasingly remote areas. In addition, deforesta- tion is advancing rapidly, mostly due to the expanding agricultural frontier, and threatens to become a serious problem both from the energy and forest industry viewpoint. Regional Imbalances 4.2 Most forestry resources are in the Chaco region (70% of total productive forests), where only 3% of the population lives. About 90% of the Chaco's wood resources, however, are beyond economic exploitation because they are inaccessable or located far from the main consuming cen- ters. Only a narrow strip along the Paraguay River could be economically utilized. 19/ 4.3 In contrast to the Chaco, the southwestern region of the country, which supports 42% of the population, has already harvested almost all its forest resources. In addition, during the past decade alone (1972-82), the rapidly expanding southeastern region has experienced a dramatic reduction in its forestry resource base. While in 1972 it accounted for almost 37Z of the country's popuLation and 45Z of total forestry resources, by 1982 the percentage of the population living in the region increased to more than 40% while the share of forests dropped to onLy 30%. On a per capita basis, this region has 67% fewer hectares of productive forests than it had in 1972. Notwithstanding this reduction in resources, the soucheastern region is the main supplier of fuelwood to the southwest. Status of Deforestation 4.4 There is no reliable, country-wide data on the rate of deforestation, but rough estimates put it between 150,000 and 200,000 ha per year, or 3-4Z of economically exploitable forests. Estimates pre- pared for selected areas of the Eastern Region of the country show that forest-clearing for agriculture alone proceeds at an average rate of about 3.4% per year. In some areas of this region the rate is as high as 5-10% per year. Against this trend, there are only 7,000 ha of new forest plantations in the country. 19/ Even this strip should be managed with care because of the fragil ecological conditions in the area. - 34 - Table 4.1: DISTRIBUTION OF POPULATION AND FORESTS IN PARAGUAY a/ 1972 1982 Change in per % Popula- Forests X Popula- Forests capita forests Region - tion % Forests per capita tion I Forest per capita 1972-82 (ha) (ha) (ha) North 17.9 55.1 7.44 18.3 69.2 4.84 -35% Southeast 36.9 44.6 2.92 40.2 30.4 0.97 -67% Southwest 45.2 0.3 0.02 41.5 0.4 0.01 -50% Total 100.0 100.0 2.42 100.0 100.0 1.28 -47% a/ Excludes Chaco resources and population. b/ North: Concepcion, San Pedro, Anawmbay and Canendiyu. Southeast: Gua;ra, Caaguazu, Caazapa, Itapua and Alto Parana. Southwest: Cordillera, Misiones, Paraguari, Central and Neembucu. Sources: Proyecto FAO/FIA, TCP/PAR/0103 (T), Documento de Trabajo #8. PNUD/FAO - PAR/71-001. Informe Tecnico I8. Proyecto PNUD/FAO PAR/76/005, June 1979. Mission estimates. 4.5 If the present rates of deforestation continue, by the year 2010 there will be few economically exploitable forests remaining in Paraguay and by 2010-2020 forests would be completely exhausted. 4.6 As mencioned earlier, most deforestation in Paraguay results from the expanding agricultural frontier; only about 10% of the areas being deforested (about 20,000 ha/year) can be attributed to fuelwood consumption. When lands are cleared for agriculture, usually only saw- logs (about 10% of the volume) are utilized; the remaining 90% is burned. 4.7 Biomass being burned runs between 100 and 200 tons/ha. At a total of 137,000 ha per year, 12-24 million cons of biomass are burned each year (about four to eight times the ptesent demand for fuelwood). Any improvement in land-clearing methods which saves the wood resource from complete destruction could have a positive effect on conserving Paraguay's fuelwood resources. 4.8 At present fuelwood levels, it generally is not profitable to process and transport the unutilize-d biomass to consuming centers 200-400 km away. On average, transport costs per ton would be as high as present prices for fuelwood. Apart from the distance factor, transport costs are high because most of the expanding areas are not serviced by asphalted highways and in some areas not even by roads that are passable all year round. - 35 - Table 4.2: DEFORESTATION FOR AGRICULTURE IN EASTERN REGION -otal Ha Deforested Z Reduction Ha per Z Reduction 1975-79 1975-79 year year Itapua 200,000 19.0 50,000 4.75 Alto Parana 152,500 5.3 38,125 1.33 Canendiyu 65,000 22.5 16,250 5.63 Caaguazu 58,100 8.4 14,525 2.10 San Pedro 30,000 5.3 7,500 1.33 Amaiubay 28,500 1.8 5,625 .45 Caazapa 13,700 2.4 3,425 .60 Concepcion 4,400 42.6 1,100 10.65 Paraguari 500 4.0 125 1.00 Guaira 700 5.6 175 1.40 Total 547,400 13.6 136,850 3.40 Source: Paraguay - Observaciones sobre Politica de Manejo Forestal, Estimaciones de los Futuros Requerimientos de Rollizos y Recom- endaciones. FAO/PNUD RLA/77/019. Documento de Trabajo 13, Santiago, Chile October 1979. 4.9 Another potentially important source of fuelwood is sawmill waste. At prese t, this resource is seldom used as fuelwood. There are about 960,000 m' (solid) of this waste available per year, or about 700,000 tons (252,000 toe), but only a fourth of it is used. Lumber waste could be used as fuelwood, as raw material for pulp production, or for charcoal production (as in Brazil). However, traditional habits, the difference in sizes and shapes of lumber waste, and transport costs vis- a-vis fuelwood/charcoal prices prevent it from being used widely. Nonetheless, given the amount of waste, it would be useful to consider the economic possibilities of using it as a source of fuelwood or charcoal. Fuelwood Demand and Prices 4.10 Per capita fuelwood consumption in Paraguay is about one ton/year (or 0.36 toe/year), which is the highest in Latin America. 20/ 20/ Per capita consumption of fuelwood in Paraguay is two to three times the per capita consumption of any South American country, and a third higher than the Caribbean average. - 36 -. Industrial consumption of woodfuel, which runs at about 540,000 toe p.a., is the second highest in Latin America. 21/ 4.11 As shown in Table 4.3, fuelwood demand in Paraguay totals almost 3 million tons per year, about 52% of the demand for industrial and transport use, 38% for domestic use, and the remaining 10% for char- coal production. 4.12 Fuelwood is produced in a competitive environment, so its price reflects short-run marginal costs. In 1983, fuelwood was sold at 9 3- 4/kg but has been subject to wide seasonal variations of 50% or more. Nevertheless, the price of fuelwood is low compared to other countries, even at the official exchange rate 22/, and there is no evidence of demand pressure on the available stock of resources. 23/ Table 4.3: DEMAND FOR FUELWOOD (thousand tons) Charcoal Domestic Industry and Transport Production Total 1976 958.3 1,300.3 243.0 2,501.6 1979 1,046.9 1,421.4 265.4 2,733.7 1982 1,128.6 1,568.9 289.9 2,987.4 Source: Energy Balances, 1976-82. 4.13 The relative abundance of forestry resources and the fact that a significant fraction of the population has free access to fuelwood con- ceal the fact that deforestation is advancing at a considerable rate. This situation distorts the true long-run economic cost of the resource (leading to waste), and does not provide any economic incentive for Le- forestation. An ideal solution would be to introduce a direct tax on 21/ The highest user of fuelwood in industry is Brazil, with 3.4 million toe. Other important users of wood after Paraguay are (in thousands) Chile (447 toe), Peru (367 toe), Guatemala (324 toe), and Honduras (102 toe). 22/ For example, at the official exchange rate the price of fuelwood in Paraguay is US$24/ton, while in Peru it is US$34/ton. 23/ During 1975-82, fuelwood prices rose at an average rate of 6.3% per year, or about half the average rate of increase in the GDP deflator (12.1% per year). - 37 - Itstumpage", but the practical problems associated with its implementation are obvious. As an alternative measure, given that the expansion of the agricultural frontier is the main cause of deforestation, the assessment mission recommends that the Government introduce a special tax on land- clearing, or on land concessions, the proceeds of which should be put into a reforestation program. Organization of the Sector 4.14 The forestry sector and government forest lands are managed by the Servicio Forestal Nacional (SFN), which is part of the Ministry of Agriculture (MAG). For the purpose of administering forests, the SFN has divided the country into districts, but these have not yet functioned as reforestation centers. A Lack of funding and manpower constraints have prevented the SFN from having an effective impact on reforestation. Financial Constraints 4.15 The most important source of funding for the SFN is the Fondo Forestal, which obtains its income mainly from permit charges for moving wood from forest to market. The SFN budget for 1982 of g242 million (US$1.9 million at the official exchange rate) is insufficient to take care of the needs of the forestry sector. Priority reforestation actions and studies are estimated to require about US$2.8 million for 1984-85 (see Annex 9 for details). Manpower Constraints 4.16 The SFN has only 46 forest engineers out of a total of 221 employees. A mission from the Federal Republic of Germany has estimated that by 1985 there ought to be 210 forest engineers for the whole country but, given present practices, it seems unlikely that the demand for foresters will rise to that level in the next two years. The energy assessment mission considers that 50 additional foresters for 1985 (of which 15 should be in the SFN) would be a more realistic assessment of short-term manpower requirements. By the year 2000, however, the country's need for forestry engineers could rise to about 500. The demand for foresters would increase if the forestry capabilities of the Servicio de Extension Agricola y Ganadera (SEAG) are strengthened, if the newsprint mill project (a current proposal involving foreign investment) comes to fruition, and if the watershed management and reforestation com- ponents of the Caazapa project (IBRD Loan No. 2087-PA) are implemented. It is estimated that there will be only 300 new graduates in forestry by the year 2000, so there might well be shortages of trained personnel in the medium to long term. - 38 - Reforestation Programs The Government's Reforestation Plan 4.17 In 1976, the Government initiated a ten-year reforestation plan to be financed through fiscal incentives. This scheme, however, has failed to materialize. The plan was to put 77,000 ha into forests, but to date only 7,030 ha have been planted. Under the fiscaL incentive scheme, the income taxes of Landholders could be entirely diverted for reforestation. This incentive system has not worked because most farmers do not earn enough to pay income taxes. In addition, actual tax refunds from the Government take two years to be reimbursed (a requirement is that after 2 years there must be 80% survival of trees planted), so most farmers, small or Large, have hesitated to tie up financial resources whose returns were uncertain for a period of two years. 4.18 Aside from the financial problem, proper implementation of the plan has been precluded, as noted earlier, by a lack of forestry per- sonneL to administer the program. Thus, the plan floundered until 1981, when the U.S. Peace Corps signed an agreement with the SFN and began to supply technical assistance through graduate foresters, but no financial resources. With the Peace Corps on the scene, the tempo of reforestation accelerated. So far, 13 tree nurseries have been established out of a goal of 20. 4.19 These nurseries have been started with meager resources. Sometimes land is leased or, if government-owned, granted to the "nucleo". 24/ The "nucleo" team must build all installations, inform the local population about the program, deliver the seedlings, train the farmers in tree planting and care, and run yearly checks on the progress of the small plantations. The program has no funds to hire labor when the critical time of seeding comes, and most important, for keeping the nursery beds weeded. Each of the nurseries needs a full-time laborer to free up the forester and technician to concentrate on disseminating program information. 4.20 An additional problem is finding the right tree species for the various soiLs. Since a major objective is to plant trees for fuelwood, the species must have high density. The "nucleos" have limited experi- ence in matching selected fuelwood species to conditions in different parts of the country. This type of research, dissemination of the program to farmers, and putting in demonstration plantations are the activities on which the foresters and technicians should concentrate their efforts. 24/ A smaLL team consisting of an agricultural extension agent from the SEAG, a forester from the Peace Corps, and a forest technician from the SFN. - 39 - Fuelwood Recommendations 4.21 A national plan for fuelwood and rural energy should be devel- oped and adopted. A two-pronged attack should aim at: (a) establishing fuelvood plantations, especially in the fuelwood-scarce southwest area; and (b) reducing domestic fuelwood consumption by increasing the use of fuel-efficient stoves in rural areas. To achieve both objectives it is important to stress that a major coordinated effort will be required on the part of all public and private institutions related to the forestry subsector. The first ster toward articuLating an organized response to this challenge would be to design a national fueLwood plan which should define in detail the implementation of the measures recommended below: (ai In order to ensure long-term fuelwood supply to Paraguay, a twofold program should be adopted consisting of: (i) a minimal 10-year reforestation program for the worst-affected areas, and (ii) a support program for the remaining areas of the country. The SFNISEAG/Peace Corps "nucleos" program should serve as a base to the reforestation program. A plan should be developed to make this program into a permanent part of SEAC and SFN. Preliminary cost calculations for these programs are presented in Annex 12. (b) The undertaking of a national fuelwood demand survey. Detailed information on household and industrial consumption is urgently needed. Information on specific gravities, moisture content and calorific value of the different wood species is also required. If funded. the survey could be carried out through the Facultad de Ingeiieria Forestal at the National University, and the Centro Fcrc3tal in Alto Parana. (c) A survey shouLd be undertaken on stove design and acceptance, and on the rural population's behavior and perceptions con- cerning fuelwood consumption and supply problems. 25/ This should be the basis of an effort to promote utilization of fuel-efficient stoves. 4.22 In addition to the actions mentioned above, the following studies, in order of priority, are needed: 26/ (a) In view of the large volumes of forest biomass being burned every year in land clearing operations, a study should be 25/ The World Bank has developed a Fuelwood Survey Package which could be adapted for Paraguay. 26/ A preliminary cost estimate for these studies is presented in Annex 10. - 40 - carried out to determine the economic feasibility of capturing some of this material, either through preparing fuelwood in the traditional manner or by making fuel chips in the forest and transporting them to industrial sites for use as fuel. In addition, the Government should consider a special tax on land- clearing operations, the proceeds of which should be channeled into the reforestation program. Part of this study also should be devoted to determining the economics of using lumber waste for domestic or industrial fuelwood, or making charcoal from it at the individual sawmills. (b) A land-use and land-classification map should be prepared at a country-wide level in order to determine which lands now used for agriculture should be reforested, and which forest lands not appropriate for trees should be converted into agricultural lands. Charcoal Supply and Demand 4.23 Until 1980, the charcoal subsector in Paraguay did not present any significant problems. Per capita consumption of charcoal in Paraguay, at about 19 kg/year, is rather low compared to other Latin American countries, 27/ and total demand, at about 58,000 tons/year, requires only about 2,300 ha of forest, or 2% of forest lands being cleared every year. The production of charcoal is carried out by small- scale producers using beehive brick kilns. This is probably the most efficient method in or near the forest. 4.24 In the period 1980-82, charcoal prices started to escalate at an average of 23Z per annum (compared to 12% for the GDP deflator). This increase is most probably due to increases in liquid fuel prices, since transport costs represent about 50% of total costs in charcoal production (charcoal is brought into the main consuming centers from a distance of 100-200 km). Moreover, in the near future, prices may rise even faster as ACEPAR's steel mill comes on stream. 4.25 The ACEPAR steel plant, designed to produce 150,000 tons/year of non-flat products, is a government-sponsored facility which will employ charcoal blast furnaces in the steel-making process. This technology is well known and used in Brazil. In fact, ACEPAR is a joint venture with a 40% equity participation of two Brazilian firms; the re- maining 60Z is held by Siderurgica Paraguaya, S.A. (SIDEPAR) -- a govern- ment-owned company. The plant is located on the Paraguay River at Villa 27/ For example, per capita consumption is 40 kg in Brazil and Ecuador, and 30 kg in Uruguay. - 41 - Hayes, about 24 km upstream from Asuncion. The main raw materials manganese and iron ore - will come from Brazil, some 950 km from the plant. 4.26 Although the feasibility of the project may well have required closer study before its implementation, construction is now well ad- vanced, and the plant will start operating within 18-24 months. Conseq- uently, the mission looked into this matter strictly from the energy viewpoint, particularly with respect to its impact on charcoal and, hence, fuelwood supply. 4.27 The plant is expected to start using 60,000 tons of charcoal per year and, when steel production reaches design capacity, demand will more than double, to 130,000 tons/year. By that time, total demand for charcoal in Paraguay will more than triple, so the impact of ACEPAR's demand on the fuelwood/charcoal market is a matter of obvious concern. 4.28 The question of charcoal supply to ACEPAR is still an unre- solved and pressing issue. Plants operating with ACEPAR's technology normally start plantations five to eight years ahead of actual plant start-up. One of the major constraints for ACEPAR is the lack of fi- nancial resources to invest in fuelwood plantations. As a consequence, ACEPAR is currently favoring the alternative of producing 20Z of its charcoal requirements in Capiibary, San Pedro (about 300 km from the plant) because government land there would be granted free of cost. Options for ACEPAR's Supply of Charcoal 4.29 Transport Versus Land Costs. The assessment mission reviewed this matter with a view to heLping determine the least-cost solution for ACEPAR. The analysis reveals that transport cost advantages favor the purchase of land close to the plant (see Table 4.4, below). For in- stance, using a discount rate of 12%, production at 100 km distance would produce total net present savings of about t320 million, which represents one-and-a-half times the investment required in Capiibary during the first year. 4.30 The analysis is approximate and would need more careful study of actual land sites for reforestation and charcoal production. Nonethe- less, it strongly indicates that ACEPAR should look for land closer to the mill instead of starting production in Capiibari. 4.31 Economics of Scale. Another important aspect that the mission considered is whether ACEPAR should increase the scope of its own planta- tion due to the relatively high initial fixed costs. Table 4.5 presents the net present costs per ton at different scales of output and discount rates. The calculations show that there are moderate advantages derived from producing at a larger-than-envisaged scale. - 42 - Table 4.4: NET PRESENT COSTS PER TON OF CHARCOAL AT VARIOUS DISTANCES (in guaranies) a/ -----Distance from ACEPAR--- Discount Rate 100 km 200 km Capiibary 12Z 19,496 20,541 20,945 15Z 20,296 21,318 21,643 20Z 21,543 22,525 22,732 a/ c.i.f. ACEPAR plant Note: Charcoal prices are presently ˘ 15,000-20,000/ton. Source: Mission Estimates (Annex 11). Table 4.5: NET PRESENT COSTS PER TON OF CHARCOAL AT DIFFERENT OUTPUT LEVELS (in guaranies) Discount Rate 30,000 tons 60,000 tons 90,000 tons 12% 20,945 20,445 20,278 15% 21,643 21,048 20,850 20% 22,732 21,973 21,720 Source: Mission Estimates. Recommendations on Charcoal 4.32 With respect to the supply of charcoal to ACEPAR, the assess- ment mission recommends that: (a) ACEPAR seek suitable land areas and tree species 28/ to plant fuelwood. Once potential areas are located, the decision should dlpend on the trade-off between distance and land prices. The evidence collected by the mission indicates that the currently favored alternative is not optimal; 28/ The UNDP is currently sponsoring a pilot project to help determine the appropriate species and production technology for ACEPAR charcoal requirements. - 43 - (b) having decided on the plantation site, ACEPAR should analyze carefully the optimal scale of operations. The evidence so far indicates that a larger-than-envisaged scale may be optimal, but this should be confirmed through a detailed study; (c) in order to satisfy ACEPAR's demand for charcoal over and above its own production, a system of long-term contracts with local producers should be organized. It is also recommended that special clauses for protecting the environment be included. This could be carried out by setting operational standards for managing forest plantations under contracts with ACEPAR; (d) given the availability of large quantities of sawmill waste which are burned every year, it is important to study the economic possibilities of producing charcoal from this resource. If feasible, this would minimize the deforestation impact of ACEPAR's charcoal procurement and improve resource utilization in Paraguay. - 44 - V. PETROLEUM SUPPLY Background 5.1 Paraguay imports 100X of its petroleum requirements. The key issue in the subsector for Paraguay concerns the high supply costs of petroleum and petroleum products. This problem can be attributed in part to the high transportation costs associated with shipping petroleum to landlocked country such as Paraguay. Another factor, however, is the small size and limited flexibility of the country's 7,500 BD refinery. This chapter addresses the issue with a view to reducing petroleum procurement costs. 5.2 Petroleum supply arrangements are the responsibility of Petroleos Paraguayos, S.A. (PETROPAR), which is owned 60% by the Govern- ment of Paraguay and 40% by a private company called Refineria Paraguaya, S.A. (REPSA). PETROPAR imports Algerian crude oil via Argentina for pro- cessing in its refinery in Paraguay. 29/ Consisting only of a distilla- tion unit with associated storage and utility facilities, the refinery cannot readily process other crude oils or vary the yield or quality of products. Retail marketing of petroleum products is carried out by Esso Standard Paraguay S.A., Shell, and a local company called COPETROL. Some diesel and fuel oil is sold directly by PETROPAR. 5.3 Paraguay's import levels of crude petroleum and petroleum pro- ducts for 1978-82 are shown below. Table 5.1: IMPORTS OF CRUDE PETROLEUM AND PETROLEUM PRODUCTS, 1978-82 (barrels) Year Crude Oil Petroleum Products 1978 2,043,000 979,000 1979 1,951,450 842,000 1980 1,728,260 1,216,000 1981 1,707,970 1,334,000 1982 1,426,090 1,448,000 Source: Energy Balances for Paraguay, 1978-82, and mission estimates. 29/ Installed in 1966, the refinery was designed for Algerian light crude (440 API), known as Saharan Blend. - 45 - The transport of crude oil from Argentina to Paraguay takes place principally via the Parana and Paraguay Rivers (IBRD Map No. 18174). Under an agreement with Argentina, crude oil purchased by Paraguay is stored at, and transshipped from, Zarate, about 70 km up-river from Buenos Aires. This routing is necessarily expensive, which is reflected in the fact that handling and transport between Argentina and the refinery account for 17% of the total crude oil cost to Paraguay, whereas ocean transport accounts for only 2Z of the total cost of the crude oil. 5.4 Petroleum products are imported from various countries to balance market demand. Certain products such as aviation gasoline, pre- mium motor gasoline, and asphalt cannot be produced in the refinery and in any case must be imported. Imports of diesel oil and LPG have grown at particularly rapid rates as a result of high consumption growth and the inability of the refinery to produce nore diesel oil. Petroleum products can be imported into Paraguay for significantly less than the cost associated with equivalent refinery production in Paraguay (paras. 5.11-5.12). This situation still persists with the downward trend in International crude and product prices. Table 5.2: MAIN PETROLEUM PRODUCT PRODUCTION AND IMPORTS AS PERCENTAGE OF CDNSUMPIION a/ 1978 1979 1980 1981 1982 (thousand barrels) Motor Gasolines Production 620 620 539 458 470 Net Imports a/ 190 233 354 354 247 Consunption 810 853 893 812 717 Imports as Z of Consumption (23.5) (27.3) (39.6) (43.6) (34.4) Middle Distillates Production 1,311 1,233 1,079 1,010 885 Net Imports a/ 649 665 1,025 1,100 1,234 Consumption 1,960 1,898 2,104 2,110 2,119 Imports as Z of Consumption (33.1) (35.0) (48.7) (52.1) (58.2) a/ Imports by difference. SmAll discrepancy with official import figures, partly due to inventory changes. Source: PETROPAR. 5.5 Although the capacity of Paraguay's refinery was expanded from 5,000 BD to 7,500 BD in 1982, it remains extremely smanll; the bulk of the refineries in the world typically have a capacity of 50,000-100,000 BD or - 46 - more. While PETROPAR has succeeded in producing a high percentage of middle distillates (about 55% of total product output) at its refinery, the demand for these products, particularly diesel oil, requires signifi- cant amounts of imports to meet domestic requirements. Motor gasoline yields at the refinery have varied in the 24-29% range. For middle dis- tillates, mainly diesel, the proportion of imports to consumption has tended to grow rapidly in recent years, as shown in Table 5.2. 5.6 Crude throughput at the refinery has fallen recently -- from more than 6,000 BD 30/ in 1977-79 to 4,400 BD in 1982. This might well reflect PETROPAR's recognition that low product prices on the interna- tional market have tended to favor product imports over local refining. Petroleum Product Prices 5.7 The prices of petroleum-based fuels are set at the recommeada- tion of PETROPAR, and price adjustments must be approved by the Ministry of Industry and Commerce and the Economic Coordination Council, which is the main decision-making body in the Government dealing with economic matters. With the exception of kerosene, petroleum products are priced at or above their opportunity costs, as shown in Table 5.3. 31/ In the case of kerosene, prices are only slightly below opportunity cost, reflecting policy decisiona to protect lower income groups. Fuel oil prices are above or below opportunity costs depending on whether or not the refinery produces in exc!ss of the country's needs or whether imports are required. 5.8 In the price structure, there is a distortion produced by the substantial price difference between gasoline and diesel oil which has allowed a strong penetration of diesel-powered engines in transport, including light vehicles for private transportation. Since diesel oil is now priced above its opportunity cost, however, the main cost to the economy as a whole is the relatively high foreign exchange cost of diesel-powered light vehicles. The net economic costs of such a distor- tion 32/ are not significant since yearly additions to the light vehicle 30/ About 20% above nominal capacity. 31/ In the case of petroleum products, the opportunity cost is cal- culated as the cost of importing the products and delivering them to the main distribution center in Asuncion. 32/ The difference in price and maintenance costs between diesel and gasoline-powered cars minus fuel savings from the use of diesel cars. - 47 - Table 5.3: RETAIL PRICES AND OPPORTUNITY COSTS OF PETROLEUM-BASED FUELS, MAY 1984 (in US$/gallon) Opportunity Retail Price and Percentage Cost a/ of Opportunity Cost (˘280/US$) b/ Regular Gasoline 0.99 2.03 (205) Premium Gasoline 1.14 2.44 (214) Kerosene 1.02 0.94 (92) Diesel Oil 0.96 1.08 (113) Jet Fuel 1.02 1.15 (113) PG 0.77 1.20 (156) Av. Gasoline 1.80 2.43 (135) a/ For petroleum products: Aruba, November 1983, posted prices, except for avgas and premium gasoline (November 1982), plus estimated transport costs. bi Average effective exchange rate for 1983. Source: PETROPAR and mission estimates. fleet are small (probably less than a thousand per year). Efforts to eliminate the price distortion between the two fuels are discussed in further detail in Annex 13. The assessment mission concluded that for Paraguay any significant price increase for diesel would be quickly countered by contraband imports. 5.9 As shown in Annex 14, the 1983 tax rates on regular gasoline (56% of the ex-refinery price) and premium gasoline (65.5Z of the ex-re- finery price) are designed to discourage consumption of these fuels, which are used mainly in private passenger cars. On the other hand, the relatively low tax rate for diesel oil (16.1% of the ex-refinery price) reflects government support for coamercial transportation and agricul- ture, where the diesel-powered tractor has become the major vehicle for commercialization of farming. Similarly, the low tax rate on kerosene (4.8% of the ex-refinery price) is designed to protect low-income groups. Petroleum Supply Issues Reducing Supply Costs 5.10 Because Paraguay's refinery is extremely small and of limited flexibility by world standards, the assessment mission examlned available data and concluded that significant savings would be achieved if Paraguay were to close the plant or, alternatively, place it on standby - 48 - (mothballing) and import all required petroleum products. In its analysis, the mission considered various options for modifying the plant as well as changes in the type of feedstocks used in the refinery. 5.11 To begin, the mission compared PETROPAR's procurement costs for Saharan Blend from Algeria plus estimated refining costs for the slate of products produced in the refinery in 1982, with the cost of importing the same composition of products produced at the refinery (Annex 15). From this analysis it was concluded that the 1982 slate of products would cost the equivalent of US$41.97/bbl if produced in the refinery at November 1983 prices, as compared with a weighted average price of US$39.12 (cif refinery) if the same products had been imported. 33/ Ocean freight represents only 2% of the average product cost for Saharan Blend and 3.7% for imported products and therefore is not a major factor in the cor- parison. 5.12 PETROPAR Total Costs and Refining Costs. One measure of PETROPAR's overall efficiency would be a comparison of its total costs, in terms of US dollars per barrel of oil, with estimated costs of petro- leum procurement and refining only. Since details on PETROPAR's refining and other operating costs were not available to the mission, we compared PETROPAR's reported total costs, including administrative costs (˘24.4 billion for 1982, the most recent full year of operations), with esti- mated petroleum and product procurement costs based on published data, plus estimated refining costs. At e 126/US$1 (reported as the exchange rate for PETROPAR petroleum purchases) the company's estimated costs were equivalent to US$60.53/bbl (Annex 16). In contrast, estimates based on published data for crude and product export prices, transport costs, and a separate estimate of refinery costs indicate a total of US$48.12/bbl, or about 20% lower than the corresponding price per barrel for PETROPAR's estimated total costs mentioned above. 34/ 5.13 The vulnerability of the Paraguayan refinery is not surprising in light of the current situation and outlook for the economics of refining in the world today. OPEC countries have been building refineries over the past several years with the intention of increasing 33/ The US$39.12/bbl figure is based on a calculated price of Saharan Blend crude of US$31.33/bbl, CIF Buenos Aires. PETROPAR, however, has been paying US$38.00/bbl. 34/ The estimate assumed that PETROPAR purchased crude oil at the Algerian official price FOB Arzew, Algeria, and that products were purchased at Aruba or Netherlands Antilles published export prices. Products purchased from other sources, e.g., Brazil or Argentina, would not be expected to be higher than Caribbean prices on a CIF basis. Refinery costs were assumed to be the equivalent of US$5 million, which would be typical for a refinery like the one in Paraguay. - 49 - their share of the ref ining industry worldwide. At the same time, falling product demand has resulted in massive over-capacity and refinery sbutdowns. These d&-elopments have combined to depress product prices relative to crude oil, and the situation is expected to change only moderately over the medium term. As a result, investment in new crude refining capacity is difficult to justify at this time. Moreover, only the larger and more efficient refineries can usually afford to stay in operation. 5.14 It also should be noted that PETROPAR is purchasing crude oil at official government selling prices, or posted prices. Under prevail- ing prices in the international market, however, refiners elsewhere have been purchasitLg an increasing part of their crude supplies on the spot market. With surplus conditions in the international market, spot prices have been lower than official prices and have been higher for only short periods of tight supply over the past several years. PETROPAR therefore would benefit by buying at least part of its petroleum on the spot market as long as it continues to refine crude oil. Refinery and Petroleum Supply Options 5.15 In view of the probability that importing petroleum products would be much cheaper than refining crude oil in Paraguay, the assessment mission proposes that the Paraguayan authorities give priority considera- tion to closing the refinery at Villa Elisa. Alternatively, if economically justified, 'mothballing- the refinery might be considered. In either case, one means of importing petroleum products would be via pipeline from the coast of Brazil. The option of refining reconstituted crude instead of Saharan Blend might also be considered, as outlined below. 5.16 Refinery closure versus 'mothballing". The mission's analysis and the medium-term outlook for petroleum product prices in the world market strongly suggest closing the Paraguay refinery. And, while further detailed analysis might well rule out "mothballing' the refinery facilities (i.e., placing them on standby) on economic grounds, this option should be considered as part of an overall study of alternative refinery operations in Paraguay. If 'mothballing" is found to be economically justified, the facilities could be placed on standby for possible future use. In this case, the refinery would continue to be used as a receiving, blending, and shipping depot; processing units would be maintained in sound condition for possible future refining operations in the event that they become profitable. 5.17 Product pipeline from Brazil. One supply option that has been discussed in the past is a possible pipeline from the coast of Brazil. The assessment mission recommends that the feasibility of a pipeline for petroleum products, rather than for crude, be investigated under the assumption that the Paraguayan refinery would be closed or 'mothballed-. The mission estimates that the pipeline cost would be closer to US$150 million, assuming an 8-inch line and an investment cost of about - 50 - US$200/mile. Estimated costs under this option should be compared with the cost of the present barge transport by river from Argentina. Assam- ing pipeline investment costs of about US$150 million and annual operat- ing costs around US$30-35 million, a pipeline alternative might compare favorably with present transport via barge. An 8-inch pipeline would allow spare capacity for future load growth of about 20,000 BD. Power for pumping the oil through a pipeline could be drawn from Itaipu, thus saving some oil required for barge transport. 5.18 Refining reconstituted crude oil. As part of the review to determine petroleum cost reduction alternatives, the proposed study men- tioned above might include the option of refining reconstituted crude oil in the event that a decision is made to keep the refinery operating. This option would require little or no investment; it would involve acquiring a blend of crude oil with naphtha and middle distillate so as to permit production in balance with domestic demand. Most reconstituted crude produced at Caribbean refineries requires reforming and desulferization capacity to meet product specifications. A blend of semi-refined pro- duct, however, could be obtained to fit the Paraguay refinery and market demand. If the cost turns out to be at least equivalent to the cost of the products purchased separately, then the choice of this option would depend on transport and refinery operating costs. If this option were feasible, producing a suitable blend probably would require g-vernment negotiation with an oil-exporting country such as Mexico or Venezuela which has sufficient refining capacity. Petroleum Product Storage and Inventories 5.19. On several occasions as recent as October 1983, petroleum products have been in short supply in Paraguay, thus causing costly in- terruptions in commercial transport and tractor use on farms. These shortages have been partly attributed to general difficulties encountered by a landlocked country in securing supplies from foreign sources. While some of these difficulties are indeed beyond PETROPAR's control, erratic supply has been exacerbated by the problem of inventory control. Con- sidering Paraguay's complete reliance on foreign suppliers, it is important that PETROPAR maintain oil product inventories at high enough levels to ensure supplies whenever import delays occur. At the same time, this should be balanced against the high cost of holding inven- tories. Annex 17 shows storage capacity and inventories reported for December 31, 1982. In general, storage capacity seems adequate, but inventory management needs improvement. Organization, Management and Financial Aspects (PETROPAR) 5.20 For a relatively new organization, PETROPAR seems to be operat- ing with reasonable efficiency. There are, however, some areas in which improvements can be made. Excessive petroleum supply costs, for example, might be attributable in part to inexperience in the field of petroleum procurement, as well as to other factors. - 51 - 5.21 PETROPAR's refinery is well-maintained and appears well man- aged. Total staffing, however, is high at 180; many refineries of this capacity operate with half as much staff. Also, refinery fuel losses are high. Since no detailed refinery cost figures were made available to the missiou, it was not possible to directly assess the cost performance of the refinery. 5.22 As shown in Table 5.4, PETROPAR's "profit" (Limited to 7% by statute) amounted to gl.71 billion (US$13.6 million at *126/US$1) in 1982. Of this amount, 602 (0 650 million) was paid to the Government and 40% (˘430 million) to REPSA, PETROPAR's private sector partner. 5.23 By government decree, automatic price adjustments are allowed whenever PETROPAR's costs exceed its revenues by 2%, after allowing for the fixed 7% "profit" provided for in PETROPAR's charter. To provide an incentive to contain costs, it would be appropriate to link PETROPAR's ex-refinery prices to some measure of world prices, such as Caribbean posted prices plus transportation and handling costs, or a suitable combination of export prices, including those quoted in European and Middle East export centers. Recommendations 5.24 PETROPAR should take the following actions to reduce petroleum procurement costs: (a) With the assistance of consultants, explore alternatives that would permit petroleum supply to Paraguay at lower cost than under present arrangements. For this purpose, the consultants should carry out a study to examine: (i) the economics of closing versus "mothballing" the refinery at Villa Elisa; (ii) the feasibility of a product pipeline from the coast of Brazil to the refinery site in Paraguay; and (iii) the feasi- bility and comparative costs of substituting reconstituted crude oil for Saharan Blend in the event that the study finds maintaining refinery operations to be the Least-cost solution. (b) For the present, while the refinery is still operating, PETROPAR should: (i) procure a significant percentage of its crude oil purchases on the spot market; (ii) in connection with petroleum storage capacity and inven- tory management, carry out a detailed analysis of supply reliability in order to determine the optimum level of stocks and; (iii) with the purpose of improving the management of its opera- tions and reducing petroleum supply costs, PETROPAR should - 52 - carry out a training program by seconding staff to other national oil companies or through staff exchanges with such companies; and review auditing procedures to improve cost control. Table 5.4: SUMMARY FINANCIAL RESULTS OF PETROPAR, 1982 (billion guaranies) Revenues 30.88 Costs 24.40 Net Revenues 6.48 Less PETROPAR Statutory Profit a/ 1.71 Surplus Available after Statutory Profit 4.77 Allocation of Surplus To PETROPAR for Operating Capital 3.77 Reserve for PETROPAR Investments 1.00 4.77 Allocation of PETROPAR Statutory Profit 10% to PETROPAR Legal Reserve 0.17 Income Tax Payment 0.46 Government Share (60%) 0.65 REPSA Share (40%) 0.43 1.71 a/ 7% of costs Source: PETROPAR. 5.25 The initial studies proposed above would require 6-8 man/months of consultant services, plus two Paraguayan technicians, and support personnel and facilities. The estimated total cost of carrying out these activities would be US$100,000-$150,000. - 53 - VI. PETROLEUM EXPLORATION Overview 6.1 I'araguay has no crude oil or natural gas production. Thirty- nine exploratory wells have been drilled in the country since 1947, but no commercial quantities of hydrocarbons have been discovered. It cannot be said, however, that oil companies have not shown interest in explora- tion. As evidence of this interest, expenditures of US$150 million would be required today to acquire the data obtained by the companies through past exploration activities in Paraguay. In any case, large areas of the country have remained unexplored, and several companies have indicated that further exploration would be warranted. With a modest amount of outside help, the Government could play an important role in acceLerating exploration by undertaking a small exploration promotion program designed to attract the necessary high-risk investment by private companies. 6.2 Exploration work carried out thus far has made it possible to obtain useful knowledge of the subsurface in areas already explored. On the basis of this information, renewed exploration aided by up-to-date techniques of data acquisition and interpretation would be worth pur- suing. As a result of past exploration efforts, it would be possible, for example, to better understand the subsurface of the Chaco, where most exploration has taken place. Ceology 6.3 What appears superficially to be a single, Large geological province in the Chaco can be seen as a number of smaller regional sub- divisions. The major subdivision is the Central Chaco High, which dominates the area and on which the Devonian section is either at the surface or at a shallow depth below younger sediments. To the north of this High is the Curapaity Basin and, to the southwest, what is known as the Carandaity Basin. Farther to the southwest in the Chaco is the Pirity Basin and directly south, the ill-defined Pilar Sub-basin (IBRD Kap 18174). 6.4 Part of the Chaco area (the Carandaity Basin and the adjacent Boqueron Arch) has been explored by some 1,500 km of seismic lines, 22 unsuccessful exploratory wells, and five stratigraphic tests. Although this particular area would seem to have little remaining potential, the presence of source rocks and excellent reservoir rocks in the overlying sediment suggests that further exploratory work would be warranted. As only three exploratory wells have been drilled on the up-dip edge of the Curupaity Basin, it must still be considered to have some potential. The Central Chaco High is considered to have no potential since no reservoir rocks have been encountered to date in the Devonian section. The Pirity Basin, on the other hand, is known- to have source sediments in the lower- most Eocene section as well as in the Cretaceous. A well across the - 54 - border in Argentina (YPF Palmar Largo -1) tested about 3,000 BD of oil in December 1983; therefore, further exploration in the adjacent area in Paraguay appears to be warranted as the basin must be considered to have moderate potential. The Pilar Sub-basin is unknown and therefore cannot yet be evaluated. 6.5 The Parana Basin in eastern Paraguay has been tested with only two exploratory wells and about 2,000 km of seismic. Since moderate structural development is present along with poor-to-medium source rock and highly porous reservoir rocks, this basin is considered to have moderate potential. Psst Exploration 35/ 6.6 Exploration for hydrocarbons in Paraguay began in the mid-1940s when the Union Oil Company of California undertook an exploration program in the Chaco. Exploration has been sporadic over the years. Until about 1975, all such activities took place only in the Chaco, where geological formations - known to have produced oil in and along the Andean foot- hills in Argentina and Bolivia -- were the objectives. These same forma- tions remain the main exploration objectives in Paraguay. Because of the extremely large size of the Chaco and the normal sequence of exploration in such cases, seismic work has been limited to reconnaissance, as opposed to detailed, seismic surveys. 36/ 6.7 Of the 39 exploratory wells completed in Paraguay to date, none has tested hydrocarbons except for the reported gas flow in the Pure Mendoza No. 1 well. Yet moderate prospects prevail in view of the exis- tence of what appear to be many large, well-defined structures. In sum- mary, the information obtained from the unsuccessful wells, plus the total of more than 12,000 km of seismic. work completed, has made it possible, for analytical purposes, to divide the country into large geo- logical features. The boundaries separating these major features, parti- cularly those in the subsurface of the Chaco, are uncertain and could change as new data are obtained. 35/ See Annex 19 for an exploration history chart. 36/ This appears to have been the strategy of Texaco/Marathon and the REPSA/Petrolera de Chaco/Esso/Aminoil group. For the most part, these and other companies (Pennzoil, Victory Oil, and Trend Exploration) based their exploration strategy in Paraguay on oil discoveries or exploration in contiguous areas of Argentina and Bolivia. - 55 - Current Exploration and Outlook 6.8 Five companies or groups have concessions or prospecting per- mits in Paraguay, as shown on IBRD Map No. 18174. Of these, only one - Pecten (Shell US)/Trend - has undertaken any exploration activity recently. In December 1983, this joint venture group completed a mag- netotelluric survey in their large prospecting permit area which lies along the Paraguay River. The company is now interpreting the data. Neither Pecten/Trend, which is the largest group involved in Paraguay, nor the other prospecting permit and concession holders have plans for exploration in 1984. This lack of activity reflects, in large part, the general slowdown in exploration in the world oil industry. 6.9 Nonetheless, some of the smaller groups, which have been ac- tively seeking partners, might attract investment from the oil discovery in Argentina, which is in the Pirity Basin and only about 28 km from the Paraguayan border. If drilling is successful in Argentina, a major company can be expected to show interest in obtaining an exploration concession in Paraguay on part of the present permit areas near the reported oiL find. Petroleum Legislation 6.10 Present legislation dealing with petroleum exploration in Paraguay is one of the most liberal in the world. Because of its lenient terms, particularly those which allow prospecting permits to be obtained at virtually no cost, the law has attracted a few promotional-type companies without resources to carry out meaningful exploration. The law's terms, however, also have attracted large international companies that have invested sizeable sums of money .n exploration. Other specific provisions of the petroleum law would tend to encourage exploration, par- ticularly if supplemented in the future with a modest petroleum exploration promotion program sponsored by the Goverrment. From an examination of the concession agreements between Paraguay and some of the large companies, financial obligations have been fair and were probably exceeded substantially by the oil companies. Organization of Petroleum Exploration and Requirements 6.11 Day-to-day handling of petroleum exploration matters, as well as those dealing with mineral resources, is the responsibility of the Direccion General de Recursos Minerales (DGP;R) in the Ministry of Public Works and Communication. The main functions of the DGRM with respect to the oil industry are to: (a) prepare documents dealing with concessions and permits; (b) audit operations of the companies while their programs in Paraguay are in progress; and (c) receive, file, and safeguard explo- ration data that the companies are required to furnish the Government under the Petroleum Law. - 56 - 6.12 Because DGRM lacks the specialized expertise and staff to carry out all of these functions, it has not been able to evaluate the work of the companies or advise the Government on terms of petroleum exploration agreements. Also, because of the intermittent pace of exploration over the years, the DGRM has not been able to gain sustained experience in monitoring exploration operacions of the companies; consequently, the assessment mission found that well records and exploration data were incomplete or poorly organized. 6.13 The DGRM has thirteen staff members, six of which, including the Director, are professionaL employees. None of the staff has had spe- cialized training in the field of oil exploration and production. One particular shortcoming is the absence of a geophysicist on the staff. Some of the geologists have had the opportunity to learn something of well-drilling techniques and geological procedures connected with drilling by spending time on the drilling rigs. But since hydrocarbon exploration has been carried out only sporadically over the years, on- the-job training has been superficial. Moreover, there has been little opportunity for DGRM personnel to learn about other exploration tech- niques, such as seismic, gravity, and magnetic methods and interpreta- tion. Therefore, the DGRM would not be in a position to monitor explora- tion activities in the event that a company were to undertake an explora- tion drilling program in the country. As outlined in the recommendations below, it should be possible, with a modest technical assistance program, to improve DGRM's capacity so that it could undertake a reasonably effective exploration promotion program. 6.14 The facilities necessary to mount an exploration promotion program also call for improvement. DGRM's laboratory is poorly equipped and there are no base maps or regional studies based on the available exploration data. 37/ More important, in order to attract exploration investment, the Government should make sure that it has or can obtain from exploration companies the necessary information and data. Paraguay's petroleum law requires the permit and concession holders to furnish the Government with all exploration data acquired in Paraguay. However, the requirement, as in many countries, has not been strictly enforced; if the data had in fact been received, they have been lost. In any case, the Government does not have much of the exploration data acquired by the companies. 6.15 As shown in the exploration history chart in Annex 19, a con- siderable amount of the missing data has been obtained by the assessment mission. Information was found on the specific amounts of seismic data acquired by various companies over the years, along with a detailed de- scription of the work carried out on field geology, surface gravity, 37/ Preparation of maps on geology, hydrology, and mineral resources - to be financed by the UNDP-- should be suitable for the regional studies needed to promote petroleum exploration. - 57 - aeromagnetics, and magnetotelluric su.veys. The mission also was able to determine from many of the companies that Paraguay could obtain almost all of the missing data simply by paying duplicating costs. While much of the seismic data acquired some years ago under out-of-date techniques probably will not be useful, they should be evaluated along with avail- able well files. The mission estimates that the missing data can be gathered in a matter of weeks, once the effort has been undertaken. Recommendations 6.16 The assessment mission recommends that the following steps be taken by the Government with the assistance of an exploracion consuLtant: (a) gather the missing geophysical and well data from foreign companies that have undertaken work in Paraguay in the past; (b) assemble, catalog, and evaluate all data obtained through the efforts described in (a), above; Cc) undertake a program of regional studies based on base maps being prepared under a UNDP project; (d) institute an on-the-job training program for DGRH staff in preparation for monitoring future seismic, gravity, magnetic, or other surveys relating to oil exploration; (e) train through seminars in Paraguay, if possible and, where necessary, by short courses abroad in techniques and inter- pretation methods in the fields of seismic, gravity and magnetics, and in stratigraphy and subsurface mapping; and (f) if the data quality and exploration potential of the counLry warrants it, develop a promotional package designed to attract potential risk investment by oil companies. 6.17 The energy assessment mission has estimated that a well- designed, yet modest-size, exploration promotion program could be mounted for US$125,000-$150,000 which would cover costs of an explorationist con- sultant and a small amount of equipment and reference materials. - 58 - VIII. RNE IABLE AND OrHER ENERGY RESOURCES 7.1 This chapter analyzes the complementary renewable energy re- sources of interest for Paraguay, concentrating on bio-fuels (ethanol and methanol), solar energy, wind energy, wood gasification, small hydro, and biogas applications. No discussion of coal is included since a recent Bank technical review concluded that Paraguay has no perceptible coal prospects. Ethanol Program Background 7.2 The ethanol program is the most important Government initiative in Paraguay to substitute a domestically-produced energy input for an imported fuel. Implementation of the program has important consequences for the energy sector in Paraguay; it also has a substantial impact on agriculture, sociaL conditions, and the environment. 7.3 Paraguay combines several characteristics which, prima facie, make ethanol production a potentially attractive proposition. 38/ For one, the country is landlocked and almost totally dependent on imported liquid fuels. PetroLeum procurement is costly, cumbersome, and occasion- ally unreliable. Per capita land endowment is high, and the uneven dis- tribution of the population still permits expansion of agricultural production either by advancing the agricultural frontier or increasing productivity. In addition, Paraguay is self-sufficient in most food requirements. 7.4 Against this background, and perhaps emulating the Brazilian example, Paraguay is producing and using sugarcane-based ethanol as a partial substitute for gasoline. This initiative, however, faces institutional and economic difficulties. As a result, no coherent national ethanol fuel program has emerged so far in Paraguay despite the efforts of the National Commission on Fuel Alcohols (CONAC). Economics of Ethanol Production in Paraguay 7.5 Paraguay is already producing ethanol, and substantial invest- ments in distilleries already have been made. Since these may be con- sidered sunk costs, the mission recommends continuing the program at its present scale. However, further expansion of the program (i.e., new investments in distilleries) would be economically feasible only if the following conditions were to hold: (a) a reduction in the opportunity 38/ See: "Alcohol Production from Biomass in the Developing Countries", World Bank, September 1980. - 59 - cost of feedstocks (particularly for sugarcane); or (b) under certain circumstances (paras 7.8 - 7.10), a substantial reduction in the capital and installment cost of distilleries; 391 or (c) a relative increase in the opportunity prices of ethanol over and above the increase of opportunity cost of inputs. The following analysis presents a summary review of the program and recommendations for its improvement. 7.6 Fermentation ethanol production and use involves many complex factors, some of which are difficult to quantify with the available in- formation. Complete information required for a comprehensive analysis, however, was not available during the assessment mission. Nevertheless, data obtained from two operating distilleries in Paraguay (APAL and Azucarera Paraguaya) were used to make a preliminary determination of the economic cost of anhydrous ethanol and straight ethanol as summarized in Annex 20. 7.7 APAL's distillery (120 m3/days capacity) is the largest in Paraguay, with an estimated capital investment estimated of US$20 mis- lion, and a total annual output for a 180-dayslyr season of 21,600 m The distillery produces anhydrous ethanol based on sugarcane juice, which was chosen as the reference case in the analysis. The economic revenue vas based on the opportunity cost of anhydrous ethanol, set equal to the opportunity cost of regular gasoline, since it is used in blend with gasoline without altering end-use performance. For simplicity, the rate of return has been calculated assuming level cash flows. Crucial items in determining the economics of ethanol production are capital costs and the opportunity cost of feedstocks. 7.8 Under these assumptions, the economic rate of return for APAL's distillery is quite low--2.84Z per annum for sugarcane valued at ˘ 2,630 (US$9.46/ton) FOB distillery. The capital cost of such a distillery, all other conditions remaining constant, would have to be lower than ˘ 2,771 million (about US$10 million) to yield a 12% or higher annual rate of return. Conversely, for the repu.ed investment of US$20 million, a 12% rate of return would require sugarcane to ha.e ax, opportunity cost 58% of the present one. 7.9 Azucarera Paraguaya's 15 m3/day distillery is the largest pure ethanol producer in the country. For the analysis, two investment esti- mates were employed, one based on APAL's investment, admittedLy high, and another which would yield an economic rate of return on investment of 12% per annum. Since this distillery operates on molasses, it is expected to 39/ Investment costs of APAL, at US$20 million, seem to be high. Investment costs for a plant the size of APAL's in a high-cost country are estimated to be US$14.6 million in 1979 prices. Similarly, for a plant the size of Azucarera Paraguaya, they should be about US$4 million in 1979 prices. See "Alcohol Production from Biomass in the Developing Countries", World Bank, September 1980. - 60 - run all year long under normal conditions. Economic revenue is based on the opportunity cost of straight ethanol set equal to 83.3% of that of gasoline (regular). 7.10 Under these assumptions, the economic rate of return is 7.1% for a distillery investment of 9 1,608 million (US$5.74 million). A 12Z rate of return would require an opportunity cost of molasses equal to 48% of the present one; or an investment of ˘ 1,146 million (US$4.09 mil- lion). On the other hand, if straight alcohol were to substitute for premium gasoline, with all other conditions remaining the same, the annual rate of return becomes 10.8%. Alternative Strategies for the Ethanol Program 7.11 This section analyzes the impact on foreign exchange and the social and environmental effects of alternative strategies for the ethanol program under the following scenarios: (a) anhydrous ethanol substitutes for 20% of total gasoline (regular and premium); and (b) straight ethanol replaces 100% of imported premium gasoline. 7.12 Foreign Exchange Savings. Foreign exchange savings could be achieved under the ethanol program; these are outlined below for illustrative purposes: Scenario (a), above, yields cumulative savings of US$38.5 million through 1990. Current installed capacity for ethanol production, if fully utilized, could meet the 1990 requirements under this scenario. Since ethanol would replace mostly regular gasoline, less crude would be imported. Hence, according to the fixed crude slate at Paraguay's refinery, less diesel oil, kerosene, jet fuel, and LPG would be refined in Paraguay and would have to be imported. Under Scenario (b), the current ethanol installed capacity, with a 2CX improvement in yields, would be sufficient to meet the production requirements. At US$39.4 million, the total cumulative savings would be marginally higher than for Scenario (a). Premium gasoline would be gradually replaced by straight ethanol, either through market penetration of straight ethanol- powered vehicles. In general, then, producing ethanol in Paraguay could save an average of about US$5 million a year in foreign exchange, repre- senting about 5% of total average oil imports between 1980 and 1982. 7.13 Social Impact of the Ethanol Program. The absence of a compre- hensive nationaL ethanol fuel program in Paraguay prevents any elaborate analysis of income opportunity and distribution effects. Nevertheless, if the current system of large numbers of sugarcane suppliers persists (e.g., 3,000 for APAL), the income generation and distribution effects will be positive. 7.14 The area required by Scenario (a) above would be almost 9,100 ha (18.8% of the 1981 sugarcane-cultivated area). To prevent presently cultivated sugarcane areas from being affected, this scenario would require 1.7% annual growth rates in the number of new cultivated hectares. This rate of growth is not unrealistic in Paraguay but, if concentrated in the existing sugarcane region, it might well have an - 61 - impact on other agricultural activites. Two possible solutions are: (a) increase average productivity from the observed 45 tonlha/yr, and improve sugarcane conversion to ethanol to yield more than 65 liters/ton; andlor (b) open up new land for sugarcane (and other feedstocks). 7.15 The first alternative above would imply the need to import fertilizers, thus reducing the foreign exchange benefits of ethanol fuel production. The second would require investment in rural infrastruc- ture. In this context, a proposed program to produce sweet sorghum and sugarcane for ethanol production in Vallemi and Alto Paraguay could have merits, although both proposals still present unresolved or problematic issues. 40/ 7.16 Environmental Impact of the Ethanol Program. The disposal and recovery of valuable materials from stillage associated with ethanol dis- tillation could become a serious problem in Paraguay. Currently, stil- lage is either being lagooned or disposed of in streams which are a source of potable water used by inhabitants in the area of the distil- leries. 7.17 The solution often preferred elsewhere, e.g., in Brazil, is to recycle stillage back to the sugarcane fields, thus recovering the organic fertilizer and irrigation values of the stillage. This approach is difficult to apply in Paraguay because of the large number of small farmers supplying distilleries with sugarcane, the diversity of their crops, and the timing of requirements with the availability of stillage. Despite these difficulties, an effort should be made to reconcile the farmers' needs with stillage disposal. In this connection, new ethanol- making processes which minimize the volume of stillage generated deserve special attention. 7.18 Other al.:rnatives such as anaerobic fermentation to produce biogas using stillage as a feedstock, as contemplated by APAL, have two basic problems. First, it is a costly solution, estimated at US$7 mil- lion for APAL's distillery. Second, it still would produce waste (bagasse) that would create disposal problems of its own. Recommendations 7.19 The ethanol program in Paraguay is an important step towards increased reliance on domestic resources and capabilities, and may become an efficient, though partial, response to the lack of domestic petroleum 40/ Sweet sorghum has never been commercially planted in Paraguay, nor has sugarcane ever been cultivated in the Vallemi area. Cost fi- gures are therefore speculative at this point. The major problem in this case, however, is that the proposed market for ethanol fuel would be the cement plant of INC in Vallemi which uses fuel oil, a low-value product. - 62 - resources. However, the following steps should be taken to assure the technical and economic feasibility of the program. (a) An effort should be made to formuLate and implement a compre- hensive and coherent national ethanol fuel program in Paraguay engaging all relevant and interested parties. Such a program should make the following components explicit: market penetra- tion strategies, production targets, financing mechanisms, agricultural zoning for ethanol feedstock growing, process technologies, interaction with the refinery crude slate, pro- gram monitoring mechanisms, etc; (b) It is imperative to stimulate agricultural experimentation aimed at increasing sugarcane productivity in currently culti- vated areas and testing sugarcane and other feedstock-growing (e.g., sweet sorghum) in agricultural frontier land. In this context, reinforcing agricultural credits and technical exten- sion services to existing sugarcane farmers would be high priority measures. (c) Stillage disposal soon will become critical as the stabilizing ponds near the distilleries run out of space. Therefore, recovery of fertilizer and other agricultural values should receive priority. APAL's proposed recovery of energy values via biogas is not recommended. Monitoring alternative solu- tions to this problem in other countries would help develop a solution adequate for Paraguay. Cd) Improving the efficiency of operations in existir, distilleries and reducing the investment costs of planned distilleries should be promoted and adequately financed. Besides process and equipment improvements, training and education on a permanent basis should be undertaken. In this connection, bilateral arrangements with Argentina and Brazil should be developed. (e) Provided that straight ethanol can be economically produced in Paraguay, the Government should promote its market penetration to subsritute for premium and regular gasoline. Under these circumstances, it should further the promotion of straight ethanol-fueled cars to substitute for light diesel-powered vehicles. In addition, consideration should be given to the possibility of eliminating the need for premium gas by either developing a single gasoline specification (intermediate between regular and premium), or developing a new premium fuel based on ethanol (e.g., modified straight ethanol or modified anhydrous ethanol/gasoline blend). - 63 - Methanol Proposal 7.20 The methanol proposal in Paraguay involves production of hydrogen and oxygen from water electroLysis and subsequent utilization of oxyger in wood gasification to make syrthesis gas, the hydrogen require- ments of which would be supplemented by the eLectrolytic source. 7.21 As this concept by itself is not economically feasible, it has been proposed that the manufacture of ammonium nitrate, a fertilizer, be added. The feasibility of the revised project was based on the avail- ability of a viable export market for ammonium nitrate in neighboring Brazil and Argentina. '-ittle evidence, however, is presented to justify the expectation of a remunerative export market, and the domestic market for this fertilizer is also highly uncertain. Additional problems concern the market potential for methanoL (given that ethanoL is already being produced) and the long-run cost uncertainties of the major inputs (electricity and wood). 7.22 With current technologies, the cost of methanol increases wil-h the feedstock chosen, from the cheapest (natural gas) to the most expe sive (wood). For natural gas at US$4/million Btu, 41/ methanol would be produced at a cost of US$278iton to US$330/ton (1982 prices) for a plant with a capacity of 266,500 tons/yr. If used to replace gasoline via a blend of methanol gasoline, methanol would have the highest potential value in the Paraguayan economy, at US$261/m3, or US$331/ton of methanol. As this value lies within the range of the cheapest methanol available anywhere (from natural gas) it becomes clear that, unless natural gas is found in Paraguay, methanol fuel is not an attractive economic proposi- tion (Annex 21). Solar Energy 7.23 Present Situation. Solar radiation in Paraguay is a resource suitable for thermal and photovoltaic appLications. Global monthly mean radiation values are estimated at 613 to 288 cal/cm2/day in the Chaco, between 575 and 275 in the Eastern Region, and between 580 and 250 in Asuncion (Annex 22). Some efforts have been made to apply solar technologies in the country. The Instituto Nacional de Tecnologia y Normalizacion (INTN) and a few private firms are developing and building solar water-heating systems for households in Asuncion. Also, the INTN and the Fondo Ganadero are experimenting with solar energy use in rural areas (mainly in the Chaco) for water distilLation, crop drying, and photovoltaic electricity production. 41/ See Vematsu, S. Methanol, Technology and Demand Trends and Their Future Prospects, CEER (Japan), April 1983 Vol. 15 No 4 pp.5-13. - 64 - 7.24 Thermal applications. Private companies have introduced solar water-heating systems for a limited number of single-family houses in Asuncion to replace gas and electricity. The unit fuel cost for conven- tional water heating in Asuncion is estimated at arcund 60 mills/kWih for diesel, 63 mills/kWh for gas, 70 mills/kWh for electricity, and 10 mills/kWh for fuelwood, as shown in Table 7.2. Table 7.2: CONVENTIONAL WATER HEATING FUEL COSTS IN ASUNCION Heat Conversion Process Unit Useful Fuel a/ Value Factor Efficiency Energy Cost Diesel Oil 11,100 kcal/kg 860 kcal/kWh 65% 60 mills/kWh LPG 57,450 kJ/kg 3,600 kJ/kWh 65X 63 mills/kWh Electricity I kWh/kWh 1 kWh/kWh 95% 70 mills/kWh Fuelwood 3.600 kcal/kg 860 kcal/kWh 50% b/ 10 mills/kWh a/ Prices: Diesel ˘ 65 liter, LPG ˘ 105 kg. Electricity 10.6 G/kWh and fuelwood 3GIkg. US$1 = 126 guaranies. b/ Based on large industrial operation using modern equipment. Source: Mission estimates. 7.25 Considering the typical solar water-heating system costs pre- sented in Table 7.3, it was found that pump-assisted systems used for domestic and industrial applications are competitive with diesel, gas, and electric water heating in Paraguay. Even though fuelwood is cheaper than all other alternatives, in practice its use is restricted for water heating because of handling and environmental limitations. Table 7.3: SOLAR WATER HEATING COSTS System Collector Useful Life Unit Cost Area (m2) (years) (mills/kWh) Thermosiphon system (domestic) 2.63 15 109 Pump-assisted system (domestic) 2.41 5 a/ 58 Pump-assisted system (industrial) 920.00 15 ?7-54 a! Using plastic materials. Source: Mission estimates. - 65 - 7.26 Taking into account the relative economic attractiveness of solar water heating in Asuncion, it is recommended that the INTN and the National University continue their activities to promote the solar options (both domestic and industrial applications) for Asuncion. Tech- nical assistance should be sought to help upgrade the capabilities of these institutions. 7.27 Photovoltaic applications. Photovoltaic applications of solar energy are not economically attractive. The typical investment cost is around US$10-17/peak watt and its useful life is about 20 years. Table 7.4, below, shows energy production and estimated cost for a typical system of 100 W capacity. Therefore consideration of its use should be restricted to remote areas (the Chaco Region where energy costs are rela- tively high due to transport costs), and specific applications characterized by low electricity consumption. Table 7.4: PHOTOVOLTAIC SOLAR ENERGY COSTS IN CHACO RECION (100 W system) Mean Global Annual Solar Radiation Energy Production Unit Cost a/ (kWh/m2) (kWh/year) (mills/kWh) 2,141 (max) 214 1,063 2,033 (min) 203 1,120 a/ Estimated value at 12Z annual discount rate. Source: Hission estimates. Wind Energy 7.28 From available information, che western Chaco region seems to be the most suitable area for using wind energy for energy purposes. Wind Pumping 7.29 The mean annual wind velocity in the Western Chaco is the highest (16 km/hr) in the country (see. IBRD Map 18240), while the mean annual wind velocity for the Eastern Chaco and Eastern Region is significantly lower (8-12 km/hr). This potential indicates the economic attractiveness of using wind for water pumping. The typical energy cost for multi-blade windmill pumping systems varies between 525 and 141 mills/kWh for mean wind velocities between and 12 and 22 kmlhr. - 66 - Table 7.5: WINDMILL WATER PUMPING ENERGY COSTS IN PARAGUAY Mean Rotor Annual Useful Mean AnnuaL Energy Area Efficiency Energy Wind Velocity 2 2 Unit Cost (km/hr.) (kwh/mr) (m2) (Z) (kWh) (mills/kWh) 12.9 673.1 2.63 30 531.1 525 16.1 995.5 2.63 30 785.4 355 19.3 1,744.1 2.63 30 1,376.4 203 22.5 2,512.3 2.63 30 1,982.2 141 Source: Mission estimates. Taking into account the high cost of the diesel oil alternative (410 mills/kWh) and the impracticability of using electricity from the grid, it was concluded (Table 7-5) that wind pumping applications would be cheaper and more practical in the remote regions with high mean wind velocity (greater than 16 km/hr). Electricity 7.30 The situation for electrically-driven wind generators is less promising. The typical cost of this application is about 250 mills/kWh (for 12Z annual discount rate and 15 years of useful equipment life) for mean wind velocities of about 19 km/hr. Due to the high cost and relatively low mean wind velocity throughout the country, this use should be very limited. Wood Gasification 7.31 Wood gasification for electricity generation is economically attractive for small communities in remote villages where extending the interconnected system would be uneconomical. Cooperativa Loma de Plata, in the Chaco region, has installed 1.6 MVA 42/ using wood gasification technology. This installation produces savings of $40,000/month 43/ compared to the dieseL-oil plant used before. Including the investment, operation, and maintenance costs for this kind of thermal plant, the cost 42/ Three units of 525 KVA each. 43/ Estimated value with US$1,400/KW of investment cost, US$150/KW/year of operation and maintenance cost, US$.025/kg of fuelwood, five years of useful life, 30% utilization factor, and 12% annual discount rate. - 67 - of electricity is estimated at 250 mills/kWh, 44/ which is lower than the 320 mills/kWh estimated for medium diesel-oil plants in Paraguay. The Fondo Ganadero also is experimenting with this technology using similar 2 x 37 KVA equipment. However, before this application is more widely used, the impact on deforestation must be addressed. Small Hydro 7.32 Even though small hydro applications for electricity have been very limited in Paraguay, they are economically attractive compared with wood gasification. Based on a typical investment cost of US$3,400/kW for 10-50 kW hydroelectric plants, the unit energy cost results at around 120 mills/kWh, using a 122 annual discount rate, US$10/kIW/year of operation cost, and 20 years of useful life. This indicates the viability of small hydro for remote areas with appropriate hydraulic potential and where extension of the interconnected system represents higher total costs. However, taking into account the extraordinary amount of hydro power available from Itaipu, ANDE is reluctant to invest in additional generating facilities of a marginal nature. Thus, all the investments required for small hydro plants in Paraguay should come from private sources. 4S/ Biogas 7.33 It is too early to draw any firm conclusions on biogas poten- tial in Paraguay, but economic and socio-cultural factors make it unlike- ly that biogas will play a significant role in the energy sector. The dispersion of agricultural activity and the cost of collecting vegetable and animal wastes are major constraints for this application. In addi- tion, the reLuctance of people to collect wastes and to use the gas produced inhibits the development and utilization of biogas. ffowever, the INTN, the Fondo Ganadero, and the Instituto de Ciencias Basicas are engaged in development of the biodigestor systems, using cattle manure and algae, especially for small rural groups and individual families. 44 USS = 126 Guaranies. 45/ Some private farms have installed small hydro plants in the Eastern Region and the Fondo Canadero aims to introduce this application in that region. - 68 - VIII. ENERGY SECTOR COORDINATION, INVESThENT AMD TECHNICAL ASSISTANCE Energy Sector Coordination and Management 8.1 As in many countries, there is no central organization in Paraguay that deals with the energy sector as a whole. Responsibilities are dispersed among various centers of decision-making with few formal channels for coordination. Energy poLicies and programs are undertaken in many cases .ithout fully taking into account alternative solutions or the effects of a particular program on various sectors of the economy. Nor are opportunity costs adequateLy considered to help achieve appropriate fiel supply and demand patterns for the country as a whole. Demand management programs in the form of energy conservation or inter- fuel pricing policies do not exist. In addition, well-compiled energy data are hard to come by. 8.2 The energy assessment mission concluded that development of the energy sector would be considerably enhanced by the establishment of a framework which would allow the Government to address the country's main energy issues more effectively. The mission recommends that a National Energy Coummission (NEC), coordinated by the Secretaria Tecnica de Planification (STP), be established consisting of the ministers, heads of agencies, and presidents of autonomous public sector organizations most concerned with energy matters. Representatives from the private sector also ought to be involved. Public sector members should include the Minister of Industry and Commerce, the Minister of Agriculture, the Minister of Public Works and Communication, the Ministry of Finance, the head of the Secretaria Tecnica de Planificacion (the government planning agency), ANDE, PETROPAR, and others involved in the energy sector. 8.3 The main purpose of the NEC would be to coordinate all major activities in the energy sector. For example, the Ministry of Agriculture, through the National Forestry Service, should participate in formulating of poLicies concerning ACEPAR's plans for obtaining charcoal to meet requirements of the national steel plant. It also should be involved in the agricultural aspects of the Government's ethanol fuel program. Similarly, the Ministry of Public Works and Communication and PETROPAR should participate in all matters concerning policies on energy use in the transport sector. 8.4 The assessment mission concluded that an indispensable compo- nent of the NEC would be a technical secretariat consisting of a small, full-time unit which would support the NEC on the technical and economic aspects of energy. The main purpose of the technical secretariat would be to provide essential information and analysis as inputs for NEC policy decisions in the energy sector. The technical secretariat would also prepare studies for priority energy programs, taking into account inter- relationships of the various subse;Lors; prepare energy balances for the country as a whole; and establish a solid energy data base. - 69 - 8.5 The mission reco uends that the technical secretariat be staffed with an energy economist, an electrical engineer, a petroleum engineer or geologist, a fuelwood specialist, and a project economist. Technical assistance for a period of about one year would be essential in getting the enterprise off to a good start. Such assistance should include the services of an experienced energy specialist; it would also encompass priority library and reference materials. The consultant would mak proposals for organizing and establishing procedures at the commission and technical secretariat, and propose terms of reference and job descriptions for the staff members of the technical secretariat. Energy Investment 8.6 Paraguay does not have an energy investment program as such. As in the case of most energy matters, decisions on energy investments are made separately by various ministries and autonomous public entities such as ANDE, PETROPAR, APAL, and ACEPAR. In any case, except for ANDE's expansion program for transmission and distribution of electric power, there are no firm plans for future projects in the other energy sub- sectors. In the case of electric power, ANDE plans to invest about US$20 million per year for 1984-87, with financing of about 50% of the total from the Inter-American Development Bank (IDB) and bilateral sources, and the balance from its own resources. In addition, the assessment mission has identified 23 projects totalling about US$47 million with an IRR of at least 12Z for electricification of the interior, as outlined in Chapter III. 8.7 No significant investments are expected over the next few years in connection with the ongoing ethanol program, the major capital expen- ditures already having been made for construction of the APAL alcohol plant. In the case of petroleum, a modest investment of about US$5 mil- lion might emerge over the next several years for explor-ation promotion activities if technical assistance efforts recommended below and in Chapter VI of this report prodtce positive results. Also, as mentioned in Chapter IV, the fuelwood subsector would require an investment of about US$3 million for 1984-85 to launch an effective reforestation program. In addition, ACEPAR's plans for charcoal production might require an investment of about US$10 million over the next five years. Technical Assistance Requirements 8.8 As discussed in earlier chapters, the assessment mission identified the following areas in which follow-up technical assistance or studies would be useful in resolving some of the issues in the energy sector in Paraguay: - 70 - Subsector Areas Requiring Technical Assistance Electric Power - Feasibility studies for electrification of the interior - Power demand forecasting - Electric power policy and planning - Establishment of a tariff analysis group Petroleum supply - Study of supply options, alternatives to refinery operations, training, and petro- leum inventory control improvements PetroLeum exploration - Compilation and analysis of geophysical promotion and well data - Training and advisory services on moni- toring operating companies - Project definition for a petroleum explo- ration promotion program Energy conservation - Assistance to develop energy audits, extension services, and credit programs Fuelvood - Development of a reforestation program, to supply ACEPAR's needs. - A series of studies on use of woodwaste, a national fuelwood supply and demand study, and a land use survey. - Program to promote efficient cooking stoves Energy sector organization - Establishment of a Nationai Energy and management Commission (NEC) and establishment and staffing of a Technical Secretariat for the NEC. 8.9 The technical assistance proposed above would be suitable for multilateral or bilateral financing including, in particular, the joint UNDP/IBRD Energy Sector Management Assistance Program (ESMAP). O OVERALL ENERGY BALANCE - 1982 (Thousand Toe) Commerclol Energy Non- C .e Commercial Commerclal & Commercial ilEtectdclly Energy Non-Commorckaj Energy Crude OU ProIorbum Total Total PRoducts Hydro Thermal Total Pilmary Supply Produclion 116b 56 56 56 1222 Expolts (8) (8) (8) Impoits 197 197 197 lolol 1166 197 . 48 245 , 1411 Transformallon (197) 177 Rer.nerl 1 77 .._ Chaicoal Kilns 116 . lihermal Plnisa (3) . 1 1 (2) Energy Sector (12) (12) losses (76) (20) (7) _ (9) (112) ProdL'cl Trade lnipoItS' 201 * 30 231. 231 Expoits Dornosllc Supply 1090 356 70 426 1516 Final Consumption Industry 638 49 24 73 711 lransportcrlion 26 184 104 210 Households 4 26 20 40 60 486 Olhers 103 6. 109 109 'U * - -_.. - * . . . IAnnex 2 OVERALL ENERGY BALANCE -1990 Page I of 2 (Thousand Toe) BASE CASE Commercial Energy C & Cofmnercial . Pet le Eletdclty Eneg Non.Commercol Energy Cnsde CHI Petrol umd 3 Total Total Total Prtmory Suppy_ Production 1596 165 165 165 1761 Exports _ . _ Imporls 200 200 200 Total 1596 200 165 365 1961 Transonraton__ (200) 180 Charcoal KUns 275 Thermal Plants__ Energy Seclor _ __ (15) ________ _ (15) Losses (180) (20) (10) (15) (225) Product Trade Imports 295 295 Exports Domesllc Suppty 1416 450 150 600 2016 Final Consumplion Indusiry 853 62 51 113 966 Transportallon 28 233 233 261 Households 535 ._._._.__ _ __25 86 111 646 Olhers i130 13 143 143 Mnex 2 OVERALL ENERGY BALANCE -1990 Page 2 of 2 (Thousand Toe) II lGl CASE Commercial Energy - . Commercil. E)ochtcy_ Erwy Non-Commorck . _ % Energy Cntde OProducts Hydro Themwl Total Total Tota Produclon 1867 190 190 190 2057 Expodts Impods 200 200 200 Total 1867 200 ,. 190 2257 Transtormation Reflnoles (200) 180 Charcoal KUns 417 Themial Panls . Energy Sector (15) _ , (15) Losses (273) (20) (15) ._-_____(17) - -- - - - (325) Product Ttade Imports 376 376 Exports Domesl1c Supply 1594 526 173 699 2293 Final Consumpilon Industry 1031 72 59 131 1162 Transpodallon 28 272 272 300 Households 535 30 99 129 664 Others 152 15 167 167 - 74 - Annex 3 POTENTIAL ENERGY SAVINGS IN TRANSPORT IN PARAGUAY a/ (short tenu) Potential Savings Transport Node/Service Actions involved Relative to 1982 ktoe - Wheeled Freight - promotion of backhaul in long-one way hauls 3.8 - operating with tuned Diesel (and Otto) engines - maintenance improvement - Wheeled Urban Passenger Transport - rerouting and further organization of bus lines 8.1 - reorganization of work schedule - operating with tuned Diesel (and Otto) engines - maintenance improvement - Wheeled Inter-city Passenger Transport - operating with tuned Diesel (and Otto) engines 5.0 - maintenance improvement - Off-the-road Services - operating with tun.ed Diesel engines 5.1 - tractor pooling b-y farmers in different cultures throughout the year Total Short-term Potential Savings 22.0 Basis: Gasoline consumption urban passenger transport 60% inter-city passenger transport 35% wheeled freight 5% Diesel oil consumption off-the-road services 45% wheeled freight 15% urban passenger transport 15% Industry 15% inter-city passengor transport 10% Savings potential - wheeled freight: 10% of diesel oil consumed in freight - wheeled urban passenger transport: 10% of gasoline + diesel consumed in urban transport - wheeled intercity passenger transport: 10% of gasoline + diesel consumed in Intercity transport - off-the-road services 5% of "other" diesel oil consumption a/ Data and basis presented are prelliminary and subject to further dotailedl analysis. Source: Mission estimates. Annex 4 POTENTIAL FOR ENERGY SAVINGS AND INTERUEL SUBSTITUTION IN INDUSTRY IN PARAGUAY RELATIVE TO 1982 (short term) Potential Invostmnt Fuel/End-Uss Actions Involved Savings, ktoo/yr RequIred, 106 USS Fuel Oil - Thermal requirewent of - swltch by natlonal coemnt coment plant plant from wet to dry process (to be completed In 1984) 7.6 a/ 30 - switch from fuel all to Import coal 14.6 b/ 21,5 Total (beyond 1984) 22.2 51.5 Diesel Oil n - Steamralslng - Improve housekeeping 34.3 c/ !/ - decrease dllution of residual oll In refinery operations 7.5 Total 41,8 Biomass - Steam raising - Improve efficiency of other vegetable rosidue end-use, particularly bagasse 4-5 4-5 - Improve housekeeping 50-80 - - Thermal process roquIroemnts - Improve officlncy of end-use equlpment 50-80 50-80 Total 104-165 54-85 a/ Relative to 1982 productlon. Full capacity savinps would result In 30 ktoo/yr savings, b/ Includes both thermal requirements of cemont plant and captive power generatlon; substitutlon spread over 10 years, cl Substitution of all diesel oil consumed by Industry, except PETROPAR refinery. d/ Estimated at 30% of fuel oils el The bulk of the Investment would relate to blomass fuels, Source: Mission estimates, ~ 76 - Annex 5 Page ' of 2 ESTIMATED ELECTRICITY DEMAND GROfTH (1983-1990) GDP Electricity Consumption Ln (GWh) Total Asuncion Year (1979 Guaranies x 103) Total Asuncion GDP Consumption Consumption 1970 161.48 124.80 124.80 5.084 4,827 4.827 1971 168.72 139.51 135.17 5.128 4.938 4.907 1972 177.06 163.63 152.22 5.176 5.098 5.025 1973 189.79 198.59 175.00 5.246 5.291 5.165 1974 205.82 233.23 189.84 5.327 5.452 5.246 1975 220.17 262.77 206,43 5.394 5.571 5.330 1976 236.55 302.79 230.04 5.466 5.713 5.438 1977 270.52 306.41 273.93 5.600 5.904 5.613 1978 303.88 420.93 305.51 5.717 6.043 5.722 1979 331.99 487.26 340.44 5.805 6.189 5.830 1i9o 365.95 583.29 404.16 5.913 6.369 6.002 1981 401.77 681.71 456.29 5.996 6.525 6.123 1982 391.55 776.72 517.64 5.970 6.655 6.249 Correlations - Ln GNP/Ln total consumption B1 = 0.99229 - Ln GNP/Ln Asuncion consumption B2 = 0.99351 From Annex 5, pg. 2 - Additional coverage C = r3 - r2 = 0.0354 - Vegetative growth V = r2 - ri = 0.0342 Expected Economic Growth (Base Case) G:3% p.a. Estimated Electricity Growth (EG) p.a. EG = G + V + C = 10% - 77 - Annex 5 Page 2 of 2 Coffebtbn Between Economic Growth and Elictlclty Growth In Paraguay 900 CORRELA8 L CZ/An AG Pnclon costron .99351 i- LnCGDP/AnTotldCorelMM 099 9290 400- 300- 250- Iotd 200- / \3 12 S 12 4 116 r =In490-hn416=012C ID12 _ 500- K = 124 CAvcc'x_ K = Total Consurprion42 400- F-TMC =0 _VgtivGwh 400C = 0.03 4(Addtkbrt C a)veG t) j250o 200f 0-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ GDP 150- 150 11I 2 -I =50 .065 70 71 72 '73 74 '75 76 n7 7e 7 10 81 182 Year Wo- Boar*-26217 - 78 - Annex 6 Page 1 of 3 BASIS USED FOR ECONOMIC EVALUATION OF ELECTRIFICATION PROJECTS The benefit/cost evaluation of the electrification projects has been made using the basic parameters and results of the following studies recently concluded for Paraguay: (1) Westley, Glenn, "The Residential and Commercial Demand for Electricity in Paraguay" 1981 (2) Mejia, Millan & Perry Ltda. "Estudio de Evaluacion de las Inversiones Financiadas por el BID" y (3) Castagnino, E. Chapter 4 "El Calculo de Precios Cuenta en La Evaluacion de Proyectos". A. Work Quantities Potential Users: according to the 1982 census (22 annual increase); 23kV and 66KV line lengths: according to geograchical maps; 380/220V circuits: 25 mt per urban user and 150 mt per rural user; Transformer capacity: 0.525 KVA per user and 0.33 per KVA per luminary; and Luminaries: 1 per 80 mt of secondary circuit B. Unit Prices (market prices US$ 1982) 66kV Lines: $22,800/km; 66/23kV substations: $67/KVA 23kV lines: $11,700/km; 23kV urban circuit: $10,500/km 380/220 V secondary circuit: US$10,300-9,lO0/km Distribution transformer: $50/KVA; luminaries: $90/unit; meters and connection: $32/unit Administration, engineering: 10Z; contingencies margin -f 152 C. Residential Users, Unit Consumption and Unit Benefits The residential consumption was estimated with a 22 annual increase and the benefits where estimated with US $0.094/kWh 1982 tariff and the Westley demand curve with the following results: Old User's New Users Old Users Substitution Greater Consumption X Benef. Benef. Benef. Year Connect (k%P./u) (US$/kWh) a/ (kWh/u) (US$/kWh) a/ (kWh/u) (US$/kUb) a/ 1 652 754 15.8 1,033 46.0 418 12.0 3 732 1,289 21.9 1,033 46.0 484 12.5 5 79% 1,546 24.9 1,033 46.0 513 13.0 10 90% 1,688 26.5 1,033 46.0 655 19.1 15 902 1,835 28.0 1,033 46.0 802 21.2 20 90X 2,035 30.3 1,033 46.0 1,002 24.2 25 90Z 2,252 32.8 1,033 46.0 1,219 27.0 a/ US$ mid-1982 expressed in border prices. - 79 - Annex 6 Page 2 of 3 D. Total Consumption and Benefits Total consumption was estimated for two cases: CASE 1 (non-agroindustrial zones) Actual auto-generacion: 0.0% of users Co:mmercial consumption: 13% of residential Industrial consumption: 5-15% of residential CASE 2 (agroindustrial zones) Actual auto-generacion: 30Z of users Comuercial consumption: 131 of residential Industrial consumption: 15-45% of residential Total benefits consist of estimated residential, commercial and industrial benefits. Residential benefits were calculated according _ the "willingness to pay" theory, Commercial benefits were estimated as equal to 13% of Residential benefits (ANDE's practice), and industrial benefits as the equivalent to the auto-generation substitution (US$O.43/kWh). E. Total Costs and Net Benefits The total cost was estimated adding to the investment cost the operation and maintenance cost (4.5Z annual of investment) and the energy cost estimated with 12% losses and US$0.057/kWh as a long range marginal electric energy cost (at 66kV and 23kV sub- transmission). The internal rate of return was calculated for each project with the corresponding stream of net benefits during its 25 years of useful life but maintaining the benefits constant after year 15 (the usual design life of the projects). - 80 - Annex 6 Page 3 of 3 ELECTRIFICATION OF THE INTERIOR km FPtentlal bk tVA km K VA 380/ Total Cost Per Internal rate "ms- Usrs 66 kV 66 kV 23 kV 23 kV 220 V Cost a/ User b/ of Retrn c/ CENTRAL ZONE Cuazapn la 1,386 - - 135 1,750 56 2,620 1,470 Hlqb Cuape lb 209 - - 51 250 16 970 3,650 Lowd/ Cazapa 2 1,693 70 10 88 2,150 59 4,530 2,000 Hlgh Curdillers I 153 - 19 I9O 7 360 1,940 High Cardl lrs 2 148 - - 16 190 6 330 1,720 Hlqh Cwrd llere 3 261 - - 41 330 13 800 2,390 MedIum Caruazu 1 561 _ - 62 700 24 1,290 1,790 High TOTAL 4,410 70 10 412 5,590 11 10,720 ALTO PARAkA ZONE Alto Parana 1 205 - - 46 250 14 870 3,300 medl. Alto Parana 2 378 - - 86 460 25 1,640 3,3l0 Medium Alto Parana 3 322 - _ 46 400 16 930 2,250 High 7OTAL 905 - - 178 1,110 55 3,440 SOUTH ZON Itapue 1 926 - - 60 790 40 2,400 2,000 Hlqh Itapus 2 337 - - 16 430 12 430 1,000 High Itapua 3 896 - - 68 110 40 1,940 1,690 Hlqh Itepue 4 794 - - 18 1,010 23 660 650 Hlqb Itapue 5 513 - - 48 630 23 1,060 1,640 Hlqh Itaps 6 153 - - 23 190 9 460 2,360 Hlqh Itapum 7 123 - - 20 160 8 410 2,620 High 041Mioes 1 2,117 90 10 158 2,700 75 6,120 2,260 Mmdtui MiD sbcu 1 968 - - 98 1.230 37 2,050 1,651 HIqh itmbiucu 2 166 - - 50 210 tO 900 4,210 Low dZ Ma_mb cu 3 74 - - 15 100 4 280 2,950 Mmdii Iiucu 4 133 - - 44 170 6 720 4,200 LOW Nbembucu 5 824 105 5 46 370 11 3.565 3,570 LOW dt TOTAL 8,024 195 15 684 8,100 300 21,015 NORTH ZONE Son Pedro 1 465 - - 42 590 is 9tO 1,520 High Snn Pedro 2 2,596 120 5 165 3,750 s0 6,200 2,020 High San Pedro 3. 1,971 - 5 78 2,510 60 3,090 1,225 HIqh Sen Pedro D 275 - - 41 350 12 610 2,290 High Coaoclon la 5,208 _ 10 100 3,160 60 3,300 500 High Concspclon lb 788 - 93 1,000 30 1,840 1,820 Hiqh Coacopclon 2 795 - - 15 1,020 21 600 590 High Amel 1 7,209 100 10 13 4,110 6o 6,810 740 High Abey 2 1,530 - - 215 1,770 65 4,200 2,140 Hlqh Candlyu 1 1,120 90 5 75 1,420 38 4,110 2,860 Medliu Comendlyu 2 6o0 100 5 75 1,020 31 4,210 4,005 LoW TOTAL 22,565 410 40 912 20,700 495 36,060 EAST REGION IMAND TOTAL 35,904 675 65 2,186 35,500 1,031 71,255 aO Invst.nt cost at mrkert prices Cin USS '000 end 1962). bt Evaluefd at border prices wiTh 0.78 factor. ct High: wr than 121; Mmdl.: 7-12%; Low: Less than 71. dt Project with local generation as possible least cost eloctr.cificarton solution. - 81 - Annex 7 ITAIPU - GENERATION COST 1. As indicated in the text, Itaipu's tariff cannot realistically be set according to treaty provision; a more logical approach would be to consider ANDE's system as an extension of the Brazilian power network and to set Itaipu's tariff according to long-term marginal costs of such an integrated network (22 mills/kWh). However, this approach may encounter serious political obstacles and therefore the Itaipu generation cost has been estimated according to annualized generation cost. 2. End-1982 cumulative estimated investment costs for Itaipu are US$14.1 billion direct costs ($8.9 billion) and interest during construction ($5.2 billion). 3. Given the size of the project, full generation will only be reached around 1988. The following are rough estimates of Itaipu generation, assuming that transmission lines to Brazil will be in service by 1985: 1984: 1400 MW at 0.5 plant factor = 6 TWh 1985: 2800 MW at 0.5 plant factor = 12 TWh 1986: 7000 MW at 0.6 plant factor = 37 TWh 1987: = 50 TWh 1988: = 72 TWh/year full generation Therefore, total discounted energy in 50 years is around 460 TWh, resulting in an average cost of 30 miLls/kWh. - 82 - AnneS 8 Page 1 of 2 COMPARISON BETWEEN THE ITAIPU AMD YACYRETA TREATIES 1. The Itaipu Treaty, signed by Paraguay and Brazil on April 26, 1973, created Itaipu Binational (IB), which is the legal entity in charge of construction and mar.agement of the Itaipu hydroelectric plant. 13 is, in turn, constituted b:r ANDE and Eletricas Brasileiras S.A. (ELETROBRAS) as representatives of the Paraguayan and Brazilian governments. The Yacyreta Treaty was signed by Paraguay and Argentina on December 3, 1973, to develop hydroelectric potential and to improve navigation conditions on the Parana River up to Yacyreta Island. Yacyreta is constituted by ANDE and Agua y Energta Electrica (AyE) on behalf of the Paraguayan and Argentinian governments, respectively. 2. The two treaties are similar in their basic provisions. The most important similarities are: (a) The share capital of each Binational is US$100 million, and is subscribed in equal parts by each party. In both cases the Brazilian and Argentine partners each lent to ANDE the US$50 million required for its share of the capital contributions. 1/ (b) The investment needed for st_a.dies, construction, and operation of the projects is being supplied by the governments or borrowed by the Binational Authorities. The funds provided by the governments for Itaipu were lent by Brazil, and those for Yacyreta by Argentina. Paraguay has not b.ten required to make any cash investment. Loans from third parties to Itaipu and Yacyreta are guaranteed by Brazil and Argentina, respectively. (c) The Binational Authorities are exempted from all taxes and are considered to be estra-territorial. (d) The total energy produced by the plants will be divided equally between partner countries, which will then have the right to buy part or all of its share, and to sell the remaining portion to the other partner country. Power cannot be sold to third parties except by mutual agreement between the signatories of the treaties. (e) The price of electricity will be such as to cover the amounts required to: (i) pay a 12% dividend on the share capital; (ii) pay amortization and interest payments on Loans received; 1/ The loans were at 6% per annum interest for a term of 50 years, including a grace period of 8 years, during which interest will be capitalized. -83 - Annex 8 Page 2 of 2 (iii) pay royalties, where appiicable; (iv) make payments to ANDE, ELETROBRAS, and AyE as compensation for the cost of supervision and administration; (v) pay for operating costs; (vi) defray positive or negative balances from the previous year's operations; (vii) pay for the energy ceded by one country to the other, where applicable; and (viii) all US dollar payments (except items (ii), (v) and (vi) above) will be kept constant by an adjustment factor. The cost of service will be charged to each country in proportion to the capacity it contracted for. In cases where energy is ceded, the cost wilL be distributed according to the capacity actually used. 3. The main differences between the treaties are: (a) The contract period for energy requirements is 20 years for Itaipu and 8 years for Yacyreta. (b) The royalty in the Itaipu Treaty is US$650 per GWh generated and cannot be less than US$9 million per year for each party. There are no royalties provided for in the Yacyreta treaty. (c) Compensation for the supervision and administration services for ANDE, ELETROBRAS, and AyE is US$50 per GUh in the Itaipu Treaty (presently,it is not applicable) and US$166 per Gih in the Yacyreta Treaty. (d) The compensation for energy ceded is US$2,998 per Glh in the Yacyreta treaty. This compensation cannot be less than US$9 million per year and is payable from government to government. The amount of compensation is US$ 300 per GWh in the Itaipu Treaty (presently it is not applicable) and there is no minimum. (e) The adjustment factor for US dollar-denominated payments (exceptions noted above) is based on the official gold-US dollar parity in the case of Itaipu. The Treaty provides that if the official parity is abolished both partners will seek an alternative method of valuation. In the Yacyreta Treaty, the adjustment factor is based on a formula composed of export price indexes of the developed countries published by the IMF and the UN, and the variation of petroleum prices. Anona 9 Paqe 1 of 3 PRELIMINARY CALCULATIONS FOR A FUELWh00 REFORESTATION FRO"RN4 FOR FIVE WORST AFFECTED AREAS I Phase 1 251 No. ha 1902 Populatlon Ton He H.tPlntation 2 Total of Total Fare Tress/ Seedllnqs j/ liqa Total Total Lrban (1S Rural (11 Rural Fuelvood Nuided to , Land Ruquinar t to be per Mseded Needed for Dapartm_nt Area Fares Used 1962 Sustaln Usage Area (l0 Yearsl Planted Form Each Year 10 Yer Proqrao (ha) (ha) (000) (mlIllon) Cordlilera 494,600 194,668 48,452 (25) 146,216 (75) 27,151 194,6S 9,733 2,0 2,433 ,33 700 583 5.8 Mlstones 955,600 79,376 30,078 (383) 49,200 (623 6,702 79,276 3,964 ,4 991 ,46 920 238 204 Parutarl 670,500 205,160 40,604 (20) 164,556 (60) 29,954 205,160 10,258 1,2 2,564 34 680 614 6.2 Central 246,500 494,264 289,000 (58) 205,264 (42) 38,654 494,264 24,713 10.0 6,178 ,64 1,210 1,483 14.6 Nesmbucu 1,214,700 70,689 23,108 (33) 47,581 (67) 9,099 70,689 3,534 .3 884 .39 780 211 2.1 Total 3,782,100 1,044,059 431,242 (41) 612,817 (59) 114,360 1,044,059 52,203 1,4 13,050 .46 3,130 31.3 (Avereae) / At per capita us* of I Ton/yr. V At 20 tons growth/ha/a. S1 At 2.5 . x 2 m spa Cing or 2,000 trees/ha. d/ At 2,000 seedlIngs/ha + 20S for losses. Sourcet MIssIon estletes. - 85 - Annex 9 Page 2 of 3 ESTIMATED COST OF A TEN-YEAR REFORESTATION PROGRAM Per Nucleo Million g (Nursery) Total Equivalent US$ a/ Capital Investment (10 new nurseries) 40,500 405,000 51.0 Upgrading 3 Existing Nurseries 7,000 21,000 2.7 Operating Costs, 1st year 57,000 741,000 93.6 Nucleo Vehicles 10,000 130,000 16.4 Nucleo Vehicles Maintenance 5,000 65,000 8.2 Supplemental & Misc. 12,000 156,000 19.2 First Year 1,518,000 191.6 Contingency, 10% 95,000 19.1 1,613,000 210.7 2nd & Subsequent 9 Years 69,000 897,000 113.0 9 Year Total 8,073,000 1,017.0 Total 9,686,000 1,227.7 Rounded for Budget Purposes 10,000,000 a/ At the official exchange rate (1 US$=1269) Source: Mission estimates. - 86 - Annex 9 Page 3 of 3 ESTIMATED ANNUAL COST OF SUPPORT PROGRAM OF NUCELO EXTENSION EFFORTS Cost Item (US$) a/ - Salaries of 10 SFN Foresc Technicians US$4,400 x 10 nuclei 44,000 - Per diem travel for forestry supervision US$375 mo x 12 month 4,500 - Peace Corps foresters 4,900/man/year x 10 nuclei 49,000 Subtotal 96,000 - Permanent Nursery Laborers -US$3,000/year x 10 nuclei 30,000 - Audio-Visual equipment US$2,500 x 10 nuclei 25,000 Total 152,500 a/ At the official exchange rate of 1US$=126˘ Source: Mission estimates. - 87 - Annex 10 ESTIMATED COSTS - PROPOSED REFORESTATION PROGRAM AND FUELWOOD STUDIES (1983 US$) 1984-85 1985-90 National Fuelwood Reforestation Planning 100,000 National Fuelwood Survey 100,000 National Reforestation Program 1,613,000 4,485,000 Financial Support of Nucleos 305,000 762,500 Main Studies Survey on Stove 350,000 Design and Stove Promotion 650,000 Other Studies Recovery of Forest Biomass and Sawmill Waste 200,000 - Land Use Map and Classification 100,000 300,000 Source: Mission estimates. - 88 - Annex I1 COST OF PLANTATION AND CHARCOAL PRODUCTION IN CAPIIBARI, SAN PEDRO (million Cuaranies, 1983) Camp, Kilns, Refores- Operating Main- Yearly Year Road, etc. tation Costs Transport tenance total 1 221 - - - - 221 2 - 298 250 120 - 668 3 - 298 250 120 82 750 4 - 298 250 120 82 750 5 - 298 250 120 82 750 6 - 298 250 120 82 750 7 to 20 - - 250 120 82 452 Source: 1. Varela Aparicio: "Estudio Economico-Financiero Preparado para la Firma Forescal Sidepar (FORESIDEP)," Jan. 1982. Updated to Dec. 1983. 2. Mission estimates. PARAMETERS FOR CALCULATING NET PRESENT COSTS Price of Land Paid in 10 years at 122 interest Transport Costs (per ha) ( per ton) 100 kns 40,000 1,350 200 kms 30,000 2,700 Source: Mission escimates. - 89 - Annex 12 Page 1 of 3 ALTERNATIVE SOURCES FOR CHARCOAL PROCUREMENT BY ACEPAR ALternative 1: Purchase of Charcoal in the Domestic Market. This alternative could be implemented in two ways: one would be simply to pay the price required to induce the supply of charcoal for ACEPAR's operation. The only advantage of this alternative would be that no cash investment would be required by ACEPAR. The main disadvantages would be the impact on domestic prices and the environment. Assuming charcoal producers cut forests at 200 m3 st/ha, about 6,000 ha/year would be cut over a full-production requirement of 130,000 tons of charcoal. A second variation would be to organize a system of long-term contracts with local producers, sigring up as many as necessary to meet the projected charcoal demand. The advantages of this variation would be that prices would be stable (or move in an orderly fashion), while special clauses could be included to ensure that the environment would be protected. This could be carried out by setting operational standards for the management of forest plantations under contracts with ACEPAR. Another way of pro- tecting the environment would be to make speciaL arrangements with sawmills to transform their waste into charcoal. It is estimated that the volume of waste presently available could supply almost all the fuelwood needed for charcoal production to meet ACEPAR's demand at plant capacity. Thus, it would be worth exploring the use of this waste as the raw material for producing charcoal. Alternative 2: Purchase 80Z of the Charcoal in the Open Market and Produce 20% in San Pedro. ACEPAR favors a plan to obtain 20% of its charcoal needs for fuelwood grown on government lands in Capiibary, San Pedro; it would purchase charcoal for the remaining 80X on the open market. Assuming the first ACEPAR furnace enters into full production in 1985-86, and the second starts a year later, demand for charcoal would be 15,000 tons during the first year and 30,000 tons thereafter. The impact on prices would probably be less than for Alternative 1, but investment costs would be higher. Under this alternative, the 26,000 ha of the government land could be obtained without cost, but an estimated 9221 million would have to be invested in roads, camps and kilns, logging equipment, etc. About 0248,000/ha also would have to be spent o planting with eucalyptus trees Assuming the native forest yields 200 m st/ha and that it takes 7.6 m st to make a ton of charcoal, the annual requirement of 30,000 tons of charcoal would require about 1,200 ha to be cut each year. This implies that investment requirements in reforesta- tion would be 9298 million from the second through the sixth year of the project. Preliminary calculation shows that the plantation project would yield a rate of return higher than 12% if charcoal is priced at ˘21,000 ton or higher. - 90 - Annex 12 Page 2 of 3 PLANTATION PLAN Native Plant Cut Block Forest Eucalyptus Eucalyptus (ha) (ha) (ha) 1st year A 1200 2nd year B 1200 A 1200 3rd year C 1200 B 1200 4th year D 1200 C 1200 5th year E 1200 D 1200 6th year - E 1200 A 1200 + B 300 = 1500 7th year B 900 + C 600 = 1500 8th year C 600 + D 900 = 1500 9th year D 300 + 1200 = 1500 10th year Repeat for two more 4 - year cycles Source: Estudio Economico - Financiero preparado para la Firma: Forestal Sidepar (FORESIDEP) by Ing. Aparicio Varela, January 1982. Setting an orderly exploitation and reforestation plan there would avoid any negative impact on the environment. This plan would also serve to build up know-how in forestry management to be disseminated to other producers under long-tern contracts with ACEPAR. In fact, ACEPAR could include clauses whereby they would replicate their forest management techniques on plantations under such contracts. Alternative 3: Plantations in the Chaco. This is similar to Alternative 2, the difference being in the location of the pLantations. In this case, land in the Chaco would be purchased, leased, or put under contract to plant eucalyptus within 200 km from the ACEPAR plant. Native forest would be cut and eucalyptus planted under the same plan as in Alternative 2. The impact on domestic prices and the basic investment costs for camps, kilns, etc. should be about the same as under Alter- native 2. Also, following the same exploitation plan, environmental conditions would be preserved, although in this case the quality of land would have to be evaluated more carefully due to the greater fragility of ecological conditions in the Chaco region. If land has to be leased or put under contract, then additional operational costs would be incurred. If the land is purchased, a one-time capital cost would be incurred but could be paid off over several years. Forest land prices range between g15,000 to ˘50,000 per ha, depending on location. Assuming a cost of ˘30,000 per ha, 9180 million would be required. If accesible Lands can be found within a 200 km range, transport cost savings (compared with Alternative 2) I/ would amount to ˘60 million per year, or ˘10,000 per ha. Therefore, on average, the land could be paid off in about three years from savings in transport costs. This alternative is more attractive than using the Capiibary land in San Pedro. -91 - Annex 12 Page 3 of 3 Alternative 4: Plantations Near the Paraguay River in San Pedro. This alternative is similar to Alternative 3 except that it would use land located up-river from Asuncion. The plantations would have to be far enough from the river so that flooding would not kill the planta- tion. The impact on the environment and basic investment costs would be about the same as Alternative 3. However, by locating the plantations close to the river and hauling by truck only 50-100 km to the river (or ˘1,500/ton), and hence to market via river barges, there would be substantial savings in transport costs as compared with Alternative 2. The following combinations show the possibilities of transport savings according to location under this alternative. Savings per year (Compared to Alternative 2) River Port Barge Truck in million of ˘ Per ha Rosario 1,500 1,500 30 5,000 Ybapodo 2,000 1,500 15 2,500 Antequera 2,000 1,500 15 2,500 Any alternative location on the above table would yield savings to ACEPAR. The decision whether to locate the plantation on any of these lands would depend essentially on the price of land. 1/ Transport from Capiibary, San Pedro would be ˘4,000/ton; from a 200 km radius it is assumed that it would be ˘2,000/ton. -92 - Annex 13 Page 1 of 2 COMPARISON OF DIESEL OIL AND GASOLINE PRICES As mentioned in the main text, the relative price of diesel vis-a-vis gasoline has stimulated penetration of light diesel-powered vehicles for private transportation. While diesel and gasoline prices are close to parity in the international market, in Paraguay the ratio is about two to one, with gasoline having the higher selling price. Given that the price of diesel is aLready higher than its opportunity cost, raising it to parity with respect to gasoline may engender distortions in other productive sectors of the economy ( viz., agriculture) far greater than the ones it eliminates in the transport sector. Conversely, reducing gasoline prices to parity with diesel prices would provoke losses in government revenue at a time when the Government is hard pressed by fiscal imbalances. As a second best solution, the mission considered the possibility of implementing measures such that the incentive to use light diesel-powered vehicles would be eliminated. Taking a sample of models currently used in Paraguay I/ it was estimated that if diesel were priced at 87Z of the price of gasoline, consumers would be indiffer2at between diesel and gasoline-powered cars, since the higher price of vehicles would be offset by the discounted fuel savings. This situation can be arrived at in the following ways: (a) reduce the price of gasoline to attain the 87% price ratio; (b) increase the price of diesel to obtain the 87% price ratio, leaving gasoline prices at their present level; and (c) a combination and (a) and (b) to obtain the 872 price ratio leaving government revenues unchanged. (d) tax diesel-powered light vehicles to offset the advantage of using these vehicles at the prevailing relative price. Under the first alternative, the Government would have short- term losses of tax revenue amounting to about t4,600 million/year. 2/ This represents about 16% of the public sector deficit in 1982. Alter- native (a) is thus not very attractive from the fiscal point of view. 1/ Assuming a 10-year life of the vehicle, 100,000 miles of use, 302 highway and 70% city. 2/ All revenue effects are calculated taking the average short-run direct and cross elasticities of demand for diesel and gasoline from: "Phillipines; Petroleum Product Pricing Study", Meta Systems Inc. January 1984. - q3- 3nnex 13 Page 2 of 2 Under the second alternative, the Government would theoretically experience a very substantial, positive short-run increase in revenue. It is estimated that about ˘14,000 million would be added to the Government income, representing about 48% of the Government deficit in 1982. In practice, though, it is doubtful whether such an increase in revenue would materialize due to the widespread presence of contraband trade. Previous experience with fuel price rises above the level of those in neighboring countries indicates that contraband operates very swiftly. 3/ Moreover, the current prices of diesel in Paraguay (as well as of fuel oil and kerosene) already are substantially higher than in Argentina and Brazil. Consequently, there is also very little room for implementing the third alternative, which would involve raising dieseL prices to about ˘82/liter, and reducing regular gasoline prices to about ˘951lt. In the case of diesel, the price would be more than three times what is paid in Argentina, and about two times what is paid in Brazil. The fourth alternative -- taxing light diesel-powered vehicles to offset the advantage using diesel at the prevailing price levels -- seems to be adequate. 3/ The latest price rise in gasoline provoked a 50% reduction in demand iuzediately after the rise was implemented, reportedly due to the movement of fuel through the borders. The GOP had to reduce prices within three months after implementing the price increase. Annex 14 PETROLEUM PRICES - DECEMBER 1983 (Amounts in Cuaranies/liter) (1) (2) (3) (4) (5) (6) Ex-refinery Direct Petropar Distribution Pump Price Taxes X of 2/1 Price Price Price Regular Gasoline 75.40 42.25 (56.0) 117.65 - 130 Premium Casoline 93.45 61.20 (65.5) 154.65 163.60 170 Kerosene 58.70 2.80 (4.8) 61.50 66.25 70 Jet Fuel 78.25 2.55 (3.3) 80.80 n.a. 85 Diesel Oil 50.59 8.16 (16.1) 58.75 61.60 65 1 Avgas 146,70 27.00 (18.4) 173.70 n.a. 180 - Fuel Oil 34.00 0.88 (2.6) 34.88 n.a. 44 LPC 74.00 1.78 (2.4) n.a. n.a. 89 Source: PETROPAR - 95 - Annex 15 COST OF PETROPAR REFINERY OPERATION VS. COST OF PRODUCT IMPORTS PETROPAR Direct Refinery Costs (Estimated) US$IBbl Cost of Saharan Blend Crude Oil, FOB Arzew, Algeria 30.50 a/ Freight to Buenos Aires 0.83 b/ Transhipment at Zarate 0.79 Freight, Zarate - Villa Elisa 5.31 Insurance 0.24 Cost CIF Villa Elisa $37.67 Refining Cost - (estimate) 3.00 c/ Total Cost: $40.67 Average product cost (allowing 3.9% for fuel and losses) $41.97 /Bbl Estimated Cost of Similar Slate of Product Imports 2 Vol. d/ USt/US Cal (FOB Aruba) e/ Regular Gasoline 29.0 79.0 Kerosene 3.7 82.0 Cas Oil 44.5 76.5 Jet Fuel 6.4 82.0 Fuel Oil 14.2 57.1 LPC 2.2 57.1 Weighted Average 74.6 $31.33/Bbl Freight Aruba - Buenos Aries, (assume 130Z Worldscale) 1.45 Transshipment at Zarate 0.79 f/ Freight, Zarate - Villa Elisa 5.31 Insurance 0.24 Average cost, CIF Villa Elisa $39.12/Bbl a/ Official sales price for Saharan Blend (Nov. 1983). b/ 60Z of July 1983 Worldscale Freight Rates. cl No refining cost figures available to mission. Assumes total cost of $5 million/year, typical for a small refinery of this type. dl Assumes 1982 PETROPAR refinery yields. e/ November 1983 postings. ft PETROPAR data. Source: PETROPAR and published data from Petroleum Economist and Petroleum Intelligence Weekly, for 1982 and 1983. Annex 16 - 96- CALCULATION OF 1982 SUPPLY FOR PETROPAR BASED ON PUBLISHED PRICE INFORMATION 1. Product imports Imports Aruba Price Thous. bbi S Vol. USCUS Gal Awgas 45.4 2.8 160.0 Premlum Gasollno 126.3 7.9 94.0 Regular Gasoline 125.8 7.9 91.5 Diesel Oil 1,207.4 75. 5 95.0 Jet Fuol 35.9 2.2 94.7 LPG 59.2 3.7 58.0 (estimatod) Total 1,600.0 100.0 93.6 39.3 1/bbl wt ev. Freight at 130% Worldscalo 1.99 CS/bb I) Transhipsont 0.79 Froight - River Barges 5.31 Insurance 0.24 Average Product Cost CIF USS47.64/bbl 2. Rofining Algerlan Crude Oil S/bbl Average Official PrIce, Saharan Blend Crude Oil 36.63 Freight Arz-w - Buonos Aires 1.12 Transhlpmnnt at Zarato 0.79 Froight Zarato - Villa Elisa 5.31 Insuranco 0.24 Total Crude Cost CIF 44.09 Assume Refining Cost 3.00 Total Cost, excl. fuel & Loss 47.09 Allowing 3.9% RefInory Fuel a Loss, Estimated Average Product Cost US&48.60/bbl 3. Combinod Supply Cost S Vol. Stbbl Imported Product 49.8 47.64 Refined In Paraguay 50.2 48.60 100.0 S48.12/bbl (welqhtod) 4. Actual Potropor Roportod Costs (In mililons) Total 1982 costs 024,000 (USS193.7) S60.53/bbi Snurco: PETROPAR, Petroloum Intolligince Weekly, and Woridscals Frelqht Ratos, 1982 and 1983. Annex 17 PETROLEUM AND PETROLEEM PRODUCT STORAGE CAPACITY AND INVENTORIES inventories Storage Capacity Dec. 31, 1982 ('000 bbl) (days) ('000 bbl) (days) Villa Elisa Crude Oil 397.8 90 206.3 47 a/ Avgas 17.2 173 8.7 87 Regular GasoLine (without alcohol) 31.2 43 22.0 29 bJ Straight Run Naphtha 40.5 27.0 2 Premium GasoLine 29.7 62 15.9 34 Jet Fuel (kero type) 28.2 108 14.0 53 Kerosene 10.6 41 none reported Diesel Oil 233.2 44 77.6 15 c/ Heavy Fuel Oil 21.5 34 38.7 61 dl LPG (including mobile) 6.8 28 Absolute Alcohol 0.9 3 0.6 2 bl 817.8 e/ Storage Depots Hernandarias 17.3 Calera-cue 164.5 Total in Paraguay 999.6 113 fl Zarate, Argentina 586.0 TotaL Available 1.585.6 180 f/ a/ Based on average 1982 consumption and crude run. bl Based on 18% alcohol, 1982 gasoline sales. c/ Additional 10 thousand bbl reported in transit. di Inconsistent with storage capacity reported. eJ Refinery tankage was increased by 316.5 thousand bbl in 1982. fl Based on total annual sales for 1982 of 3,220 thousand bbl. Source: PETROPAR - 98 - Anxiex 18 PETROPAR REFINERY CRUDE SLATE (percent by voLume) Kerosene Regular and Diesel Fuel Crude Year LPG Casoline Jet Fuel Oil Oil Run 103m3/yr 1975 2.8 24.6 13.1 45.1 14.4 233.9 1976 2.9 26.9 13.1 43.8 13.3 234.5 1977 2.5 27.5 12.2 43.6 14.2 297.9 1978 2.1 27.0 10.2 47.1 13.6 366.2 1979 2.5 28.2 10.4 45.7 13.3 349.8 1980 1.5 27.7 10.9 43.9 16.0 309.8 1981 1.1 23.8 10.3 42.2 22.6 306.1 1982 2.2 29.0 10.2 44.4 14.2 255.6 1983 2.4 29.4 11.5 45.9 10.8 - Range 1.1-2.9 23.8-29.4 10.2-13.1 42.2-47.1 10.8-22.6 - Typical Crude 2.5 28.0 11.0 45.0 13.5 - Slate Source: Energy Balances. - 99 - Annex 19 Page 1 of 6 EXPLORATION HISTORY CHART Union Oil of California YEARS AREA (km2) EXPLORATION In the Chaco Seismic Other Wells unless other- in crew/mos. wise noted and/or km 1945-49 93,080 46(3,000 est.) Unknown 5 Union reportedly spent US$7 million on the above. To do the same work in 1984 would probably cost US$40-50 million. An oil show was reported in one well (the Picuiba L) which is up-dip from known production in Bolivia. There is no data in the DGRM files in Asuncion. However, the mission obtained information that these may be availabLe from Union Oil for the cost of reproduction. The data is in dead storage; therefore, it is not clear exactly what is available. Pure Oil Company YEARS AREA (km') EXPLORATION En the Chaco Seismic Other Wells unless other In crew/mos. wise noted and/or km 1957-60 60,000 Unknown Unknown 4 - One well (Mendoza 1) reported a flow of 5MMCFDG from the top of the Devonian at 1,937 ft. (591 meters). There is no data in the DGRM files, but as Union took over Pure in the late 1960s, these data may now be available under the same terms as those noted above. -100 - Annex 19 Page 2 of 6 Placid Oil YEARS AREA ( km2) EXPLORATION In the Chaco Seismic Other Wells unless other In crew/mos. wise noted and/or km 1966-67 58,100 4(276) 1 field 3 Cost $547,000 geol. The DGRM has none of these records. However, the missi n was able to examine and review the data in Dallas. One well file, the Mendoza 2, was fairly complete, but wells 1 and 3 had little data. The company has film of the logs on file if needed. The seismic data was extremely poor and appeared to be of no value. The mission does not recommend reproducing the seismic data, but the well data may have some value. Pennzoil/Victory YEARS AREA (km2) EXPLORATION In the Chaco Seismic Other Wells unless other In crew/mos. wise noted and/or km 1969-73 50,000 6(900) 18,000 kms 16 air mag. This group carried out a geophoto study and drilled five shallow stratisraphic tests. Most of the 16 exploratory wells were less than 1,200 meters deep, but all tested into the top of the Devonian. A few electric logs on five wells are available at the DGRM, but there are no compLetion reports. However, Pennzoil International in Houston has informed the mission that the company would make availabLe copies of their exploration data to Paraguay for the cost of reproduction. The mission has also been informed that the seismic data was very poor and probably not useable. - 101 - Annex 19 Page 3 of 6 Petrolera Cenera., 5.A. YEARS AREA (km2) EXPLORATION In t4e Chaco Seismic Other Wells unLQss other In crew/mos. wise noted and/or km 1969-73 11,500 None 2 field 0 geology surveys This company, which was owned by Phoenix Canada Oil Co., Talent Oil & Gas, Galaxy International Oil Management Ltd. of Nassau, and C. & K. Petroleum, Inc. of Houston, was not contacted. This operation appears to be one of the promotional type permitted under the terms of the Petroleum Law. Texaco/Marathon YEARS AREA (km2) EXPLORATION In the Chaco Seismic Other Wells unless other In crew/mos. wise noted and/or km 1973-79 30,000 23 6 field 3 (2632) geology surveys There were no oil shows reported in the three wells drilLed, but some gas shows were present in tight sands; none flowed on drill stem tests. All seismic sections are available at the DGRM; DCRM also has a good report of the field geology work. Completion reports with electric logs are also on file; these reports lack only source rock analysis. - 102 - Annex 19 Page 4 of 6 Chaco Expl. Co. YEARS AREA (km2) EXPLORATION In the Chaco Seismic Other Wells unless other In crew/mos. wise noted and/or km 1973-undetermined 12,900 Unknown Unknown 2 This company, which is no longer in existence, drilled the Parapity No. 1 on a drainage anomaly and the No. 2 to test a possible anomaly near the Pennzoil Don Quijote 1. This information was obtained from the geologist who was on this project; he may be able to locate these well files but would need permission from the Paraguayan authorities before releasing them. Repsa Cia YEARS AREA (km2) EXPLORATION In the Chaco Seismic Other Wells unless other In crew/mos. wise noted and/or km 1973-81 33,000 18 or more 1600± 4 (3,500±) surface magnetics These two concessions, held by a total of four companies, are reviewed together since most of the exploration work, prior to drilling, was done jointly. The exploration was undertaken in a Cretaceous graben (or half graben) and had, as its objective, a different section than all the previous programs. Excellent well reports are available in the DGRM files, but there are neither seismic nor magnetic records on file. In order to make a study of this area, seismic and magnetic records data need to be obtained. 0 - 103 - Annex 19 Page 5 of 6 Cia. PetroLera del Chaco YEARS AREA (km2) EXPLORATION In the Chaco Seismic Other Wells unless other In crew/mos. wise noted and/or km 1974-80 1,200 1 (84) None 0 The records of the 84 km of seismic completed in 1976 are available in the DGRM files. It is satisfactory data and, when combined with the 3,500 km recorded on Repsa Cia. concessions noted above, should give an excellent structural picture of the Pirity Basin. Trend (Now Pecten Trend) YEARS AREA (km2) EXPLORATION In the Chaco Seismic Other Wells unless other In crew/mos. vise noted and/or km 1975 - 75,000. Hostly 26 1.5 gravity 2 undetermined east of Rio (2,046) 4.0 magneto- Paraguay telluric Pecten, which is the international arm of Shell (U.S.), became operator in 1979, at which time two concessions were granted with the remainder of the original prospecting permit continuing. Occidental Petroleum had taken an interest in this area but withdrew in 1982. The DGRM has copies of the well-completion reports as well as the seismic records. They also have an excelLent report prepared by Pecten in which an interpretation of aLl the geological and geophysical data up to the end of 1982 has been made. As these concession and permit areas are still under contract, the data cannot be made public without the permission of Pecten/Trend. Summary 1945 to present. All companies combined have drilLed a total of 39 wells, completed 124 crew-months of seismic field operations, during which approximately 12,438 kms of data were recorded, and completed a few man-months of exploration in aeromagnetics, surface magnetics, gravity, magnetotellurics, Annex 19 - 104 - Page 6 of 6 of exploration in aeromagnetics, surface magnetics, gravity, magnetotellurics, and surface geological studies. The remaining present-day concession and permit holders, not noted above, are not shown here because the mission had no information on any of their expLoration work. - 105 - Annex 20 Page 1 of 3 BASE CASE DEMAND ESTIMATE FOR ETHANOL FUEL SCENARIOS IN PARAGUAY (in m Iyear) 1982 Fuel actuaL 1990 LPG 13,512 17,117 Gasolines 98,890 125,271 Kerosene and Jet Fuel 28,817 36,505 Diesel OiL 263,920 334,326 Fuel Oil 16,686 21,,37 Ethanol 17,433 22,084 Source: Mission estimates. - 106 - Annex 20 Page 2 of 3 ECONOMICS OF ETHANOL PRODUCTION AT APAL a/ Lower Sugarcane Lower Unit Actual Price Investment Capacity m3/d 120 Operation da:s/yr 180 Total output m Iyr 21,600 Investment 106 ˘ 5,600 b/ 5,600 2,771 c/ Economic Revenue d/ ˘/liter 73.20 73.20 73.20 Total Cost d/liter 56.00 38.48 56.00 Sugarcane ˘/liter 42.00 24.48 42.00 Chemicals, labor, etc. C/liter 3.00 3.00 3.00 Working capital ˘/liter 8.00 8.00 8.00 Stillage disposal ˘/liter 3.00 3.00 3.00 Net cash flow ˘/liter 17.70 34.77 17.20 10/yr 371.00 750.00 371.00 Rate of return e/ Z per annum 2.84 12.0 12.0 a! Main product is anhydrous ethanol. bI Estimated at US$20 million equivalent. Exchange rate of ˘280/US$. cl Investment required to yield 12% per annum. a/ Set equal to anhydrous ethanol replacing regular gasoline. e/ Even cash flows for 20 years with zero residual value. Source: APAL and mission estimates. Annex 20 - 107 - Page 3 of 3 ECONOMICS OF ETHANOL PRODUCTION AT AZUCARERA PARAGUAY a/ Capacity m3/d 15 Lower Ethanol Operation d/yr 330 Molasses Lower Replacing Total Output m lyr 4,950 Prics Investment Premium Investment 10 C 1,608 b/ 1,608 1,146 c/ 1,608 Economic Revenue g/1 60.99 d/ 60.99 60.99 70.26 e/ Total Cost ˘/i 30.00 17.56 30.00 30.00 Molasses C/1 24.00 11.56 24.00 24.00 Chemicals, Labor, etc. ˘/1 2.00 2.00 2.00 2.00 Working capital ˘/i 1.00 1.00 1.00 1.00 Stillage disposal C/1 3.00 3.00 3.00 3.00 Net Cashflow ˘/1 30.99 43.43 30.99 40.26 106C/yr 153.4 215.0 153.4 199.3 late of Return f/ Z per annum 7.14 12.0 12.0 10.8 a/ Main product is straight ethanol. h/ Estimated from APAL investment. c/ Investment required to yield 12% IRR. d/ Set equal to straight ethanol replacing regular gasoline. e/ Set equal to straight ethanol replacing premium gasoline. f/ Even cashflows for 20 years with zero residual value. Source: Mission estimates. Annex 21 - 108 - Page T of 4 METHANOL PROPOSAL Background 1. One energy-intensive concept that has received attention in Paraguay is the production of methanol based on Itaipu power. This concept involves the production of hydrogen and oxygen from water electrolysis. The obtained oxygen is used in wood gasification to produce synthesis gas; the hydrogen requirements of this process are supplemented by the electrolysis. 1/ 2. To make the production of methanol economic, the idea of Including the manufacture of ammonium nitrate (a fertilizer) was added to the proposal. The amended proposal calls for ammonia to be synthesized from electrolytic bydrogen and nitrogen obtained from air liquefaction. Oxidation of ammonia by either electrolytic oxygen or air would yield nitric acid, which would be neutrallzed with ammonia to produce amuvnium nitrate. Table 1 summarizes relevant data for the two alternatives proposed. Economic Aspects 3. The uncertainties surrounding the concept of producing nethanol based on hydropower and wood resources in Paraguay make the project, economically questionable: as originally proposed, the project was apparently not considered feasible with respect to methanol production alone. Overall feasibility was consequently based on the availability of a reimmerative export market for amionium nitrate in neighboring Brazil and Argentina. There is little evidence, however, to justify this expectation. The market in Paraguay for this fertilizer is also highly uncertain, given the low per capita fertilizer consumption in the country, agricultural practices, and cost of fertilizers. 4. Another major uncertainty concerns the market for methanol in a country that already produces and markets ethanol fuels. Still other uncertainties Include the costs of major inputs such as electricity and wood. The availability of wood should also be a major concern; In this connection, a parallel can be traced wit,h respect to the ACEPAR situation. Also, if the ALCOPAR pulp and paper project 2J materializes, the additional demand for fiber would increase the uncertainty concernlng the availability and price of wood for methanol production. 1/ ELC/SICAI, Produccion de Metanol y Fertilizantes Utilizando la Energia Electrica de Itaipu. Pre-feasibillty report prepared for ANDE, two volumes, Milano, July 1978. 2/ A proposal for a large project involving foreign investors. Annex 21 - 109 - Page 2 of 4 Table 1: METHANOL AND AMMONIUM NITRATE a/ PRODUCTION IN PARAGUAY BASED ON ITAIPU POWER AND WOOD Alternative Alternative A B High Power High Wood Consumption Consumption Capital Costs, millions of US$ Chemical plants 59,010 71,550 (methanol, ammonia, nitric acid, anmonium nitrate) Electrolyzers 51,040 26,860 Total (with allowances) 121,050 108,250 Average Production Costs, USS/ton Methanol 196.50 137.25 Ammonium Nitrate 147.25 137.25 Main rnputs Electric'ty b/,udillion kWh/yr 1,066 647 Wood, 10 m37yr 122.40 318 Cost Range of Main Inputs Power, mills/kWh 5 - 15 Wood, USt$ton dry wood ll - 16 Total Power Requirements, MW 153 91 a/ 80,500 tons/yr of methanol (244 tons/day) and 94,050 tons/yr of ammonium nitrate (285 tons/day). b/ Electricity at 10 mills/kWh Source: ELC/SICAI Produccion de Metanol y Fertilizantes Utilizando la Energia Electrica de Itaipu, prefeasibility report to ANDE, two volumes, Milano, July 1978. Annex 21 - 110 - Page 3 of 4 5. With current technologies the cost of methanol increases with the feedstock chosen, from the cheapest (e.g., natural gas) to the most expensive (e.g., wood, naphtha, other crude derivatives, and coal). According to a recent study, 3/ for natural gas at US$4/million Btu, methanol would be produced at a cost ranging between US$278-330/ton under European conditions of mid-1982 for a plant with a capacity of 266,500 tons/yr. The proposed methanol plant in Paraguay, with a capacity of 80,500 tons/yr, would utilize wood to obtain carbon, and electricity to generate hydrogen. Estimated costs in the proposal are extremely low (US$137-197/ton), largely because of the inclusion of the ammonium nitrate component. Based on the foregoing, the estimated cost of methanol would be lower than the cost of methanol from natural gas, (i.e., the least expensive form of producing methanol), which would be inconsistent with practical experience around the world. 6. If used to replace gasoline via a blend of methanol/gasoline, the methanol value could be set equal to that of gasoline, assuming the end-use performance to be about che same for both fuels. Hence, methanol would be vaLued at the opportunicy cosc of gasoline, or US$307.90/ton of methanol. This would be the highest eco-.omic value of methanol for the Paraguayan economy. (Other uses if methanol, i.e., as a diesel oil substitute, boiler fuel, etc. would have a lower value). As the aforementioned estimated value for methanoL lies within the range of the cheapest available for this fuel (i.e., from natural gas), it is clear that unless natural gas is found in Paraguay methanol fuel is not an attractive economic proposition. Environmental Impact 7. The environmental impact of producing electrolytic/wood methanol would pertain mainly to forest resources. Overcutting of forests is a growing problem in Paraguay, particularly in the region provisionally chosen to implement the proposed project, i.e., on the Paraguayan side of the Itaipu Lake. Accordingly, this aspect would have to be considered with great care in any further analysis of the methanol issue. &. End-use issues would focus on the distribution difficulties because of the toxic character and related problems of handling methanol. The foregoing suggests thac, if introduced as a fuel, the use of methanol would be restricted for an indefinite period of time to a small number of consumers. For this reason, and because of the problems relating to the economics of wood-based methanol outlined above, production of this fuel in Paraguay wouLd be unattractive. 3/ Vetmasu, S. Methanol Technology, Demand Trends and Future Prospects. CEER (Japan), April 1983, Vol. 15, No. 4, pp. 5-13. Annex 21 U1 _ Page 4 of 4 Technologies Employed 9. The capital intensity of the proposed methanol project relates, in part, to the state-of-the-art of current technologies embodied in electrolyzers and gasifiers. Between 20 to 38 electrolyzers and six eo 12 gasifiers would be required under the proposed concept, denoting the lack of economies of scaLe. Both technologies, electrolysis and gasification, are old and have not progressed much for a long time. There are, however, current efforts worldwide to upgrade these technologies by increasing efficiency and volume production. If successful, such efforts couLd make electrolytic/wood methanol more competitive with alternative concepts. Annex 22 - 112 - GLOBAL MONTHLY MEAN SOLAR RADIATION (CaL/cm2 /day) Month Chaco Eastern Asuncion January 613 575 580 February 500 538 525 March 500 475 467 April 475 375 375 May 325 313 283 June 288 275 250 July 325 275 275 August 388 365 340 September 463 413 437 October 513 488 500 November 575 563 575 December 563 563 540 Average 460 435 430 Source: Extracted from "World Discribution of Solar Radiation", University of Wisconsin. 4 ;5 W C Ff A C 0 lUGiNQA OARAW 33 NUEVA ASUNC I C) N h4lyl otlAopu A 1 'I 0 O------ A 10 Avi O.., t; 11 f t R CASAI -0 I k- is Vb, C,p 1-4, C4 -A(Fclctj Nl, I A Y A R G E N T I N A SAfi Pfl'CX) MM Olt f k A, 1 i ~~~~~~~B O O U F. R b t- CARAj t; X_~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~b W *< t:.!<;t1P,a Dl >FJC EI..I fS!\ Nb.s <--, j&'''j > ,T,h,q7,,Sr,Tgl m I > S ! lW t t ;; ; t~~~~~~~~~~~~~~~~01 CLoA C,L fAApcic EfI S!Wz 5 I 0 : 1 ' ' , , , ,, , , ' ' , ' * , * , , , \ , F ^ 1 D . ,, ; hJ P [ t ) ) ( r w 1 [ t ' ' ' ' ' ' \ \ , , \ , I , .~~~~~~~~~ I r 1 '1'''f'"'''-''' DX : S\Q07y' /S < a"'~~~~~~~~~~~~~~~~~g- |~~RG PAAGN ,pT -O A It Ui^eD 10 , i3 1 u ^l f o*b4qUI _-fW RMN ODRS.' > sv&JaP\RGAIX e §,.) - - R tR^T1°N^t E§OUNrfARIEs ; g˘"'J (z ,,:} ^fs > WI PI 4#' I SAITO . l C .' ' . .. .. ,Hi} ISivSf.; W3 f (jyt. ,~~~~~~~~~~~~~~~~~~~~~~AN t ND " z ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-4 J f0 1 P-111 A IBRD 1817 D.? ~~~~~~~~~~~~~~~~~~~~~4APRIL 1914 G.f BOLIVIA oc' 5 -20 T d B PE R A Z I L 20' 20% ~~~~~~~~~o:-.K ~BOLIVIA~ I ~~~~~ANGEPITINA __ ---' ~ I)_ O O cea 2I~~~re~~ ~~Yo" ~ ~ DCI-,B R A Z I L W> --. 2--?^g-- 0 - 'I. ~ o. .. ... f r -~~~~~~~~ -. I~~~~~~~~~~~~~~~~~~~~~~~~ ENERGY ASSESSMENT PETROLEUM PERMITS, CONCESSIONS, AND \ 5, f;/:.t EXPLORATION SURVEYS Asunc.ot\xi ;//// .v-. piecong Ie,mIs > o, - ,- - -Explorot.on Concess.orts \ --lt - - Areas Covered by Explorot-on Sufveys > --- i%.2 A rav± s 0' - nr.) 2 Explorn atorWells ' No .Yono I - 1 --- ntemr.oonal Boundmfies t PP .--- ~~~~:. ~ ~ ~ ~ p 0 O ' 5000 1IE 2;0 TENS= so OD .....F 4 ?, _ ,_ _ _ _ _y n *_ _SZ 'V.> A G ^ r,^gxwa w _S _ - bX - * ,wIro.' ! i 5es 50. IBRD 18240 6e 00 JUNE 1984 B O L I V I A BOLIVIA PARAGUAY ENERGY ASSESSMENT t\. I ENERGY RESOURCES KILOMETERS 20 I 0 l / /1 1 1 , o 50 100 150 2 00 20 20' f / 50 100 /50 I TOW w / me I W ffC ,/ dw VW coe e..d* of ,,Vu ole of The W0,14 9am )~~~~~~~~~~~~~~~~~~~~~~~~~~s and Ve bofenem.u Fmo,i !~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~a f s -w dp A:-v.a rws. / V~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~de,,wI,rme Fwn.ne CwDwehoe } }gm - e s a V i "t dfa a of WV, \lC /, w aw smuRt - accm-W a/e of -q~~~~~~~~~~~~~~~~' 250 . -- , 25' 12 Forest Resources It R / 1 o,p/ i Dry Forest Asunci(2 h0 MW) -. I Grazing ond Agricultural Lond Ouebracho Forest j Virgin and Exploited Forest - - ,,-= Hydro Energy (Existing and Potential) -6- Wind Energy (Mean Velocity. km./hr.) -wio- Solar Energy (Direct and Diffused, calories /sq. cm. Jdoy) / @ Notionol Capital Internationol Boundary _ : _ 10 f(4, 400 M WI As, Aih0f, rM..., so h- hA. trde' - CT.r'o.. pA s s 0- , . -.o/ jv/or!d Aplcs.--A C.b0.- -v 5,4,w ',,,', -J,, 5J eW, Cl P/n 0~ ~ 9 J*Pr er 'J'P s7b 7e'Se p -seeu˘I. 550 5'8° PARAGUAY ENERGY ASSESSMENT POWER SYSTEM AND BOllVlA POTENTIAL AREAS FOR ELECTRIFICATION BOLVI 2 2 220- I~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ R- A''< Z0 I'' LsZ *~~.o YaIIerr~~~~~i **.. ~~Vista I o ,.,o Yoiierrfi ............... ~ ~ ~ . .P Pedro Juan C obaI lik | | ) §., Poso // '/\\ ' A y Paso / ' O Bbneto .' ~~~ARGENTINA Sclodilccuojti Ccpilcn,Dodo ,.\ | l ~~IURUGUAY Salodilfo ~ ~ u~c*..CptnBd -S Concepciot abi h;"""" 540 0*~~~~~~~~~~~~~~~~~~~~~~~~~~~~20 24~~~ 0 ........ 06,,, W 6 corpus Cristi .. Volmncl&n . I> ',, t; n d o n 1, .. l o r tbe . . . . . ;Rosr do Aqciino Curuguaty 25 'd" Diciembce I Juan de Mena Mbuouy 9Arroyos y E5iero hu * .Ort /o @ W /#/ Capitah B,adol,\. Salacli6o <*or t ulr i IURUGUAY Concepcic;n, J 54.*. \ 0 %~~~~~~~~~ 24 * 0N 240 . A \ ~~~~~~~~~~~~~~~~~~ / d5lcJ~~~~~~~~~~~b Gtjbia*;f 240_ ,""'" Corpus Ceisl ; Volendarn * * e* do Aqwp*no Curuguaty Iy F;;1sood° 1. ,< ~ - N Diciembce Juon de Menoa .. Mbutuy Arroyos y Estevos Y ' _ % , 1°~~~~~~I de Marzo l *" " I royao ~~Cal i.E. ll Tobopi Cora Bergthold 'er 12 //o#p La~~~a ®~~I O~ s a Mbocayoi.* 7 Foquro nnor Os loit I , nOl uozu~ ~ ~~~~~I S.Antonoc Ilaurubi t=Pe.Sroessner Guora ar Co.SS …rf Z VilIet, Ji, / \UUOFO PaAuauv Le se Troche ,.-| .-.- ~~~ ~/ CaropegJa Ybytymi Comn hop Ato Nd | | 26° Z 2 *. )} * Valle Apua Ybycui * \ \\_ L > T a v oi . *- .tlaI_ - l v M yacey BaPa S .relY ; Lopez . CmbeodI Co.pucu. OC)uyquyO .... / : . nilla Florida . a /~~~~~~~~~~~~S.Agst Z., ", -II. n Juan Butisto / Santa c *. \ y0.- / San Juon B. delNeembucu q\ / Moroti C.A.n Pedro del Parana Son JuaaSon Igna c *S ncisc h Obiigpd SnaRosa Isb\~Cilonio ~~ I ( U O * ~ ~ ~ ~ ~ ~ ~ ~ l I O ~~~~~ ~ ~ i r n9 , J e s w e Arroyos y Eseo | - AtsToboti Caa erihld Oleary m%I/,p toi are ol eMFrzo I / e - omrt4) of PJ Isl rosner oW S L s\o Pucu e1ad'a S Antonio -a… - _W== , Slroessner Gu / Ce /l Colmerfe VI/ gauop r Ybpty,, /?iar..o I aap byy I 01rt u airrIn IC, j N "3roi6nl. ." .... CAOlo Y. S. Agustin . : . 0 9 X~~~~~~~~Acchcy 1' Aboi 7 ..../.~~~~. I IreTv;..... - 26° Z , o/ . Valle Apuo Ybycui lturb ,,\ a 20' ,a b Oliva Mociel ......\0,.C........,-..* Napomucenp Llj .w .. Mbuyopey ",., Caapucu ~~~~~~~~Buenp'Vistc Albed COOP u yqu yo illa Fl Cr e , Son Juan Bautisto Santa v . . San Jpan B de Neembucu \ /° Moroti \ Son Pedro del Polano "",-"on Jlcn Bro; de: F Weembucu, Son 'gnacS Froncisco / Obligodyi,u P,-~ioI~ Srt Ros sI C Conia . h ~ ~ it o1 .6ijozucu6 ~~~~~~~~~~~~~~~~~~~~~~ l'to \~iom Jes, dm.,bu I. ... I S. agog : Tri iaad . . . . ... ....... _rol E' , ...... -2 P3"t H A ------- Loures >' 66 San C os - V cente Motioudo O Potential Agro.Industrial Areans EXtSINO CNSI.Fu^UE Trasmisionsines Mayor -Aols23 kv. o, geecnneneoi :Potential Areas for Ylectrification Susttins7eerd0n elyfjine EX N CONI FUURE TransmissionCornLin neesdenJOS Rivers 220 kv. u s 280 EoInte unational Boundaries * 66 kv. 5p heenpepar2 El Potential Agro-industrialEPlants tne dn.ni s ank' segafl elies MI'FS Dams~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~t enthre Cn.eratr-ce 01thneot C SO m~~~~~~~~~~~~~~~~~~~~~~~~~~~2 v s dfsads e[.y,awel rot h P 5tenti l AO E T E fR E e rf580i nUnd if-'mra'S Zac Subsatios: BrpLatz Tri de-ymnron usd nath bunirS h0%