__2 C;Z_NUMBER 31 9ED Precis U Operations Evaluation Department June 199 World Bank Lending for Natural Gas: Policy and Institutional Issues To increase the supply and commer- The Bank changed its petroleum 1970s. An important thrust of the gas cial use of natural gas, the Bank has lent lending policies after the price lending program has been to support $4.3 billion since 1954. Lending covered increases of 1973 greatly improved a greater role for the private sector. the spectrum of activities from explora- the economics of oil and gas from tion and appraisal through distribution higher-cost sources-either for The study examines 32 com- and the development of gas-consuming export or to replace costly imports. It pleted natural gas operations sup- industries. strengthened its staff with oil and gas ported by the Bank in 14 borrowing expertise and embarked on one of the countries. Half the operations were A new study by OED finds that the most comprehensive reviews of in Egypt, Pakistan, and Thailand. Bank's gas lending has been profitable, policy undertaken for a single sector has made substantial progress in its goals of lending. Studies by the Bank Outcomes and has been more successful, in general, showed that 50 -60 oil importing than lending to other sectors.* Fears that developing countries could poten- Natural gas production or commer- the Bank would displace private investors tially produce oil or gas, or both, and cial use rose substantially in all but one were ill-founded. By improving pricing would benefit substantially, but that of the 14 countries. The Bank's influence and the regulatory environment, and they lacked the necessary skills and helped expand private sector participa- developing markets, the Bank's support finance and the experience to plan a tion in gas exploration and production. has in fact acted as a catalyst for private strategy for the petroleum sector. sector participation in exploration and Considerable advances have been production, though not in transmission The lending policy that resulted, made in gas planning and coordination, or distribution. The Bank's projects introduced in the late 1970s, treated rationalization of gas use, economic significantly improved the technical natural gas projects as integral parts pricing, institutional development of gas capacity of the institutions they assisted. of national energy programs, within utilities, and private sector participation. The Bank's influence was more effective the context of country-specific energy But many obstacles are still to be in countries at the early stages of lending strategies designed to help overcome. developing the gas subsector. Efforts borrowers: to reform or rationalize existing institu- tions and demand patterns were less establish a national energy policy successful. framework, including investment strategy, pricing policy, and institu- Background tional setting; Review of World Bank 0develop institutions; Lending for Natural Gas", Report For the first 20 years of lending 0 enhance the role of the private No. 10828. June 1992. Copies are for natural gas, the Bank concen- sector; availabl, to World Bank Group trated on development of gas mobilize financial resources. Executive Directors and staff transmission and distribution fnnn the InTnal Dtcunt5 utilities, independently of countries' Energy lending, including gas Unit and from Regional Informa- energy sector policies and long-term lending, was significantly increased tion Senices Centers. energy development programs. and diversified starting in the late Petroleum Authority of Thailand a slow process of maturation, helped by a P push from policy-based lending. By the late 1970s, Thailand was gas development in the Sirikit field. spending nearly half its export was supported by the Bank; several earnings on imported energy. Two joint ventures with IOCs followed, a lOCs had found commercial quanti- The company has been onsistent] policies meant that in many coun- ties of gas in the Gulf of Thailand. profitable since 1981, and since 1986 But when the Bank became involved, has financed a substantial part of its tance for gas planning and coordina- the government had been negotiating investments from internal resources. tion to studies and technical assis- with one of the companies for more tance for preparing gas subsector than a year. Progress was slow Dialogue between TT and the plans and developing planning because there were no models to Bank has been ver important. The capacity in borrower organizations. follow for a developing country Bank-financed gas projects and The measures taken were not very contracting with a foreign operator SALs supported studies on energy effective: man studies lacked focus; for the purchase of offshore gas. pricing, gas utilization, LPG-CNG y use, estimation of gas rsves, ad dataond enaergy/nuraloswere The Bank's first gas loan to finance, and management informa- Thailand (1978) helped the Petroleum tion. Strategic subsectoral planning actions tended to be poorly timed or Authority (PTT), established in 1979, ensured that gas supplies were inadequate; and policy makers were with the project management and allocated rationaUv. For example, often apathetic. Loan covenants engineering services and related following a 1985 Bn study, related to sector planning and studies to develop the Erawan gas Thailand did not build up a coordination were generally com- field. MFT was made responsible for fertilizer industry dependent a plied with but rarely achieved their gas purchases, sales, and transmis- cheap gas-unlie many countries, underlying goals. sion, as well as for refining and In 1979, the government began petroleum product marketing. raising energy consumer prices so In future, with the further Strengthening lTT remained a major that by end-l981, petroleum prices commercialization and privatization goal of the two gas projects that were above international levels. followed, and of the later Sirikit Current concession agreements with agencies will need to shift away petroleum project. lOCs link the producer price of gas from investment allocation toward to the border price of fuel oil, broad strategy formulation, demand In just over ten years, PTT has though prices for the major source estimation, and ensuring that built up enough expertise to under- of gas--the Erawan field-are still take joint venture operations. The based essential.1 on a cost-plus first of these, for oil and associated system. under-taken to meet demand. wassup d b te Bk seGas supplyand use Between the beginning of Bank changes it has supported in national Efforts to channel natural gas to lending and 1990, gas production policies and regulations have high-value uses were more successful in increased by 110 percent in the 14 encouraged successful exploration countries without established consump- countries studied. The most dra- by private oil companies and tion patterns. In countries with major matic production increases were in stimulated national oil companies gas-consuming industries, they were Egypt, Pakistan, and Thailand. (NOCs) to redirect exploration less successful and aroused much toward gas. controversy. Bank-supported gas projects have been economically sound; most In Bangladesh, Bolivia, Egypt, Though most of the gas utiliza- of those already completed have Pakistan, and Thailand, the Bank tion studies helped to identify issues economic rates of return higher than has had an important influence in and shape the Bank's dialogue with 20 percent, even though the prices of establishing the infrastructure governments, their direct impact was substitute fuels fell sharply after needed to make gas reserves limited by data weaknesses, the 1985. Ninety percent of the projects commercial, political influence of vested interests, were rated satisfactory. More than and lack of timeliness and Bank half the projects made substantial Issues follow-up. At least half the countries progress in institution building and studied still need to rationalize gas the other half made partial progress. Sector planning, coordination use. But with continued pressure from the Bank on gas pricing, and Bank-assisted exploration Gas planning and coordination has the worldwide trend toward a projects have so far yielded only improved slowly, but in many countries market economy, prospects are small commercial petroleum discov- is still weak, where discernible improve- better for attaining more high-value eries in Egypt and Tanzania. But the ment was obtained, it was due largely to use of gas. June 1992 Many countries still need to owing to borrowers' reluctance to Private Sector Participation in rationalize the structure of con- accept Bank assistance, orgamza- 14 Borrowing Countries sumer prices, eliminate price tional inertia, or the civil service's (number of countries) distortions between gas and gas lack of resources and constraints on substitutes, and eliminate cross- its actions. Several of the institution Explorabon Production Transmssion I subsidies between consumers building components suffered from ft- m8. l-V(particularly, subsidies benefiting being designed without a clear fertilizer producers) in a way that strategy and action program. I eradicates distortions in resource A pervasive problem was the Sallocation. Bank's misplaced optimism about Ei the commitment of governments or Institutional development gas companies to the proposed institutional changes. The Bank's assistance considerably improved the technical capacity of gas Diffusion of responsibilities, lack of institutions. In Egypt, Indonesia, autonomy. Generally, enterprises L. uF vI, I.Pakistan, Tunisia, good results urgently needed to establish a were obtained where local staff working environment and salary .4" 0worked side-by-side with staff levels that would maintain the 1 from internationally known oil continuity of management and companies or gas utilities in qualified staff. Utilities also needed industrial countries. help to improve their management structures, accounting systems, Pricing, tariffs Components to strengthen gas procedures for billing and collec- institutions had a significant impact in tion, planning operations, and Bank lending helped considerably newly established entities (see box) and maintenance. Managing these to bring gas producer prices up to in utilities operating in niche markets. enterprises was made more difficult economic levels, and had moderate Components that targeted estab- not only by weak planning but also success (more than in electric power) in lished NOCs or natural gas mo- by diffusion of responsibilities and increasing consumer prices. nopolies had only modest success, excessive political interference. When the Bank began lending forg gas, only one country had gas prices at or close to the economic level. By 1990 , nearly half the countries had achieved lizing inancial Resources economic pricing. Several had raised Argentina: Continuing Bank Condensate field by a joint venture gas producer prices and attracted dialogue with the government has led of the National Nigerian Petroleum considerable private investment in to a large number of concessions for Corporation and a major C, exploration and development oil and gas exploration by private (Argentina, Egypt, Pakistan, Thai- companies, and joint ventures with Paistan: The Bank was instru- land, and Turkey). Others were private sector companies, represent- mental in persuading the govern- making purposive efforts to attract ing at least 40 percent of the national ment to increase producer prices more private investment petroleum company's production, and encourage the Oil & Gas (Bangladesh, Hungary, India). Development Corponation to enter EeW;: The exploration actibvities more joint ventures with aOCs. Gas consumer prices generally financed under the Western Desert were kept well below economic Exploration Project yielded only Tanzania: Bank financing of costs, both to protect low-income limited discoveries of oil and gas, but exploration resulted in modest households and for fear of worsen- together with more attractive discoveries of gas. After a pro- ing inflation. Bank studies showed incentives for gas productionB the tracted period of trying to engage neither of the latter concerns to be findings were enough to attract the private sector, a concession has investment by international oil now been awarded to a private justified. Progress on consumer companies Q0OCs) in the area. About entity. prices was mostly achieved after the 16 percent of Egypt's gas consump- fiscal situation in borrowing coun- tion now comes from the Wewstern Thailand All exploration and tries no longer permitted large Desert. production is done b the private subsidies, and once the decline in sector, either alone or in joint world energy prices (after 1985) had Nigeria: The Bank's participation ventures with the Petroleum narrowed the gap with controlled has led to the development of the Oso Authority of Thailand. domestic prices.w a r OED Pricis I had resisted making gas develop- Recommendations ment attractive to foreign oil companies, expecting that there Sector poicies: Action is still needed design institutioniding compo- o e o inae to:n t t n agencies to develop the subsector. * promoting twining arrange- Svrlfcoscmie ocag * eliminate distortions in consumer ments with more experienced gas prices; utilities; their outlook: limited capacity * raise the returns on investment for * ineasing emphasis on maint (financial, manpower, technical) to all gas operations so as to attract more nance and safety; implement gas projects; the 1979 private investment; * designing and using management energy price increases; and the * separate govermment's role as information systems. deteriorating economic situation of regulator from its role as entrepre- the nid-1980s. neur; Resource mobilization: Actions to help a corporatize or privatize natural public sector agencies generate By 1990, the environment for gas utilities; internal funds and shift more gas private sector participation in gas * separate trsmission and operations to the private sector distribution functions; includeed * improve planning greatly improved in many of the tion of sector activities. * shifting the emphasis from countries studied-particularly in fiancia rate of return covenants toEgypt, Nigeria, Pakistan, and Instiuional strengthenng Whether or performance-enhancing ones Tanzania (see box). Financial not they are to be commercialized, contract plans; incentives were still considered many gas utilities need to improve * promoting non-recourse project inadequate in Bangladesh, Hun- performance, for example bv- financing, provided there is a gary, India, Indonesia, and Yugosla- satisfactory legal, regulatory, and via. * defining a clear institutional fiscal framework for gas; development strategy, accompanied * directing some Bank assistance to The Bank has been an effective by an action plan; peak load shaving and gas utilization catalyst for mobilizing resources for * using institutional development facilities, so that gas is used more upstream gas development in expet instead of generalist staft to efficiently. several countries (see chart). It I needs to continue efforts to attract more investment in most of the borrowing countries. Private sector The misgiving that Bank lending for upstream petroleum activities would The Bank has not noticeably The Bank's influence has helped to displace private risk capital has proven encouraged private participation in expand private sector participation in unfounded. natural gas transmission and natural gas exploration and production distribution. It did not advocate a by advocating suitable policy changes Until the 1980s, most countries private sector role in several gas and through a large variety of lending borrowing from the Bank had many utilities that it helped to establish instruments. In general, the Bank has obstacles to private sector involve- (Egypt, Indonesia, Thailand), and in kept its financing to a minimum, ment in gas development, mostly Pakistan, it did not object to govern- bearing in mind that it had to have a concerning inadequate financial ment actions that reduced private certain level of involvement to affect incentives and legal and regulatory participation in transmission borrowers' energy policies and strategy. restrictions. Indeed, governments companies. Juenerl a99tors o ned to3chang thee mid190s