-m -. '.d, ' Xi *. ,:. *. 97.S ' :/,* -Document of

The World Bmk

FOR OFFICIAL USE ONLY

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'o p '> Report No. 5492-YU

STAFF APPRAISAL REPORT

YUGOSLAVIA

FIRST PETROLEUM PROJECT

June 3, 1985

Energy DepartmentPetroleum Projects, Division I

- | This document has a restricted distribution and may be used by ricipients only in the performance oftheir oficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS:

Currency Unit = Dinar200 Dinar - US$1.00Dinar 1.00 = 100.00 paras

ANNUAL AVERAGE OFFICIAL EXCHANGE RATE(Dinar/US$)

1977 1978 1979 1980 1981 !982 1983 1984

18.0 18.6 19.0 24.9 35.5 51.3 90 154

UNITS AND MEASURES

bbl = barreiTOE = ton oil equivalentMTOE = million tons oil equivalentm = normal cubic meter of gasscf = standard cubic feet of gas1 Ton Oil = 7.4 barrels oil (340 API)1 Bcf = 109 standard cubic feet1 Tcf - 10 standard cubic feet of gas1 Tcf 23.3 MT EI TOE = 1,153 m natural gas1 TOE = 43,000 scf gasTWh = Terawatt hour (109 kilawa.t hours)

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

BOAL - Basic Organization of Associated Labor(such as a department in an enterprise)

WOAL - Working Organization of Associated Labor(a group of BOALs i.e. an enterprise)

COAL - Composite Organization of Associated Labor(a group of WOALs i.e. a conglomerate company)

EXPL - Energoinvest Work Organization for Exploration and Exploitationof Oil and Gas (a subsidiary of RBB)

INA - Industrija Nafte (in Croatia)

OUNP - Association of Oil and Gas Producers

PBS - Privredna Banka Sarajevo

RAP - Republic and Autonomous Province

RASP - Resource Appraisal Simulation for Petroleum

RBM - Energoinvest - Rafinerija Nafta Bosanski Brod

FISCAL YEAR

Januarv L - December 31

FOR OFICuL USE ONLY

YUGOSLAVIA

FIRST PETROLEUM SECTOR PROJECT

Loan and Project Summary

Borrowers: tNA NaftapLin, Nafta-Gas and Privredna Banka Sarajevo-UdruzenaBanka (PBS). (Each Borrower being a party co a separate LoanAgreement with the Bank).

Beneficiary: Under the PBS Loan, the Beneficiary and implementing agencywouLd be the Energoinvest Work Organization for Oil and GasExploration and Exploitacion (EXPL).

Guarantor: The Socialist Federal Republic of YugosLavia.

Amounts: A total of 92.5 million equivalent as follows:INA Naftaplin, US$55 million; Nagta-Gas, US$35 million; and PBS,US$2.5 million.

Terms: Each loan is repayable in 15 years, including three years ofgrace, at the standard variable interest rate.

Project Objectives, Description and Risks:

The proposed project supports a cross section of the hydrocarbon explorationand p=oduction activities in the Socialist Republics of Croatia and Bosnia-Herzegovina and in the Socialist Autonomous Province of Vojvodina. Itsobjective is to assist in the developmenc of indigenous energy resources,thereby reducing Yugoslavia's dependence on imported energy. The projectcomprises support for a time slice of the gas exploration programs for INANaftaplin, Nafta-Cas and EXPL through: (i) the expansion of explorationactivities to the more complex and deeper areas that hold the potential forincreasing the country's future recoverable reserves of hydrocarbons; (ii) theacceleration of exploration activity in Yugoslavia by promoting to inter-national petroleum companies exploracion areas that are prospective but areinsufficiently explored due to the inadequate resources of the localcompanies; (iii) the strengthening of the technical capabilities of Yugoslavpetroleum companies to develop gas reserves under high pressure and tempera-ture, and containing corrosive gases; and (iv) the introduction of anunderground gas storage system to reduce problems related to seasonal demandfor gas.

Possible project risks have been identified and taken into consideration inthe project delays. The geological risk has been minimized by (i) previoushydrocarbon exploration which reveals a high probability of success; (ii) theresult of a recent resource appraisal in the Pannonian Basin using an advancedcomputer model; and (iii) earlier test drilling in the Sava Basin which hasclearly identified a very high probability of success. The technical risksare minimized by virtue of the past experience that the two operatingcompanies, INA Naftaplin and Nafta-Gas, have had in carrying out expLorationand production programs in severe environmental conditions.

TIis documt ha a resieddis tbXutionand may be sod by recipients orly in the perfomanc ofO&thi ofil duds Its ontets My not otrwise be dioed without Wodd Bank authorizton

Project Cost SummarYv-ocL - US$ -Million'ocaL Foreign Total

INA Naftaplin Sub-ProjectBase cost 188.5 9-9.8 288.3Contingencies 55.8 27.3 83.1

Sub-project cosc 244.3 127.1 371.4

Nafta-Gas Sub-ProjectBase cost 63.9 65.3. 129.2Contingencies 19.8 18.1 37.9

Sub-project cost 83.7 83.4 167.1

EXPL Sub-ProjectBase cost 9.3 2.0 11.3Contingencies 2.2 0.5 2.7

Sub-project cost 11.5 2.5 . 14.0

Interest - 55.4 55.4

Total Project Cost 339.5 268.4 607.9

1/ Includes US$38.8 million in taxes and duties, and US$19.7 milLionin indirect foreign exchange.

Financing Plan:

Local Foreign Total %

Internal Sources 339.5 78.1 417.6 71Export Credits andDownpayment Financing - 97.8 97.8 14

Proposed IBRD Loans - 92.5 92.5 15

Total Financing 339.5 268.4 607.9 100

Estimated Disbursements:

FY86 FY87 FY88 FY89 FY90 FY91

Annual 4.0 17.0 24.0 28.0 17.5 2.0Cumulative 4.0 21.0 45.0 73.0 90.5 92.5

Rate of Return: Not applicable

YUGOSLAVIA

FIRST PETROLEUM SECTOR PROJECTSTAFF APPRAISAL REPORT

Table of Contents

Page No.

I. THE ENERGY SECTOR....... O............................... I

A. Overview. .............................. IB. Resource Base-.... ....... ....................... 1C. Energy Consumption.o.9...... .................... 2D. Sector Development Strategy...................... 2E. Energy Pricing..............................O.... 3

Natural Gas Prices .............................. 3F. Energy Institutions....................*........ 5

II. THE HYDROCARBON SUB-SECTOR ... ... ............ 6

A. Hydrocarbon Resources..e... .............. ...... 6B. Geology .......................................... O....... 6C. Institutions .. ...... ................ 7D. Exploration Strategies ..................... 8

Early Exploration .......... ........ ..... 8Recent Exploration Activity ..................... 9Future Exploration Programs ................. 0 .. 10

E. Gas Development .................................. O........... 11F. Role of the Bank.........*.... 12

Resource Appraisal.............. .g .ee 13Exploration Promocion. .......................... 13Project Formulation ........ * ..... e .... e... 14Institution Building. ge...... ee.....eg..., ge. 14Financing ....................................... 15Sector Policy............. O.................... 15

III. THE BORROWERS AND BENEFICIARIES .... .. ............ 15

A. Croatia ............................ e........ 15Organization and tanagement ................0... 16Staffing mnd Training........................... 16Geological and Geophysical.,...... ............. 17Drilling ........ ..... e..... .. ee 17Engineering............e........ e.... 18Auditing and Accounting.* ...................... 18Insurance .......... .g....... 18

B. Vojvodina ..o.......................... 00.......... 19Organization and !fanagement..................... 19

This document is based on the results of appraisal missions which visitedYugoslavia from June 3-27, 1984 and from November 24-December 16, 1984.The missions were comprised of: R. Berney (Mission leader); P. Jinek(Financial Analyst); J. Schweighauser (Exploration Geologist);A. Odoulowu (Geophysicist); C. Yuksel (Reservoir Engineer); H. Mors1i(Drilling Engineer); and Y. Heitner and J. Carriere (Consultants)

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Table of Contents (continued)

Page No.

Staffing and Training ... 19GeoLogical and Geophysical ..................... . 20Drilling .. ....................................... 20Accounting and Auditing . . . 21Insurance ....................................... 21

C. Bosnia-Herzegovina ...... . .............. * ... 21Organization and Management . . .. 22Accounting and Auditing ... 23

IV. THE PROJECT .23

A. Project Objectives and Scope .. 23h. Project Background and Rationale.... 24

Exploration Components .. 24Exploration Promotion Components 27Testing and Appraisal Components .28Underground Gas Storage Component .29

C. Project Description . 30INA Naftaplin Sub-project .30Nafta-Gas Sub-project . 31EXPL Sub-project .................... ............ 32

D. Project Implementation .32INA Naftaplin . .32

Nafta-.as .34EXPL... 35

E. Implementation Schedule he........ 36F. Project Cost Estimate ........................... 36G. Financing Plan................-.....-... 37H. Procurementocurt......... 40I. Disbursements. 41J. Reporting Requirements. 42K. Ecology and Safety .42L. Project Risks .43

V. FINANCIAL ASPECTS.. 43

A. Accounting and Financial Policies... 44B. Financial Pe r fnrmance* 44

INA Naftaplinfn....... 45Nafta-Gas...... 46

C. Future Performance . .. . ........ 46INA Naftaplaiin........... . ... 47Nafta-Gas .... 48

D. Financial Covenants for INA Naftaplin and Nafta-Gas 50E. Privredna Banka Sarajevo (PBS) ... 50

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Table of Contents (continued)

VI. ECONOMIC JUSTIFICATION AND RISKS ...................... 51

A. Exploration and Exploration Promotion ............. 51B. well Testing ..... . 54C. Kalinovac Gas Field Testing ....................... 55D. Underground Gas Storage ........................... 55

VII. RECOMMENDATIONS AND AGREEMENTS REACHED ................ 56

ANNEXES

1.01 Energy Balance 19821.02 Summary Energy Balances 1975-901.03 Gas Prices By Consumer Category

4.01 Agreed Requirements for International ConsuLtantsand Engineering and Service Companies

4.02 Implementation Schedule4.03 Detailed Cost Estimates4.04 Phasing of Expenditures4.05 Estimated Disbursement of Bank Loan

5.01 INA Naftaplin - Past and Forecast Income Statements5.02 INA Naftaplin - Past and Forecast Balance Sheets5.03 INA Naftaplin - Sources and Application of Funds5.04 Notes and Assumptions for the Financial Projections5.05 Nafta-Gas - Past and Forecast Income Statements5.06 Nafta-Gas - Past and Forecast Balance Sheets5.07 Nafta-Gas - Sources and Application of Funds5.08 Assumptions Used in the Financial Projections5.09 PBS - Past Income Statements5.10 PBS - Balance Sheets5.11 PBS - Sources and Applications

6.J1 RASP Resource AppraisaL

7.01 List of Documents in Project File

IBRD Map No. 18826

I. THE ENERGY SECTOR

A. Overview

1.01 In Yugoslavia, as in all European countries in the past few decades,hydrocarbons (oil and gas) have rapidly replaced coal in industry, transportand space heating uses. Thus, while oil accounted for only 20X of totalprimary energy consumption in 1965, it accounted for 40% in 1982, and gas,which accounted for only 2% in 1965, accounted for 12% in 1982. In the sametime period coal consumption (including lignite) fell as a percentage ofprimary energy from 63% to 43%, although in total energy value, production in1982 was about double what it was in 1965. Natural gas is now the third mostimportant source of primary energy in Yugoslavia, behind only oil and lignite;and its importance is expected to continue to rise in the coming years.During the same period reliance on imported crude oil grew rapidly. The costof imported crude oil increased by some hundredfold, as imports rose from onemillion tons, costing abouc US$20 million in 1965, to 8.4 million tons,costing almost US$2 billion in 1983, representing abouS 25Z of totalmerchandise imports. In addition, about 2.9 billion m of gas was imported in1983, costing about US$450 million,

B. Resource Base

1.02 Yugoslavia's indigenous energy resources include oil and gas, hydro-power, and low grade coal (lignite). Shale oil deposits, while extensive, arenot economically exploitable with current technology. Geothermal reservoirsprovide mainly medium temperature water, unsuitable as sources for powergeneration. Lignite reserves are estimated at about 13,000 million tons.2,600 million tons oil equivalent - MTOE), but are generally of such lowquality that they can be developed only in open pit mining operations inconjunction with mine-mouth power pLants. About 75% of the reserves arelocated within the Republic of Serbia. Proven economically recoverablereserves of hard coal are about 36 million cons (18 MTOE); proven reserves ofbrown coal are about 1,300 tons (450 MTOE), of which 30X is suitable for openpit mining. Economically viable hydropower potential is estimated at about 55TWh, of which 27 TWh (49%) has already been developed, with another 3.4 TWh(6Z) to be developed by 1990. A review of the power subsector can be found inthe SAR for the Visegrad Hydroelectric Project, dated April 10, 1985 (ReportNo. 5369-YU).

1.03 Remaining proven economically recoverable reserves of oil areestimated at about 70 million tons, of which 55 million tons are in Croatiaand the remaining 15 million tons in Vojvodina, and 3 Tcf gas (70 MTOE), ofwhich about 2 Tcf are in Croatia and 1 Tcf in Vojvodina. In addition to thecontinued exploration activities being carried out in the petroleum producingprovinces of Croatia and Vojvodina, a major exploration effort is currentlyunderway in the offshore Adriatic. An exploration program in the deep partof the Adriatic is being carried out by three foreign company consortia asjoint ventures with INA Naftaplin, the local petroleum company in the Republicof Croatia.

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C. Energy Consumption

1.04 Per capita energy consumpcion in Yugoslavia for 1982, the last yearfor vhich reliable figures are-availabLe, was 1.55 TOE, about 30% higher thanthe average for middle income countries. Much of this higher consumptionLevel is to be'expected, since the winter climate that Yugoslavia must dealwith is much harsher than that of most middle income countries. However,there is no doubt that more active energy conservation could bring this leveldown somewhat. Total energy consumption was 36 MTOE of primary energy about60% of which was produced domestically. Since energy prices began to rise in1975, the growth of energy consumption has been modest, with an elasticity ofdemand of about 1.2. Of the domestic production, 0.2 MTOE (1%) was hard coal,3.5 MTOE (17%) was brown coal, 8.6 XTOE (41%) was lignite, 2.3 MTOE (112) washydropower, 4.3 MTOE (211) crude oil, 1.9 MTOE (9%) natural gas. Importsinc-luded 9.8 MTOE crude oil and petroleum products, 1.9 MTOE natural gas, and2.6 MTOE hard coal. DetaiLs of the 1982 energy balance can be found in Annex1.01.

0. Sector-Development Strategy

1.05 In March 1983, the Federal AssembLy adopted an economic program forrestructuring the economy prepared by the Stabilization Commission followingthe balance of payments crisis in 1979. Since the energy sector wasconsidered critical to structural adjustment, the Stabilizacion Commissionformulated a long-term strategy for its devzelopment. This strategy has twomajor elements: first, expanding production from domestic energy resources,particularly lignite, coal, hydroelectricity and petroleum; and second,improving the efficiency of energy consumption, distribution andtransformation through demand management measures, mainly reforms inpricing. The Bank has reviewed the Government's strategy in the report"Constraints and P;qgspects for Restructuring the Energy Sector" (Report4797-YU), May 1984._ ). This report endorses the Government's strategy andmakes specific recommendations for the development of indigenous energyresources, rationalization of investmenc programs to meet national objectives,changing the basis and levels of energy prices and raising energyefficiency. As well as furthering the Government's structural adjustmentobjectives, the strategy outlined for the energy sector is, itseLf, dependenton general policies for structural adjustment, especially measures aimed atimproving financial discipline and the allocation of foreign exchange.

1.06 During the period 1985-1990. a number of projects to expandYugoslavia's production of lignite, hvdroelectricity and petroleum are plannedto be completed. Increased energy production, plus reforms in energy pricingand other demand management poLicies initiated under the Program of Long-Term-Measures for the Rationalization. Substitution and Conservation of Energyshould enable Yugoslavia to reduce its dependence on imported energy from 43%in 1982 to about 27% in 1990. However, success in meeting this goal willdepend on timely completion of well chosen projects and maintenance ofmomentum for increasing energy prices. By 1990, production of brown coal and

1J This report, which is current;v in Creen Cover, will be distributed to theexecutive directors in the near future.

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lignite is projected to be 58Z. natural gas 132Z and hydro and nuclearelectricity 78% above their current Levels. A summary of energy balances forthe period 1975-1990 is given in Annex 1.02.

E. Energy Pricing

1.07 The Federal authorities have accepted the recommendacion of theYugoslavia Energy Sector Study, to raise energy prices to their economicopportunity cost. Domestic prices of petroleum products are greater thantheir border prices, with the exception of fuel oil, which is about 88Z of itsborder price. Lignice prices are about 78Z of economic cost, and those ofhard and brown coal are 88% and 85Z of their respective economic costs.However, electricity prices are only 78% of preliminary estimates of long runmarginal cost and domestically produced natural gas (soLd only in Croatia andVojvodina) is priced at only 46Z of che border price as shown below:

Table 1.1

Energy Prices

Domestic Economic Domestic PricesPrice Cost as Z of Economic

Date (Dinar/TOE) (Dinar/TOE) Cost

Natural gas:Domestic Dec. 1984 15,000 32,174 47Imported Dec. 1984 32,174 32,174 100

Regular Gasoline Dec. 1984 110,370 57,915 191Diesel/Gas Oil Dec. 1984 84,825 52,065 163Kerosene Dec. 1984 58.695 53,625 109Fuel Oil Dec. 1984 28,500 31,174 88Hard Coal Dec. 1983 7,902 9,000 88Brown Coal Dec. 1983 7,074 8,280 85Lignite Dec. 1983 5,640 7,200 78Electricity(paras/kWh) Jan. 1985 470 360 78

Source: Federal Communicy for Pricing.

Natural Gas Prices

1.08 The price paid for natural gas in YugoslavLa depends on the source ofsupply. Unlike domesticalLy produced oil, which is pooled for the entirecountry, domestic gas is consumed only in the Republic and Autonomous Province(RAP)in which it is-found (Croatia and Vojvodina). This has had asignificant impact on the cost of gas in these RAPs, since the price ofdomestic gas was about one-third that of imported gas between 1979 and 1984.Consumers in regions fully dependent on Soviet gas pay the border price plusthe cost of transport and distribution. In Croacia and Vojvodina consumerspay a price representing the weighted average of domestic and imported gas.The price of domestic gas varies by end use and consumer cacegory. Theaverage weighted price of gas as a source of energy is marginally higher thanthat as feedstock. The highest price is paid by households. Annex 1.03 showsthe prices of natural gas by consumer category in Slovenia, Croatia and

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Vojvodina. The nominal price of gas increaqed between 198Q and 1984 at anaverage rate of 44% per year from 1 Dinar/m co 15 Dinar/m . While producerprices for domestic gas are fully adequate to cover past exploration anddevelopment costs, the cost of deveLoping new gas reserves is increasingrapidly and, for some fields are above the current price. Furthermore,consumer prices are stiLl well below the cost of alternative energy sources,particularly fuel oil. This discourages efficient substitution among thevarious energy sources. TabLe 1.2 summarizes the deveLopments in the price ofdomestic naturaL gas:

Table 1.2

Relationship Between the Price of Domesticand Imporced Natural Gas

In Current Prices(USS/TOE)

1980 1981 1982 1983 1984 c/

Domestic a/ 49 66 63 50 77Imported b/ 198 196 189 170 165Domestic asZ of imported 25% 34% 33% 29% 47ZAverage exchange rate(Dinar/USS) 24.9 35.5 51.3 90 195

Source: Federal Community for Pricing.a/ Price of domestic gas is the weighted average based on prices prevailing

in Croatia, Slovenia and Vojvodina. In deriving the weighted averageprice the following consumption weights were used: (i) consumption inCroatia and Slovenia is about 65%, Vojvodina and others 35% of totalnational consumpcion; (ii) sectoral consumption; households (7X), industry(44%), feedstock (49%).

b/ Price of fuel oil (f.o.b. Mediterranean). Excludes domestic cost oftransport and distribution and other domestic taxes.

c/ December price.

1.09 The price of domesticaLly produced natural gas has been adjted abouttwice a year for the past several years in order to maintain the relativeprices of domestic and imported gas. During this period, the domestic priceincreased from 25% of the imported price in 1980, shortly after che rapid risein international petroleum prices, to 47% at the end of December 1984. inline with the underscanding reached during the seccor policy discsionsassociated with the SAL I loan (2326-YU). the Government undertook to increase.the price of domestic gas co the level of imported gas by January 1, 1987.Discussions on the proposed project have provided an opportunity co continuethis dialogue. During these discussions, the producing encerprises proposedthat the prices be increased to the international level according to aschedule of quarterly adjustments.

This proposal has been accepted by the Federal Community for Prices and iscurrently undergoing che final decision-making process by the FederalExecutive Council and the National Assembly. In line with this decision, onDecember 28, 1984, the price of gas was raised by 621 from Dinar 9.1lm toDinar 15.0/m3, for the first quarter of 1985. This price adjtment was basedon 50% of the average price of imported gas during the previous quarter, whictwas Dinar 9.855/m . During negociations assurances were received from theGovernment that domestic prices would be increased to 75% of import parity bythe beginning of 1986 and to 1001 of import parity by the beginning of 1987.Under this procedure a major distortion in domestic energy prices will beremoved.

1.10 In addition, in order to cover the costs of gas storage needed tomeet winter peak demand, INA NaftapLin is seeking permission from the CroaciaRepublic Committee of Energy and 1ndustry (RCEI) to introduce a winter gasprice differential. INA Naftaplin is preparing a study on the long termsupply and demand for natural gas in Croatia, including methods for reducingthe effects of seasonal demand variations. Assurances were received atnegotiations that INA Naftaplin wu-Ld review the terms of reference of thestudy with the Bank by December 31, 1985, would furnish the completed study tothe Bank by September 30, 1986, and would thereafter take all measuresnecessary or appropriate to implement the recommendations or decisions of theCommittee for Energy and Industry of Croatia with respecc to the recommenda-ions of the study.

F. Energy rnstitutions

1.11 The three agencies concerned with the energy sector at the federaLlevel are the Federal Committee for Energy and Industry (FCEI), the FederalInstitute for Social Planning (FISP), and the Federal Communicy for Pricing(FCP). Each RAP has its own committee for energy and industry, institute forsocial planning and pricing community, with the same sphere of responsibil-ities as their counterparts at the federal level. Plans are initiated at cherepublic/province level, on the basis of the program proposaLs of theindividuaL enterprises and coordinated and harmonized at the federal level,through concensus, to develop an integrated national energy plan. It alsoensures coordination and harmonization between the plans for the energy andindustry sectors. This involves lengchy negotiations and revisions which, inthe past, have resulted in substantial delays in the implementation of thedevelopment plans.

1.12 FISP is responsible for formulating the plans tor the economy, whichincludes secting macro-economic and sectoral targets and regional developmentplans, preparing balance ox payment forecascs and for harmonizing the targetsfor each sector in the economy and rhe global investments proposed forachieving these targets; however it has no executive power. It is theOrganization of Associated Labor and their communities of interest that areresponsible for the formulation of cheir own investment plans for energy witha view to contributing towards the achievement of the targets. These are thenharmonized at the RAP levels and then again at the federal level.

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1.13 FCP was created in 1981 to set guidelines fo'r the pricing of allsocial products which, in che case of energy, include crude oil, imported gas,petroleum products and imported coal. It also reviews the prices proposed bycommunities of interest co ensure that they comply with the pricing policiesand advises the Federal Executive Council (FEC) on whether to approve orreject proposed prices. it has no executive powers, but does act as amediator between consumers and producers whenever differences arise.

1.14 The nacional associations for the three subseccors which comprise theenergy sector are: the Union of Yugoslav Electric Power Industry (JUGEL); theGeneral Associacion of Yugoslav Coal Mines (OURU); and che Association of Oiland Gar Producers (OUNP). OUNP is comprised of twentv six OALs engaged inexploration and production of oil and gas, transportation of gas, refining ofpetroLeum products, and in the distribution of these products. It concernsitself primariLy with coordinating the activicies and investments of itsmembers wich those of ocher sectors of the economy. Since the associationdoes not have executive power, decisions must be secured through consens.

II. THE HYDROCARBON SUB-SECTOR

A. Hydrocarbon Resources

2.01 Yfugoslavia contains two geological units where oil and gas reserveshave been established: the Pannonian basin and the Adriacic basin. In athird unit, the Dinaride mountain system, insufficient exploration has beencarried out, but chances are good for finding both oil and gas reserves. ThePannonian basin is Yugoslavia's major oil and gas province with 4.3 milliontons of oil and 1.9 MTOE of gas produced in 1984 from three major sub-basins. A resource appraisaL carried out by Bank staff jointly with INANaftaplin and Nafta-Cas indicates that expectations from subcle traps in theproducing areas, from lightly explored deep areas and unexplored areas couldbe three times current reserves. While there is an active exploration programin che offshore Adriatic, and proposals for new exploration efforts in theDinarides, there is as yec no production from these areas.

B. Geology

2.02 In the Dinaride Mountain system, extensive areas are covered withthick sequences of sedimentary rocks. Source rocks and potentiaL reservoirrocks are known to be widely distributed, and abundant asphalt occurrences,and oil and gas seeps demonstrate that the process of generation and migrationof hydrocarbons has taken place and is still active. However, systematicexpl.oration has been hampered by difficult access and lack of adequatetechnologies to unravel the underlying scructural complexities. Yet, inanalogy with other areas along the Alpine fold belt, several areas could yieldlarge amounts of gas and condensate, and even possibly oil. INA Naftaplinhas, in the pasc, actively explored in the Dinarides, particularly along thecoastal stretch where access is generally easy. Their first efforts focusedon regional data gathering through the drilling of deep scrarigraphic holes ina more or less grid-like fashion. While numerous oil and gas shows wJere

7

encountered, it was realized that the geology of the area was so complex thatit would be impossibLe to unravel it without more sophisticated geophysicalsurvey methods than were available to Yugoslavian oil companies-at that time.

2.03 In the Adriatic, the Dinaride equivalents are buried under severalthousand meters of younger Tertiary sediments. In both the Italian andYugoslavian parts Tertiary sediments contain important accumulations ofbiogenic gas which requires specialized techniques to identify because it isnot bound by structures. Several large fields a-e under production in theItalian part. On the Yugoslavia side, discoveries have also been made (by INANaftaplin, in the shallow water of the Northern Adria), but so far individualfields have been too small to justify deve7loping.

2.04 The deeper formations, equivalent to those outcropping in theDinaride mountains, form another major set of objectives. However, thev areprincipally found in the deeper central and southern parts of the Adriatic.The Yugoslav companies have developed a pragmatic approach for chese offshoreAdriatic operacions. In the deep water areas which were attractive to foreigncompanies because of their high potential for large discoveries, but werebeyond che scope of Yfugoslav resources, because of their high costs, highrisks and special technoLogy requirements, the acreage was farmed out tointernational pecroleum companies on a joint venture basis. Four such jointventures have been concluded (para. 2.10). Seven wells have been drilled todate, but no economic discoveries have yet been made. At least two more wellsare to be drilled in 1985/1986.

2.05 The Pannonian basin, which is currently the source of all oil and gasproduction in Yugoslavia is a series of Tertiary depressions containing up to8000 meters of sands, shales and marls. This sequence is underlain by rockssimilar to those occurring in the Dinarides. Oil and gas fields have beendiscovered in many horizons but present production comes mostly from shallowformations. Exploration for deeper layers poses serious technical diffi-culties which the local petroleum companies have, as yec, been unable tocompletely overcome with their existing seismic technology. However they havean active exploration program and have made a number of importancdiscoveries. In addition co the problem of identifying precise drillingLocations through detailed advanced seismic processing and interpretation,problems encountered in appraising and deveLoping their discoveries includehigh pressures, high temperatures and corrosive gases (H2S and C02).

C. Institutions

2.06 The authority over the exploracion and development of nacuralresources, including pecroleum. is vested in each RAP. As a resuLt, thepetroleum industry has been developed by four enterprises, each of which canbe-'identified with the province in which it is located. Resource rights havebeen assigned to INA Naftaplin in Croatia (including most of the offshoreAdriatic), to Nafta-Gas in Vojvodina, to Energoinvest Rafinerija NaftaBosanski.Brod (RBB) in Bosnia-Herzegovina, and to Jugopetrol in Montenegro(including the southernmost portion of the Adriatic). Other RAPs have noactive organizations, since there are no significant prospects for finding oilor gas in other regions of the councry. The petroleum companies act asindependent encerprises and are solelv responsible for all their operatingdecisions. INA Naftaplin and Nafta-Gas have been exDLoring for and producing

petroleum for over thirty years. They have aLso worked in association withmajor foreign companies in joint ventures both in Yugoslavia and in othercountries. RBB has jt started its drilLing program, and, as yet, has no in-house petroLeum expertise. Instead it has reLied primarily on expertise fromNafta-Gas and from individuaL consultants for assistance in running itsseismic acquisition an'd well drilling activities. Jugopetrol has contractedout its offshore (Southern Adriatic) acreage to a foreign company jointventure in which the foreign partner undertakes the total expense and riskthrough the exploration phase.

D. Exploration Strategies

Early Explorarion

2.07 M(omentum in oil and gas exploration was only ac;hieved with theestablishment, in the late 1940's of oil companies in the RAPs with the-responsibility for carrying out exploration, production, refining andmarketing operations. The operations of the two oil producing enterprisescan be divided into three distinct phases. During the first phase, whichcontinued into the earLy seventies. the focus was on exploration and produc-tion of conventional prospects in the Pannonicn basin, where, becausegeological conditions in the shallow oil bearing formations were relativelysimple and did not require sophisticated tools, discoveries came rapidly. Bythe mid seventies these trapping domains had been mostly identified anddeveLoped. While some exploration activity continues for additionaL marginalprospects in these formacions, few additional resources can be expected to beidentified there. Further exploration for such prospects can be expected tobear only marginal resuLts.

2.08 During this earLy exploration period, foreign oiL companies shoved nointerest in Yugoslavia. International operators focused on low risk areaswith high production pocential and low production costs; Yugoslavia fell intoneither category. Ear.ly exploration results by the local companies, whileencouraging, had reinforced the view that the Pannonian basin, while havingsome gas, had a relatively low prospeccivity for oil, and that most individualfields were small, and cherefore, of little interest to the internationalcompanies. Because the oil found was usually associated with large amounts ofgas, the Pannonian basin was soon classified as gas prone, further downgradingits potential for the international oil industry since the international oilindustry had found the production of gas for domestic consumption to be anunprofitable use of their technical manpower and resources.

2.09 A second phase commenced in the late sixcies and early seventies,following the realizacion that chese conventional oil fields would soon be.exhau-s.ed. AlrIcugh there were indications of deep gas in several- areas, -

geophysical mapping of trapping structures could not be achieved with thetools available to the companies. Drilling continued with the hope of findingadditionaL large oil reservoirs in the deeper horizons. Experience, however,proved that these deep formations were overpressured, that temperatures werezery high, and that the hydrocarbons discovered were almost exclusivelynatural gas with high percentages of corrosive C02 and H2S gases, whichrequired special alloy steel macerials for sustained testing and production.Since the high costs of producing this gas could not be justified on the basisof the Low energy prices of that period, these efforts were essentially

-9-

abandoned. Neither local nor foreign companies were interested in theseprospects. With dwindling oil reserves at home and new prospects primarilyfor gas only, the local oil companies turned towards exploring abroad, both asconventional concession holders and as contractors. However, these foreignexploratory efforts were Largely unproduccive; only in 1982 was there successin- a joint venture in Angola.

Recent Exploration Activity

2.10 The third phase. which was ushered in by the rapidly rising energyprices of the Late 1970's, was aimed at (i) developing the known onshorereserves of natural gas, which had previottsly been uneconomic to exploit;(ii) expanding their expLoracion efforts co deeper and more difficult prospec-tive horizons onshore which had been previously identified as being gasprone; and (iii) promoting the highly prospective but costly and technologyintensive exploration areas of the offshore Adriatic to the internacional oilindustry. The consortia for the four concessions are comprised ofChevron/Agip/INA Naftaplin, Texaco/Agip/INA Naftaplin, Agip/Chevron/Hispanoil/INA Naftaplin and Buttes/Chevron/Jugopetrol. This phase saw active geo-physical and drilling exploration operations aiming at deep and ultradeepprospects. Sizeable gas and gas/condensate fields were indeed discovered inthe Pannonian basin; the largest, discovered by INA NaftapLin was the Molvefield, with recoverable reserves of 0.5 Tcf (13 million TOE) which ispresently under development and is expected to reach 100 million SCF per day(0.9 million TOE per year) by 1987. However, the technical problems reLatedto testing these fields were such that the evaluation was very slow.

2.11 By the early eighties, all of the Pannonian sub-basins were coveredwith dense seismic grids and at least 300 exploration wells had been drilled,tescing both deep and shallow prospects. Several important discoveries hadaLready identified a number of successful gas plays that would with a betterthan 90% probability lead to the identification of significant additionalreserves. As a result., i: would have been almost impossible for the localcompanies at this stage to delineate additional bona fide exploration plays ina sufficiencly large area of the Pannonian basin to interest foreign oilcompanies. In the mature areas, the Yugoslav companies have financed cherisky expLoration activities which were needed to obtain a full understandingof the geology of the basins. As a result, they have been able to identifyfor their ongoing exploration and appraisal programs, prospective plays thatoffer a very low degree of risk.

2.12 Currently, the cwo active Yugoslav local companies ha-ve an efficienc,well diversified stracegy towards the exploration and development of thehydrocarbon potential of Yugoslavia. They have implemented their own projects.where the technology and costs were within their capabilities and havepromoted joint ventures with foreign firms for deep offshore exploration areasin the Adriatic that were beyond their financial and technical capabilities.They have participated in partnerships in joint ventures outside Yugoslavia,in an effort to secure additional oil supplies for their domestic market, andhave acted as contractors providing services to countries that had nooperating oil companies, in order to obtain funds to purchase modern equipmentand experience with international exploration and drilling standards andpractices.

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Future Exploration Prog-rams

2.13 No attempt has, as yet, been made to promete joint ventureexpLoration programs for onshore areas. There are, however, a nu'mber ofprospective onshore areas which could present good opportunities for promotingjoint ventures. The most prospective of chese areas are coastal and nearcoastaL regions of the Dinaride hills and the flanks of the Pannonian basin inNorthern Bosnia. The Yugoslav companies involved in these regions have bothagreed with the Bank to embark on a promotional campaign with the view toattracting foreign oil companies to undertake expLoration drilling in theseareas. The data gathering and interpretation work necessary for a successfulpromotional campaign are included in the groposed project.

2.14 Although the locaL companies have a well diversified program, theyare aware that, having exhausted the shallow structures, they must now shifttheir focus to the more complex areas. However, because of the difficultiesthat they have had in securing the proper equipment and technoLogy tosystematically undertake this job, their efforts so far have been limited andbased on ad hoc, experimental programs. This work has, however, managed toidencify a number of gas trends and highly prospective exploracion plays.Before the Bank's intervention, little attention had been paid to developing along term strategy based on a fuLl review of all prospeccive areas and toranking oi aLternative approaches.

2.15 in the course of the Bank's review of the exploration strategies, thecomputer simulated resources appraisal carried out jointly by the Bank staffand the technical staff of Nafta-Gas and INA Naftaplin indicated that the deepgas pocential of the country was larger than the companies had previouslyestimated and that there were extensive underexplored areas that had beenoverlooked in their exploration plans. On the basis of these appraisals thecompanies have substantially modified their medium term expLorationstrategies; priority exploration targets were idencified, and from amongthese, the project elements were chosen.

2.16 Exploration will now focu- on new, relatively lightly exploredprospective realms. In the shallower layers, exploration will aim atdetecting and testing subtle traps, such as wedge-outs and stratigraphictraps. Exploration of deep layers will focus on basement relatedstructures. Mapping of such trapping configurations has been proven to bedifficult, as it will require advanced seismic acquisition and processingtechnoLogy. Special drilling and cesting and completion techniques andequipment are also necessary because of the extreme conditions of heat,pressure and corrosive gases encountered in che deep Layers of thePannonian. There are excellent chances for discovering substantial additionaLgas-and gas condensate -reserves in each of the basin areas where work is-proposed under this project. A resource appraisal of several of the moreimporcant exploration plays in these high pocential areas will be discussed inparas. 4.08-4.12 and in Annex 6.01.

E. Gas Development

2.17 Supply constraints have been :he Limiting factor in che growth ofconsumption of naturai gas, DarticularLy in the lasc few years, when theshortage of foreign exchange has resuLted in severe constraincs on the

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availabilicy of liquid hydrocarbon resources. Therefore, gas consumption grewrapidly as pipeline connections chrough Hungary, Romania and Auscria werecompleted in the late 1970's. Whus consumption grew from about one billion m3in 1970 to about five billion m in 1983. As can be seen from TabLe 2.1below, gas imports, all of which came from the Soviet Union, have grownrapidly, ¶nd in 1983 accounted for 57% of total consumption. Imporcs of 2.9billion m in 1983 cost about US$450 million, paid for on a biLaceralcommodity trade basis.

Table 2.1

Production and ImDort of Gas by Region(million m')

1970 1975 1980 1982 1.983

Production

Croatia 478 751 983 1,245 1,188Vojvodina 499 779 828 930 958

Sub-Total 977 1,530 1,811 2,175 2,146

Imports

Croatia - - 454 563 653Slovenia - - 512 700 823Vojvodina - - 373 708 774Serbia - - 63 147 245Bosnia-Herzegovina - - 176 283 366

Sub-Total - - 1,578 2,401 2,861

Total Consumption 977 1,530 3,389 4,576 5,007

Source: Federal Committee for Energy and Industry

2.18 Gas is expected to become a much more significant source of energyover che next decade. The growth in supply will come both from majorincreases in domestic production, as the exploration and deveLopment programsfocus more and more on gas prone structures, and from imports, which wiLl comefrom the USSR on a bilateral trade basis and, possibly, from Algeria throughItaly, if agreement can be reached on a proposal that would justify asignificant expansion in che domestic pipeline system,. The capacity of thegas pipeline systems will be-expanded in the next few years to allow importsco increase, should additional quantities be needed and made available. Thiscould require a major expansion and interlinking. of che gas pipeline networksof Slovenia and Croatia with those servicing Serbia and Bosnia-Herzegovina aswell as expansions to other Republics. In order to minimize the cost of sucha system and to determine an efficienc leasc cost tariff structure for thecransport, storage and distribution of gas, a long term, planning scudy wouldbe required. This study should be initiated by OUNP as soon as preliminaryagreements are reached wich foreign gas suppliers on increased volumes of gas

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to be made available in the future and preliminary decisions are made by theRAPs about the volume of offtake that they (and their major consumers) plan tocontract for.

F. Role Of The Bank

2.19 Bank involvement in Yugoslavia's energy sector was initially directedmoscly towards electric power, with five loans totalling US$409 million todate. However, the Bank was also instrumental in helping Yugoslavia introducelarge-scale natural gas consumption, with two loans for gas pipelines (Loans916-YU in 1973 and 1264-YU in 1976) to transport domestic and imported gas toconsumers in Bosnia-Herzegovina, Se-bia anid Vojvodina, and in supporting thecreation if a national oil pipeline (Loan 1173-YU in 1975) to transport crudeto inland refineries and neighboring countries; the four Loans totalledUS$146.39 miLlion. IFC made a loan in May 1984 to INA Naftaplin for thedevelopment of a gas fieLd in the Drava basin (Investment No. 730).

2.20 In the Late 1970's Yugoslavia's policy was to have Bank projectsassist in transferring resources to che Less deveLoped regions of thecountry. In the last few years, as the foreign exchange crisis forced the GOYto greatly reduce its investment, the GOY decided to use the Bank to helpidentify and implement priority revenue earning projects. It strengthenedthis position by legislating that, for projects that did not generate theirown foreign exchange, only those that the Bank (or IFC) supported would beaLlowed to borrow externaLly. To determine which priority projects it shouldsupport, the Bank undertook a review of the country's energy sector investmentrequirements, and reached an agreement with the Government on the ranking ofpriority projects (para. 1.05). These proposed projects were given thehighest priority by both the Government and the Bank, primarily because oftheir rapid positive impact on the country's energy supply and on the balanceof payment.

2.21 Over the last two years the Bank has been engaged in an extensivedialogue with the Federal authorities and the oil companies in Croatia ,Vojvodina and Bosnia-Herzegovina within the context of the development of acomprehensive energy sector strategy and the preparation of the proposedproject. In the course of these discussions, it became apparent that the Bankcould pLay an important role in the petroLeum sector in the following areas:(a) expLoration/development strategy; (b) institution building; (c)mobilization of foreign exchange; and (d) pricing policy.

Resource Appraisal

2.22 During the preparation of this project, the Bank and the expLoration.and-production departments of each company urdertook a series of indepth-reviews of the potential of each basin. These reviews, supported by computerstudies and prospect ranking, enabled the companies to evaluate the relativemerits of the various exploration opportunities that more advanced technologywould offer. From these discussions and analysis a strategy has now emergedthat would maximize the chances of discovering and developing new hydrocarbonresources. This strategy is based on the diversification of the risk across abroad range of plays, and the continuous monitoring of the results with thehelp of the computer models set up during project preparation (i.e. RAf ).The proposed project constitutes the first critical step in the implementation

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of chat new strategy. It includes the use of both new seismic and drillingtechniques currently unavailable in Yugoslavia. It also provides fortechnical assistance to be used primarily to train staff in the use of thesestrategies and in the evaLuation of the results. During negotiationsassurances were received that the borrowers that, on an annual basis duringproject implementation, they wouLd review and reassess the explorationprograms and all significanc data that might alter these programs. Thus theBank wiLl have a continued cechnical input throughouc the projectimplementation period.

Exploration Promotion

2.23 Prospects for actracting foreign petroleum companies to explore inYugoslavia were reviewed countrywide. Foreign companies are already active inthe offshore Adriatic (para 2.04). Onshore, the Pannonian basin offersinsufficient scope to attract foreign companies. As explained in paras. 2.07and 2.11, the basin was substantially explored and developed by the twodiversified, internationally experienced Yugoslav petroleum companies duringthe 1960's and 1970's, when no international oil company was forthcoming. Itis now a mature petroleum basin with more than 2,400 exploration anddevelopment wells. While it still offers significant prospects forhydrocarbon resources, it offers little scope for foreign companies, becausethe main geological risks have already been taken thus justifying a high"'farm-in" fee. On the basis of discussions with some major foreign companiesnow involved in joint ventures in concessions in the offshore areas ofYugoslavia, it was concluded that the expected value of future earnings, underany reasonable profit sharing agreement would be inadequate to attract foreigncompanies, since (i) the undeveloped pLays are essentially gas prone (with anexpectation of gas to oil discovery ratio varying from 90:10 to 60:40) wherethere would be no possibility for exports which would, therefore, result insubstantial uncertainties about the availability of foreign exchange torepatriate earnings; (ii) the remaining prospects are scattered throughoutthe basin, with little scope for defining a potentially new contiguousexploration area of sufficiently large scale to interest the internationalindustry; and (iii) the smaLl size of each potential field, the detailedseismic work required to define each prospect, and the complex nature of thedeveLopment production infrastructure needed for producing gas in the hightemperature, high corrosive conditions found in much of the deep zone, wouLdrequire investments in scaff time and limited financial resources which wouldnot be warranted by the expecced return as compared to the potential recurn inother expLoracion areas avaiLable to them.

2.24 However, during the review of the borrower's prospective onshoreareas and associated exploracion strategies, two prospective onshore areaswere identified .wich-the required characteristics .for exploration by theinternational industry. They are relatively large contiguous areas which hadreLatively little previous exploration drilling and no commercial discoveries;the pocentialLy inceresting prospects required high technology inputs andinternational experience; and, finally, there is potential for high returns ifthe exploration is successful. These areas are (i) che Dinaride coastal andnear coastal areas, and (ii) the southern flank of the Pannonian basin in thetransition area towards che Dinaride mountains, where an exploracion programis jusc beginning. The area would be promoted for a joint venture exploracionundertaking after a limiced data acquisition and basin interpretation program

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has been carried out. This exploration promocion program will be financedunder the proposed project. It wilL include the developmenc of the data baseneeded to effectively promote the areas to foreign companies, and organizing apromocion program co bring this data base to the attention of theinternational industry. This represents Yugoslavia's first onshore joincventure promotion undertaking (paras. 4.14-4.17).

Project Formulation

2.25 In addition to the significant contribution made in shaping theexploration strategy and investment program of each of the three enterprises(an input that would continue during the supervision of the project). Bankstaff have provided substantial technical input into che conceptualization anddesign of the gas storage project component, as well as the strategy for theprudent developmenc of the KaLinovac gas field project componenc.

2.26 Since these were the first underground storage project proposals inYugoslavia, neither company had sufficienc technical experience to adequatelyevaluace them. Bank staff and consuLtants therefore worked closely with bothcompanies during the project idencification and appraisal to assist them inevaluating the merits of the proposals. In the case of the Nafta-Gasproposal, after a detailed review and history matching of the production andtest data, it was found that the gas field that was proposed to be used forstorage had certain reservoir characteristics that made its use for gasstorage questionable, since the potencial losses during the injection andwithdrawal stages were likely to be too high. It was therefore agreed thatstudies and tests be carried out on other fields to determine whether any ofthe other prospective fields could be suitable candidates. Bank staff intendto review these studies with the staff of Nafta-Gas during projectsupervision. In the case of MNA Naftaplin, the review of the reservoir studyof the Okoli gas field prepared by INA Naftaplin indicated that it wouldperform as required, but that a long-duration liquid nitrogen injectivity andgas well interference .test wouLd be needed to determine the opcimum number andlocation of wells for use in the conceptual design of the program. This testprogram has been completed (para. 4.23-4.26).

2.27 For the Kalinovac gas condensate field, the Bank assisted in reform-ulating the proposed development program to ensure (i) that additionalseismic data would be acquired to improve the stratigraphic modelline of thefieLd and the optimization of the locations for the delineation wells to bedrilled under the project, and (ii) that the testing period would be extendedto ensure that sufficient data would be available to optimize the program forthe full development of the field. INA Naftaplin has agreed to review theproposed developmenc strategy with the Bank on completion of the testingperiod (paras. 4.19-4.21).

Institution Building

2.28 Successive missions have idencified a number of areas where the Bankcan play a constructive role in bringing about improvements in the managementand operation of these companies. The Bank can be particularly useful in thesetting up of management objectives and in helping the beneficiaries establishbudgecing and control procedures for each well drilled under the projecc andfor escablishing a stronger international training program. While both INA

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Naftaplin and Nafta-Cas are technically competent in the implementation of allareas of their work, they, like many other Yugoslav enterprises, sometimesfail to fully coordinate the tasks of the various work units (or basicorganizations of associated labor) that are managerially self-contained. Thisproject emphasized the need for a multi-disciplinary approach that was usedduring project preparation and the setting up of goal oriented managemencteams that will be in charge of technical coordination and budgeting for eachproject sub-component.

Financing

2.29 In the area of helping mobilize financing, the Bank has assisted theborrowers to package bids for the projecc equipment and materials so as tomaximize the role of non-Bank financial sources. Export credit and commercialbank financing are expected to account for US$121 million of the total US$221million foreign exchange costs of the project. About US$20 million of this isanticipated to be in the form of commercial bank financing under a B loan(para. 4.47).

Sector Policy

2.30 Finally, at the sectoral level, the project has provided theopportunity for a fruitful dialogue on gas pricing policies, includingagreement for annual real increases in the price of domestic gas, willgradually increase it to the price level of imported gas (see para. 1.09). Inaddition, agreement has been reached on the implementation of a long termplanning study to examine criteria for allocating gas in the future, includingidentifying which consumers will be getting additional gas, particularly inthe winter, and which consumers will be subject to seasonal cutoffs due topeak load shaving requirements (see para. 1.10).

III. THE BORROWERS AND BENEFICIARIES

3.01 The three separate components of this project are co be irr.Lementedby the three petroleum enterprises that have been given the authority toproduce hydrocarbons in each, of the three Republics/Provinces. Two of them,INA Naftaplin in Croatia and Nafta-Cas in Vojvodina, have over thirty years'experience in exploring for and producing oil and gas. They are the onlycompanies that are presently producing hydrocarbons in Yugoslavia. The third,the Energoinvest Work Organization for Oil and Gas Exploration andExploitation (EXPL) has only recently been estabUished within the COALEnergoinvest Kombinat in Bosnia-Herzegovina, as a working organization information under the direction of the Republic's major refinery, RefineryBosanski Brod (RBB). It has yet to produce any hydrocarbons, although someoil was produced in its concession area shortly after the second World War.

A. Croatia

3.02 INA Naftaplin , headquartered in Zagreb in the Republic of Croatia,is the largest producer of oil and gas in Yugoslavia. It was founded in 1952as one of the Work Organizations of Associated Labor (WOALs) operating withinthe Kombinat Industrija Nafte (INA). It is the sole organization responsiblefor petroleum exploration and produccion in Croatia. In addition to its major

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exploration operations in the Pannonian basin in Northeast Croatia, it hasexplored in Slovenia and in the Adriatic Sea. Outside Yugoslavia, it hasexplored as a partner in joint ventures in Bangladesh, Gabon, Cyprus, Jordan,Burma, Vietnam, Italy and Angola. Oil was recentLy discovered by che Angolajoint venture (of which Nafta-Gas was also a partner). In addition itperformed contract drilling services in Syria, and Iraq. INA Na£taplin is oneof the 14 WOALS within the Composite Organization (COAL), INA. INA is thelargest COAL in YugosLavia, with annual sales in excess of US$8 billion, and astaff exceeding 30,000 workers. The activities of INA include: petroleumexploration and production (INA Naftaplin in Zagreb); petroleum processing (4refineries in Rijeka, Sisak, Lendava and Zagreb ); petrochemicals (INA-Petrokemija-Kutina, rNA-Oki and Dina-Petrokemija Rijeka); domestic and foreigntrade (INA-Trgovina, INA-Plin. INA-Commerc); handling and transportacions (INAPetronafta and INA Naftovod); and engineering services (INA-Project).

Organization and Management

3.03 The work organization INA Naftaplin is an independent legal entitywith liability vis-a-vis the other WOALs within INA that is limited to Dinar300 million (US$2.2 million). INA Naftaplin. is organized into six BasicOrganizations of Associated Labor (BOALs): Exploration and Development;Drilling; Workover; Production; Production Services; and Trade. Adminis-tration, finance and staff welfare services are provided by a separateorganizational unit called che Work Community. In addition, three BOALS werefounded. together with foreign companies, as joint-venture enterprises for chepurpose of exploring offshore.

3.04 In accordance with the Yugoslav self management system, the manage-ment of the BOALs are elected by Workers Councils of INA-Naftaplin and INAwhich set the overall policies of their respective organizations. Day-to-daymanagement is entrusted to the General Manager, assisted by six coordinators(de facto vice presidents responsible for the areas of Exploration. Drilling,Development and Production, Finance, Foreign Business and General Matters).Overall, the legal and organizational framework are responsive to therequirements of oil and gas exploration and production in the Yugoslavcontext. The senior staff are well qualified and well experiencedprofessionals.

Staffing and Training

3.05 As of end-1983. INA Naftaplin employed a staff of 7700, includingabout 1300 university graduates and about 1650 with technician levelqualifications. The total package of wages and benefits is consideredactractive by local standards; as is typical for the Yugoslav system, thedifferences between the remuneration of che professional staff and the workersare relatively small. The average turn-over rate is low, about 2.3%, whilethe turn-over rate for professional scaff is 0.2%, reflecting both thesatisfaction of personneL wich the employment conditions as well as the ratherlimited possibilities for pecroleum specialists oucside INA Naftaplin andNafta-Gas.

3.06 For its permanent staff. INA Naftaplin offers various courses andseminars. However. as a result of constraints in the avaiLability of foreignexchange, the opportunitces to receive training outside Yugosiavia have been

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limited in recent years to training provided by suppliers and related topurchases of equipment and services. Altogether, about 20 staff membersreceive advanced training per year. Considering the rapid technologicalprogress in the petroleum industry and the specific requirements of INANaftaplin, substantially larger outside training programs should beundertaken. A provision for training has been incLuded in the proposed loan.

Geological and Ceophysical

3.07 INA Naftaplin has a well developed petroleum exploration andproduction department with a cadre of qualified and experienced geological andgeophysical staff. It carries out the detailed planning of the expLorationprogram and the interpretation of the field data (both geological andgeophysical) and supervises data acquisition activities of Geofizika, anindependent geophysical data acquisition company also based in Zagreb. .Xanyof che staff have varied experience in hydrocarbon exploration both in -Yugoslavia and abroad, particularly in countries where INA Naftaplin has jointvencure arrangements with other international companies, including TexasPacific in Bangladesh, ELF Aquitaine in Cabon, and Deminex in Jordan.

3.08 Seismic data processing has, until recencly, been done on INANaftaplin's general purpose computer, with limited allocation both in time andcapacity for seismic processing. The computer was also used for generaladministrative and accounting service, wich about 40 terminals all overCroatia linked to it. As a result, the turnaround time for data processing isslow, and there is a large backlog of data to be processed. Furthermore onlyroutine processing could be done on this computer since it does not haveadvanced seismic processing software to eliminate the shortcomings. In 1984,INA Naftaplin purchased an IBM 4341 computer and placed an order for a fastarray processor especially designed for seismic processing. In addition, itconcluded an agreement with Western Ceophysical Company, USA to rent theirprocessing software including maincenance. The agreement allows access to allimprovements in the processing software made by Western Geophysical during therental period. With this upgrading of its seismic processing system INANaftaplin will be able to greatly improve ics processing capability, bringingic up to international standards.

3.09 Geofizika Zagreb is staffed by about 30 quaLified geophysicists andgeologists wich wide experience in geophysical data acquisicion and processingboth abroad and within Yugoslavia. Although 90% of its work is for INANaftaplin. Ceofizika also undertakes geophysical data acquisition assignmentsfor other companies and institutions both inside and outside Yugoslavia. Itbelieves that in order to successfully bid for contracts outside Yugoslavia itis essential that it maintain its independent status.

Drilling

3.10 CurrentLy, INA Naftaplin owns and operates seventeen onshore andthree offshore rigs, as well as twenty onshore workover rigs. All drillingand workover rigs are U.S. made and the largest unics are designed for adrilling and workover depth capacity of about 5000 meters. Only the largestmodern drilling rigs (five of them acquired over the last 6-7 years) would beused for the project. INA Naftaplin oil field personnel are weLl trained andexperienced in drilling and workover operations. DVA Naftaplin 's drilling

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capabilicy has been assessed by the Bank staff and has been foundsatisfactory, although lacking in practical operating experience in wellsdeeper than 5,000 m. However, with adequate equipment, including oneaddicional heavy rig, and reasonable assistance in deep drilling technoLogy tobe provided under the projecc, INA Naftaplin is expected to be capable otovercoming any deep drilling problem. INA Naftaplin has a large backlog ofwells that need workover services and tescing. Most of the problems arecaused by che lack of adequate foreign exchange, resulting in the use of lowquality, locally produced reservoir stimulation and workover materials, whichgreatly reduce che effective timespan becween required successive workovers ofindividual welLs. To some extent it is the result oi inadequate coordinationamong che different operating departments, which under the Yugoslav managementsvstem form semi-independent basic work organizations (BOALs). Management isaware of these problems and is working on steps to correct them.

Engineering

3.11 Engineering and design of facilities, such as pLants and pipelines,is normally entrusted to INA-Project, the engineering organizacion belongingto the INA group. INA-Project has more than 30 years experience in oil andgas facilities and chemical plants engineering; its engineering department hasa staff of 1050, of which 200 are university graduates, and has to its creditmore than 240 pipeline, refinery and oil facilities projects, some of whichare in foreign countries (e.g. CDR, Hungary, Ethiopia and India).

Accounting and Auditing

3.12 INA Naftaplin maintains its accounts in accordance with the Yugoslavstatutory regulations. These accounts are published annually within anacceptable period after the end of the fiscal year and have been unquali-fied. The accounts are prepared, audited and reclassified by externalauditors. the Social Accounting Service (SDK), to bring them broadly intoaccord wich the generally accepted accounting principles of the InternationalAccouncing Steering Committee. During negotiations assurances were receivedthat these independently audited accounts would be submitted to the Bank nolater than six months after the end of the fiscal year. Budgets are preparedannuaLly on the basis of a five year plan by each BOAL, and are subsequentlyconsolidated and approved at the level of the Workers's Council of INANaftaplin. Financial performance is monitored through quarterly reports. Atthe end of the year, detailed reports are prepared, comparing the results wirhthe plan. The internal audit section reports co the Director of the WorkCommunity, but its reports are made available directly to the GeneraL Managerand are prepared independentLy of the accounting staff. These arrangementsare satisfactory.

Insurance

3.13 In accordance with Yugoslav regulations, all of INA Naftaplin'sassets including the crude oil invencories are insured against major risks,including insurance againsc environmental damage and terrorist actions, on thebasis of replacement values. The local insurance company of Croatia reinsuresabroad with major underwri-ers in London. The foreign underwriters andYugosLav independent auditors (SDK) periodicaLly audit compliance of INANaitaolin with their sa:ezy requirements. These arrangements aresacistactory.

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B. Vojvodina

3.14 Nafta-Gas , headquartered in Novi-Sad, in the Vojvodina autonomousProvince of the Republic of Serbia, is the second largest producer of oil andgas in Yugoslavia after INA Naftaplin. It was given sole responsibility foroil and gas exploration in Vojvodina in 1949, and has been producing oil andgas since the early 1950's. In the past it has also explored in Serbia andKosovo, but without any success. Currentlv, Nafta-Cas has an onshoreexploration permit in Montenegro and an onshore block in Algeria (jointly withINA Naftaplin), and holds 5% interest in two exploration blocks in Angola inparallel with INA Naftaplin. where a discovery has been made and is underdevelopment. It also has a rig operating in Jordan on a direct servicecontract.

3.15 Nafta-Cas is one of the 12 Work Organizations or the KombinacNaftagas; of the others, three are engaged in petroleum refining (Belgrade,Novi Sad and Pancevo), two are in the distribution of oil products (Promet andJugopetroL-BeLgrade), two are in the transportation of natural gas (Naftagas-Gas of Novi Sad, and Butangas of Belgrade), two are engaged in petrochemicals(Novi Sad and Kikinda) and one is involved in engineering (Naftagas-Inzeniering), and another in pipeline construction (Montaz). KombinatNaftagas is the second largest COAL in Yugoslavia after INA. The WOAL Nafta-gas has Limited liability vis-a-vis the other Work Organizacions of the COAL,and operates as an independent LegaL enticy.

Organization and Management

3.16 Nafta-Gas is organized into twelve BOALs in accordance withYugoslavia's self management system; four are responsible for oil productionon a regional basis (Juzni Banat, Srednji Banat; Severni Banat; and Backa);the remaining eight are responsible for explorationl planning and engineering(geology, geophysics, reservoir engineering, production engineering, andcapitaL projects); drilling; well services (logging, cementing, etc.); civilworks; maintenance; groundwater drilling; seismic acquisition and processing(the Geophysical Institute); and electronic data processing. In addition. cwowork communities provide support services, one in administration and financeand the other in scaff welfare. Each BOAL has a manager elected by cheWorkers' Council. The Workers' Council of Nafta-Gas, which sets overallpolicies, is comprised of the deLegates of each BOAL elected by the workers.Day-to-day management is entrusted to a six member Management Board elected bythe Workers' Council. There is a Vice President in charge of technical(drilling and development) matters and another in charge of economics(including finance, legal and organization). In all. both the legal andorganizational framework are responsive to che requiremencs of oil and gasexploration and production in the Yugoslav context. The senior staff are alLqualified proressionals, wich Long experience in their areas ofspecialization.

Staffing and Training

3.17 As of end-1983, Nafta-Gas emploved a staff of 4,600, including 450with university degrees, 900 with incermediate degrees, and 2,400 wichtechnician-Level qualifications. Engineers and other graduates usually comefrom the universities of Belgrade and Zagreb where degrees are given in

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geology, geophysics, etc. Nafta-Gas offers various courses and seminars for.ts permanent staff. Some are run jointly with INA NaftapLin. ALtogecherabout 100 staff attend training programs each year. Because of the foreignexchange constraint in recent years. onLy 10-15 employees benefit from one-four month training opportunities abroad offered by higher learninginstitutions or equipment suppliers. Rapid technological progress in thepetroleum industry, and the specific requirement of Nafta-Gas co move to theuse of this cavanced technology has resulted in recent years in a growing needfor a substantially Larger foreign training program, for which resources havenoc been available. A provision for an expanded training program has beenincluded in the proposed loan.

Geological and Geophysical

3.18 The petroLeum exploration department is staffed with quaLifiedgeologists and geophysicists, with long experience in hydrocarbon expLorationwithin Nafta-Gas, both in Yugoslavia and abroad. In addition to working inVojvodina, it has also provided technical services for hydrocarbon explorationactivities in Serbia, Bosnia and Montenegro. Before 1983, data acquisition,processing and preliminary interpretation were done on a contract basis by theInstitute Geofizicka, based in Belgrade. In 1984, the Institute became abasic organization within the Nafta-Gas WOAL. The resulting closer ties haveimproved the supervision of data acquisition and processing and the overallquality control of the exploration program. Under the current arrangement,Nafta-Gas now has a staff of 97 geoLogists and geophysicists who areresponsible for the overall planning of the exploration program, dataacquisition and processing, and interpretation of geological and geophysicaldata. In order to improve the quality of data processing in 1983 Nafta-Gasacquired a new seismic data processing computer (VAX 11/780) to replace itsold CYBER 171 general purpose computer. Under the proposed project it wouldacquire peripheraL hardware and more advanced seismic processing software,plus training for the special processing required for implementing theproposed project.

Drilling

3.19 The Nafta-Gas drilling department was formed when the company wasfirst established, more than thir:y years ago. It has a well-establishedoperational base and infrastructure, is well organized,-and fully competent inconventional drilling and workover activities. Its technological know-how hasbeen improving continuously in line with the introduction of western oildrilling technology, and has severaL successfully completed foreign drillingprojects to its credit. It owns and operates ten drilling rigs and eLevenworkover rigs. The largest two rigs are designed for a working depth capacityot oup to 3500 meters. Nafta-Cas has some serious problems with workover,

-compl-etion and testing of deep wells. This is primariLy because it Lacks thenecessary equipment and materials to accomplish deep workovers, and must,therefore, improvise techniques to make do with what it has. The proposedproject will help to alleviate this problem. However, the problem is to someextent also the result of less than perfect coordination among the variousoperating departments thac need to work smoothly together to assure goodresults. Management is aware of this problem and is working on ways toresolve it (paras.4.34-4.36).

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Accounting and Auditing

3.20 Nafta-Gas maincains its accounts in accordance with the Yugoslavaccounting regulations. Budgets are prepared annually by each BOAL on thebasis of a five-year plan, and subsequently consolidated and approved at thelevel of the Workers' Council of Wafta-Gas. Financial performance ismonitored through quarterly reports. At the end of the year, detailed reportsare prepared, comparing the resuLts with che targecs. The internal auditsection prepares its program independentLy of the accounting staff and reportsdirectly to the President. Since 1983, Naita-Gas's accounts have been auditedby SDK. During negotiations, assurances were received that Nafta-Gas'saccounts would be audited annualLy by SDK. and submitted not later than sixmonths after the end of the financial year. The above arrangemencs aresacisfactory.

Insurance

3.21 In accordance wich Yugoslav regulations, all of Nafta-Gas' assets,including crude oil invencories, are insured against major risks, on che basisof replacement values. The local insurance companies reinsure abroad. Theforeign underwriters and Yugoslav independent auditors (SDK) periodicallyaudit compliance of Nafta-Cas with their safety requirements. Thesearrangements are satisfactory.

C. Bosnia-Herzegovina

3.22 The beneficiary and enticy responsible for the implementation of theBosnia Herzegovina project component wilL be the Energoinvest WorkOrganization for Oil and Gas Exploration and Exploitation (EXPL), anexploration enterprise "in the process of formation", organized under theauspices of the Energoinvest Rafinerija Nafta Bosanski Brod (RBB), whichitself is a Work Organization within the comoosite organizacion ofEnergoinvest. EXPL is called an "organization in the process of formation"because, having no source of income, it is unable to undertake any loanobligations. Its funds come primarily from RBB, which is fully responsiblefor all its obligations, and also from the Republic Fund for Development, andfrom contributions from the surplus of the other Work Organizations in theEnergoinvest COAL. Funds from RBB and the other contributing enterprises areprovided in che form of quasi-equity. That is, they wouLd be repayed to thecontributing enterprise if EXPL eventually became a profitable income earningencerprise. RBB would undertake the responsibility for repaving PrivrednaBanka Sarajevo (PBS), the actual borrower of the Bank funds, in case EXPLearnings were insufficient to repay the loan. PBS, as the major AssociatedBank of Bosnia-Herzegovina, would be the direct borrower of the Bank funds, as

-i has been in a number of other Bank loans, with the ultimate responsibility.of repaying the Bank loan. PBS-would ontend to US, which would then providethe funds to EXPL for the implementation of the project.

Organization and Management

3.23 EXPL was formed in 1983 by RBB. EXPL policies are determined by aneight member managing body. Four members are empLoyed by EXPL, three areappointed by RBB and one is nominated by COAL Energoinvest. Day-to-dayoverations are managed by a managing director, who is the managing direccor of

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RBB, a technical manager, a geologist and a procurement- officer. EXPL plansto hire an experienced geophysicist in the near future. It also has access coeconomic, legaL and administrative personnel through joint services withRBB. EXPL staff organize and manage the work program, which is implemenced bycontractors, mostly local enterprises. Contractors include Industroprojekt,Zagreb and Geoinzeniering, Sarajevo, for geoLogical data; Geofizicka Insticut,Belgrade, for geophysical data; and Nafta-Gas, Novi Sad, for drilling.Importing of macerials is handled by Energoinvest through Energokomerc,Sarajevo. Technical assiscance has come from BEICIP and Pemex, as well asfrom Yugoslav cechnical experts. EXPL plans to substantially increase the useof international consultancs in geology, geophysics and geochemistry to ensurequality control in che contract work. EXPL is currently drilling its secondexploration well through a service contract wich Nafca-Cas. It has no plansfor drilling additional exploration wells until the seismic program andpromotion efforts are completed.

3.24 RBB, is part of the Energoinvest COAL, and shares unlimited joincliabiLity with all other WOALs in that organization. It is comprised of chreeBOALs, Production, Engineering, Hempro and joint services work community. Itemploys in total about 2100 staff. It is currencly in che process of a majorrebuilding program, which will replace most of its existing equipment and willincrease its throughput capacity from 46,000 barrels per day to 68,000 barrelsper day. Construction is expec.ted to be completed by the end of 1985.

3.25 PBS, the conduit for the Bank's funds, is a cooperative financialinsticution, consisting of the Associated Bank and 22 independent Basic BanksoDeracing throughout Bosnia-Herzegovina. The Basic Banks are the foundingmembers which hold share capital of the Associa'ed Bank. They, in turn, areowned by the major WOALs (enterprises) in Bosnia-Herzegovina. Each foundingmember has an unlimited liability for the obligations of its Basic Bank andAssociated Bank. The Assembly of the bank members is its highest governingbody and is made up of deLegaces eLected by its members. The Assemblyapproves the business policy, the five year plan and annual plan and electsthe executives, managing and credit boards from among its delegates.

3.26 The business policy of PBS is based on the regional development pLan,and the medium-term pLans of its basic banki, which cover the mobilization andallocation of resources and the budget for the forthcoming year. Anysubstantial alLocation of che funds to a particular project or enterprise hasto be in accordance with the regionaL plan, which includes general financialpolicy guidelines approved by GOY. It accepts time and savings deposits fromencerprises and private individuals through the Basic Banks and carries outabout 85Z of all the investment realized in Bosnia-Herzegonina.

3.27 PBS has departments for resource planning, investment and-administration. The investment department is subdivided' into groups forvarious sectors such as agricuLcure, industry, etc. The Basic Banks carry outthe banking activities with considerable autonomy. Operations are managed bythe Management Board, consisting of seven members. The chief executive is thePresident of the Managing Board, appointed for a four year term by theAssembly. The senior management is competent, comprising, typically,university graduates with many years experience. The changes of the topmanagers are infrequent and professional competence has been the criterion forselection and appointmenc at all levels. The professional staff is generallycompecent and efficient.

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3.28 Since 1972, PBS has been one of the participating Banks in the threenationwide Agricultural Credit Projects (Loan No. 1129-YU, l477-YU and 180L-YU) and is the Borrower under-the Bosanaska-Krajina Project (Loan 1621-YU),Bosnia-Herzegovina Agricultural DeveLopment Project (Loan 2136-YU), SemberijaDrainage Project (Loan 2161-YU) and five Industrial Credit projects.

Accounting and Auditing

3.29 PBS is the Borrower under previous World Bank projects, and its auditreports by SDK have been considered satisfactory. During negociationsassurances were received from PBS-and EXPL that they would maintain separaceaccounts for the project which would be audited by SDK.

IV. THE PROJECT

A. Project Objectives and Scooe

4.01 The project supports a cross section of the hydrocarbon expLoracionand production activities in the three republics of Yugoslavia where activeexploration efforts are currently in progress. Its four major elements are:(i) exploration/appraisal; (ii) exploration promotion; (iii) testing andappraisaL of existing discoveries, and (iv) underground storage of gas tobalance winter and summer demand/supply pacterns. Together they will have animportant impact on the short and the medium term aggregate energy balance inYugoslavia.

4.02 The first project element aims at assisting che operating enterprisesto effectively expand their expLoration horizons from the more traditional,geoLogically simpler and shallower exploration plays (or areas), which havebeen aLmost compLetely evaluated over the past thirty-five years, and towardsthe geologically more complex and deeper plays, which hold the potential forthe country's future reserves of hydrocarbons (primarily gas). The degree ofsuccess of this project componenc will, to a large extent, determine theability of the local companies to maintain, or increase, their present levelsof hydrocarbon production over the coming decade, and thereby minimize theirdependence on imported oil and gas. These plays, which have not beensuccessfully delineated before, will require technology and equipment that arepresently unavailable in fugoslavia, and specially designed training programsto ensure successful application of this technology to the Yugoslavconditions.

4.03 The second element aims at accelerating exploracion activity bypromoting, to international petroLeum companies, areas that have goodpotential but are insufficiently explored because new techniques andapproaches are needed that are beyond the resources of the Yugoslavcompanies. The third element aims at strengthening che technical capabiliEiesof Yugoslav companies in developing gas reserves that are under high pressureand temperature regimes and contain corrosive gases. Both INA Naftaplin andNafta-Gas have commenced development of such gas fields, but they lack thehigh-grade equipment required for accelerated development. This element isexpected to lead to rapid increases in production over the next few years.

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The fourth eleement provides support for the first application of undergroundgas storage technology in Yugoslavia. It is intended to help alleviate theimmediate problems of winter shortages and summer gluts.

B. Project Background and Rationale

Exploration Components

4.04 One of the major goals of the Bank in preparing the proposed projecthas been to assist the Yugoslav companies in quantifying the extent andmagnitude of the geologic potential of their major petroleum basins. It waswith -his purpose in mind that a full evaluation of all prospective basins wasundertaken during project preparation, using the RASP programming model. Asummary of the results of this evaLuation and a review of the prospects ofeach basin can be found in Annex 6.01. The data provided has been used toestimate the number of fields and the distribution of field sizes that can beexpected, and from this, to estimate the total volume of recoverable reservesthat would be found (at an 80Z confidence Level), through a long range (15 to20 years) well defined and implemented effort. The estimates developedthrough this model are used primarily to demonstrate the potential of eachbasin and co help decide which areas should be given priority attention duringthe implementation of the proposed project. They will be reviewed and revisedwith the borrowers during each project implementation review, as an integraLpart of the evaluation of the new results of the seismic and drillingprograms.

4.05 The actual project proposed here represents only the initial phase ofa long term exploration program. The 25 well drilling program covers a fouryear period. The estimates of the results of the proposed Bank supportedprogram in terms of the total volume of reserves expected to be identifiedthrough the drilling of about 25 wells are discussed in paras. 6.08 and 6.09.

4.06 The project's exploration components are divided between cheactivities of INA Naftaplin in the Croatia part of the Pannonian basin andNafta-Gas in the Vojvodina part of the Pannonian basin. All of Yugoslavia'spresent oil and gas production is located in the Pannonian basin. The basinextends from Croatia in the Northeast into Vojvodina in the west, and intoNorthern Bosnia to the south. Exploration activity has been high, with over3500 km of seismic lines and over 2400 wells. So far, the major part of oiland gas operations has focused on relatively shallow, simple struccures.Exploration and development of struccures deeper than 3000 meters is in arelatively early stage; although gas and oil expectations here are high,operational progress has been slow due to very adverse geological conditions.

4.07 In this prospective realm, work wilL concentrate on (i) deveLopingand refining techniques to test subtle £eatures in che v'icinity of existingfields; (ii) testing deeper reservoirs chat have been penetrated but, due toinadequate equipment, have remained untested; (iii) developing deep gascondensate fields, which are often under high pressure and temperature and arehigh in corrosive gases; and (iv) seismic mapping, delineating and testing newreservoirs in the Drava, Sava and Backa-Banat sub-basins -where more thanseventy deep prospects have now been identified. The rationale for choosingthe specific programs is discussed in the following paragraphs.

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4.08 INA Naftaplin: The thrust of INA Naftaplin's operations in thePannonian during the last decade has been direcced towards exploring threebasinal areas southwest of Zagreb nameLy; the Sava, West Drava and East Dravabasins. A resource appraisal simulation for petroleum prospects (RASP) wascarried out by Bank staff in cooperation with INA Naftaplin and Nafta-Gasgeologists to evaluate the prospects of all che Pannonian sub-basins currentlyunder exploration. The RASP analysis confirmed the belief that the newprospects are primarily gas prone, with an overall gas to oil ratio of 80 to20. The potential of all of these basins together (at thg,80Z probability) isabout 11 Tcf of gas (250 MTOE) and 60 million tons of oil/-. However, it willtake a Long time (15 to 20 years of concerted effort) to fully identify,appraise and deveLop these reserves. The results of the RASP exercise for theindividual sub-basins are summarized in the following paragraphs. Details aregiven in Annex 6.01.

4.09 In the West Drava basin about 15,000 km of seismic lines have beenprofiled and some 150 wildcac wells have been drilled during the last tenyears. Currently about 50 oil and gas fields are producing or are in cheprocess of being delineated primarily in depths shallower than 3000 meters.In the deepest part of the basin a string of objectives has been identifiedand tested. Three gas fields have recently been discovered here: .lolve,Kalinovac and Stari Gradac. In alL these fields, the reservoir seceion isbelow 3500 meters and is strongly overpressured; the condensate contene ishigh, as also is the C02 and H2S content. Reserves at :4olve are estimated at0.5 Tcf, at Kalinovac 0.3 Tcf and at Stari Gradac 0.2 Tcf. Recently, yetanother deep gas discovery has been made at Oresac, some 30 km southwest ofStari Gradac. However, due to lack of special equipment, the main reservoirshave not yet been tested.

4.10 With the data presently in hand, INA Naftaplin geoLogists havecompiled a base Tertiary prospect map which shows the presence of at leasttwenty pronounced features and/or leads. The RASP exercise indicates that,when alL the leads have been drilled and the basin fully expLored, there is a902 chance that these features and leads could contain in excess of 5 Tcf ofgas (115 MTOE). There is Less than a 5Z chance of discovering oil in thesedeep plays. While the rough outline of the large structures can readily berecognized on oLder sections, smaller features cannot be identified. Toproperly inventory the deep prospects and determine correct drillinglocations, substantial amounts of new seismic surveys and advanced seismicprocessing and interpretation are required. Accordingly, the programdeveloped under the project will employ geophysical, drilling and testingmethods and cools presently unavaiLable in Yugoslavia, in order to acceleratethe exploration and delineation of chese gas prospects. The pay zones are aLlexpected to be characterized by high pressures, high temperatures and thepresence of corrosive gases. About seven wells would be drilled in this bAsinunder the project.

1/ These resource estimates and all of che escimates in the following cextrefer to economically recoverable reserves.

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4.11 In the East Drava basin the main prospective intervals are also inMiocene and older formations, but here formations are characterized by erraticdistribution of reservoir quaLities, which is a major exploration risk in thisproject area The RASP resource appraisal indicates that when the basin isfully explored, there is an 80% chance of finding in excess of 10 milLion tonsof oil and 20 XTOE of gas. The complexity of trapping structures, which aremostly combinations of structural and stratigraphic traps present anadditional exploration risk. This play is relatitrely more oil prone than We'tDrava, but still has a probable gas to oil ratio of 65:35. On the basis of areview of the quality of oLd seismic data, new. procedures are to be worked outfor seismic acquisition mechods and parameters and for the evaluation of theprospectivity of each potential prospect. Only two wells would be driLled inthis basin under the project.

4.12 In the Sava Basin the main prospect realm to date has been theyounger Tertiary section. Trapping domains are similar to the Drava area, butstructural density is much higher, resuLting in higher production levels inthe corresponding geological intervals. The geothermal gradient is somewhatLower in the Sava basin, resulting in greater possibility to have oil in thedeeper areas. The shallower Pannonian-Pontian prospects are nearlyexhausted. Remaining exploration objectives are satellite structures alongexisting fields many of which are subtle features containing a distinctstratigraphic elemenc. Disappointing drilling results on a number of medium-depth structures had led to a perception in INA Naftaplin that theprospectivity of the area was Low. However the RASP resource appraisalindicates that the deeper part of the basin remains highly prospective; whenthe basin is fuLly explored there is an 80% chance of finding in excess of 37.TOE of gas and 30 million tons of oil. INA Naftaplin has, as a result,refocused its efforts on an accelerated exploration of deep prospects, wherethere is a 50:50 chance of a discovery being oil or gas. The proposedexploration program includes both seismic surveys and exploratory welldrilling. About six wells wouLd be drilled in this basin under the project.

4.13 Nafta-Gas: Nafta-Gas operations in the Pannonian are concentrated inthree sub-basins (North Banat, South Banat and Backa). The Tertiary sectionof these sub-basins reaches a thickness in excess of 4000 meters and containsrock sequences similar to those in the Drava basins in Croatia and theprolific Mako basin in Hungary. Produccion has been established fromstructures in younger Tertiary sedimencs and from deeper, basement-relatedtraps. Fields are generally small, seldom exceeding 5 km2 in area, and mosthave muLtiple reservoirs with reserves ranging between 0.7 and 2.0 milliontons oil. Conventional prospects in the shallow depth range have been almostfully explored.- Remaining targets are stratigraphic traps in the youngergeological section and subtle traps. mainly wedge-outs in the vicinity ofexisting fields. There remain, however, prospect realms that have beeninadequately tested, mainLy at greater depths and basement structures, similarto those in the Drava area. Nafta-Gas' expLoration strategy for the nearfuture contains the following eLements: delineation of subtle structural andstrarigraphic traps in the shallow layers and close to existing production;delineation of basement-related satellite structures; and initiation ofexploration in the untested Cretaceous pLay. The RASP exercise indicates thatwnen the basins are fully explored there is an 80% chance of finding about 25million tons of oil and 40 MTOE of gas in basement-related structures in the

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central and northern part of Vojvodina, and 12 million tons of oil and 15 MTOEof gas in shallow subtle traps. Overall the area is gas prone with a probable60:40 gas to oil ratio. About 10 wells would be drilled under the project.

Expioration Promotion Components

4.14 The exercise of analysis and appraisal of all the prospects ofYugoslavia has also shown that there are large areas where there are favorableoil geological conditions, but where it would be too difficulc and costly forthe local enterprises to explore systematically wich their own resources. Animportant element of the proposed lending operation is, therefore, apromotional effort aimed at deveLoping enough data to make these areas ofinterest to incernational oil companies. Two areas have been identified asprime prospects for this promocional undertaking. One is in Northern Bosnia,covering part of the transition from the Dinarides to the Pannonian basinwhere exploracion work is currencly being carried out by EXPL, and the otheris in Croatia, covering part of che coastal area of the Dinaride Mountainsyscem where INA Naftaplin operates.

4.15 EXPL Component: The southern fringes of the Pannonian basin inNorthern Bosnia have only been sketchily explored. Prospects are not asobvious as in currently producing areas, access is more difficult andexploration requires more refined data gathering, processing and interpretingtechniques. Previous exploracion work was sporadic and uncoordinaced. A new..iified approach is now needed to prepare a detailed basin scudy, usinginformation from new geochemical and geophysical acquisition programs. Thisstudy will be used to form a reaListic appraisal of the petroleum prospects ofthe region and, if possible, to formulate some potential exploration drillingstrategies. After this program is implemented, the exploration drilling riskswould still be high, since the area would still be unproven as an oil or gasprovince, but the potential would, it is hoped, be sufficiently well definedto make the risks acceptable to an international petroleum explorationcompany.

4.16 EXPL intends to use the data to promote the area toth, internation-ally and local'y, in order to find a joint venture exploration pa-:ner. EXPLwishes to find a joint venture Partner because it has neither.th.e technicalcapability to physically implement a drilling program by itseif cr supervisethe activities of others, nor the technical capability to interpreL thestudies and make investment decisions about the kind of drilling program thatwould be appropriate.

4.17 INA Naftaplin Component: The Dinarides area is the leasc exploredamong Yugoslavia's potential hydrocarbon provinces. This is due mainly todifficult access and complex geology. However, with abundant -source rocks and-potentially attractive reservoir sequences, it remains a prospective area. Inorder to stimulate further exploration, it needs to be demonstrated thatmodern geophysical methods can unravel the complex geoLogical features. rfindividual prospects can, indeed, be mapped at reasonable cost, it is likelythat international oil companies would become interested. GeoLogical andgeophysical surveys would therefore be implemented under the project and theresults would be offered to internarional oil companies, which in turn wouldundertake prospect mapping and exploration drilling at their own risk.

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Testing and Appraisal Components

4.18 - The testing and appraisal component covers the testing and appraisalof oil and gas fields that INA Naftaplin and Nafta-Cas have discovered overthe past two years but have not had the technical resources to adequateLytest, appraise and develop. It includes: (i) the appraisal of the operatingcharacteristics and first stage development of the KaLinovac gas condensatefield by INA Naftaplin and (ii) the long duration production potential testingof a number of recent discoveries by Nafta-Cas.

4.19 INA Naftaplin: The Kalinovac gas condensate field, Located atapproximately 150 km east of Zagreb, is the second hydrocarbon accumulationdiscovered on the Molve - Kalinovac - Stari Gradac trend. Five wells havebeen drilled on the structure since its discovery in 1978. Of these one isdry and fouvre capable of production. The field produces a rich gascondensate.- The proven, probable and possible in-pLace gas reserves haveb en conservatively estimated by [NA Naftaplin at 2.4, 10.0 and L1.0 billionm , respectively; 60% of the in-place reserves are deeLed to be recoverable.Well productivities are relatively high (280-600,000 m /day against flowingwellhead pressures of 90-110 bar). However, all the wells exhibit extensiveformation damage. Furthermore, because of faulty completions and lack ofadequate equipment to handle the produced sour gas, the majority of past testshave been of short duration. Thus more conclusive tests are needed.

4.20 Laboratory analyses indicate that because the reservoir pressure isvery near the dew-point pressure of the reservoir fluid, some 17-20% of theliquid hydrocarbons contained in the field would be irrevocably lost due tothe condensation of the liquid hydrocarbons in the reservoir, if there were noactive water drive or if no gas recycling were undertaken to maintain thereservoir pressure above the dew-point pressure of the gas condensatesystem. Although INA Naftaplin has established a gas/water contact at 3,460 msubsea, long-duration production tests are needed to determine theeffectiveness of the natural water drive and to optimize the exploitation ofthe reserves.

4.21 Initially, INA Naftaplin proposed to proceed with full development ofthe Kalinovac field, including a gas processing plant in the field toeliminate the carbon dioxide contained in the produced gas - a plant thatcould prove to be unnecessary if the major portion of the produced gas had tobe re-injecced into the reservoir to optimize condensate recovery. Followingthe suggestion of the Bank staff, INA Naftaplin has agreed to modify itsoriginaL plans. The modified project (para. 4.27) is sound and followsgenerally accepted engineering principles for the development of gascondensate fields. Upon completion it will enable INA Naftaplin to proceedwith the fuLl development of the Kalinovac discovery in an optimum fashionwithout wasting either natural resources or investmenc funds. Furthermore,even in the case the reinjection of the produced gas proves to be unnecessary,

1/ The produced gas contains 3% of decanes and heavier hydrocarbons, 8-10%ca bo3 dioxide and 50 ppm hydrogen sulfide. The condensate yield is 750cmS/m03

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INA Mafeaplin would have the basic facilities required to produce about1 miLlion m /day of gas and 4,700 Bld/day of condensate, which areapproximately the same as the long-term sustained production potential ofKalinovac (1.6 million m /day of gas for 10-year pLateau production on thebasis of proven and probable reserves). In view of this, INA Naftaplinstarted test production from two welLs in early 1985. The full development ofKalinovac would be delayed until the resuLts of the test production areevaluated. The Kalinovac field is aLready connected to the Ivanic Gradnatural gas processing plant by a 100-km condensate pipeline. Theconstruction of a 12-km gas pipeLine to the Molve field, where gas treatmencfacilities already exist was completed in November 1984.

4.22 Nafta-Gas: During its driLLing campaigns over the Last several yearsNafeta-Cas has encountered shows of oil and gas in a large number of wells butwhere it was subsequently unable to decermine whether hydrocarbons were orwere not actually present in commercial quantities. Nafta-Gas intends to re-evaluate these prospective deep horizons where oil or gas has been encounteredin Low porosity/low permeability formations, but where testing operations wereunsuccessful, due, it is believed, to inadequate testing methods andequipment. The project includes the provision of materials, equipment anutechnical assistance needed to complete the testing of about 18 wells. Ifthis initial program would meet with success, another sixty wells would thenbe tested by Nafta-Gas using its own resources. The additional productionfrom the fieLds associated with all the wells can be expected to reach 180,000tons of oil per year, about 15Z of Nafta-Gas 1984 production.

Underground Gas Storage Component

4.23 Gas demand patterns in Yugoslavia have been highly seasonal. Much ofthe gas is used to provide household heating, particularly to major citiesthat have significant problems with atmospheric pollution during the winter.Contracts for imported supplies are, however, all on a fixed quantity per day,rake or pay basis. The problem has been exacerbated in the past two yearsbecause of a tendency of the importer to supply slightly reduced volumes ofgas at a lower pressure during the heavy use winter periods. As a result, anumber of industrial enterprises had to be shut off from supplies in thewinter of 1982 and 1983. Since they had no other available energy sources,chey were, for the most part, forced to cease operations for the duration ofthe shortfalls.

4.24 In order to put some balance into the supplyidemand pattern,Yugoslavia has rented some gas storage capacity from Austria and Hungary.However, this has noc greatly improved the situation, since such facilitiesare limited. As a result, both INA NaftapLin and Nafta-Gas have had tocurtail 'production of gas from their own reservoirs in the summer in order-tocreate an equilibrium. In Croatia, where the gas fields'have a largepercentage of heavier hydrocarbons, the reduction in production leads to aloss in production of gas liquids and echanes, propanes and butanes that areneeded as inputs to the petrochemical industry, as well as for the productionof bottled gas, for which there is seldom an available substitute. In orderto cope with the seasonal fluctuations in gas demand in its operating area,INA Naftaplin is planning to use the depleted Okoli gas field for undergroyndgas storage. The initial plans calL for a storage volume of 350 million m of

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mobile gas corresponding to the excess gas supplied to power plants by INANaftaplin in summer. The ca acity of the underground gas storage would laterbe expanded to 500 million m .

4.25 Before deciding on underground gas storage in a depleted gas field,INA Naftaplin studied the feasibility of using L1NG imports and a high-pressuregas pipeline forming a loop around major consuming centers (Zagreb, Sisak andKutina). The first was abandoned as coo expensive compared to underground gasstorage in a depleted reservoir; the latter was dropped because it did notprovide sufficient storage capacity in view of.practical limications on loopsize and pipeline diameter. Seven gas fields in Croatia and Slovenia (Legrad,Boksic, Dugo Selo, Janja Lipa, Zutica, Mramor Brdo and Okoli) were screened todetermine the best underground storage location, taking into consideracion thereservoir depth, reservoir volume available for storage, petrophysicalproperties of the reservoir rocks and distance to the existing gasCransmission network and largest consumption centers. On the basis of thisstudy, the virtually depleted OkoLi gas field was chosen as the best field forunderground gas storage. INA Naftaplin's screening has been reviewed by theBank consultant and he has concurred with the choice of Okoli.

4.26 The reservoir study prepared by INA Naftaplin has been reviewed andrevised by the Bank consultant, using the Caz de France's non-steady-statesimulation model. The consultant has also recommended as a part of projectpreparation that INA Naftaplin should perform a long-duration injectivity andwell interference test using liquid nitrogen. This test was carried outduring JuLy 1984. The project incorporates the consultant's recommendationand the results of this test. As a resulc, che number of weLls has beendecreased compared to INA Naftaplin's original estimates, resulting in lowerinvestment cost. The preliminary (conceptual) design of the surfacefacilities has been prepared by INA-Project with assistance from Koernig(Consultants, FRG).

C. Project Description

4.27 The project is designed essentially to support a time slice of chegas exploration/development programs of INA Naftaplin, Nafta-Gas, and RBB. Ithas been divided into three separate sub-pro'jects, under separate loanagreements with each of the three Borrowers and Beneficiaries. Detaileddescriptions of the various project components are contained in the ProjectFile. A brief summary is given below:

INA Naftaplin Sub-project

- Exploracion, comprising (i) approximately 1,200 line-km of seismicsurveys; and (ii) the drilling of about 15 deep (3,000 - 5,000 m)exploration welLs (approximately 7 in West Drava, 2 in East Drava and6 in Sava basins).

- Kalinovac Cas Field Appraisal, comprising ti) the drilling, comple-tion and testing of eight appraisal/delineation weLls; (ii) theconstruction of surface production facilities (wellhead facilities,gathering lines, central manifold and well testing equipment); (iii)long-term well testing; and (iv) the preparation of a reservoirstudy and optimized field development program.

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OkoLi Underground Gas Storage, comprising (i) the drilling andcompletion of about 17 deviated injection/production wells and sixobservation wells; (ii) checking and repairing the cement behind thecasings of approximately cen old wells; (ii) the construction ofsurface facilities including a 3.5 milLion m /day capacity compressorstation, gas treatment plant, wellhead facilities, gas flowlines,connecting pipeline to the gas trunkline and utilities, telecontroLand telecommunication; and (iv) che preparation of a computerizedoperating modeL for gas storage/production operations.

Dinarides ExpLoration Promotion, consisting of (i) che acquisition ofabout 1,200 Line-km of seismic data; (ii) geoLogical, geophysicaLand geochemical scudieq including a complete basin evaluation; (iii)the preparation of an exploration promotion package; and (iv)promoting the area to foreign petroLeum enterprises for jointventures.

Consultancv and Technical Assistance for (i) the preparation of theKalinovac reservoir study and field deveLopment program; (ii) thepreparation of the Okoli computerized operating model and thedetailed engineering of surface faciLities; (iii) seismic dataacquisition and processing; (iv) the preparation of the Dinaridesexploration promocion package; (v) drilling fluids engineering forthe deeper sections of the project wells; and (vi) well testing andstimulation and special drilling operations.

Training abroad and also through seminars organized by internationalconsultants in Yugoslavia for INA NaftapLin engineers, geologists andgeophysicists in gas-condensate field development and operation,various aspects of underground gas storage, and modern exploracion,drilling and well compLetion techniques.

LNafta-Gas Sub-project

- Exploration, comprising (i) about 2,100 line-km of seismic surveysand (ii) the drilling and completion of about 10 deep (3,500 - 5,000m) exploration wells.

- Well Workover and Testing of about 20 previously drilled wells whereoil and gas has been encountered but that could noc be testedsuccessfully due to lack of critical equipment.

Consultancy and Technical Assistance in (i) seismic data acquisitionand processing; (ii) reservoir engineering, including underground gasstorage studies; (iii) drilling fluids engineering for the deepersections of project wells; (iv) well testing and stimulation andspecial drilling operations; and (v) administrative and managementtechniques for petroleum companies.

Training abroad and through seminars organized by internationalconsultants in Yugoslavia for Nafta-Gas technical personnel in moderngeophysicaL exploration, drilling and well completion cechniques andspecial reservoir engineering subjects.

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EXPL Sub-project

- GeoloBical and Geophysical Data Acquisition and Interpretationcomprising (i? the acquisition and processing of about 1,200 line-kmof high-resolution seismic data and the re-processing of about 300line-km of oLd seismic data; (ii) geochemical analysis of about 300rock samples from surface outcrops and previously drilled wells; and(iii) the interpretation of the geological and geophysical data andthe compilation of an expLoration promotion package.

- Exploration Promotion of the Morth Bosnia Pannonian basin tointerested international oil companies Eor further hydrocarbonexploration through joint-venture arrangements wich EXPL.

- Consultancy and Technical Assistance in (i) seismic data acquisitionprocessing and interpretation; and (ii) the preparation of theexploration promotion package and the conduct of the promotionexercise.

D. Project Implementation

INA Naftaplin

4.28 Project Management: INA Naftaplin's Project Manager will haveoverall project management responsibility. His responsibility will includethe coordination of various project task groups charged with projectimplementation, consultants and INA Naftaplin's operating divisions;monitoring project implementation; and evaluating and report.ng the progressof implementation. Upon the suggestion of the Bank staff, INA Naftaplin hasset up five project task groups in which major implementing departments arerepresented at a sufficiently high level to ensure effective projectsupervision, coordination of project entities and an interdisciplinaryapproach to petroleum operations. Each project task group would be primarilyresponsible for one project component (Drava-Sava exploration, Deep Drava-Savaexploration, Kalinovac field appraisal, Okoli gas storage'and Dinaridesexploration promotion). The proposed staffing of the various project taskgroups has been reviewed by the Bank staif and has been found satisfactory.

4.29 Engineering and Design: Well drilling programs will be prepared byINA Naftaplin-Ts Drilling Department which has substantial drilLing andcompletion experience. These programs would be submitted to the Bank forreview (pars. 4.58). Field surface facilities, with the exception of thebasic engineering design for the Okoli storage facilities, will be prepared byINA-Project, the engineering organization beLonging to the INA group. Thebasic engineering for the Okoli facilities will be prepared by Koernig KG.(ConsuLtant, FRG), which will also assisc INA-Project in detailed engineering,commissioning and start-up. The reservoir studies will be prepared by INANaftapLin's Reservoir Department with the assistance of foreign consultants inreservoir modeling, gas-condensate field development and operation andoptimization of underground gas storage operations. The field developmentplans will be prepared by INA Naftaplin's Engineering and ProductionDepartments. These arrangemencs are sacisfactory.

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4.30 Drilling and CompLetion: The wells included in the project will bedrilled and completed by INA NaftapLin's Drilling Department and WorkoverDepartment, respectively, with the assistance of international consultants inthe areas of drilling fluids engineering, weLl testing and stimulation andspecial drilling operations, and the assistance of international oil fieldservice contractors in the areas of mud logging and logging of well sectionswhere high temperatures andior sour gases are encountered. INA Naftaplinshould be able to drill the wells under the proposed project and meet itsother drilling requirements using its five largest drilling rigs, which are ofrecent design and in excellent condition, plus one extra heavy duty rig whichwill be purchased with export credits in parallel with the Bank loan. Theproposed program to be carried out by rNA Naftaplin is technicaLly acceptabLeand represents the most effective method of implementing the project for thefoLLowing reasons: first, because INA Naftaplin, having drilled successfullyin Croatia for over thirty years, possesses the requisite experience, fieldinfrastructure and management capability; and second because the wells to bedrilled under this project are part of an ongoing drilling operation andrepresent only a small part of INA Naftaplin's overalL drilling program. As aresult the alternative of contracting part of the driLling program under thisproject would have been significantly more costly. The proposed project wouldintroduce a system for well cost budgeting and ex-post cost review along withthe technical review.

4.31 There are, however, some areas where INA Naftaplin will need to usethe services of foreign consultants and specialized oil field servicecmpanies. INA Naftaplin will hire specialized foreign service companies andconsultants co perform the following services: logging of well sections wherehigh temperatures and sour gas zones are encountered; mud-logging for allappraisal/exploration welLs; mud engineering for deeper sections of thewells; testing and stimulation operations and other specialized drillingservices such as blow-out control, directional drilLing, etc. as required.Annex 4.01 summarizes the requirements for the use of internationalconsultants and engineering and service companies by the projectbeneficiaries.

4.32 Construction: Field facilities, such as manifolds, compressorstations, oiL and gas treating installations, etc. will be cvnstructed bylocal concractors specializing in this type of work under the supervision ofINA-Project and INA Naftaplin's Production Department. Existing fieldfacilities built by Yugoslav contractors have been visited by the Bank staffand have been found well designed and built. These arrangements aresatisfactory.

4.33 Geophysical Surveys: Work organization Ceofizika (Zagreb), which hashad a long and successful working relationship with INA Mafcaplin, will beresponsible for the acquisition and processing of the geophysical data, withassistance from internacional consultants for the planning and parameterdefinition of the Dinarides seismic program. Geochemical anaLyses will beperformed by international consultants and the computer analysis andinterpretation of the Landsat remote sensing data will be entrusted tointernational service companies. Institute Geofizika staff are experienced4nd qualified. However, much of their existing field equipment is in need ofrehabilitation. Wich the addition of equipment and macerials co be providedunder the project (96-channel field equioment. vibrators and gravity meters),

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some additional processing 'software and reasonable assistance frominternational consultants and service companies, they shouLd be able coimplement the geophysical surveys included id the project satisfactorily.

Nafta-Gas

4.34 Project Management:- A project coordinating team comprising seniorpersonnel of Nafta-Gas operating and administrative departments will beresponsible for overall project management. The team's main functions willbe: (i) taking decisions on technical aspects.of-the project; (ii)supervising and coordinating the work of foreign consultancs and contractors;and (iii) supervising and coordinating pro.ject-related activities of Nafta-Gasdepartments. Nafta-Gas has already set-up the project management team. Thecomposition and terms of reference of the team have been reviewed by the Bankstaff and have been found satisfactorv.

4.35 Engineering and Design: Well drilling, completion, workover andtesting programs wilL be prepared by Nafta-Gas departmencs in charge ofdrilling, workover, production and reservoir engineering with the assistcnceof foreign consultants/service companies in drilling fluids engineering,stimulation, and well testing. These programs would be submited to the Bankfor review as part of the proposed drilling program (para. 4.58). Nafta-Gasoperating departments have a sufficient member of highly qualified andexperienced technical staff and are judged capable of performing chese taskssatisfactorily wich minimum outside assistance. Nafta-Gas will useconsultants and service companies in areas where it needs assiscance. Theseare suua-'arized in Annex 4.01.

4.36 Drilling, CompLetion and Workover. The wells include-i in the projectwill be drilled and completed by the Nafta-Gas Drilling Department. Servicesof international consultants will be used for %irilling fluids forsmuLation andcontrol, cementing and well completion. vell workover and test operationswill be performed by the Workover Department of Nafta-Gas. Internationalservice companies will be used for the logging of well sections where hightemperatures and/or sour gases are encountered. Nafta-Gas has a sufficientnumber of experienced technical staff capable of drilling, working over andtesting the wells included in the project with a reasonable amount ofassistance from foreign experts. However, it does not currencly have thehigh-capacity drilling and- workover rigs needed to efficiently drilL and workover the deep wells included in the project. Therefore, its fleet will bemodernized by the addition of a modern deep drilling rig and a deep wellworkover unit which will be purchased with export credits in parallel with theBank loan. In addition, one of its existing drilling rigs will berehabilitated. As in the case of INA Naftaplin, this arrangement is judged tobe -the. most cost effective and the best long-term arrangement; The proposedproject would introduce a system for well.cost budgeting'and ex-post costreview along with the technical review.

4.37 Geophysical Surveys Institute Geofizika (Belgrade), which is part of- the Exploration Department of Nafta-Gas will be-responsible for the

acquisition and processing of geophysical data. The Institute currentLyoperates five seismic crews. Its personnel are capable and experienced;however, they require additionaL training in- data processing andinterpretation for the types ot expLoration objectives discussed in para. 4.13

35

above. Although the Institute's data processing equipment are up-to-date(vintage 1983), peripheral hardware and advanced software are required to copewith the large backlog of data to be processed and also co tackle efficientlythe advanced processing techniques thac would be required for the data to becolLected under the project. These will be provided under the project. Alsothe two vibroseis crews which will conduct the project-related geophysicalsurveys will be provided with 96-channel field equipment. These arrangementsare satisfactory.

EXPL

4.38 Project Hanagement-and Implementation. The proposed component wouldbe implemented by EXPL, a Work Organization established by RBB. EXPL has asmall technical staff and will make use of che management and administrativeservices of RBB. The proposed project includes provisions for foreignconsultants to maintain qualicy concrol for data acquisition and processing,and for preparing a promotion package and assisting in the promotion of theproject area to foreign companies. This arrangement is satisfaccory.

4.39 Basic surface mapping will be done using the services of locaLspecialized organizations, such as the Geological Institutes in Belgrade andSarajevo. As there are no facilities in Yugoslavia for detailed geochemicalanalyses, these will be done by foreign laboratories. Seismic data.will beacquired by local organizations, such as Institute Geofizika of Belgrade,under the supervision of an experienced expatriate geophysical consultant.Data processing will be done by a competent international geophysicalcontractor. The preparation of the promotional package and the overallorganizacion of the promotion exercise will be assisted by internationalconsultants. The Bank will periodically review the interim results obtainedduring project impLementation to determine whether the promotion efforts couldbe initiated at an earlier date. During negotiations assurances were receivedthat EXPL would review the result of the promotion exercise with che Bankbefore deciding on which offer Lo accept. These arrangements aresatisfactory.

E. ImpLementation Schedule

4.40 The project would be implemented over a period of 56 months startingfrom late 1985 and finishing by June 30,- 1990. The INA NaftapLin projectwould be finished by June 30, 1990, the NaEca-Gas project by March 31, 1990,and the EXPL project by December 31, 1989. Annex 4.02 shows the proposedimplementation schedule. This schedule is prepared on the basis of the recentperformance of INA Naftaplin and Nafta-Gas and the Bank's past projeccexperience in Yugoslavia. It should be achievable barring unexpecced delaysin the effectiveness of export credits to be used to finance equipment and-materials., whose timely availability is of critical impo-rtance.

F. Projecc Cost Estimate

4.41 The total financing required for the project is estimated atUS$607.9 million (Dinar 122 billion) including customs duties, physical andprice contingencies, and interest during implementation (through 1989); ofthis total, the INA NaEtapLin project would cost US$405.6 million, the Nafta-Gas project US$187.4 million arid the EXPL project US$14.9 million. The direct

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foreign exchange component is estimated at US$213 million equivalent, or 35 ofthe total project cost, of which the INA Naftaplin project would account forUS$127.1 million, the Nafta-Gas project US$83.4 million and the EXPL projectUS$2.5 million. Interest during implementation (through 1989) is estimated atUS$55.4 million, or 9% of total project cost. The local costs include anestimated US$19.7 million equivalent (Dinar 3.94 billion) in indirect foreignexchange corresponding to the locally procured but imported items (mainly fueland component parts). Detailed cost estimates appear in Annex 4.03 and aresummarized below:

Table 4.1

Project Cost Summary

USS Million Dinar Bllion /Local '/ Foreign Total Local c Foreign Total

INA Naftaplin Sub-Project

Base cost 188.5 99.8 288.3 37.70 19.96 57.66Contingencies 55.8 27.3 83.1 11.16 5.46 16.62

Sub-project costb/ 244.3 127.1 371.4 48.86 25.42 74.28

Nafta-Gas Sub-Project

Base cost 63.9 65.3 129.2 12.78 13.06 25.84Contingencies 19.8 18.1 37.9 3.96 3.62 7.58

Sub-project cost 83.7 83.4 167.1 16.74 16.68 33.42

EXPL Sub-Project

Base cost 9.3 2.0 11.3 1.86 0.40 2.26Contingencies 2.2 0.5 2.7 0.44 0.10 0.54

Sub-project cost 11.5 2.5 14.0 2.30 0.50 2.80

Interest - 55.4 55.4 - 11.08 11.08

Total Project Cost 339.5 268.4 607.9 67.90 53.68 121.58

a/ US$1.0 = Dinar 200b/ Based on 1984 prices.c/ Includes US$38.8 million (Dinar 7.76 billion) in taxes and duties, and

US$19.7 million (Dinar 3.94 billion) in indirect foreign exchange.

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4.42 The estimate of project costs is based on detailed lists of equip-ment, materials and services prepared by [NA Naftaplin, Nafta-Gas and EXPL in1984 prices. A physical contingency of 10 applied to the base cost is deemedto be sufficient. For local engineering and consultancy, the average cost toINA Naftaplin of an engineering man-month (Dinar 100,000 or US$500.00 per man-month) were used. The expected average cost per man-month for the variousexpatriate consultancy services required (136 man-months) is US$22,000,including foreign travel and subsistence. Price contingencies were calc-latedassuming annual escalation rates of 5.0Z in 1985, 7.5% in 1986, 8.0% in1987-90, and 5.OZ thereafter, for both local and foreign costs. These ratesreflect the current estimates for price increases in Yugoslavia (in US$ terms)and major petroleum equipment and service supplying countries. The phasing ofexpenditures appears in Annex 4.04 and can be summarized as follows:

Table 4.2

Phasing of Expenditures (excluding interest)USS Million

Calendar Year 1985 1986 1987 1988 1989 1990 Total

Expenditures:

INA Naftaplin 11.7 182.0 103.6 56.1 13.5 4.5 371.4Nafta-Gas 1.2 99.8 25.6 18.9 17.7 3.9 167.1EXPL 3.6 5.0 4.9 0.2 0.3 - 14.0

Total 16.5 286.8 134.1 75.2 31.5 8.4 552.5

The proposed implementation schedule calls for project completion withinlittle more than five years, which is somewhat faster than the average forBank projects in Yugoslavia. This rapid implementation is appropriate for aproject that is supporting a time slice of an ongoing exploration/appraisalprogram in the petroleum sector. If costs were to rise due to slower thananticipated project implementation, INA Naftaplin and Nafta-Gas should have noproblem in covering the increased local currency costs. Increased exportcredits would be expected to cover any increase in cost of imports for theproject. However, if they were unable to obtain sufficient foreign exchangefrom other sources, they would have to reduce the number of weLls drilledunder the project.

G. Financing Plan

4.43 The beneficiaries intend to finance the local cost of their proposedprojects through internally generated funds. Their access to foreign exchangeis, however, extremely limited, with most current sources committed to therequirements of ongoing operations. It was, therefore, decided to structurethe financing so as to provide the maximum potential for obtaining exportcredit (or suppliers' credit) financing. Accordingly, six packages of goodswere identified that could be financed through export credits. These packageswere decided upon on the basis of the valUe of the items, the number ofpotential suppliers for the items and the competitive nature of the supplying

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industries, and the general practices of the petroleum industry in thisregard. The borrowers then sent out requests for export credit proposals topotential supplier*s.

4.44 There remain a large number of goods and services that are notsuitable for financing through export credits. Among these are (i) items forwhich the contract values were less than optimal size to attract export creditpackaging by the suppliers (well heads, liner hangers); (ii) items for whichthe quality was criLical to the technical implementation of the project, sothat the Bank's presence in the bid evaluacion procedure was consideredessential for ensuring project success (seismic equipment); (iii) items thatare generally not available on export credit terms because there is a limitednumber of suppliers with an exclusive technological or marketing position(logging and testing services); (iv) items for which ICB could attract a muchLarger group of bidders than if export credits were needed, and where theresult of this larger bidding group were thought to be important forminimizing project cost (high chrome tubulars, mud logging equipment); and (v)items that were needed throughout the full term of project implementation, andcould not be assured of export credit financing in the future (spares, cement,chemicals). In addition it was judged important to ensure that the Bankinvolvement in project financing should be spread throughout the projectimplementation period and across all the major project components.

4.45 On the basis of the preliminary responses to the request forfinancing offers, it was estimated that export credit facilities on reasonableterms and reasonable prices could be obtained for goods and works costingabout US$98 million. The borrowers would have to obtain US$15-20 million tocover down payments for items purchased under export credits or otherwise, notfinanced by the Bank. The items proposed for Bank financing are shown inTable 4.4, para 4.48. In the case of cost overruns, the beneficiaries haveagreed to provide the local and foreign funds required to complete implementa-tion of the project from their own resources. The financing for the specificitems not financed by the Bank wilL be determined by the outcome of thecompetitive bidding process. The present financing plan is based onpreliminarv commitments and letters of intent from the national export creditagencies )f a number of major manufacturing countries which, in total,substantially exceed the crediting financing requirements of the project.This, along with the depressed state of the petroleum equipment manufacturingindustry, would provide the competitive conditions needed to ensure minimumcosts. The best offers, in terms of technical and financial conditions, wouldbe selected from the competitive bidding process and the associated exportcredits negotiated with each supplier's bank and national export creditagency. Therefore, in order to ensure that the financing plan isimplementable, as a condition of effectiveness of the loans to INA Naftaplinand-to Nafta-Gas, a financing plan, including, specifically, financing for theitems required for project implementation and not financed by the Bank willhave to be furnished to the Bank in a form satisfactory to the Bank.

4.46 A Bank loan of US$92.5 million (15Z of total project cost) isproposed to cover the cost of importing those items that cannot efficiently befinanced through export credits. This would be comprised of a loan of US$55million to INA Naftaplin, a loan of US$35 million to Nafta-Gas and a loan ofUS$2.5 million to PBSIEXPL. The beneficiaries wouLd provide the foreign

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exchange for additional expenses and for interest during implementation fromtheir own resources and would expense these interest payments. This wouldcomplete the financial plan for an estimated US$268.4 million foreign exchangeproject cost.

4.47 If the borrowers are unable to obtain from domestic resources theforeign exchange needed to finance the down payments for goods imporced underexport credit arrangements, the Bank may be requested to assist INA Naftaplinand Nafta-Cas in their efforts to obtain commercial bank financing to coverthe down payment requirements for the items purchased under export credits.This would come to about US$15-20 million. The commercial banks ot :liepotential suppliers wouLd be the most likely source of this financing. Sincethe Bank's presence may be needed to attract this financing, the Bank may beasked to package the commercial loans into a B-Loan in the amount of aboutUS$20-25 million, in which the Bank would participate up to US$5 million. Thefollowing table presents the financing plan:

Table 4.3

Financing Plan( US$ MiLlion)

Local Foreign Total ZINA Naftaplin Sub-ProjectOwn resources 244.3 43.5 287.8 71

(of which for interest) - (34.2) - -Export credits and down

payment financing - 62.8 562.8 15Proposed IBRD loan - 55.0 55.0 14Sub-Total 244.3 161.3 405.6 100.0

Nafta-Gas Sub-ProjectOwn resources 83.7 33.7 117.4 62

(of which for interest) - (20.3) - -Export credits and down

payment financing - 35.0 35.0 19Proposed IBRD loan - 35.0 35.0 19Sub-Total 83.7 103.7 187.4 lO0

EXPL Sub-ProiectOwn resources (of which

for interest) 11.5 0.9 12.4 83Bank financing - 2.5 2.5 17Sub-Total 11.5 3.4 14.9 100

SummaryOwn Resources 339.5 78.1 417.6 71Export credits and down

payment financing - 97.8 97.8 14Proposed IBRD loan - 92.5 92.5 15Total financing 339.5 268.4 607.9 100

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H. Procurement

4.48 Procurement of items proposed for Bank financing will be through ICBaccording to Bank guidelines with the exception of approximately US$5.6 million(6%) of goods and services which will be procured through limited inter-national bidding (LIB); US$3 million for INA Naftaplin, US$2 million forNafta-Gas, and US$0.6 million for EXPL. Limited international bidding will berestricted to certain essentiaL goods and services of a highly specializedtype (such as logging, well stimulation, coring equipment, etc.), which areavailable from very few suppliers, are of relatively low monetary value (notexceeding US$300,000 equivalenc CIF per contract) and are sometimes needed onshort notice, due to the nature of petroleum operations, which often requireson-the-spot decisions. Consultants will be selected according to the Bankguidelines. There are no qualified local suppLiers capable of providing thegoods and services selected for Bank financing. Retroactive financing ofabout US$50,000 will be used by EXPL for consultant services for seismicacquisition and processing.

4.49 Procurement arrangements and items proposed for Bank financing forthe project are summarized in Table 4.4 below.

Table 4.4

Procurement PlanParentheses are used to Identify Bank Financed Items

(in Us$ Millions)

Project Element Procurement Method

ICB LIB LCB Other N.A. Total Cost

Field services 12.0 2.6 - 31.5 - 46.1(12.0) (2.6) - - - (14.6)

Field equipmentand materials 64.3 2.4 - 211.7 - 278.4

(64.3) (2.4) - - - (66.7)Civil works - - - 18.0 - 18.0Construction, installationand testing - - 8.6 - - 8.6

Drilling, completion andworkover - - - 85.2 - 85.2

Geophysical Surveys - - - 54.7 - 54.7Engineering, technicalsupervision & administration - - - 11.5 - 11.5

Training and technicalassistance - - - 11.2 - 11.2

- - - (11.2) - (11.2)Duties and Taxes - - - - 38.8 56.8

Total 552.5.2)

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4.50 Field equipment and materials worth US$211.7 million would beprocured by the beneficiaries under their own procurement regulations. Amongthose, some locally produced goods would be procured from YugosLav suppliersthat are the sole sources for the items under consideration. These suppliersmanufacture oil field equipment and materials of acceptable quality,equivalent to the American Petroleum Institute (API) standards. Because ofthe importance of thle gas compressors for the Okoli Underground Gas StorageSubproject, the Bc.ic will satisfy itself as to the performance guarantees tobe given by the foreign manufacturer (Ingersoll Rand, UK) under whose licensethey wiLL be manufactured locaLly and the delivery guarantee of the Localmanufacturer (Split Shipyards) before disbursing Bank funds allocated to thissubproject. Equipment and materials that are to be imported would be procuredby Limited international tendering, if the successful bidder is required toprovide export or suppliers' credit to finance the purchase. US$31.5 millionworth of oil field and exploration services, US$18.0 million worth of civilworks, and US$11.5 million worth of engineering would be supplied by theengineering groups of the beneficiaries. Drilling and complecion servicesestimated to cost US$85.2 million would be implemented by the borrowers.Consultancy and training services costing US$11.2 million would be procuredunder the Bank guidelines for the use of consultants. US$8.6 million worth ofconstruction and installation work would be contracted out to local companiesunder Yugoslav LCB procedures, which require nation-wide advertising andcontract award to the lowest evaluated bidder where there exist more than onepotential source of supply.

4.51 It is estimated that the number of the bid packages for Bankfinancing would be approximately 50. Prior Bank review of the bidding andcontract documents of all packages estimated to cost more than US$250,000 CIFwould be undertaken, which, it is estimated would comprise 50Z of the bidpackages. Packages costing less than this threshold value would be subject copost review by the Bank.

4.52 The responsibility for initiating procurement action for items to befinanced by the Bank will rest with INA Naftaplin, Nafta-Gas and EXPL. Theforeign trade companies belonging to the INA, Nafta-Gas and EnergoinvestGroups (INA-Comerc, Naftagas Promet and Energokomerc) will undertakeprocurement of Bank-financed items. They will prepare the bidding documentsfor approval by the Bank, and all further procedures will be processed throughthem. However, the beneficiaries will reserve to themselves the technicalcontrol of all orocurement (i.e. specifications, scheduLes, inspection,etc.). This arrangement, which is required by the Yugoslav laws, is similarto the Hungarian Petroleum Project (Loan NO. 2398-HU) and the Videle/BalariaEOR Project in Romania (Loan No. 2148-RO). ALthough somewhat more timeconsuming than direct procurement by the beneficiaries, it has been found tobe a workable arrangement.

I. Disbursements

4.53 Disbursements under the proposed loan would be made against 100X offoreign expenditures for the items proposed for Bank financing (para. 4.48).The withdrawal applications would be fully documented. Statements ofexpenditure could be used for contracts for goods or services valued at lessthan US$25,000, which would represent about 5Z of the contracts.Disbursements are expected to be completed by JuLy, 1990. The loan closing

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date would be December 31, 1990 for the INA NaftapLin Loan, September 30, 1990for the Nafta-Gas Loan, and June 30, 1990 for the PBS loan, six months afterthe expected completion dates for the separate projects implemented by each ofthe beneficiaries. The estimated schedule of disbursements for the Bank loanappears in Annex 4.05. The schedule is based on the standard disbursementprofile for IBRD projects completed in Yugoslavia during the first four yearsof the project.

4.54 To accelerate payments of ICB suppliers and reduce administrativework in the Bank for small disbursements, a Special Account would beescablished at a bank acceptable to the IBRD. It would maintain a floor ofBank deposits of the equivalent of the average four months' expendicures whichare estimated to be about US$3 million for INA Naftaplin, USS1.65 million forNafta-Gas and US$0.3 million for EXPL. The Borrowers wouLd be allowed, uponrequest, to increase adequately deposits ac the time of major ICB bid opening.Records of the Special Account proceeds and outlays would be kept in a specialproject account to be held at the designated banks and run parallel to themaster project account. A record of all contracts financed and a permanentaccounting record of operations financed wouLd be kept by the Borrowers andche Beneficiaries and would be available for review by Bank missions upondemand. Paymencs from the Special Account would only be made for eligibleexpenditures indicated in the Loan Agreement.

J. Reporting Requirements

4.55 Agreement was reached during negotiations that the Bank will receivebi-weekly drilling summaries, quarterly technical progress reports and semi-annual financial reports from the beneficiaries and borrowers according toagreed format and content. All reports will be submitted within 45 days afterthe end of the relevant period. The beneficiaries will also prepare separateProject Completion Reports witnin six months after their respective loanclosing dates.

K. Ecology and Safety

4.56 The main sources of pollution attributable to project relatedactivities are well effluents 'oil. gas and produced formation water),chemicals used in production operations (methyl alcohol, surfactants andammonia) and drilling fluids while drilling. The well effluents, exceptduring well testing operations, are handled in closed systems to minimizelosses by leakage. After treatment, the produced formation water and thewaste chemicaLs resulting from production operations are injected into waterdisposal wells to prevent the pollution of fresh water sources. All necessaryprecautions will be taken during design and construction of surface productionfacilities to minimize the chances of overpressurization and corrosion. TheWest German Association of Property Insurers (VdS) standards will be followedin the design of Okoli facilities. The design of wells and gas fieldfaciLities will conform to the recommended practices of the American PetroleumInstitute (API). Installations where well effluents are coLlected and treatedwill be provided with safety valves, containment walls, drain basins and drainremoval pumps. Flares will be provided for burning excess gases. During welltests, the relativelv small amounts of oil and water produced are dumped ;ntospecial pits where the oil is disposed of by burning and the water allowed toevaporate. The Produc_ gas is ourned at a flare to minimize firs andexplosion hazards. All production wells will be equipped with downhole safety

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systems to prevent blowouts or oil spills. Fresh water aquifers will beprotected according to standards set by the industry. As required by theYugoslav laws, the operating companies will contain and clean up any drillingmud or chemicals, and reclaim that portion of land which is not required forproduction operations, such as access roads and locations of abandoned wells.

L. Project Risks

4.57 The risks associated with the project are those inherent in petroleumexploration and production. In the proposed project these can be summarizedas follows: (i) geological risks; (ii) drilling risks; and (iii)uncertainties associaced with the discovered gas fields' reserves andproductivity. The economic risks are further discussed and evaluatedquantitatively in Chapter VI.

4.58 In order to minimize the geological risks, the following provisionsare included in the design of the proposed project: (a) seismic programs havebeen so seLected as to evaluate typical problem areas in each basin whichshould help reduce the number of dry holes, and (b) drilling would be focusedon prospects that carry high geological ranking. In addition, assurances werereceived at negotiations that, (i) the entire exploration program would bereassessed by the Bank and the Borrowers on an annual basis (para. 2.22);significant data that might alter the program couLd be reviewed as they becomeavailable; and (ii) all well locations would be evaluated with detailed infiLlseismic and would be fully mapped before drilling was approved for anylocation financed by the Bank. A detailed geologic prognosis and the drillingand testing program, including full detailed cost estimates would be submittedto the Bank for approval on a no-objection basis, at least one month before arig is moved to the proposed site.

4.59 The risks associated with drilling are minimized by the use of high-grade equipment and materials such as double blowout preventers with remotecontrol systems, sophisticated instruments and modern mud logging techniquesand equipment, and the enforcement of strict safety codes (e.g. daily blowoutdrills). The reserves and productivity of the Kalinovac gas condensate fieldare determined on the basis of very conservative assumptions. Yet there isthe risk that the gas reservoirs may not Live up to expectations, a riskinherent in aLl petroleum development projects. However, in view of cherelatively good data base and the conservative approach of INA Naftaplin toreserve determination, this risk is small.

V. FINANCIAL ASPECTS

5.01 The two operating petroleum companies, INA Naftaplin and Nafta-Gasare financially strong and sound enterprises. This is because, in addition totheir sound management policies, they have been the primary beneficiaries ofthe Covernment policy to maintain the prices of domestically produced crudeoil and petroleum products at paricy with international levels. The companiesare expected to remain financially strong because they are increasingproduction of natural gas (which will more than compensate for the potentialshortfalls in crude oil production for quice some time) and the Government hascommitted itself to increasing the price of domestic natural gas to theinternacional level by January 1987. Although both companies are financialLystrong, they have serious difficulties ontaining foreign currency. The main

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financial objectives of Bank assistance are: (i) to facilitate the re-entry ofthe borrowers to capital markets outside Yugoslavia and; (ii) to preserve theborrowers financial strength so they will be able to have continued access tothese markets without COY and Bank support. The appraisal therefore focuseson the factors affecting the future creditworthiness of these entities, asperceived by the foreign lenders, and the institutional capabilities needed tomaintain their financial strength in the future.

,.02 The role of the other borrower, PBS, is to function as a conduit forchannelling the Bank's funds to the beneficiary EXPL and RBB (paras 3.22-3.25). A major appraisal of PBS was undertaken by the Bank as part of theSixth Industrial Credit Projecc, in April, 1982. The financial andoperational performance of PBS was found to be acceptable and a number ofmeasures to improve the quality of PBS project appraisal, to introduce asystem of project supervision, and to streamline PBS operational and financiaLprojections were agreed upon with PBS. During supervision of the existingindustrial and agricultural credits, the Bank has been discussing with PBSappropriate arrangements for uionitoring PBS performance in relation tospecific financial targets aimed at a graduaL improvement in its operationalefficiency, specifically in the areas of loan arrears and the reserve for theloan write off (para 5.19).

A. Accounting and Financial Policies

5.03 Both INA Naftaplin and Nafta-Gas maintain their accounts inaccordance with the Yugoslavia accounting regulations, which are materiallydifferent from the accounting practices of international oil companies. EachBasic Organization (BOAL) (see para 3.03) maintains separate accountingrecords, and buys and sells products or services to the other BOALs atpredetermined prices. These accounts have been subsequently consolidated bythe SDK in order to obtain a representative picture of the finances of INANaftaplin and Nafta-Cas in a form that is broadly similar to internationalstandards.

5.04 The main departures from the international standards are twofold:first, all intangible downhole expenses (i.e. drilling, logging; cementing,workover, etc.), whether for exploration or development, are written offduring the year in which they are incurred. Normal IOC practice is tocapitalize these costs and the Yugoslav practice substantially increasesoperating expenses and reduces internal cash generation and net income.Second, deprecivrion and depletion allowances include the legaL standarddepreciation (which applies to the calculation of mandatory contributions andtaxes), and the additionaL depreciation that is decided upon by the Worker'sCouncil. As a result of these depreciation policies, the annual depreciationcharge is overstated and the asset base of both the companies are understatedvis a vis international practice.

B. Financial Performance

5.05 The historical financial performance of INA Naftaplin and Nafta-Cashas been satisfactory, and both are in a sound financial position. Thefinancial projections have been based on the conservative assumption that nonew gas or oil reserves will be discovered and developed in the next severalyears, and the forecast production based only on present proven reserves. The

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following paragraphs review the historical income statements and balancesheets, and the projected financial statements for the two companies.

5.06 Both operating petroLeum companies have a legal obligation, alongwith all profitable institutions in Yugoslavia, to invest some of theirsurplus in certain other institutions, primarily in related fields. Becausethese investments take the form of loans with low fixed interest rates andlong maturities or of equity participations which are often not made on purelyeconomic grounds, it is not possible to determine their real value or probablerate of return. In order to reflect this uncertainty on the balance sheets,for the purposes of this report, the debt:debt plus equity ratio has beenadjusted by deducting these long term investments from total equity. Evenwith this more conservative approach, both INA NaEtaplin and Nafta-Gas balancesheets remain strong.

INA Naftaplin

5.07 INA Naftaplin's detailed financial statements for the period 1981-1984 appear in Annexes 5.01-5.03. The assumptions used in the projections arein Annex 5.04. INA NaftapLin's income statements over the past three yearsbased on audited statements and estimates for FY 1984 indicate that rNANaftaplin operations have been profitable, despite the fact that profits inrecent years have been constrained by declining reserves, production and theinternational oil prices. They can be sumuarized as follows:

Table 5.1

INA Naftaplin - Selected Operating and Financial Data(Dinars million)

1981 1982 1983 1984

Oil Sales (thousand tons) 3,133 3,054 2,856 2,850Gas Sales (million M3) 1,442 1,631 1,517 1,817Revenues 32,867 41,547 67,396 118,733Operating expenses 20,826 27,202 41,322 69,437Other expenses 4,839 7,062 12,769 15,149Yet income 7,202 7,283 13,305 34,147

Total Assets 41,320 59,180 105,515 154,449Long-term debt 2,792 6,534 11,754 19,064Int. Cash Generation 15,107 15,000 25,720 50,592

Current Ratio 1.7 1.7 1.5 1.7Adjusted Debt:Debt Equity 2 17 32 34 39Operating Ratio X 64 67 62 59

a/ Operating Expenses as i of RevenuesSource: INA Naftaplin

5.08 The key indicator is the operating ratio which declined only slightlyduring the period and demonstrates the fact that price increases have keptpace with costs during this period of rapid inflation. Also, given the fact

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that operating expenses for a substantial portion of the total would normallybe capitalized under international practice, the low operating ratio showshigh profitability. INA Naftaplin's current position is strong and its debtposition satisfactory with a debt to debt plus equicy ratio (adjusted, seepara 5.06) of 39Z at the end of 1984.

Nafta-Gas

5.09 Nafta-Gas is highly profitable, with an operating ratio of 40 and netincome in excess of 50% of revenues. Nafta-Gas detailed financial statementsfor the period 1981-84 appear in Annexes 5.05-5.07. The assumptions used inthe projections are in Annex 5.08. The 1980-82 results are not audited. The1983 accounts have been audited, and have been found satisfactory. The 1984figures are estimated.

Table 5.2

Nafta-Cas -- Selected Operating and FinanciaL Data(Dinars million)

1981 1982 1983 1984

Oil Sales (thousand tons) 1,183 1,244 1,303 1,277Cas Sales (million M3) 876 1,031 946 927Revenues 12,593 18,274 25,183 41,094Operating Expenses 4,651 5,700 9,130 15,893Other expenses 1,483 2,179 2,684 4,121Net Income 6,459 10,395 13,369 21,080

Total Assets 21,758 32,515 47,966 70,994Long-term Debt 268 241 246 760Int. Cash Generation 3,707 5,921 3,918 19,432

Current Ratio 2.5 4.2 5.0 4.6Adjusted Debt: Debt & Equity Z 4 3 3 3Operating Ratio % 38 32 38 40

Source: Nafta-Gas

Nafta-Gas has consistently maintained a satisfactory current position; itslong-term debt is particularly low because in recent years Nafta-Cas has hadlimited access to foreign borrowings, the debt: debt plus equity ratio(adjusted, see para 5.06) was onLy 3% in 1984.

C. Future Performance

5.10 Detailed financial projections over the 1985-88 period and supportingassumptions are in Annexes 5.01-5.08. The projections are based on theborrowers financial statements as prepared by SDK, the 1984 budget, the draftlong-term sector plan for 1985-89, and the current financiaL policies. Majorassumptions used in the projections were: (i) the international price of oilwill remain at the 1984 year end level; (ii) the price of natural gas willgradually increase in accordance with an agreed schedule, so that price paritywith the imported gas price will be established by January 1987; (iii) the

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exchange rate will be Dinar 200 to US$1.0; and (iv) no production from newdiscoveries will be realized during the forecast period.

INA Naftaplin

5.11 INA Naftaplin's revenue is expected to peak in 1987 and stabilizethereafter, as a result of a decline in crude production and stabilized gasproduction. The operating ratio should deteriorate as cost increases outpacerevenue growth, because of the assumed stable world oiL and gas prices and theassumption of operating cost increases, the operating ratio is projected todecline over the forecasc period. Nevertheless, profitability wiLl remainhigh and net income, as a percent of sales is expected to remain above 20%over the next four years as indicated in the following cable:

Table 5.3

INA Naftaplin - Future Financial Performance(Dinars milLion)

1985 1986 1987 1988

Crude Oil Sales (thousand tons) 3,027 2,883 2,711 2,633Gas Sales (MMM3) 2,016 2,628 2,860 2,957Sales Revenues 180,110 201,643 209,520 209,806operating Income 84,487 86,947 79,620 69,589Net Income 60,121 61,707 58,272 53,045Operating Ratio a/ 53 57 62 67Net Income/Sales (Z) 33 31 28 25

Current Ratio 2.2 2.2 2.2 2.3Adjusted Debt:Debt&Equity (Z) 42 37 30 25

Source: INA-INA Naftaplin and Bank staffa/ Operating expenses as X of sales revenues.

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5.12 The financing plan can be summarized as foLlows:

Table 5.4

INA Naftaplin - Financing Plan Summary (1985-1988)

Dinar MM US$MM

Internal Sources a' 641,652 3,208Less: Exploration andDevelopment Cost (125,258) (626)

Sub-TotaL 516,394 2,582Deductions:Debt Service 48,145 241Taxes and Contributions 84,150 421Increase in Working Capital 18,673 93Increase in Other Assets 14,715 74

Subtotal 165,700 828

Funds Available for Investments 350,694 1,753

Fixed investment 213,407 1,067External investment 16,951 810

Financial Cap 24,664 124

Financed By:Borrowings (foreign loansincluding IBRD loan) 30,891 154

Source: INA Naftaplin and Bank staff.a/ Before downhole exploration and development cost.

5.13 As the table indicates, INA Naftaplin's funds available forinvestment over the four years 1985-1988 incLusive would amount to someUS$1,753 million, against the investment program of US$1,877 million,excluding investment in downhole and development cost in the amount of US$626million which will be expensed. The oil and gas related investment (US$1,693million) will represent 681 of the total investment; exploration and downholedevelopment expenditures will account for about 37Z of oil and gas relatedinvestments, reflecting the cost of che increasing complexity of the newprospects. This is reasonable, taking into account INA Naftaplin'sprofitability. The external investments will represent about 32% of the totalinvestment program. The borrowings Are in foreign currency. INA Naftaplin isexpected to accumulate a modest cash su.plus in local currency.

Nafta-Gas

5.14 Nafta-Gas' performance in the coming years is expected to remainstrong, with a steady increase in revenues. Net income as percentage of salesis expected to remain in the range of 45%. Nafta-Gas' future finances can besummarized as follows:

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Table 5.5

Nafta-Gas Future Financial Performance(Dinars million)

1985 1986 1987 1988

Crude Oil Sales (thousand tons) 1,159 1,135 1,251 1,223Imported (Ang2lq) 27 77 138 189Gas Sales (10 M ) 926 986 943 901Revenues 64,118 73,115 81,020 83,088Operating Income 38,084 38,483 42,987 42,885Net Income 32,605 32,619 36,185 36,152Operating Ratio (x) a 39% 46% 46% 47%Net Income/Sales (X} 522 45% 462 64Z

Current Ratio 3.7 4.5 5.4 5.7Adjusted Debt:Debt & Equity (Z) 9 17 17 14

a/ Operating expenses as Z of revenues.Source: Nafta-Gas and Bank staff.

5.15 As the table below shows, Nafta-Gis' funds available for investmentover the four-year period 1985-88 inclusive would amount to some US$658million, against an investment program of US$643 million, excluding investmentin downhole and development cost in the amount of US$314 million which will beexpensed. Investment related to oil and gas (US$654 million) will representabout 68Z of total investment, with joint ventures accounting for 9%.Exploration and downhole development expenditures will account for about 49%Oa the oiL and gas related investments, reflecting the cost of increasingdepth and complexity of new prospect. This is reasonable, considering theprofitability of Nafta-Gas. The external investments will represent about 32%of the total investment program. The borrowings are in foreign currency. Inall, Nafta-Cas would, under the current assumpt'uns, accumuLate a cash surplusin local currency.

-50l

5.16 The financing plan can be summarized as follows;

Table 5.6-

Nafta-Gas -- Financing Plan Summary (1985-1988)

Dinars million USS million

Internal Sources a' 252,606 1,263Less: Exploration Development Cost (62,769) (314)

Sub-Total 189,837 949Deductions:Debt Service 4,820 24Taxes and Contributions- 27,153 136Increase in Other Assets 26,178 131

SubtotaL 58,151 291Funds Available for Investments 131,686 658

Fixed Investment 67,197 340External Investments 60,589 303Cash Surplus 3,180 15Borrowings (foreign loansincluding IBRD loan) 16,775 84

Source: Nafta-Gas and Bank staff.a/ Before downhoLe exploration and development cost.

D. Financial Covenants for INA Naftaplin and Nafta-Gas

5.17 In order to achieve the financial objectives (see para 5.01), bothborrowers should maincain a financial position at Least as good as thefinancial position of sound oil enterprises of good standing abroad.Therefore, assurances were received at negotiations from both INA Naftaplinand Nafta-Gas that: (i) they will maintain a sound financial position byinternationaL petroleum industry standards practices, with current ratio notless than one to one; an operating ratio of not more than 90%; and apercentage of the debt to debt plus equity of not more than 60%; and (ii) theywill provide the Bank with a yearly updated investment plan and give the Bankan opportunity to review jointly with them these plans and the expected impactof these plans on their financial position.

E. Privredna Banka Sarajevo (PBS)

5.18 All proceeds from the Bank loan to beneficiary EXPL would bechanneled through PBS (see para 3.22). A major review of PBS was undertakenby the Bank, in 1981, as a part of the appraisal of the Sixth IndustrialCredit Project. Subsequently, during the appraisal of Bosnia-HerzegovinaForestry Project the updated financial data was reviewed. The financial andoperational performance of PBS was found to be acceptable to the Bank. As aresult, the assessment of PBS's suitability as a borrowe' is, as it has beenthe case in the previous lending operations, based on the assessment of thefundamental soundness of its management decision-making process and results.

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5.19 Audited Financial Statements for the period 1981-1983 are in Annexes5.09-5.11. Consistent with the conclusions of the appraisal mentioned aboveand the SAL I agreement regarding the Yugoslav banks, improvement should besought mainly in the area of arrears and reserves for loan write off.Therefore, at negotiations assurances were received from PBS that it wouLdreduce its arrears with specific target dates for their achievement. Inaddition, assurances were received from PBS that it would increase, the amountavailable for loan write-offs in the Joint Liability Fund (JLF) to 3% of thetotal of its and its member basic banks' loan portfolio.

5.20 The future lending operations of PBS are linked to the regionaldevelopment plans of the Republic of Bosnia and Herzegovina. However, the GOYand the Republic are stiLl deeply engaged in the process of formulating thebasic parameters for ics 1986-1990 five year plan at both the republic andnational levels. As a result, it was not feasible for PBS to preparemeaningful projections. Assurances-were received at negotiations chat PBSwill furnish to the Bank, for review and comment, a set of detailed financialprojections for the period 1986-1990 within 30 days of the approval by itsWorkers Council of its 1986-1990 five year plan.

VI. -ECONOMIC JUSTIFICATION AND RISKS

6.01 The project supports a full cross section of hydrocarbon explorationand production activities. It is a balanced, integrated program, which aimsat, (i) increasing available resources in the short run through expandedproduction facilities (Kalinovac field appraisal and Okoli gas storage), (ii)testing and proving reserves for increasing production in the medium term(testing of existing wells and appraisal drilling on defined trends), and(iii) identifying additional reserves to ensure continued production in thelonger term, (seismic data gathering, exploration drilling and explorationpromotion). In this section che economic merit of each separate projecccomponent is evaluated. The evaluation covers: Ci) exploration/explorationpromotion, (ii) appraisal and testing, and (iii) gas storage.

A. Exploration and ExpLoration Promotion

6.02 In a country with a macure petroleum industry, the size of anexploration program should bear a reasonable relationship to the level ofcurrent production for the industry. In the proposed project the componentsthat relate to exploration and exploration promotion amount to about US$110million per year for about three years, or about 10% of the value ofYugoslavia's current annual production (about 75 Bcf of gas and 4.3 milliontons oil in 1984, valued at about US$1.2 billion). In order to find enoughreserves to maintain production at its current Level, Yugoslavia must identifynew fields with recoverable reserves of about 15 milLion tons or 0.5 Tcf of

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gas over the life of the projectl/. This requires the appraisal of a newfield about the size of the NoLve field (which is currently being developed)or a field about 50% larger than the expected size of the Kalinovac field,(which will be appraised and tested as part of the proposed project). Asdiscussed in para. 6.09, the increase in recoverable reserves that thisproject is expected to identify is estimated at several times this amount.However, even if only the minimum 0.5 Tcf reserves were identified, theexploration cost would be Less than US$20 per TOE (less than US$3 per barrelequivalent).

6.03 The risks associated wL.h the exploration component of the projectare geological, technical and economic. The geologic risk is that theexploration program will not find sufficient hydrocarbon reserves; thetechnical risk is that the beneficiaries wiLl not be abLe to implement thedrilling program because of the difficult drilling conditions and hostilegeologic environment; and the economic risk is that the reserves that arefound would not be adequate to cover the costs of the entire exploration anddevelopment program. Each of these exploration component risks is discussedbelOw. Subsequently, the risks and benefits of the non-exploration componentsof the project are assessed.

6.04 Geologic risks can be separated into two kinds: (i) the risk that thebasin, or the geologic play that is being followed in the exploration programis not hydrocarbon bearing, and (ii) the risk that the exploration programwill be unable to adequately identify the hydrocarbon bearing strata ordistinguish between productive and dry objectives within the geologic play.Both of these risks are minimal in the Pannonian basin, where the explorationprogram is to be implemented. This has been borne out by (i) the success rateof recent hydrocarbon exploration in this basin, and by (ii) the results ofthe resource appraisal of the Pannonian basin using the RASP computer model.The results of this appraisal suggest that there is about a 902 chance that inthe Sava and Drava sub-basins, a long term, fully implemented explorationprogram could find recoverable reserves of over 9 Tcf of gas (210 MTOE) and 70million tons of oil, if all prospects were drilled over a 15 to 20 yearperiod. In the basins of Vojvodina where exploration is planned under theproposed project, there is about a 90% chance of finding, under similarconditions, recoverable reserves of 2 Tcf of gas (46 MTOE) and 32 million tonsof oil. Full details of this analysis, with a basin by basin description aregiven in Annex 6.1.

6.05 The risk of being unabLe to identify and adequately map the larger,more obvious deep traps is also extremely low. In fact, four fields along thegas trend in the Sava basin have already been confirmed by drilling, and as aresult, a number of productive trends, or plays, have been clearly

1/ If no new fields are brought into production, the annual productiondecline is estimated at about 8% or 500,000 toe over the next three years.New fields can be expected, on average, to have a ratio of reserves toproduction of about 10:1 during their early years of the project. Thereforereserves of 15 million toe would be needed to cover the shortfall over threeyears, which is the proposed time span over which the exploration drillingprogram would be implemented.

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identified. The risk of being unable to map the subtle features in thevicinity of producing fields and the porosity traps are greacer, and detailseismic modelling will be used to minimize this risk. Drilling will. ofcourse, only be undertaken in locations where these features have beenmapped. On the basis of previous exploration drilling experience and existingseismic data, some 200 new prospects have been identified, all of which willeventually need to be tested by exploracion drilling. The major problem hasbeen to obtain sufficiently high quality detailed seismic to properly Locatethe optimum drilling location on these prospects. The program of upgradingthe seismic data gathering, processing and interpretation technology has beendesigned specifically with the problems of the proposed exploration areas inmind in that it will focus on the specific techniques that have beensuccessful in identifying similar sized exploration objectives in other,similar, geologic basins of Europe.

6.06 The technical risks created by the hostile environment into which thedeep wells will be drilled are limited, primarily because the two operatingcompanies have had substantial experience in the Pannonian basin and are awareof the problems that they will face. In both companies, expLoration andproduction programs have already been carried out in the most severeconditions of high temperature, high pressures and high gas corrosion; as aresult they have learned from experience which materials and equipment arenecessary to effectively handle these extreme environments and what kinds ofproblems these environments create. Their basic problem has been one oflimited availability of foreign exchange to obtain the technical assistanceand special services and to purchase the equipment and materials needed tocarry out the program under these conditions. The project provides fortechnical assistance and training in the identified areas where theenterprises still have difficulties.

6.07 The economic risk is chat the amount of hydrocarbons found could beinsufficient to cover the costs of the exploration/appraisal program. Thefollowing paragraphs evaluate this risk by comparing the size of the minimumdiscovery required to cover the cost of the program with the volume ofreserves that are expected to be discovered. The minimum volume of new gasneeded to cover these costs and still yield a 12% InR for the wholeexploration program is about the size of the Molve field (0.5 Tcf recoverabLein 12 years). As detailed in the discussions beLow, the exploration programhas a very high probability of finding considerably better than this minimumrequirement. To determine the probable outcome of the proposed program,estimates are needed for {i) the probability of drilling a given number ofsuccessful welLs (hits), and (ii) the size distribution of the reserves of theamount found in each successful well.

6.08 The projections of the probable ratio of successful wells to dryholes are determined by evaluating the improvement in future success rates,over the historical success rates, chat can be expected through the use ofadvanced technology. Historically, the operating companies in Yugoslavia havehad a success rate of about 25%; three out of four wells have been dry andone in four have been oil or gas bearing. It is expected that the advancedgeophysical data gathering and processing techniques introduced through theproposed project will improve this ratio to at least 40% - and better than 502in some exploration plays, such as in deep gas in the Drava basin, where anumber of discoveries have been made and the trend established. However,

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using a conservative average rate of 35%, the 25 well program would beexpected to have a 65% probability of having at Least eight successful wells,and a better than 90% probability of at least six successful wells. Fieldsize estimates are based on the sizes of pasc discoveries and on sizedistributions projected from the detailed RASP models of each sub-basin. Thesize of the fields in the exploration areas are expected to range from 10 BCFto 1.5 Tcf of gas and averaging 0.2 Tcf. or, if oil prone, from 5 million bblsto 70 million bbls of oil and averaging 10 million bbls. However, the largerstrucures would be drilled first. so that the expected average size ofdiscoveries during the project life would be 0.3 Tcf or 15 million bbls.

6.09 Overall, the drilling program supported by the project would coverless than 10% of the potential drilling locations in each sub-basin. Thus, ona statistical basis, it is expected (at a 80% confidence level) that theaverage recoverable reserves of the gas fields identified under l4e programwould be about 0.3 Tcf, or slightly less than in the Molve field-'. TheMoLve Gas field project required an investment of almost US$300 million fordevelopment, and will yield a net present value of about US$330 million whenthe cost stream and the benefit stream are discounted at 12% in real terms.There is a better than 90% probability (which means, essentially without anysignificant risk), that six fields, with total recoverable reserves of 1.8 Tcfof gas, will be identified during the course of the proposed project. If alldiscoveries were as difficult and expensive to develop as Molve (i.e. hightemperatures and corrosive gas), their total net present value, whendeveloped, discounted at 12%, would be about one biLlion dollars. It isbelieved that this, however, is the minimum, aLmost riskless return. Thereis a substantial probability that it could be much higher. In addition, theexploration promotion project components would, of course, have their ownadditional economic benefits, which would depend on how successful they werein identifying new exploration plays and in attracting foreign explorationequity financing to investigate them.

B. Well Testing

6.10 The economic return for the exploration well testing program is quitehigh. While it is only a small part of the proposed project (US$600,000 perwell for 15 wells, or US$9 million out of a total project cost of almostUS$600 million), it will provide critically important information for theNafta-Gas medium term exploration and development drilling program. Currentestimates are that the program would allow Nafta-Gas to confirm additionalrecoverable reserves of oil by about 10 million barrels (1.5 miLlion tons) andto increase production by approximateLy 1.3 million barrels (180,000 tons) peryear, with an economic value of about US$35 million per year. However, thetesting program is important even if the results were to show that many of the

I/ The higher than average field size is based on the expectation chat sincethe program will drill only 10% of the potential structures, the largest oneswould be drilled first, and, as is the case in most mature plays, eightypercent of the resources would be discovered with the first fifty percent ofche wells drilled.

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reservoirs were not productive. Without a program to rework the wells,prepare them for testing and then to run long duration production tests, therewould be no way to tell whether additional appraisal or production wellsshould be drilled, or whether, instead, the area abandoned; nor would there bea way to decide whether simiLar identified structures shouLd also be drilledor should be abandoned. Thus, in essence, the goal of the proposed project isto avoid the necessity of having to driLl new wells, at a cost of US$3-US$4million each, to get the required information about these recently identifiedreservoirs.

C. Kalinovac Gas Field Testing

6.11 The economic return from bringing the Kalinovac gas condensate fieldinto production is also high. In fact, the proposed project component, whichincludes only the investment in the preliminary facilities required to fullytest the long term pressure versus production pattern of the field anddetermine the optimum strategy for developing the field will be repaid fromproduction within the first 14 months. The total return from the developmentof the field would depend on whether the field pressure could be maintained ata sufficiently high level to continue to produce both condensate and gas, orwhether the gas would have to be reinjected to maintain sufficient pressure toallow all of the liquid condensates to be recovered. In the former case morewells would need to be drilled to optimize production and a gas treatmentfacility would be required. In the latter case, compressors would be neededto reinject the gas to maintain pressure, with the production of most of thegas delayed until most of the condensates were produced.

D. Underground Gas Storage

6.12 Gas storage for peak shaving is an essential element in any Largescale gas distribution system that experiences substantiaL seasonal variationsin demand. The economic benefits of the proposed gas storage project are atleast equal to the cost of obtaining equivalent storage facilities elsewhere,while the costs are substantially less than other technical alternatives.Vojvodina and Slovenia are currently hir'ng such facilities from Hungary andAustria at a cost of US$26.50 per 1000 m of stored gas per annum INANaftaplin, in Croatia, has no similar facilities avaiLable to it-7. Thus, thecurrent border price represents the minimum, rather than the maximum, vaLue ofthe additional storage capacity. The actual cost to the economy of not havingthis storage available is substantially more than the price paid by Sloveniaand Serbia for the limited exiscing facilities.

6.13 When these storage facilities are not available, as is currently thecase for Croatia, the domestic petroleum industry has to vary its levels ofgas production to bring summer/winter supply in Line with seasonal changes indemand. At present it is only possible to expand winter production by a smallamount. As a result equilibrium is accomplished by lowering summer production

1/ Furchermore, the current foreign facilities are available for only limitedvolumes of gas, and may not be availabLe in che 1990s, when the domesticrequirements of Austria and Hungary as weLl as Yugoslavia will increase.

56 -

and, during periods of peak demand in the winter, reducing consumption by someusers. In the past few years large numbers of smaller industrial consumershave had to be disconnected in winter in order to assure sufficient gas to thehigh priority domestic heating market. This problem can be particularlysevere when the levels of imported gas are also marginally reduced, asoccasionally happens during peak winter demand periods.

6.14 The economic cost of such shutdowns during particularly severe winterconditions has not been effectively measured, but, as in the case of peakdemand for electricity in periods of shortages, it is likely to be substantialwhen fuel oil cannot be used instead. In addition, there are also economiccosts associated with not being able to store domesticaLly produced gas duringperiods of reduced demand, both in the summer and on those occasions whenmajor petrochemical industry consumers have to shut down due to both scheduledand unscheduled maintenance requirements. Those petrochemical industries thatuse the heav4dr fractions of the domestic gas (butanes, ethanes and propanes,etc.) also have to reduce their leveLs of production when the raw materialsthat they need are not available localLv. Since these are capital intensiveindustries, the income foregone by such slowdowns and stoppages is animportant element in the indirect benefits of a gas storage facility thatenables INA Na_taplin to maintain a more even level of domestic gasproduction.

6.15 The resulting cost of large variations in domestic production of naturalgas is extremely high, because it includes both the direct production forgoneand the indirect loss of output of other industries. The problem would becomemore severe in the future, as larger quantities of imported gas arecontracted, since these contracts are always based on a constant, level supplythroughout the year, with a take or pay contract. Over time, the flexibilityand security requirements of the system will continue to increase, both interms of requiring storage capacity needed to hold gas during programmed andunprogrammed periods of low consumption and in terms of the need for anadditional source of supply during programmed and unprogrammed periods of highdemand or shortages from other sources. Taking all these costs intoconsideration, it appears likely that they would be substantially greater thanone quarteS the average price of the delivered gas, (which is US$170 perthousand m ). This would be substantially less than the cosc of the nextlowest cost solution, which would be an ab3ve ground liquification and stor.egcplant. At a price of US$42 per thousand m , the proposed underground storageproject would have an economic rate of return of 16%. This project componentis therefore justified on economic grounds.

VII.AGREEMENTS REACHED AND RECOMMENDATIONS

7.01 During negotiations assurances were received, individually, from INANaftaplin and Nafta-Gas that:

(a) the borrowers shall submit each drilling proposal for which Bankfinancing was requested of the Bank for approval on a noobjection basis at least one month before a rig is moved to theproposed site. Information so provided shall include a geologicprognosis and map, based on detailed infill seismic, togetherwith a drilling and testing program and detailed cost estimates(para. 6.58);

- 57 -

(b) they will review and reassess with the Bank their explorationprograms in light of all significant data that might alter theseprograms on an annual basis during project implementation(paras. 2.22 and 4.58);

(c) they will maintain a sound financial position by internationalpetroleum industry standards, including a current ratio of notless than one to one; an operating ratio of not more than 902;and a ratio of debt to debt plus equity of not more than 60%(para. 5.17); and

(d) they would provide the Bank with an updated annual and five yearinvestment plan and would give the Bank an opportunity tocomment on these pLans (para. 5.17).

7.02 During negotiations assurances were received from PBS that:

(a) it will increase the amount of its joint liability fundsavailable for loan write-off to 3% of its total consolidatedloan portfolio, according to a schedule acceptable to the Bank(para. 5.19);

(b) it will reduce its arrears in accordance with a scheduleacceptable to the Bank (para. 5.19); and

Cc) it will furnish to the Bank, for review and co_ment, a set ofdetailed financial projections for the period 1986-1990 within30 days of the approval of its 1986-1990 five year plan.

7.03 During negotiations, assurances were received ftru INA Naftaplin that:

(a) it will furnish to the Bank by December 31. 1985, the terms ofreference for a study on the long-term supply and demand ofnatural gas in the Republic of Croatia, including methods forreducing effects of seasonal demand variations (para. 1.10); and

(b) it will review with the Bank, by September 30, 1986, thecompleted study and thereafter take all measures necessary orappropriate to implement the recommendations or decisions of theCommittee for Energy and Industry of Croatia with respect to therecommendations of the study (para. 1.10).

7.04 During negotiations assurances were received from EXPL that:

(a) it will review the synthesis of the geophysical, geological andgeochemical studies with the Bank before engaging in a promotionexercise (para. 4.39); and

(b) it will undertake a promotion exercise acceptable to the Bank,and attempt to find foreign joint venture partners for ahydrocarbon expLoration drilling program in the project area,and would review the results of this exercise with the Bankbefore deciding which offer to accept (para. 4.39).

- 58 -

7.05 At negotiations assurances were received from INA Naftaplin, Nafta-Gas and RBB that:

(a) they will furnish the Bank with periodic project progressreports and a project completion report on a timetable and aformat acceptable to the Bank (para 4.55); and

(b) in the case of a cost overrun they would provide the fundsrequired tD complete the project from their own resources(para. 4.45).

7.06 As a condition of effectiveness for the loans to INA Naftaplin andNafta-Gas:

(a) the borrower shall submit to the Bank an updated financing plan,acceptable to the Bank, that wiLl identify the specific sourcesof funding for the portion of the foreign exchange required forproject implementation and not covered by the Bank loan (para4.45); and

(b) the borrowers shall furnish to the Bank satisfactory evidence ofthe agreement of the borrower's associated bank to uncondition-ally guarantee all payment obligations on foreign loans neededfor implementing the financing plan in (a) above.

7.07 As a condition of disbursement for activities related to theunderground gas storage project, INA Naftaplin shall furnish to the Bank acopy of the executing agreement for the purchase of compressors withsatisfactory performance guarantees (para. 4.50).

7.08 With the above assurances and agreements, the project is suitable fora loan of US$92.5 million (US$55 million to INA Naftaplin, US$35 million toNafta-Gas, and US$2.5 million to PBS) for a term of 15 years including 3 yearsof grace.

(TImmd Tam of 01l iqvlstmit)

"" t_ z twrrIw_ twt' tr1 ltu ftn& U >1 C~~~~~~~r"rl _mr

pa"l _*1aCttt_" U "Me" 1tl trTtlT,

MUd or" mi&- Croft latestl oLamti ea.t.~ ~ ~ ~ ~ ~ ~ ~~~~~~~u-a. .Iti .- . _ el

151 Cell Limits OIl Ba so .1 LiCoe Pr*wwts elm Stiff LEB omil fm OLne.. Ul fee, oil TotalI Totll

1a tic Ptro tm 210 l.491 8,163 2,335 4,296 1.911 .0,4Iqessa 2.620 *11. *s * - 210 * 17 .

15.201St e' (30 _ . - - .- -17 (2

Cm rsbhow5SIo 10L1 .1 2U -u .m 1,117 n.s 2,,.7 4.7w- 3 10 0)1t4"m le ( 1 e - 1,416 U *. . ...lIstr4 Pt t vow G~ttsm cm) (1,134?) (6.) 1.3353 * (") (619) . . 11,61 . - - ' 699) - (66 *C.iaei 6e419of wIhic

Sltehtticil (SI) (6) 3(5 . . (11) - (11) 0Sl 58 (171) * ((in ) . . (1) . . . 53) - (N) 0ler plits (11) (430) (243) * (3) (

. * 2,6 (13) * - * .314) . (1o32) 0SeIf. c hma.t. Il (l) (196) (0) * . (21) . . . . ... 6)Cen sus Lf . * (n7) . (133) * (1,064) (910) - ..mLesSe * . . . .IU , , , -§z

, ,** *6)Ur SIvE f6 I,t 1,120 2.403 * 1,98 1,13 4.,H 3,974 322 1,611 221 25.03 3.24 3N0 8,316 2S.14

Se~~~~~~~eg~~~j *et -l} . .34 *11 * -nl -~ - (211 (7e)l_r Sils * * * * * * * *

VIt OWItic SS ON 1,170 - * , t 1.615 I,Flt 4.16 3.94 322 1617 ns .G,6 3.014 X10 .114 16.6t1

t try o 401 4* 1,31 - 1.15 2,07S 2.674 213 . , , in SAW 12,4Ewer * * - * .... 4, 1,07Z

IM?1-4w ass - 6 -*1 732 *'

* * * 2.t11Trmsess * - 87 . * Wl . . 1,116 131 11 I 21 3.3 03.41Nm.ut * 36 3S7 * M 31J14 m lO0 - at 1- aPblk/09 * 101 1I3 . I. H - - 3# I. 63 93 1174Aricltr1a * ' ' . M1 . . . 70 3. -U in IShEWs PreWed by ttsltan bsseo date orpeidui aj ta riwal rea. of Stlstius.

LI Ta rein. cae.5tgng with data fe 111 _w I9, son sate,WI we cullaesed, Wd as a result th e or wall difterciebete tis bal blance An the am prwitG M Tl L.1.

0ecse 1963_~- ___ _ __ ____ -___. -

- 60 -

YUGOSLAVIA Annex 1.02

Suary Enermy Balances 1975-90(too million)

Actual _Proieted1975 1982 1985 Igo

Production 15.8 20.8 25.1 19.4

of which: Coal 9.0 12.3 14.6 19.4Crude oil 3.6 4.3 5.1 5.9Gas 1.3 1.9 2.3 4.4Primary electricity 1.9 2.3 3.1 4.1

Imports 9.6 15.2 11.3 12.4

of which: Coal 1.7 2.6 2.2 2.1Crude oil & products 7.8 9.8 6.8 8.2Gas - 1.9 2.0 2.1Other 0.1 0.9 0.3 -

Exports of Primary Energy (0.1) (0.2) - -

Stock Changes 0.1 (0.6) - -

Gross Supply of Primary Energy 25.6 35.2 36.4 46.2

Conversion & Distribution Losses (6.2) (10.0) (10.7) (16.3)

Exports of Secondary Energy - (0.7) (0.1) (0.2)

Net Domestic Consumption 19.4 24.4 25.6 29.7

of which: Industry 9.9 12.1 10.1 11.4Transport 3.3 3.4 4.4 5.8Households 2.4 3.7 3.5 4.0Feedstocks 1.0 2.2 4.4 4.5Other 2.8 3.0 3.2 3.9

Source: "Yugoslavia, Constraints and Prospects for Restructuring the EnergySector" (Report 4797-YU), May 1984.

- 61 -

Annex 1.03

IUCOSLAVA

GCa Prices By Consumer Category

I. Current Retail Prices of Natural Gas(DmiJ1,000 EJ)

Slovenia and Croatia VojvodinaHouseholds Industry Feedstock Households Industry

1976 4,915.7 798.80 713.41 1,032.30 706.001977 5,653.0 918.60 820.40 1,032.30 706.001978 5,653.0 918.60 820.40 1,032.30 706.001979 5,653.0 918.60 820.40 1,032.30 706.001980 5,653.0 918.60 820.40 1,750.60 1,296.601981 5,653.0 1,858.54 1,393.91 1,750.60 3,715.201982 5,653.0 2,509.03 1,881.77 4,169.20 4,644.001983 5,653.0 4,014.53 3,010.84 5,361.40 5,877.10

1I. Real Retail Prices /1 of Natural GasDin/1,000 u (1983 prices)

Households Industry

1976 290.35 466.51 421.39 609.75 417.011977 294.12 542.59 426.65 536.94 367.331978 261.23 477.94 378.93 477.03 326.251979 216.01 351.01 313.49 3V4.34 269.781980 164.76 267.81 239.11 510.23 377.731981 117.77 387.04 290.34 364.56 773.841982 905.9 402.09 301.57 668.14 744.231983 697.0 495.01 371.25 661.09 724.67

Jl GDP deflators have been used to adjust current prices to teal prices(1973 - 100).

December 1983(1601P)

62 --

-ANEX 4.01Page 1 of 2

YUGOSLAVIA

FIRST PETROLEUM SECTOR PROJECT

Agreed Requirements for International Consultantsand Engineering and Service Companies

Consultants Engineering/Service Companies

INA NAFTAPLIN.

1. Drilling fluids engineering 1. Logging of well sectionsfor the deeper sections of where high temperaturesexploration/appraisal wells; and/or sour gases are

encountered;

2. Well testing and stimulating; 2. Kud logging of allexploration/appraisalwells;

3. Special drilling services 3. Basic engineering of the(blow-out control, directional Okoli surface facilitiesdrilling, fishing, etc). as (with the exception ofrequired; civil works);

4. Detail engineering, commissioning 4. Geochemical analysis ofand start-up of the Okoli surface surface and well rockfacilities; samples;

5. Development of the computerized 5. Processing of Dinaridesoperating model for the Okoli seismic data (if theunderground gas storage; upgrading of Naftaplin's

seismic data processingfacilities are delayed);

6. Preparation of the Kalinovac 6. Computerized analysis andreservoir study and field interprxsation of thedevelopment program; Dina-rides Landsat remote

sensing data.

7. Planning and parameterdefinition of the Dinaridesseismic data acquisitioned program.

- 63 -

ANNEX 4.01Page 2 of 2

NAFTA-GAS

1. Drilling fluids engineering 1. Logging of well sectionsfor the deeper sections of where high temperaturesexploratory wells; and/or sour gases are

encountered.

2. Well testing and stimulation;

3. Special drilling services(blow-out control, directionaldrilling, fishing, etc.) asrequired.

EXPL

1. Seismic data acquisition; 1. Geochemical analysis;

2. Preparation of the exploration 2. Seismic data processing.promotion package and the overaLlorganization of the promotionactivities.

;-:. ;-64-.- ~~ ~ ~~~~~~~~~ 6- -

Annex 4.02

YUGOSLI.FIRST mITROLUK SECT PROJECT

DWLfNATIG SCHE

VE. m14 1965 1 10 1967 19_ 19 1990 1991

ER 112 314111213 41412 1 3412 1341 21314 1213141112 3 4 1 2 3 4

GeapIusicd sUW95mmm * mm

OkdlUroxid GI Srg I I I m I I m m

KIclmc Reld AppbIol m m _ _ m m m m r m m

DinaIddes E1xploraion PiwomoIon

C-oophyieaI Sme" amm--

wed r&Tedh _ _ _ e __

C-ooovcale Ctueos &:

E4xplorton PtonWmoo -… -J-

Be DepomrentFetxwuy 1985 Wodd Balk-27220

- 65 -

nAmex 4.03

TUGOSLA VIA

FRS PEOLEUM SECTOR PROJECTDETAIED CoST ESTIMATES

US$MNillion Dinar Billions c/

1. INA-NFTAL SUBPROJECT Local F.E. Total Local F.E. Total

Geophysical sureysm 71.64 59.3 131.100 14.33 11.87 26.20Exloation drillinq 8732 93.09 17040 17.46 16.62 34.08Kalinovac field appraisul 92.43 34.38 116.91 16.49 6.89 23.36Okali underground gam storn 65.67 12494 79.60 13.13 2.59 15.72Dinarides exploration pr 8an 9.92 3.92 12,84 1.78 0.78 2.57Cansultancv and technical assistance 2,00 3.50 5.50 0.40 0.70 1.10Training 25.54 2.10 27.64 5.11 0.42 5.53Duties and taxes 23.64 0.00 23.64 4.73 0.00 4.73

Sub-total 19852 99.76 288.29 37.70 19.95 57.66

Contingencies: Phlsical a/ 55.81 27.34 83.16 .11,16 5.47 16.63Price b/ 36.9 17.37 54.33 7.39 3.47 1047?

Total (IN taplin) 244.34 127.11 371.44 48.87 25.42 74.29

NAFTA-rAS SUBPROJECT

Geophvsical surveys 43.04 60.50 103.54 8.61 12.10 20.71Exploration drillinq 37.90 63.40 101.30 7.58 12.69 20.26Hell orkover and tistinq 5.30 3.90 9.20 1.06 0.78 1.84Consultancv and tehnical assistance 0,40 1.90 2.20 0.008 0.36 0.44Training 15.58 0.90 16.48 3.12 0.18 3.30Duties and tXes 15.18 0.00 15.18 3.04 0.00 3404

Sub-total 63.92 65.30 129.22 12.78 13.06 25.94

Contingencies: Physical ai 19,83 18.07 37.90 3.97 3.61 7.58Price bl 13,44 11.54 24.98 2.69 2.31 5,00

Total (Naftt-Gas) 83.75 83.37 167.12 16.75 16.67 33.42

3. EXPL SUBPROJECT

Geol. & Geoph. Survevs 9.33 1.36 10,69 1.87 0.27 2.14Exploration promotion 0.12 0.69 0.81 0.02 0.14 0.16Consultancv and technical assistance 0.00 0.59 0.59 0.00 0.12 0.12

Sub-total 9.33 1.95 11.28 1.87 0.39 2.26

Continqencies: Phvsical aJ 2.20 0.55 2.75 O.4 0.11 0.55Price bl 1.27 0,36 1.63 0.25 0.07 0.33

Total (EXPL) 11.53 2.50 14.03 2.31 0.50 2.81

Proiect base cost b/ 261.77 167.01 428.78 52.35 33.40 85.76

4. TOTAL PROJECT COST 339.61 212.98 552.59 67.92 42.60 110.52

a/ 102 for all proiect elements.b/ For both local nd foreiqn expenditures 52 in 1985,

7.5Z in 1986, BQ in 1987:1990 and 52 thereatter,U.S 1.00 = Dinar 200

S.E SR : Hission Estimates

Na 19 bvl85

I. DmwIU VANN= Loca FE.!. Local F.If. Loca F.!. Loca U.!. Load F.!. Ladt V.! Loail F.14 Tobta

_'.11.9 0. I75 40 l .1 3. 3.'... ,.5 1:, _.,,Itt U '3 4.9 ' '- ' ' '-- -

*JFa ta.c ¶4 , Us*

* la~~~~b-totalV L0.22 0.51101 U7.02 Wil 213.3 30.74 6.9IT 6.474 2.36 1.946 1.42 305..5d24

", au 'cii ' 'P .'9'.'976l15 - 1 -75 __

0.51 0.04 10.,-" 1.63 32. 4.4J9.7I2STo 1-ftI. 11.70 4,G 9?. --A 57 j 7i- - -.. O Z% JU2- I VI.04

wu-m 9111,11160 9.? 236 7.6 63? 4. 1.3 94m36 16 043 171

2. .IJW

1. DllfhsIu Slw 1 F0.976 00 4.310 0.060 46 401 LI- 0.4 014 1014 4 0 . 5.w 4W 5..6 4_0_ 1.30 1_2 __._01lb. 1-ko. wIO tll. 1.260 1.00 00 s 1 -

c*10 L11 we ' 00 L - 91 1 1 . - .*Prie rub.51 eiln g" --" 040 034-0 0n Z R J460 tn 0R 0- 09 60.

.uties . ~ tam_ 0.010 - 12.114 _. _ _ _ _. l _a_ . An _.1_

1*-total 0.936 0.404 32.60 4364 134-61 5.90 44 I .0 .0 4.660-" 7 1.20 14 6.9 Z5=0 129

EmtAiRwgmcaa Pv Ca/ 0.10 A4 3.26 4.06 1.35 0.40 0.0 0.50 0. 15 0.10 6492 4.310 32.9220.05 .4 4.20 6.?A 2.5 1.1 2.641 1.50 Q. 1.90 0.65 0.0i 13.45 11.041 24.916

TO t-bal 1.12 0.00 0.04 59.77 17.76 7.66 1.z3 7.04 10.5 7u.0 2.33 1.55 Z .74 13.V1 10.120

3. ML M

Fea. a oQW1. tuvvm 2.923 LING0 3375- 0.505 2.930 0GM5 : : 9.26 1.240 1to4-Emiuratw -uatai 5 - - - - - 0 0.100

_m.lt . mr taeu1 asui o - 0-00 1. 0.10 -Z. L.230 - 01| *.120 * -0 - - P. 0.s

11tuwsa e *. *dl L3Z4 LF4 U.4 *.^" e-3ol LWD 7." 6.e Oa Leunzm a

lab-total 2~~~~~ ~~.9203 0440 3.37 0.40, 2.91 0.45 0.00 0.104 0.1S 0.10 0.604 0.000 0 l4i92p 190 .7

Tout am) 0.23 4.1 04 ,3.4 I1.6 i0.04 0.17 0.3 05 .- 4 0.04 011.516 Z.3 14.101

Projc ham coot h' 14.7n 0.3 WAS05 116.20 74AIR V7.150 VAR4 14.05 13.504 7.107 3.473 2.4011 2U.M7 167.0 42070

4. IUTIL"SACTCT 14.11 03 1420 142.966 9324 35.117 .303 19.Z 20 *0. 1 5.2M2 3.5 339.614 212.7 MU.M

a-~~ ~ Wl 51kma - .

.1 1 1J0Oo 20.4 2 1 -1Z h1 -0 s§m §9g -0

hi all ot 19.7 .t4ol (. 3.94 bl-liosal is -iras-i-t F.E.di 10690 al o,oct. algss

dl .r _41 1_.fuq uediuu RI 95

7.50 ast U.. INI.U Ui.15 1007119 7t. W.srao it.r7U7 3q.z27Sm U713 2

di * Ihlhl !atIIuAi ex2 1 531IuJJ a CE hii t i t"n_t 5tIt

- - 67 - - --

ANNEX 4.05

*YUGOSLAVIA

FIRST PETROLEUM SECTOR PROJECTEstimated Disbursement of Bank Loan

IBRD Fiscal Amount CumulativeYear and Quarter Disbursed Amount

1986 III 1.5 1.5IV 2.5 4.0

1987 I 2.5 6.5II 4.5 11.0III 4.1 15.1IV 5.9 21.0

1988 I 6.5 27.5II 5.5 33.0III 5.0 38.0IV 7.0 45.0

1989 I 6.0 51.0__ - 7.0 58.0III 5.0 63.0IV - 10.0 73.0

1990 I 5.5 78.5II 5.0 83.5III 3.0 86.5IV 4.0 90.5

1991 I 2.0 92.5

Total 92.5

:- . - ~~~~~~~~~~- 68 -

Annex 5.03YU:OSLAVIA

IN A -PA F TAP L IJl

Past and Forcast Inemoe Statewnts(Dinar million)

ACTUAL FOPECAST

1990 1991 ir 1933 1994 1995 1996 1937 1998

Sales Voluaui

Crude Oil (thousard tons)Domestic 3?053 3.133 3!054 2M956 2PB 3,000 2906 2,57 2,444Imported 1 7 13B 199

Gas imillion 2'"339 19Dmestic 703 '29 073 964 1409 1,292 1,764 IMS2 1,Y91Imports 454 563 563 653 28 724 864 1,039 1 039

Condensate (thsand tons) 53 91 116 122 105 123 142 139 139

Average Sales Price

Crude Oil (dirw'ton&Domestic 5.099 8.214 10i362 17?241 29742? 40,241 40.241 40241 40,241Imported 40.241 40,241 40t241 409241

Doestic 752 1,701 2,070 3P514 7.683 176?5 24.690 2-8079 2'004Imports 4481 7,011 9.90B 14,796 25.466 34,.04 34,094 34.094 '34094

LKc (dinar/ton) 7-340 11,469 15,810 Z4.038 40,130 56.311 56?311 56.293 56i,275

Operating Revernes

oilDomestic 15.564 25.734 31,646 4.i24) 93,953 1!0.77! 112.916 103.540 03P349Im'orts Ce 0 0 0 0 1.09' 31.00 5r553 7,606

G-sDomestic 506 1,590 2-024 3036 8.367 22,772 41.553 !2v709 55,630ImPotts !-216 3-947 5.015 ,66 6 9 l8541 24.694 79.457 35.900 35.428

Condinsate 360 Q39 1834 2.923 4&-10 6015 7.-948 7?741 7-911Other 146 328 27 1.55' 29744 3.30 4,650 4,587 4,987

Total S21es 1.Sg12 32.51' 4(s,7R 66.-420 1717,14 180,110 201.64S 20.520 209.60t

Operating Ecperses

Direct Prodoctien Cost 685 E-.24 2-044 24153 3-19 4-058 5,325 6!1&4 6e!63Gas Imoorts .P20' 4t203 5,389 10.570 1°2'8 25.3B 2'.90 35,890 3'5,990Salaris' 3o Gaqeaes 1.181 1*40 1,94 2.568 3,925 4.120 4-285 4.457 4435Sellim and Administr7tion 415 590 91 1416' 14M! 2.93 2.023. 2,225 2-446EIplorition a3td Developmeent >415 3!J54 54665 8.254 M5.1 25,650 31663 34-413 13P702DmPreciation 7.401 Q696 11.250 i? :608 25.436 344574 41-50 46.931 56-79w

Total Operwtinq Evpenses 1495!7 .{86 v27 2 *,202 41.22 69.43 *5,63 i14,6o 12'.900 140,271

Operating Income 4-415 119 1o° 1-56 2fl038 48-27 8-4.487 3S47ec "42 -0 60-.59

Add: Other Inomw 353 34 740 974 1,0Q 1.o00 27430 4,67! 6.455

Gross Income 4.8 *3 0l_ 1 1P.45 . !6-.04 40.206 66.4S6 8'" 34.Z'3 !6?0444

Less: Interest 3n5 441 1.136 3'155 2-825 4,74, 5.62 4,049 3.99*aves amd Contributions 1-e53 4.27' 5.04 84e83 12324 -i.4 !24 4 21,073 19.011rusiness F.nd Charoes 11w 8'" '1

Net Irnome 2*713 - r.2: 2* 23 13.305 34,17 60!tIl1 61.7P' 58.72 .w'C45

Anpriut ions cEf "elt incow

Peserve Fund 306 -0 81! 1,564 Z'3R 31 3-5'1 3.691 3-4# 3-182Colvtive, t'onwsution Fund 357 41 747 '04 1-334 1.400i 1.45' 1*515 1.57IBuin-ess Fj A 2.7 5-.R1 6tir 11?5698 20-55 e5.j50 5_6.56' ThZr 1e827

Total 2700 . 915 1-42-036 3441147 ".I11 *;I-57:1.'7 57384_5

loer3tvinq P3tio Z 4 f 62 9 ;'l . '% '7Met IneofrSales '' 1s% Z I 2" 202 ; 3K 31' B% 95

- 69 -Annex 5.02

YUGOSLAVIA

INA- N AF TA-P L IN

Past and Forecast Balance Sheets(Dinar million)

ACT UA L FO R ECAS T

1981 1982 1983 1984 1985 1986 1997 1988

AS SETS

Current AssetsCash 2M394 1,551 5,549 7Ml8 14,546 13, 102 10,669 14,145Trade Receivables 4,028 5,066 13,M 16,125 24,673 27D622 28,701 28,741Other Receivables 14695 1,810 2,203 2,203 2203 2,203 03 2,203Inventories 2,284 3r261 5,548 6,687 10P398 1ZP946 14,142 14,163Cur. Port. of L-T Rec. 832 315 1,922 39246 3,784 49626 5S720 5,771

Subtotal 11,223 12,003 29,212 36,190 55,604 60P499 6143 65,022

Lone Term Receivables (net) 12,701 25,526 37,133 61,501 98,362 138,679 179,795 223,452

Cross Assets 43,639 62,305 93,618 132,460 190,823 249,590 303,264 3268Less: ce Dep. 30,450 46P462 62,722 89,158 122,732 1641232 211,163 267Y952

Subtotal 13,189 15r843 30,896 44,302 68,091 95t35B 92,101 35,316

Collective Consumption F.jnd 2!766 3,539 4,409 5,743 7,143 8i600 10,115 11,691Reserve Fund 1P441 2,269 3,865 6,723 10294 137975 17P455 209637

Total Assets 41,320 59,l1O 105,515 154,449 239,494 3079111 360,901 406,118

LIABILITIES and EQUITY

Current LiabilitiesTrade Pavable 889 1,908 4,099 4,400 6,105 7.320 9,297 8,343Short Tern Bor. 327 263Advances 1,976 1.096 372 500 500 500 500 500Coll. Consumption Fund 1IP193 999 3,079 3,079 3079 3,079 3P079 3,079Current Portion of L-T Deb 588 1.222 3,542 5,443 6,763 8,318 8,333 8,333Other 1,489 1,700 8,329 8.328 8,328 8,328 8P328 8.328

Subtotal 6.462 7.188 l,420 21,750 24,775 27,545 28.537 28,583

Long Tern Debt 3P380 7-756 15,296 24,507 42,579 47,275 41,816 33.942Less: Current Portion 588 1;222 3,542 5,443 6.763 8.310 8,333 8.333

Subtotal 2,792 6,534 11,754 19064 35.817 38,957 33.483 25.609

Joint Venture Investments 226 3,294 8,441 13,588 13,588 13.589 13,588Collective Consumption Fund 2,766 3r539 4,409 5,743 7,143 8,600 10.115 11.691

Bsiness Fund 27PB59 39,424 62,773 92,728 147,978 204,447 257,723 306,010Reserve Fund 1,441 2,269 3,865 6,723 10,294 13,975 17,455 20,637

Subtotal 29P300 41,693 66,638 99,451 158,172 218,422 275,178 326.647

Total Liab. and Equity 41,320 59.l18 105,515 154,449 239,494 307,111 360.901 406,118

Current Ratio 1.7 1.7 1.5 1.7 2.2 2.2 2.2 2*3Debt:Debt & Equity (%) 10 161 19Z 20Z 21Z 18Z 13% 9XAdjusted Debt ebt I Equitv 17Z 32% 34Z 39Z 42% 37Z 30Z 25Z

; 70 -

Annex 5.03

"UCGSLAVIA

I N A - N A F T A P L I N

Sources and Applications of Punds

(Dinar million)

A C T U A L F O R E C A S T

1981 192 1983 1984 1995 1986 1987 1988

Internal SoureeOperatinq Incq me 11P693 13,596 25P098 48r277 84,487 86,947 79-620 69,589Depreciation 9,696 11.250 16r608 25P436 34,574 41,500 46r931 56,789

Subtotal 21,389 Z4,846 41,706 73,713 119,061 128I44? 126P551 126P378

Deductions:Debt Service: Interest 441 1A136 3,155 2N825 4,74 5,626 4Y948 3,988

Principal 396 637 1,496 5,776 5,443 6,763 8;318 8,333Taxes and Contributions 4,279 5049 BP383 12P324 21,622 22M444 21 073 l9pO11Business Fund Charqes 119 877 731 0 0 0 0 0Increase in 4orkini Capital (151) 16521 3,299 4,169 11,091 5,125 2M392 65Increase in Other Assets 19546 1,375 (602) (955) (176) 5P138 4P995 4P758

_ - ___~ -

Subtotal 6Y630 10,595 16P962 24 140 42U723 45v096 41,726 364155

Add: Other Income 348 749 976 1?019 19999 2,830 4 673 6h455

Funds Available for Investnent 15,107 15.000 25,720 50,592 79,337 86i191 89,497 96,678

Investment Progras 9°018 6,168 12!397 31P254 58r363 53,767 51,273 50,004External investments 5,471 12825 11,607 24r368 36,861 40,317 419116 43,657Financial Gap (618) 3,993 (1Q716) 5P030 16Pi7 7!"3 2?892 (3,017)

Financed BY:Borrouings 1?010 3,160 ZM282 7,398 23PS15 6,459 459 459

Increase (Decrease in Cash) 1P628 f833) 39M 2,368 6r628 (1,444) (2v433) 3,476Cumulated Cash 2?384 1,551 5,549 7M918 149546 13i102 10,669 14P145

Debt Coveraqe Ratio 26 14 9 .. 9 12 10 10 10

Amnex 5.04Page 1 of 3

YUGOSLAVIA

INA-Naftaplin

Notes and Ansumptions for the Financial Proiections

1. The financial projections are based on: Mi) Financial statements forFY8O-83 as prepared and audited by the Social Accountancy Service (SDK);(ii) 1984 budget; (iii) Long-term plan for 1985-1989; and (iv) Currentfinancial policies.

2. The financial projections are expressed in constant dinars, year-end1984 prices, at the constant exchange rate of Din 200- US$ 1.0.

Assumptions for income statements:

3. The sales volumes are provided by I-N. The price of domestic oil for1984 is Din 29422 per ton; from 1985 onwards the assumed price is Din 40241per ton. The price of imported oil is asssumed to be Din 40241 per ton. Theprice of domestic gas for 1984 is Din 8367 per 1000N3, which is the averageprice including the transportation and distribution charges in Croatia. It isassumed that the price of domestic gas will increase so it will reach paritywith the imported gas by January 1987 in accordance with the agreed scheduleas follows:

Z of Imported Amount in1985 Gas Price Din/u

I quarter 45 13,860II quarter 52 16,016III quarter 59 18,172IV quarter 66 20,328

1986I quarter 73 22,484II quarter 80 24,640III quarter 87 26,796IV quarter 94 28,952

1987I quarter 100 30,80011,1II,rV quarter 100 30,800

4. Other operating revenues include mostly the revenues from sale ofpolypropyleen and ethylen and are based on the five year plan.

5. Direct production cost include materials, maintenance andmiscellaneous services, so that the cost are highly variable, as well as theproduction and transportation cost of crude produced abroad. The budget wasused for 1984. From 1985 onwards, the production cost was assumed to increaseproportionally to the volume of domestic production and to meterage drilled.The cost of production of oil abroad are based on the five year plan.

-72 -Annex 5.04Page 2 of 3

6. Salaries and wages: The budget was used for 1984. From 1985 onwardsthii was increased by 4Z annually.

7. Selling and administrative expenses: Actual for 1984 was increased by10 annually.

8. Exploration and (downhole) development cost: please refer toInvestment program.

9. Depreciation: 20X of revalued gross assets in operations in line withfive year plan.

10. Other income: mainly the interest income on L-T receivables (OtherInvestments), based on percentage of the balance of L-T receivables inaccordance with five year plan.

11. Interest: please refer to Debt Schedule.

12. Taxes and contributions: are actually related to Dohodak, a categoryof income including the depreciation. We assume 25Z of gross income in linewith historical trends.

13. Appropriation of net income are related to Dohodak . The BusinessFund: The balance between the Net income and the appropriations to ReserveFund and Collective Consumption Fund.

Assumptions for Balance Sheets:

14. Trade receivables were assnmed to be equivalent of 50 days.

15. Inventories: in line with bistorical trends assumed to be 35Z of thesum of direct production cost and the development and exploration expenses.

16. Current portion of L-T receivables: assumed to represent a percentageof L-T receivables in accordance with five year plan.

17. Long term receivables: Please refer to Investment schedule (ExternalInvestments).

18. Gross assets: Please refer to Investment schedule. The gross assetswere increased annually by the depreciable assets provisions in the InvestmentProgram and a part of the development of the Joint Ventures. A specialprovision was made for the foreign exchange losses related to fixed assetsfinanced with foreign currency loans.

19. Collective Consumption Fund and Reserve Fund. These two items wereincreased by the annual appropriations as shown in the income statement.

20. Trade payables were assumed to be equivalent to 10K of the Operatingexpenses excluding depreciation.

21. Advances were assumed to be constant during the period ofprojections.

-73 - Annez 504Pape 3 of 3

22. Other current liabilities are reoccuring short term liabilitiesrelated to Dohodak, and are asmued to remain costant.

23. Long term Debt: Please refer to Debt schedule.

Assumptions for Sources and Applications Statements:

24. These vere derived from the Income Statement., Balance Sheets, andthe Debt schedule and the Investment Program schedule.

74 Y U C 0 51 A V I A

-~~~~~~~~~~~~~~~~~~~~ A F 7 A - I9A 9& SMAFIA-GAS -- '

Punt and Forecast Icm Statnets'Finer million,

ACTUAL FORECAST

Sales 'Jols M991 1932 I83 194 195 1996 1il7 1988

Oil 'thousand tons)Domstic t1244 1.303 1277 1.202 1.132 1,059 14113 1,134[saorted .P 77.00 139.00 1P.O0

CGa (million "3) 1.031 e46 *27 821 '26 *R6 '43 "I

Avere Sales Price

Domestic Oil 'dinar/ton) 7,724 109O10 14.90 2S.01' 39.000 '39.000 39.000 39.000mported Oil (dmar/ton& 39000.00 394000 399000 39.000

Cas Idinar'M3) 2.7'4 3,411 4.S66 A 900 179004 25,718 30.900 30,800

Operating POevnUeF

Domestic Oil 8*0'4 14.09 1*-152 31?266 44.149 41,626 43.407 44.226Imuorted OiI 14053 3.09 5.382 7.371[-as 2.981 iCr 4.233 7.307 15.C2' 2S3 e358 Z.44 '.51Other 461 417 9' 1,353 1.63t ZuQeP 1572 1.967

Total Sales 12.332 1''V 24,26S 4:-Q1. 62*960 71,601 ;Q9405 91,315

Or.eratinm Expenses

Direct Pro*tclion Cost 26 695 °i5 :z3 :4809 33'71 4.029 4.429Direct Production Cost'Angole 735.99 2454.00 3324.00 4158.0"Salaries ird u*gsg 1.136 1467 2.02' 3.49' 4.253 4-S0 4.TM 5-065Sullinf and Adinistratiorn 125 2P5 276 439 62 '66 1.406 1.820E.plorution and Development 1.4:7 2'.*35 4.Al 9 70t)0 1:.33 1'.087 16,'6Z 1.8

1.476 I U ' 1r 7 1*1 '9783 3.615 4. 5-.Q1 6-97!

Tote) Owerting Eerienses 4.651 5* '{I0 013 15S893 24.f76 33*206 36.419 9.743r

Dperitinu Income -.4El I: JR 15*t34 :4.124 -3-984 38.483 42-.97 C.995

A4d: Other Income 61 40 2 r '." i*258 1.424 1.615 1-A

Cresi Incame 0-4. t 1.574 !.n93 25*2.nl 3'.43 3Ce.c7 44,.l 14-.58

Les: Interesl i9 62 4S 80 25!. 855 1.3M 1.3'0T3.eS 3ra fCntoribj:enE 1. 415 :-1:- >c36 ..104 6-4.7 i.433 .-117 -lo

Oe$ Incose ,.49 1'*3'5 1i-346 '149( l.6i05 32.1'0 3615 3;^. l¶:mm==e inmmn: mm:::: az::: ..sz--- uni: s-Cum 2:

~Apu:retioriE pf Pet incDome

Pecer,e fimq . oJ-.C 1-14 1-I: t-e I -xr :45,Collective torsttotior 1... 1 494 5r r gpr SPA 'nC eg3

__ __ ___ __~~~~~r- __ % _0 _ __4

T-A31 ~ ~ ~ ~~~~~~_:-_3 I== =3t Z_ _=G 11_0 GS: Z-3Z 1. GZ 1::

lwrit:nt Fe:o 30 -2 36 3'? J.. J.% aW*t Ieomiw:2Sre-; 1V 5 Ujr s_ 5 r J.

; UJ 1 OS c~ tLiI AAnnex 5.06

0 A fT A - C A S

Past and Forecast Balane Sheet!'Dinar million)

AC TUAL FORECAST

1981 1582 1983 1984 1995 1986 19YB 1988

ASSETS

Current Asset,Cash 7,096 2?598 2,702 59303 5t911 12,1I" 21?851 25,258Trade Receivables 3,265 4,0?1 5778 7,455 11,743 120398 15,68 15764Other Receivables 2t138 4596 7?794 9,350 9M030 9?710 109450 11l270Prepauments 139 257 1,070 563 1,160 14850 2,O65 1,994Tnventories 966 1t307 1.893 2,813 5,800 9,250 10.327 9?970Other 19907 301 366Curt Port, of L-T Pee, 0 90 235 321 556 615 662 716

Subtotal 10.601 13,210 19,939 24.-805 34,200 464012 619040 644972

Lonq Term Receivables (net) 904 2.224 7i071 7,046 7.415 7,713 8.114 8,194

Investsents 3,970 7?970 9.208 20t539 37,182 529821 69,307 81,149

Gross Assets 13,921 19,114 249949 309920 419972 57,786 729355 959136Less: Acc Dep. 10,267 14,649 19,820 22M603 26.21B 31t040 36,959 439931

Subtotal 3.554 4,465 5.128 B.317 159754 26746 35,396 514205

Work in Proqress 354 891 1v323 221 6,324 7,092 5,099 6.600

Collective Consumption Fund 1912 2?634 3,453 4,307 5,187 6,093 7,026 7.997Reserve Fund 646 lr068 19885 3,059 4,B21 6.678 7,760 9.817Other 17 43 60 65 70 75 90 85

Total Assets il!758 32.515 47,966 ?0,994 110,983 153,155 193,742 2923

LIABILITIES and EGJm

C4r¶ e 275 4?4 455 844 1,740 2.775 3,098 2.991

Short Ter Borrowinps 179 478 114 0 0 0 0 0Customer Deposits 72 143 259 427 671 765 848 868Other liabilities 1649 1,660 2,543 4,041 6,487 6433 7,11? 7,116Other 1,859 202 491Current Portion of L-T Debt 220 199 110 116 280 287 341 341

Subtotal 4,252 3,176 3?972 5.429 9,178 109260 11.404 11,316

Lang Term Debt 489 440 356 877 4,598 13,176 16,488 16,606Less; Current Portion 22Q 199 110 116 280 297 341 341

Subtotal 268 241 246 760 4.317 12.889 16,147 16,264

Other Liabilities 75 67 46 23 0 0 0 0Other Funds 1? 43 60 60 60 60 60 60Collective Consumption Fud 1?812 2,634 3?453 4?307 5,187 6.093 7,026 ?,997

E uitvsiness Fund 14,689 25,266 38,304 57,356 97,319 117,175 151,345 184,479

Reserve Fund 646 1,069 1,885 3059 4,821 6,678 7,760 9.817

Subtotal 15.334 * 26,354 40.189 60.415 92W140 123,853 15P9105 194,296

Total Liab. and Equitv 21J758 32,515 47,966 70.994 110.893 153,155 193.74! 229,923=3= =3=33=333=3= - ===m

Current Ratio 2.5 4.2 5.0 4.6 3.? 4.5 5.4 5.7Debt:Debt A Equitv () 32 7% 1; 12 SZ 10? 9? 9ZAdjpsted Debt.-Debt t EqvItv 2 4a 3Z 1% 3Z 9Z 17 17m 14

~~~~~~~~~~~~~~7 6-

, 76 -b A ex 5.07

iPAFT A-C AS

Sources and Applications of Funds-'Dinar million)

ACTUAL FORECAST____

1981 1982 1I8 1984 1995 1986 1987 1998

Internal SourcescOperatinq Income 7!6PI~ 12,089 15,134 24,124 38,084 38,483 42Y987 42,885Depreciation 1,467 1,328 19770 2FM8 3,615 4,82 5,919 6,9727

.- ~~~~~~~~~~~~~~Y4 :3W-277Z0

subtotal 9,4 3,1 6i94 2697 4,9 3 5 489,906 49,957

Deductions:Debt Service' Interest 68 62 48 80 250 855 1.300 1!,390

Principal ~~106 48 94 106 116 290 2B97 341Taxes and Contributions 1~415 2,117 2.636 4,041 6,487 6,433 7a117 7o116Inreease in IIorkinq Capital 2.974 34162 5,639 916 5,201 49,449 4v207 613Inerease in Other Assets ,IM 2 5,498 3,409 3M039 3,066 2r421 3,103

subtotal 5,02 7,981 13q905 8i552 15j,094' 15,083 15,411 12P563

Add: Other Income 261 485 919 1B077 I L258 1424 1615 1773

Funds Available for' Invstment 39707 5,921 3N918 19.432 279B6 29,646 35,110 39,067

N-I; Investment Prooram 803 1319 2I576 5,9843 14,477 16,582 12,576 249Eertunal Investmets 2298 41,00 19238 112331 16,638 159634 16U480 11,283

3,101 5,419 34114 17,174 31415 329216 29056 36P,19

Cash Surplus 606 502 104 2W,5 43251) (2,505) 64,54 2948

Add:Borrowings 0 0 0 343 31859 8859 359 459

Increase (Decrease in Cash) 606 502 104 29601 607 6,429 94653 3,407Cumulated Cash 2096 28 598 2,762 5,303 5,910 12,199 219,M5 25,258

- 77 -Annex 5.08Page I of 3

IUGOSLAVIA

NAFTA-GAS

Assumptions Used in the Financial Projection

1. The financial projections are based on: (i) Financial statements forFY8O-83 as prepared and audited by the Social Accountancy Service (SDK); (ii)1984 budget; (iii) Long-term plan for 1985-1989; and (iv) Current financialpolicies.

2. The financial projections are expressed in constant dinars, year-end1984 prices, at the constant exchange rate of Din 200- US$ 1.0.

Assumptions for income statements:

3. The sales volumes are provided by N-G. The price of domestic oil for1984 is Din 26012 per ton. From 1985 onwards the assumed price is Din 39000per ton. The price of imported oil is asssumed to be Din 39000 per ton. Theprice of domestic gas Din 9010 per 1000.3. It is assumed that the price ofdomestic gas will increase so it will reach parity with the imported gas byJanuary 1987 in accordance with the agreed schedule as follows:

Z of Imported Amount in1985 Gas Price Din/ 3

I quarter 45 13,860II quarter 52 16,016III quarter 59 18,172IV quarter 66 20,328

1986I quarter 73 22,484II quarter 80 24,640III quarter 87 26,796IV quarter 94 28,952

1987I quarter 100 30,800II,III,IV quarter 100 30,800

4. Other operating revenues include mostly the revenues from leasing ofdrilling rigs, the drilling of water wells. data processing services for otherparties and other special projects.

5. Direct production cost include materials, maintenance andmiscellaneous services, so that the cost are highly variable, as well as theproduction and transportation cost of crude produced abroad. The budget wasused for 1984. From 1985 onwards, the production cost was assumed to increaseproportionally to the volume of domestic production and to meteragedrilled. The cost of production of oil abroad are based on the five yearplan.

- 78 -Annex 5.08Page 2 of 3

6. Salaries and wages: The budget was used for 1984. From 1985 onwardsthis was increased by 6Z annually.

7. Selling and administrative expenses: Actual for 1984 was increased by1OX annually.

8. Exploration and (downhole) development expenses: please refer toInvestment program.

9. Depreciation: 20Z of revalued gross in operations in line with fiveyear plan.

10. Other income: mainly the interest income on L-T receivables (OtherInvestments), based on percentage of the balance of L-T receivables inaccordance with five year plan.

11. Interest: please refer to Debt Schedule.

12. Taxes and contributions: are actually related to Dohodak, a categoryof income including the depreciation. The amounts assumed are based on thefive year plan.

13. Appropriation of net income are related to Dohodak. The BusinessFund: The balance between the Net income and the appropriations to ReserveFund and Collective Consumption Fund.

Assumptions for Balance Sheets:

14. Trade receivables were assumed to be equivalent of 65 days.

15. Inventories: in line with historical trends assumed to be 35Z of thesum ot direct production cost and the development and exploration expenses.

16. Current portion of L-T receivables: assumed to represent a percentageof L-T receivables in accordance with five year plan.

17. Long term receivables: Please refer to Investment schedule (ExternalInvestments). The amounts of external investments are related to excessprofits and are in line with the five year plan.

18. Gross assets: Please refer to Investment schedule. The gross assetawere increased annually by the depreciable assets provisions in the InvestmentProgram and a part of the development of the Joint Ventures. A specialprovision was made for the foreign exchange losses related to fixed assetsfinanced with foreign currency loans.

19. Collective Consumption Fund and Reserve Fund. These two items wereincreased by the annual appropriations as shown in the income statement.

20. Trade payables were assumed to be equivalent to IOZ of the Operatingexpenses excluding depreciation.

21. Advances were assumed to be constant during the period ofprojections.

_ 79

Annex 5.08Page 3 of 3

22. Other current liabilities are reoccuring short term liabilitiesrelated to Dobodak. These are assumed to be equal to a percentage of Dohodak.

23. Long term Debt: Please refer to Debt schedule.

Assumptions for Sources and Applications Statements:

24. These were derived from the-Income Statements, Balance Sheets, andthe Debt schedule and the Investment Program schedule.

? -- ,,0, 1. i~~~~~~~~~~o

- . -~ ~ ~ ~ ~ ~ ~~~~p

Pat icme dsatas(In million dimes)

is.0 1it 1982 LM

Interet on Loans 7861 10.517 15.Z39 27967Inteest -n bank dmsits 446 614 959 2459Fe and omisians 499 647 308 985OUw Income 45 778 10776 4C733Accrud intent 672 745 2,944 6.435

Gras Incoe c 9,943 139301 Z,n725 42,779

Financial

bntet an individual's dip. 39104 4,089 5,52 10,90ZIterest an oUwr dep. 2.912 39798 6,129 14,596Debts written off Z6 57 119 23Othew 872 1,947 2,921 5.153

Total Financial cast 7,064 9.891 15020 30e674

Administrative

Salaries an Persowel 932 1,079 1.397 1.9oth 4W0 639 911 1366Allocation to colletive Canso. 164 303 435 549Depreciation 78 110 318 422

Totl administrative epns 1,554 2131 3.051 4.166

Total expen 83618 12.0M2 19.71 34.940

Incm before stat.obl. 673 534 710 1,304krued (not colleed ) interst 672 745 244 6.635Total incm bWore sts.obl. 1345 1.279 3.654 7.99

Statutory Oblipatiwms 475 172 224 231

et income 970 1.107 3.430 T7458u_==fl _ am = ==

Distribution to different tfuds

Propertv an Ewip'.rnd 192 1W? 96 59Resev Fud 247 127 1ll 24QJoint liability fund 79 148 131 104Fund of the bnt ME 164 303 435 5P

Total Funds Allotted 672 687 763 961

AR,opriation af ne. inc

Distribution to ers 198 362 136 1423Uapprarte inm 672 745 2944 6635

870 1.107 3.430 7,659

- 81 -

Annex 5.10

YUG0SLAJIA

P8S

Balanc Shet!!in million dinars)

ACTUAL

190 8M 19 983ASSETS

Cash and other liguid assets P!796 ,0 15.926 17,533keposits with Natofl Bao 5,297 64295 7Y745 985315T loans a current mtur, 49553 8ir367 98,497 143.272Securities and discounted bills 9.705 9.836 22199 28M9Acrued interst and other assets 174207 M3,M4 5.515 120,794

Subtotal 90t59 129Y971 196,872 319.022

L-T loans less current utur 100357 126r035 159?615 222.896Property and equipment 2457 3306 4?350 5,114Qther assets 2.933 3r187 6.577 14,105

Total Assets 196.205 262,499 367,414 561,13?Z=- ==== =C-= =:5.

Funds anaqed for others 23t494 24,432 28.695 34,193

Dmand deposits 49260 67223 5812 104P539Savinqi A ST deposits 24.933 32104 49-8? 82.262S-T birravings A curent utur 23M683 35.311 64.B61 76,862Accrued interest and other 3,365 8.220 15.173 22,066

Subtotal 101,241 142.858 215,725 295.749Savings & L-T deposits 27.254 34r582 49.137 84,106L-T bortouinqs less curt mtur 59945 759464 88.029 168.349

188.440 252.904 352.891 538,204

Funds emploved

Joint liabilitv fund 1.496 1643 1.745 14851Reserve Fund 1438 I.573 1.702 1M51Property, and equipmen fund 2.?063 2.843 4,09 5,?115Collective comption Fund 629 652 1,150 1.553

Subtotal 5.626 6.711 8,695 10470

nappropriate incomenot collected W13 2!884 5.928 12463

Total Liabilities 196.205 262P499 367,414 5619137

Ftxds manaqed for others 23,494 24.432 28P695 34?193

Cuarantees outstanding 130.867 145.440 177rM5 225.6V

- 82 -

Annuie 5.11

YUGOSLAVIA

PBS

Sources arid applications(in million diners)

A C T U A L

1981 1982 1983

Sourcee

Demand deposi -.s 17!963 18,589 18,7219iuinqs I S i deposits 7,171 17,775 32,383Sa;">: _ L-T deposits 71328 14,555 34i969S-l b6rrowinqs t current uiaturd 11628 29,550 12,001L-T borrowings less current matur 15,519 12M565 80U320Accrued interest and other 4,855 6,953 6Y913New members investment 455 355 415Internal fund qeneration 1,217 3,748 8,0B8

Total sources 66,136 104,0O90 193,808

Applications

Cash and due from banks 144 5!986 1!607De osits with National Bank 988 1?460 786S!T loans & current matur. 31,914 17,120 44!785Securities and discounted bills 131 13Y363 6Y693Accrued interest and other 6i336 289972 68,279L-T loans less current uatur 25478 33,580 63i281Propertv and equipment(net) 333 191 228Other assets 331 2497 7v125Distribdtion to members 381. 526 1024

Total applications 66,136 104!090 193iB08

- 83 -

Annex 6.01

RESOURCE APPRAISAL YUGOSLAVIA Page 1 of 11

While the prospectiveness of the Yugoslavian geological basins haslong been recognized, there remained considerable doubt about the ultimatevolume of recoverable oil and gas. The Bank mission recognized that the vastamounts of geological data had never really been organized in a way so as toallow a formal prospect appraisal. It was therefore decided. with bothNaftaplin and Naftagas management to undertake such an appraisal. The resultswould be twofold: an evaluation system would give the appraisers a feel forthe oil and gas pcoential in the various plays, and, equally importantly, acareful evaluation of the geological input data and their comparison with theshape cf the expectation curve would help in determining what methods toemploy in future exploration. Thus, an acreage appraisal would allowmanagement not only to rank various prospective areasj, but it would alsoassist in developing exploration strategies. Accordingly, 15 geological playshave been subjected to the RASP evaluation system used in the Bank; 13 ofwhich are presented her.

Eight plays were evaluated in Croatia and seven were evaluated inVojvodina. As a result of this exercise, overall exploration strategies werediscussed with the companies, and several proposed project elements have beenmodified in order to focus on certain geological risks in the areasevaluated. The outputs are presented in table form at the end of thediscussion of each play.

Naftaplin and Naftagas geologists provided the required input data;geological factors were estimated based on measured and evaluated informationretrieved from the companies' data files. The input data were subjected tothe RASP program, which is available at the Bank. The following paraigraphswill focus on the oil and gas expectations in the trapping domains of thevarious plays; the particular exploration risks will be highlighted andspecific recommendations made for further operations/geological studies. Afinal paragraph will summarize/redefine the exploration priorities of thevrarious companies. 1/ The tables represent the probability of finding atleast the quantity of gas or oil shown.

Croatia

Sava Shallow

This prospective: area comprises the Pliocene/Upper Miocene geologicalsection, conmonly called Pontian/Pannoziian. Prospects are mainly anticlinaland fault traps. While most of the large structures have been identified andtested, there remain many secondary features, such as fault closures nearexisting fields, sand wedge-outs and other subtle traps. The basic oil

I/ No resource appraisal has been carried out for Energoinvest's projectarea; this will be done in the course of the promotion once sufficientpertine'- exploration data have become available. Also, a resourceappraisal o_ Naftaplin's Dinaride and offshore areas will be carried outat a later date.

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Annex 6.01

Page 2 of 11geological parameters (source rocks, reservoirs and time of migration) arewell known and documented. Two risks face future exploration: remainingstructures are relatively small, and reservoirs are generally thin and oferratic lateral distribution. Predrilling work therefore requires carefulseismic processing and geological correlation from neighboring wells and alarge number of delineation wells to determine the size of a discovery.Haftaplin has identified over 100 structural features (leads) which they hopeto mature for drilling. With the completion of their present seismicprocessing for subtle trap projects, the amount of drillable prospects couldbe substantially increased. This work will be very manpower intensive, and noquick results can/should be expected in the short term.

Reserves: The RASP output indicates that there is an 90% chance of270 mio bbl of oil being trapped in the structures (leads) identified. Eightypercent of the fields simulated lie within a range of 2 mio bbl and 20 mio bbl(recoverable); there is an 90% chance for the presence of 0.5 Tcf of gas; 80Xof the fields lie within the range of 10 Bcf - 90 Bcf.

Strategy: Naftaplin, following discussions with Bank staff, hasdeveloped a long-term exploration strategy to evaluate this potential. In afirst step, the available seismic data will be closely scrutinized and gradedaccording to their quality. Where possible, sections will be reprocessedfocusing on shallow anomalies; poor quality sections will be reshot. Overselected areas the seismic grids need to be narrowed to 1 km. In parallelwith thin seismic effort, a number of wells will be drilled on selectedprospects; synthetic seismograms will play an important role in the evaluationof these subtle traps. A full evaluation of this prospect realm is labor-intensive and will extend over at least 10 yearb. No wells will be drilled inthis play under the proposed project.

Sava ShallowMKB Oil BCF Gas

In Place Recoverable In Place Recoverable

90% 1,360 272 720 57680% 1,540 308 820 65670% 1,090 338 890 71250Z 1,940 388 1,030 82430% 2,260 452 1,220 9761O0 2,670 534 1,430 1,1445% 2,840 568 1,540 1,232

Sava Deep

The play comprises prospects in the geological section immediatelyoverlying basement. Source rocks and potential reservoir rocks bave beenpositively identified; also, past drilling has confirmed that oil and gasmigration postdated trap formation. The majority of the host rocks areclastic; while primary/matrix porosity is generally lov, well productivitiesare expectev to be enhanced by fracturing. Past exploration has identified 70prospective structures that need to be detailed by future seismic. Reservoirand caprock development is the main uncertainty; the study of these parameterswill be given particular attention under the project. Despite the

- 85 _ Annex 6.01

Page 3 of 11

considerable depth of many prospects, the play is more oil prone than the deepDrava due to a relatively low geothermal gradient (50/50 oil/gas).

Reserves: Oil expectations are as follows: At the 902 confidencelevel expected volumes are of the order of 200 mio bbl; in the gas casecorresponding volumes would be 1.4 Tcf. With regard to field sizes, there isonly a 10X chance that fields smaller than 2 mio bbl recoverable (the presentbreak-even size) would be present; the corresponding figure for gas would be15 billion cu ft.

Strategy: Naftaplin and Bank staff have closely scrutinized a numberof potentially prospective plays. As in the case of the shallow horizons afirst step in the geological evaluation will consist in a quality grading ofexisting seismic lines followed, where feasible, by reprocessing. Gaps in theexisting grids will be closed so that in the event each prospect will becovered by a 1 x 2 km net of lines. As a first step, the project wiLl financeacquisition of 400 km of new lines which will adequately cover sevenidentified prospects, followed by drilling of one deep test on eachstructure. Five or six wells will be drilled in this play under the proposedproject.

Sava DeepMMMB Oil BCF Gas

In Place Recoverable In Place Recoverable

90Z 980 196 1,790 1,43280Z 1,120 224 2,010 1,60870Z 1,200 240 2,180 1,74450% 1,380 276 2,500 2,000301 1,580 316 2,890 2,31210;' 1,890 378 3,470 2,7765: 2,060 412 3,750 3,000

Drava West Deep.

This prospective realm consists of basement features, faulted/foldedMesozoic and Lower Tertiary limestones and clastics. All formations areseverely fractured. Due to high geothermal gradients the prospects are gasprone. The petroleum geological parameters are well developed and have beenadequately described by Naftaplin geologists. The main risk lies in reservoirdevelopment; prospective horizons are predominantly limestones or metamorphicrocks which generally have a low matrix porosity; the high productivitiesencountered in the Molve, Starigradac and Kalinovac fields reflect partlyfractured reservoirs. The optimum location of exploration wells wouldtherefore be close to fault/fracture zones where chances for secondaryporosities are highest. Past seismic operations did not generally focus onprospects shallower than 3,500 m; consequently there is a wide range betweenidentified prosp_cts and leads (40 to 100).

Reserves: Gas expectations: There is a 90% chance that 5 Tcf gascan be discovered in this play; 80% of the fields simulated have a range of80 Bcf to 600 Bcf with an average of 250 Bcf.

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Strate Bank staff have discussed Naftaplin's approach toaccelerate/optimize exploration of this deep prospective realm. Four areashave been identified which offer attractive structural features. To arrive ata complete prospect inventory, seismic grids need to be tightened andprocessing should focus on resolution of the internal structure ofprospects. In a first step 800 km of semi detail/detail seismic lines will beacquired to (a) map the outline of the prospects and (b) determine, ifpossible, the internal configuration of the prospects (faulting, porositydistributions). Upon completion of seismic mapping, six or seven deep testswill be drilled under the project.

Drava West Deep

Gas Tcf.In Place Recoverable

90% 6.11 4.88802 7.27 5.870% 8.14 6.550% 9.52 7.630% 11.39 9.110% 13.68 10.95% 14.94 11.9

Drava West Intermediate (Lower-Middle Miocene)

This is a predominantly clastic play with structures related tobasement features. Porosities are generally low, and high productivitiesrequire presence of fracture systems. Past expLoration has identified30 leads which riy mature into prospects; given sufficient seismic acquisitionand processi:ag this number can be more than doubled.

Reserves: Oil expectations at the 90Z confidence level are about10 mio bbl (recoverable) while gas expectations at the same confidence levelare 500 Bcf.

Strategy: Naftaplin does not intend to focus exploration on thisplay. However, when exploring for deeper horizons, this Lower-Middle Miocenesection will be carefully evaluated. One or two wells would be drilled inthis play under the project.

Drava West IntermediateMMB Oil BCF Gas

In Place Recoverable In Place Recoverable

9OZ 30 6 600 48080Z 40 8 760 60870% 40 8 890 71250% 60 12 1,120 89630Z 70 141 370 1,09610% 90 18 1,740 1,3925% 100 20 1,960 1,568

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Page 5 of 11

Drava West (Shallow)

This prospect realm has been intensely explored during pastoperations. Remaining prospects are small, reservoirs are thin and porositiesare low.

Reserves: Expectations for oil and gas are low; at the 902 levelless than 15 mio bbl and 0.3 Tcf spread over a large number of fields.

Strategy: Exploration operations will remain at a low level.Naftaplin will execute regional studies (evaluation of source rock/reservoirrocks) while old seismic data will be reprocessed.

West Drava ShallowlMB Oil BCF Gas

In Place Recoverable In Place Recoverable

90X 60 12 318 2608OZ 70 14 380 3007O0 80 16 420 3405o0 90 18 500 4003O0 110 22 590 4700OZ 130 26 720 58052 150 30

East Drava Deep

The prospective section consists essentially of Miocenecarboraites/conglomerates and basement. The main oil geological parameters arewell understood, and all are favorable. The major risk pertains to erraticreservoir development which is ef such a nature that fraccing will be onlyparciy effective. Individual prospects are relatively small. However,Yugoslaviaab largest oil fieLri, Benicance, was found in this prospectivearea. It may well be that efter a full seismic evaluation, strings of smallerprospects may merge into large prospective features as is often seen in oilexploration.

Reserves: Oil and gas expectations: There is a 902 chance offinding in excess of 60 mio bbl of oil/200 BCF gas. The field sizedistribution would indicate that there is a 302 chance that fields would besmaller than the minimum size required. Intensive geological/geophysicalstudies are evidently a requirement before additional drilling.

Strategy: As ?orosity development is erratic and as there is astratigraphic trapping eiement in some producing features, Nattaplin haschosen a careful approach to further exploration. There will be aconsiderable amount of predrilling work including geochemical studies andseismic processing; where indeed possible, synthetic seismograms will be usedfor determining the extent of stratigraphic traps. A full suite of logs willbe taken in future exploration wells and extensive coring will beundertaken. Two wells would be drilled in this play under the project.

Annex 6.01

Page 6 of U

East Drava DeepPMK Oil BCF Gas

In Place Recoverabl' In Place Recoverable

902 270 54 240 19080Z 320 64 280 2257O0 350 70- 310 25050Z 420 84 370 30030Z 480 96 430 34010Z 580 116 520 42052 620 124

Bilogora Flank

This is a new geological play which has been developed on the basisof modern concepts of crustal tectonics. Essentially it consists of animbrication of structural elements of the Bilogora mountain area which werethrust into the Drava basin. Several wells encountered encouraging oil andgas shows indicating that the oil and gas play parameters are welldeveloped. Main risks are limited extent of individual prospects and lowporosities/reservoir thicknesses. The play is, bowever in the early stages ofexploration and obviously needs close attention, particularly as objectivehorizons are relatively shallow.

Reserves: There is a 90S chance that 15 dio bbl of oil and 200 Bcfof gas can be found in this play.

Strategy: Key seismic lines will be reprocessed, and the availableexploration data will be incorporated into a regional oiL habitat study.

BilogoraMMD Oil BCF Gas

In Place Recoverable In Place Recoverable

90X 60 12 40 32802 80 16 60 48702 90 18 70 5650% 120 24 90 72302 160 32 120 84102 220 44 170 13652 250 50 200 160

NaftaCas

laftagas operates in a relativel7 small area, the Autonomous Provinceof Vojvodina. Exploration density is high, and four important basinal areashave been developed, some of which extend into Romania and Hungary. Similarto Naftaplin, prolific production has been established from Miocene toPliocene sediments. However. basement-related features so important inCroatia have been relatively little exolored here. 8aftagas has, on the other

- 89 - Annex 6.01

Page7 of 11

hand, identified a new geological play that is practically unexplored andwhere exploration may well be stepped up if the Bank financed seismicacquisition and processing project elements are successful.

North Banat (Miocene/Basement)

This play comprises the geological section immediately overlyingbasement features. Lithologically it is characterized by a mix ofsandstones/limestone and basement rocks. While source rocks and reservoirdevelopment are well documented, main uncertainties relate to size anddefinition of structures and the presence of integer caprocks. Naftagas hasan inventory of 25 untested mature prospects and with denser seismic andfocused processing this amount could double. Past drilling was hampered byhigh pressure and temperatures and the presence of corrosive gases.

Reserves: At the 90% level, expectations for oil are 50 mio bbl ofoil; gas expectations at the same confidence level are 300 Bcf. Uncertaintiesregarding prospect sizes are reflected in the field size distribution: thereis a 25% chance that fields will be smaller than the minimum economic sizerequiied (1 mio bbl).

Strategy: Seismic data acquisition and processing aimed atunraveling deep structural configurations and careful mapping of deep horizonsand the integration of previously acquired drilling data are of highestpriority.

North Banat MioceneMMB Oil BCF Gas

In Place Recoverable In Place Recoverable

90% 240 48 400 32080% 290 58 480 38470% 330 66 550 44050% 400 80 680 54430X 480 96 830 60410% 620 124 A,070 8565Z 700 140 1,210 968

Middle Banat (Miocene/Basement)

The play exhibits some similarities to the North Banat. The area hasproven production, so the play attributes are all positive. Mapping ofprosrects is somewhat easier than in the northern part of the basin butsr.uctural density is lower.

Reserves: Expectations: At the 80% level oil expectations are50 mio bbl while gas expectations at the same confidence level are 400 Bcf.

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Annex 6.01Page 8 of 11

Middle Banat MioceneMMB Oil BCF Gas

In Place Recoverable In Place Recoverable

90% 270 54 500 40080X 330 66 630 50470% 380 76 720 57650Z 460 - 92 880 70L30Z 550 110 1,060 84810% 730 146 1,370 1,0965% 810 162 1,520 1,216

South Banat (Oligocene/Miocene)

This is an extension of the North/Central Banat basins but with athinning Tertiary section to the southeast. While play attributes are welldeveloped, prospect mapping and caprock development remain a major problem.Individual prospects are generally small; reservoirs are of the multiple typeand composite thickness is relatively thin. At present the prospect inventoryis Low at 15; Naftagas expects that this number can be doubled with denserseismic grids and focused processing.

Reserves: Expectations are low for both oil and gas (10 mio bbl ofoil and 120 Bcf gas at the 90% confidence level). There is a 30% chance thatfieLds encountered wiil be below the minimum required for economicdevelopment.

Strategy: Clearly further exploration drilling carries a lowpriority at present and would only be undertaken after extensivegeological/geophysical studies.

South Banat MioceneMMB Oil BCF Gas

In Place Recoverable In Place Recoverable

90Z 60 12 150 12080% 80 16 190 15270% 100 20 220 17650% 120 24 270 21630X 150 30 330 26410% 180 36 410 3285% 210 42 460 368

North Banat/Middle Banat - Strat.graphic Traps

The Pliocene section, similar to the Mako area in neighboringHungary, contains large numbers of stratigraphic traps and combinationstructural/stratigraphic traps. Many of these features are gas bearing butfew can be identified on old seismic lines; they were discovered accidentallywhile drilling for deeper prospects. It is a characteristic of such shallowtrapping structures that they contain biogenic gas (formed by bacteria ratherthan by thermal/chemical processes). Such gas pooLs have been formed in situand are not normally related to structural features.

- 91 - Annex 6.01Page 9 of 11

Individual prospects are usually of small areal. extent; reservoirsconsist of thlin, multiple pays. Unlike structural prospects, subtle/strati-graphic traps require well defined lateral and top seals. '".,Ie the top sealscan be reasonably predicted with existing well control, lateral seals are moredifficult to assess. Naftagas has identified 80 prospects so far; with denserseismic grids and focused processing the total number could be well over 100.

Reserves: There is an 90% chance for finding in excess of 60 mio bbLof oil; the correzponding figure for gas is 500 Bcf. Fifty percenc of thefield sizes will be smaller than 5 mio bbl for oil and 10 Bcf for gas.

Strategy for the Banat Basins: While part of the sub-basins are wellexplored, there remain several prospect realms where expectations for futurediscoveries are high. Naftagas has had relatively little success in exploringfor daep, basement related features. The main reasons were poor seismicresol-t tion, a hostile geological environment and uncertainties about overallprospectivity. The RASP appraisal has shown. however, that this prospectrealm carries high expectations. One project element therefore focuses onmapping and drilling deep, basement related prospects.

Subtle traps form another prospect-realm which is underexplored.Expectations are high and any finds from these shallow features could bequickly developed. The project provides for the acquisition of 700 km ofseismic lines; careful correlation of seismic horizons with well logs isexpected to determine/outline subtle traps realms. Follow-up drilling offersno particular problems and will be carried out without Bank assistance.

North/MiddleBanat Pliocene

MMB Oil BCF Gas.In Place Recoverable In Place Recoverable

90% 370 74 710 56880% 430 86 810 64870% 480 96 890 71250% 550 110 1,030 82430% 620 124 1,160 92810% 720 144 1,370 1,0965% 780 156 1,470 1,176

Backa/W,st Tiza Area

This is basically the western extension of the Banat basins-Basement becomes gradually shallower and the area can be considered apromontory facing the deeper areas to the east. The main exploration riskspertain to seismic mapping and presence of well developed caprocks.

Reserves: There is an 901 chance of finding 50 mio bbl ofoil/600 Bcf of gas. Twenty percent of the field sizes will be smaller than5 mio bbl.

Strategy: Prospect evaluation is relatively straightforward anddrilling offers no special problems. As a result of this appraisal, Naftagaswill develop an aggressive evaluation program for this basin.

- 92 - Annex 6.01Page 10 of 11

BackaMMB Oil BCF Gas

In Place Recoverable In Place Recoverable

90Z 270 54 730 58480% 320 64 860 68870% 360 72 960 76850% 430 86 1,170 93630Z 510 102 1,410 1,12810% 650 130 1,760 1,4085Z 690 138 1,900 1,520

South _art of Vojvodina

Naftagas has defined a prospective area south of the oil bearingBanat/Backa basins. The play consists of a thick wedge of Cretaceoussedimentary rocks of very variable lithologies. There is considerableuncertainty regarding development of source rocks, potential reservoir faciesand the presence of caprocks. The play appears to be considerably structured,but seismic grids are too loose to map prospects.

Reserves: Due to these uncertainties, chances are high (70%) thatthe play contains no hydrocarbons. The expectation curve indicates, however,that in the Lower probability ranges expected volumes are of the order of100 mio bbl and 1.8 Tcf.

Strategy: In order to test this potential Naftagas will, under theproject, acquire a re-ional/semi-detail seismic grid; in case drillablestructures can be identified, selected key prospect may be drilled.

South Vojvodina1MMB Oil BCF Gas

In Place Recoverable In Place Recoverable

50% 0 0 0 030% 80 16 530 42410% 370 74 2,160 1,7285% 450 90 2,690 2,152

Conclusions

The resource appraisal has strongly emphasized the importance ofYugoslavia's producing basins and, in particular, that in some well exploredareas there remains considerable scope for additions to reserves.

The largest scope for new reserves lies in the deeper parts of theDrava basin where potential additions would be mainly gas. Of equal if notgreater importance are the remaining prospects cf the Sava basin where deepprospects have high expectations for both oil and gas; the potential ofshallow prospects is also appreciable. While the deep prospects are mainlyconventional structures with a certain stratigraphic component, the shallowerprospects are dominantly wedge-outs and lenticular sand bodies that areusualIl very difficult to detect. Several of these features have been found

-93-3Annex 6.01Page U1 of 11

to be hydrocarbon bearing; most have been discovered when drilling for deeperprospects. The prospect appraisal has focused on this prospect realm as animportant exploration target. Accordingly, Naftaplin is mounting aconcentrated effort towards exploring this play.

The eastern part of the Drava basin is volumetrically lessimportant. Here Naftaplin has identified structural trends which containimportant reservoirs in the Lower Miocene section. In contrast to other areasin the Pannonian basin, these reservoirs consist exclusively of conglomeratesand sands that vary over short distances in thickness and reservoir quality.The area contains numerous untested prospects, but predrilling work requiresmore in-depth seismic processing and geological analysis.

The expectations for the major Vojvodina basins are in the same classas those in the East Drava Deep area. The potential here lies mostly in deep,basement related features also requiring a considerable amount of predrillingwork. Although the overall expectations of the various basins are high, itwould be wrong to expect rapid additions to reserves. Rather, the lead timebetween prospect mapping and drilling will be long, particularly for thesubtle traps. Prospect appraisal requires painstaking geologicaL studies,preparation of synthetic seismograms and seismic integration. This will be avery manpower intensive process.

Evaluation of Exploration Expectations: The resource has indicated thepresence of at least 550 structural features/leads which need to beevaluated/mapped by the companies' interpretation teams. it is likely that inthe course of this evaluation additional prospeets will emerge; most of theseare expected to be subtle traps.

Geological evaluation of several prospective realms requires newapproaches. In the past prospect mapping was was purely "geometrical" withlittle regard to seismic velocity changes and lateral reservoir development;mapping was done almost exclusively by geophysicists with little understandingof the attendant geological factors.

In the future mapping will be on a more integrated basis. Thepreparation of drilling proposals will be vested in teams composed ofgeologists/geophysicists and reservoir engineers/petrophysicists. Prospectmaturation will thus become increasingly manpower intensive with longer leadtimes.

It is Bank staff's best estimate that these teams will mature between350 and 400 drillable prospects per year, say 200 in Naftaplin and 150 inNaftagas. Given the likelihood of finding additional prospects at the rateof, say, 20 per year, exploration drilling in both companies is expected toremain at the present level through the end of the nineties.

94 _Ainex 7.01

LIST OF DOCUMENTS IN PROJECT FILES

1. Udruzena Banka Hrvatske - Zagreb (2 copies)2. INA For Export3. Yugoslavia - Petroleum Exploration Project - General - June 4, 19844. Statutes for Refinery Bosauski Brod - June 19, 19845. Sarajevo: Exploration Regulations (Law?) - June 19, 19846. Bosnia and Hercegovina - Natural Resources Law7. Energoinvest - Exploration Unit of RBB (Self-Management Agreement for

Exploration Unit and its Funding8. Naftagas Project Cost Estimate9. INA-Naftaplin - Feasibility Study of the Kalinovac Gas-Condensate

Field (Reservoir Study)10. INA-Naftaplin - Feasibility Study of Underground Gas Storage - Okoli

(Reservoir Study)11. "Energoinvest" - Sarajevo Bosanaki Brod Oil Refinery - Oil and Gas

Explorations Project in North Bosnia Region, Sr. Bosnia andHerzegovina

15. Complementary Report on a Project for Storage of Natural Gas in theOkoli Depleted Field, Undertaken by INA-Naftaplin (Zagreb-Yugoslavia)

16. INA-Naftaplin - Gas Storage Project Okoli, Feasibility Study -Installation of Surface Equipment for Injection and Production

17. Okoli - Underground Gas Storage - Copy of letter with attachmentsfrom Gaz de France dated July 24, 1984

18. Plan of Funds Necessary for Implementation of Nafta-Gas' Projects inSAP Vojvodina in the Period from 1985-1987

19. INA-Naftaplin - Debt Schedule for FY85-FY8S20. INA-Naftaplin - Investment Program FY85-FY8821. Rafta-Gas - Debt Schedule for FY85-FY8822 NAFTA-Gas - Investment Program FY85-FY8823. Listing of All Suppliers of Equipment and Services to Whom the

Requests for Preliminary Bids have been sent

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