Document of

The World Bank

FOR OMCIAL USE ONLY

UqPwt No. P-3684-SO

REPORT AND RECOMENATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT OF SDR 17.5 MIlLION

TO THE

SOMALI DEMO CRATIC REPUBLIC

FOR TEE

AFGOY GAS DELINEATION PROJECT

April 10, 1984

This document b-s a restricted distrilatdm and may be used by recipient ony in She perfoImzae ofdhir offida dute lb cents may Not rwe be disosed witho Wrl Bnk sliidon. I

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CURRENCY EQUIVALENTS

Unit = Somali Shilling (So. Sh.)So. Sh. 1.00 = US$0.057US$1.00 = So. Sh. 17.50

ABBREVIAIIONS AND ACRONYMS

DMH = Department of Mines and HydrocarbonsEIB = European Investment BankENEE = Ente Nazionale Energia Electrica

(the national power company)- - = Ministry of Mineral and Water Resources

WEIGHTS AND MEASURES

BCF = billion cubic feetBD = barrels per dayBTU = British thermal unitCIF - cost, insurance, freighptECU = unit of accountGWh = gigawatt hourKWh = kilowatt hourLPG = liquid petroleum gasMCF = thousand cubic feetMNCF - million cubic feetMNCFD - = million cubic feet per dayMT = metric tonmw = megawattpsi = pounds per square inchTOE = tons of oil equivalenttpy = tons per year

GOVERNMENT OF SOMALIA

FISCAL Y%AR

January 1 - December 31

FOR OFFICIAL USE ONLY

SOMALI DEMOCRATIC REPUBLIC

Afgoy Gas DeLineation Project

Credit and Project Summary

Borrower: Somali Democratic Republic

Amount: SDR 17.5 million (equivalent to approximatelyUS$18 million)

Beneficiary: Ministry or Mineral and Water Resources

Terms: Standard

Cofinancing: ECU 7 million (US$5.5 million equivalent) loanfrom the European Investment Bank (EIB), on thefollowing terms:

(a) 15 years including five years of grace;

Cb) 1 percent rate of interest, to be increasedto the EIS subsidized rate (maximum 8percent per annum) from the time ofcommercial gas production.

Objective: To carry out the first phase of a two-stageprogram including appropriate institutionaldevelopment aad support, for the development ofthe gas reserves at Afgoy for use in the nearbyMogadishu area.

Project Description: The project includes:

(a) The drilling of two delineation/productionweLls on the Afgoy structure and (if foundnecessary) the re-entry and completion as aproducer of the Afgoy-l well;

(b) Drilling management (60 man-months) toprepare and manage the drilLing operationsas the owner's representative;

(C) Petroleum technical consultants (12man-months). A petroleum consulting firmwould provide during the period of drillinga well-site geologist and a petroleumengineer for testing;

(d) Preparatory studies and detailedengineering for the subsequent Afgoy GasDevelopment Project (17 man-mon.hs);

This docment has a restricted distribution and may be used by recipients only in the perfcrmance oftheir official duties. Its contents may noL otherwise be disclosed without World Bank authorization.

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(e) A power planning and gas utilization study(18 man-months); and

(f) Assistance to the Ministry of Mineral andWater Resources in the form of(i) equipment and training; and (ii) thecost of the audit of the drilling operationby a qualified international auditing firm.

Benefits: The project would delineate the gas resourcesto provide a domestic energy source near thecapital city of Mogadishu, replacing importedfuel.

Risks: The principal risk for the project is that thedrilling of one or more wells might suffer fromtechnical problems or that insufficient gaswould be found. These risks are inherent inany delineation drilling, but are being reducedas much as possible by detailed preparatorywork including the seismic already completed;careful choice of locating the wells; andhiring of an experienced drilling managementcompany to undertake detailed drilling programsto be approved by IDA.

Estimated Costs: US$ MillionLocal Foreign Total

Ci) DrillingRig costs 0.2 5.0 5.2Materials and supplies 0.1 5.9 6.0Transport - 0.3 0.3Ancillary services - 4.6 4.6Drilling. management 0.2 1.3 1.5Subtotal 0.5 17.1 17.6

(ii) Technical Assistance 0.1 0.3 1.4

(iii) Studies and Project Preparation 0.1 0.5 0.6

(iv) Training, Equipment and Audit 0.1 0.4 0.5

Base Cost 0.8 18.4 19.2

(v) Physical Contingencies 0.2 3.7 3.9

(vi) Price Contingencies

(vii) PPF Refinancing_ 1.0 1.0

Total Cost 1.0 23.5 24.5

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US$ MillionLocal Foreign Total

Financing Plan:

IDA - 18,000 18,000European Investment Bank - 5,500 5,500Government of Somalia 1,000 - 1,000

TOTAL 1,000 23,500 24,500

Estimated IDA Disbursements: FY85 FY86 FY87

Annual 14,000 3,500 500Cumulative 14,000 17,500 18,000

Rate of Return: A minimum of 17 percent (for gas developmentprogram as a whole).

Staff Appraisal Report: N. A.

Maps: IBRD No. 17734 and 17735

INTERNATIONAL DEVELOPMENT ASSOCIATION

REPORT AND RECOMMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS

ON A PROPOSED CREDIT OF SDR 17.5 MILLION (US$18.0 MILLION)TO THE SOMALI DEMOCRATIC REPUBLIC

FOR THE AFGOY GAS DELINEATION PROJECT

1. I submit the following report and recommendation on a proposedcredit to the Somali Democratic Republic for SDR 17.5 million (US$18.0million equivalent) to help finance the Afgoy Gas Delineation Project.The European Investment Bank has agreed to co-finance the project with aloan of US$5.5 million equivalent, on terms and conditions discussed inpara. 52.

PART I - THE ECONOMY 1/

2. A report on the economy entitled: 'Somalia - Policy Measures forRehabilitation and Growth- (Report No. 4081a-SO) was distributed to theExecutive Directors in May 1983. An Agricultural Sector Review in threevolumes (Report No. 2881a-SO) was distributed to the Executive Directors inJune 1981. Country data sheets are provided in Annex I to this report.

The Resource Base

3. Somalia is a large, sparsely populated country; its variedtopography includes a hot and arid coastal plain, rugged mountains andplateaus, and lowlands of varying fertility and rainfall. Its populationof about 5 million (including 400-500,000 refugees) is unevenly distributedover a land area of nearly 630,000 sq km of semi-desert. Population growthin recent years has been approaching 3 percent (excluding refugee inflows)which will result in long-term pressure on the fragile resource base. Onlyabout 13 percent of the land is suitable for cultivation, but with waterthe limiting constraint, only a small fraction (8.5 percent) of thispotentially arable land is cultivated.

4. The mainstay of the economy has long been nomadic pastoralism.Over 60 percent of the people depend on livestock for their livelihood;about 20 percent are farmers; and 20 percent are engaged in variousagricultural operations. Livestock production accounts for about 35percent of GDP and provides over 80 percent of export earnings. Cropproduction generates about 10 percent of GDP. Although Somalia has one ofthe longest coastlines (3,000 km) in Africa, fishing generates only about 2percent of both GDP and employment.

1/ This text is identical to the one in the President's Report for theFisheries Exploration/Pilot Project, dated April 10, 1984.

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5. The country's limited natural resource base and its uncertainenergy potential account for the scarcity of economically viable investmentopportunities. Apart from the traditional export of livestock, commercialagriculture is centered mainly on the production and export of bananas (inwhich foreign concession holders are important) and the production of sugarfor the domestic market. Expansion of the manufacturing and servicesectors is limited by the small size of the domestic market, poorinfrastructure, and shortages of capital and entrepreneurial experience.The existence of several minerals has been confirmed, but their explorationis still at an early stage, and the commercial viability of productionremains to be proved.

6. A number of foreign companies have been engaged in inshore andoffshore exploration of hydrocarbons but so far no commercially viable oilprospects have emerged. However, investigations under an IDA project forpetroleum exploration promotion have indicated possible natural gasreserves near Mogadishu which could be used for power generation insubstitution for petroleum imports. In the absence of other knownresources, Somalia's prospects depend upon agricultural and livestockdevelopment, whose progress will depend upon careful management of thescarce land and water resources.

7. Somalia is among the poorest countries in the world and isclassified by the United Nations as a least-developed country. Per capitaincome was estimated to be below $300 in 1981. Other indicators of thecountry's low level of social and economic development include: a crudedeath rate estimated at 25 per thousand population (compared to a crudebirth rate of 48 per thousand); an average life expectancy of only 40years; an infant mortality rate as high as 150 per thousand population;primary and secondary enrolment ratios of 50 percent and 7 percent,respectively; and a ratio of nearly 20,000 persons per physician.

Past Development Strategy and Performance

8. Following its assumption of power in 1969, the Government adheredto a program of 'scientific socialism' whose stated objectives wereegalitarianism and social justice, development through the public sector,nationalization of certain foreign enterprises, and the formation ofcooperatives. Public ownership and management expanded both throughnationalizations and througn the creation of new public enterprises. Theparastatal sector established in the 1970s included about 45 autonomousagencies which eliminated private enterprise in wholesale trade and bankingand which dominated manufacturing. The 1974-78 development plan and the1979-81 development plan were essentially public investment programs thatallowed for only a few small private ventures. Although the plans provideda needed impetus to investment, they did not play a major role in theallocative process. Despite the Government's initial intentions, industryand infrastructure, especially transport and communications, received morepublic investment than agriculture. At the same time, public enterprisesoperated without firm Government control, owing largely to weak managementand inadequate monitoring.

9. In the early 1970s, Somalia made considerable progress in meetingcertain basic needs. A program of literacy and primary education hadnoticeable results, and an effective system of food distribution was alsoestablished. In other respects, however, the record in the social sectorshas been less impressive, particularly in water supply, sanitation andhealth where services have frequently been biased in favor of the urbanpopulation. Moreover, there are indications that there has been a trendtowards increasing income differentiation within the rural sector.

10. On the production side, provisional national accounts data showthat between 1972 and 1978, Somalia's GDP grew in real terms by 2.8 percentper annum, at approxiuately the same rate as population. On average, theproductive sectors grew much more slowly - by only one percent -- ascompared to the growth of the services sector at about 7 percent,reflecting to a large extent increased Government employment. Within theproductive sectors, the average annual growth was 2.7 percent in livestock,minus 3 percent in crop production, and minus 2 percent in industry.Comparable national accounts for 1979-1982 are not yet available, butindicators suggest that an upturn in value added in crop productionoccurred in 1981 and 1982, due to unusually favorable rainfall whichstimulated the output of maize and sorghum, and partly owing to improvedincentives provided by increased producer prices made effective in April1981. In recent years, Somalia's dependence on food imports to meet itsgrowing consumption needs has increased; food imports now account forone-third of total requirements. The growth of other sectors however,continued to be stagnant.

11. About 100,000 Somalis have migrated to work in neighboringoil-exporting countries in the Gulf area. As labor migration has beenneither organized nor controlled by the Government, it has led to a severedepletion of Somalia's already small stock of qualified and skilledmanpower, thereby weakening institutions and reducing the country'sabsorptive capacity. The savings of these emigrants are potentially animportant resource for the economy, but despite substantial adjustment ofthe exchange rate, only a small proportion of emigrants' savings isremitted, largely through unofficial channels.

12. Following the border conflict of 1977/78, there was a great surgein Government expenditures which resulted in widening of deficits in boththe budget and the balance of payments. During 1978-80, the Government'sfinancial situation deteriorated rapidly, mainly because of the sizeableexpansion in expenditures consequent upon the border conflict, the cost ofmaintaining large numbers of refugees, and the wage bill associated withthe Government's policy of guaranteeing employment for secondary schoolleavers. At the same time, official foreign aid declined. This resultedin Government recourse to deficit financing. With further deterioration inthe budgetary situation in 1979 the Government's recourse to the CentralBank rose to record levels (about 13 percent of GDP). This, in turn, ledto rapid inflation, from 10 percent in 1978 to 60 percent in 1980.

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1981, the Government began to take substantial remedial action, andsuccessfully implemented two successive stabilization programs, which wereboth supported by IMF Standby arrangements. The core of these measurescomprised adjustments of the exchange rate, fiscal and monetary restraints,and de facto liberalization of agricultral marketlng. As part ofstabillzation under the first Standby program, a dual exchange rate wasintroduced which meant a substantial devaluation of the Somali shilling.Producer prices for agricultural crops were increased, while banana growersreceived the full benefit of devaluation. The program stipulated asubstantial reduction in Government recourse to the banking system, andthis was achieved. The Government also increased interest rates.

18. Following the completion of the 1981/82 program, the Governmentadopred a new stabilization program in mid-1982, supported by the IMF wltha SDR 60 million 18-month Standbv arrangement for the period July1982-December 1983. Under this program, several key policy measures weretaken: the dual exchange rate was unified on July 1, 1982, the Somalishilling was further devalued, and interest rates were further raised. TheGovernwwnr also agreed further to restrict fiscal and monetary expansion.Furthermore, in January 1983, the Government introduced a bonus schemeproviding for a premium of 25 percent in foreign exchange terms of inwardremittances and capital inflows by Somali nationals. These actions werereinforcece in mid-1983, when Somalia introduced a more flexible exchangerate system. Under the new arrangement the Somali shilling was pegged tothe SDR adjusted by the relative rates of inflation between Somalia and thefive countries in the SDR basket. However, the beneficial effects of thesemeasures have so far been overshadowed by the negative impact of a ban onSomali cattle imports by Saudi Arabia (which has been in effect since May1983) and by the impact of a drought in 1983.

19. In a recent courageous action, the Government decided to abandonits policy of guaranteed employment to high school leavers. Aninterministerial committee is looking into the future of publicenterprises; the Committee's report and recommendations are likely tobecome available soon. The Government has also taken some steps toliberalize the economy, particularly by de facto eliminating Governmentmonopsony grain purchases.

20. The policy reforms introduced by the Government in the past threeyears are quite significant and they had a positive impact on the economyby reducing the rate of growth of the money supply, Government recourse tothe banking system, and the rate of inflation. These measures, which alsoresulted in increasing commodity production and exports, represent thefirst stage in the formulation and implementation of a policy agenda whichmust be directed simultaneously at restoring financial equilibrium,rehabilitating and making fuller use of existing agricultural andindustrial productive capacity, and establishing the foundations oflong-term growth.

21. In March 1983 the Government requested the Bank to organize afirst Consultative Group meeting for Somalia and accepted the Bank'srecommendation that it prepare a Medium Term Recovery Program (MTRP) to be

presented to the Consultative Group meeting. As outlined by the Governmentand subsequently elaborated in a government paper entitled "DevelopmentStraregy and Public Investment Programme for 1984-86", the MTRP consists of1981, the Government began to take substantial remedial action, andsuccessfully implemented two successive stabilization programs, which wereboth supported by IMF Standby arrangements. The core of these measurescomprised adjustments of the exchange rate, fiscal and monetary restraints,and de facto liberalization of agricultral marketing. As part ofstabilization under the first Standby program, a dual exchange rate wasintroduced which meant a substantial devaluation of the Somali shilling.Producer prices for agricultural crops were increased, while banana growersreceived the full benefit of devaluation. The program stipulated asubstantial reduction in Government recourse to the banking system, andthis was achieved. The Government also increased interest rates.

18. Following the completion of the 1981/82 program, the Governmentadopted a new stabilization program in mid-1982, supported by the IMF witha SDR 60 million 18-month Standby arrangement for the period July1982-December 1983. Under this program, several key policy measures weretaken: the dual exchange rate was unified on July 1, 1982, the Somalishilling was further devalued, and interest rates were further raised. TheGovernment also agreed further to restrict fiscal and monetary expansion.Furthermore, in January 1983, the Government introduced a bonus schemeproviding for a premium of 25 percent in foreign exchange terms of inwardremittances and capital inflows by Somali nationals. These actions werereinforced in mid-1983, when Somalia introduced a managed floating exchangearrangement based on a peg to the real SDR. However, the beneficialeffects of these measures have so far been overshadowed by the negativeimpact of a ban on Somali cattle imports by Saudi Arabia (which has been ineffect since May 1983) and by the impact of a drought in 1983.

19. In a recent courageous action, the Government decided to abandonits policy of guaranteed employment to high school leavers. Aninterministerial committee is looking into the future of publicenterprises; the Committee's report and recommendations are likely tobecome available soon. The Government has also taken some steps toliberalize the economy, particularly by de facto eliminating Governmentmonopsony grain purchases.

20. The policy reforms introduced by the Government in the past threeyears are quite significant and they had a positive impact on the economyby reducing the rate of growth of the money supply, Government recourse tothe banking system, and the rate of inflation. These measures, which alsoresulted in increasing commodity production and exports, represent thefirst stage in the formulation and implementation of a policy agenda whichmust be directed simultaneously at restoring financial equilibrium,rehabilitating and making fuller use of existing agricultural andindustrial productive capacity, and establishing the foundations oflong-term growth.

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21. In March 1983 the Government requested the Bank to organize afirst Consultative Group meeting for Somalia and accepted the Bank'srecommendation that it prepare a Medium Term Recovery Program (MTRP) to bepresented to the Consultative Group meeting. As outlined by the Governmentand subsequently elaborated in a government paper entitled "DevelopmentStrategy and Public Investment Programme for 1984-86", the MTRP consists of(i) a program of phased policy measures aimed at restoring equilibrium inthe balance of paymen..s and public finances and at rationalizing thepricing and incentive structure; and (il) a resource-constrained PublicInvestment Program for the period 1984-86. The formulation of thisrecovery program represented a major accomplishment on the part of theGovernment.

22. The inaugural meeting of the Consultative Group for Somalia was g

held on October 26-28, 1983. Participants were encouraged by the remedialmeasures taken by the Government under the stabilization programs supportedby the IMF and by the Government's pursuit of its new policy path. Inparticular, the participants appreciated the formulation of the PublicInvestment Program and the emphasis in the program on rehabilitation andimproved utilization of existing facilities. The participants welcomed thesubstantial adjustments made by the Government in the size and compositionof the investment program at the Consultative Group meeting. Theseadjustments included postponing some new projects (including the Bardheredam and associated investments, pending results of new studies), rephasingthe implementation of ongoing projects and introducing new high-priorityschemes such as the rehabilitation of irrigation in the Shebelli region.Participants at the meeting favorably responded to the external aidrequirements of the public investment program and other elements in therecovery program for 1984-86. It was recognized at the meeting thatfurther financial aid to Somalia should be on highly concessional terms andthat Somalia should attempt to secure debt relief on concessional terms.

23. Since the Consultative Group meeting, intensive discussionsbetween the Government and donors have been held concerning follow-upaction on the development of the Juba Valley, including the proposedBardhere Dam, and agreement was recently reached with the Bank on terms ofreference and a timetable for a study of interim water solutions. Aftereffectively implementing during the last three years two successiveStand-by Arrangements, the Government approached the IMF for furtherbalance of payments support under an Extended Fund Facility (EFF) to dealwith the country's structural and short- to medium-term financialproblems. Agreement in principle on such a program was reached in early1984. However, in February the Government decided not to implement certainkey measures. Discussions during the visit of a recent Fund missionindicated that, although the Government accepts these measures inprinciple, it is reluctant to implement some important ones at the presenttime when the country is facing serious difficulties.

24. The condition of the Somali economy, after having improvedmarkedly between mid-1981 and late 1983, has in recent months come underincreasing stress. It appears, moreover, that the renewed financial andbalance of payments difficulties which the country is now experiencing maywel'l intensify in the course of coming weeks and months. This situationhas emerged from (i) the acute shortage of foreign exchange due to the fall

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in livestock exports (consequent upon a ban on Somali cattle inports bySaudi Arabia), a probable shortfall in grant receipts and the Governmentdecision not to go 4head with the IMP program ar thls time; (Li) a drop Indomestic food produiction owing to the current drought situation; and (11i)a prospective shor:fall in Government revenues which could lead to eitherdistruptive cutbacks in lnvestment and current expenditures or to anacceleration in credit and money supply, or some combination thereof.These developments are resulting In a rising rate of Inflation and arapidly falling exchange rate in the parallel market. If correctivemeasures are not taken soon, a renewed economic and financial crisis couldensue, A Bank economic mission, scheduled to visit Somalia thli spring,will review the current economic and flnanclal situation and prospects.

PART II - BANK GROUP OPERATIONS IN SOMALIA

25. Since 1970, IDA has extended 24 credits to Somalla, amounting toabout US$193 million, of which roughly thirty percent has been foragriculture, twenty five percent for transport and the rest Is aboutequally divided over educatlon, water supply, ports, energy, industry andtechnical assistance. Over the last three years annual commitments haverisen from $10 million in 1981, to $15 million in 1982 and $23 million1983. IFC has so far made one Investment In Somalia -- a $375.000 loan in1981 for a molasses terminal for the Juba Sugar Project. IFC is noWfocusing its attentlon on export-oriented projects. In recent years, theAbu Dhabi Fund, African Development Fund, Arab Fund, IFAD, IslamicDevelopment Bank, EEC, Kuwait Fund, Saudi Fund, and USAID have co-financedprojects in Somalia with IDA.

26. Physical progress in Implementing IDA projects has been mixed;agriculture projects have not always done well, with the exception of theNorth West Agriculture Project. Projects for roads, ports, water andeducation have in general been executed expeditiously. Most projects haveincluded expatriate technical assistance, while also benefitting fromregular supervision missions, follow-up through the resident misslon, andannual country implementation reviews. The disbursement rate under theprojects has improved appreciably in recent years from about 15 percent inFY79 to about 24 percent in FY83; this compares very favorably with theBank-wide average of 21 percent. The Government's Pro 4 ect ImplementationUnit which was set up in the Planning Ministry in 198... and the more recentMonitoring and Evaluation Unit contributed notably to this encouragingtrend.

27. The Bank assistance strategy for Somalia is to encourage andassist the Government in the formulation and implementation of rollingmedium-term recovery programs directed simultaneously at restoringfinancial equilibrium and rehabilitation and making fuller use of exlstingcapacity, and at establishing the foundations of longer-term growth. TheBank's economic and sector work for Somalia is designed to assist indeveloping an adequate data base and improvements in macro-economicmanagement. Two other projects are In ao advanced stage of preparation,namely the Fisheries Exploration/Pilot Project, which will be presented tothe Executive Directors on a date to be determined and a proposed SecondTechnical Assistance project, which was recently appraised.

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PART III - THE ENERGY SECTOR

28. Resources. Somalia's energy endowment is potentiallysignificant, but identified resources are modest. Forests coveringabout 130,000 km2 are the main domestic energy source, butindiscriminate use and lack of reforestation have resulted in seriousdepletion and ecological damage. Due to low rainfall and irregularwater flow in the country's rivers, the Shebelli and Juba, the hydropotential does not exceed 100 MW. No commercial hydrocarbon reserveshave yet been proven to exist, except for the Afgoy gas-bearingstructure near Mogadishu. Oil shale deposits and small occurrences ofcoal, both in northern Somalia, appear to be of little economic value.Deposits of uranium estimated at 8,500 metric tons (MT) (with a U3308content of less than 0.1 percent) have been discovered in the MudugValley. Among other energy sources, bagasse from sugarcane is used to aminor extent for steam and electricity generation in captive plants.There also appears to be wind and solar energy potential, but this hasnot been investigated to any significant degree.

29. Like all statistics in Somalia, data on energy output anddemand are scarce and unreliable. According to preliminary estimates,the gross domestic output of primary energy in 1982 was about 1.16million tons of oil equivalent (TOE), consisting almost entirely of fuelwood and charcoal and a small proportion of agricultural wastes. Energyconsumption, inclusive of imported energy, but net of transformation andtransmission losses,-is estimated at 1.14 million TOE or 0.28 TOE percapita, which is low even by African standards. 73 percent is providedby fuel wood, with charcoal contributing an additional. 7 percent, andagricultural wastes, 3 percent. Petroleum imports account for only 17percent of final energy consumption. Commercial energy consumption hasgrown fast at 14 percent per annum throughout the 1970s and early1980s. Electricity is supplied through isolated systems to Mogadishu,five provincial towns, and a number of villages. It is entirely basedon fuel oil and diesel-fired generation although a 5 MW hydropower plantlocated on the Shebelli river will soon be commissioned. Totalinstalled capacity in 1982 (including captive generation) is estimatedat about 60 MW and consumption at less than 90 CGh (22 KWh per capita);this is among the lowest consumption levels in sub-Saharan Africa.

30. Institutions. The responsibility for the energy sector isdivided among a number of Government institutions. The Ministry ofMineral and Water Resources (MMW) is in charge of developing mineralfuels, including petroleum, as well as hydrological resources. TheMinistry of Commerce supervises the National Petroleum Agency, whichimports, transports and distributes petroleum products. The Ministry ofIndustry oversees the petroleum refinery, jointly owned by the Somaliand Iraqi Governments, and the state-owned industrial enterprises, someof which have their own power generation facilities. The Ministry ofPublic Works supervises the main power utility, Ente Nazionale EnergiaElectrica (ENEE), and the Ministry of Livestock, through its-NationalRange Agency, is responsible for forestry development. The EconomicCommission of the Presidency of the Republic is instrumental in settingenergy prices and in approving energy sector investment. Energy sectormanagement and planning has been weak because of the prevailing dilution

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of responsibilities and lack of coordination among energy sectorinstitutions, compounded by shortages of basic data and of competentpersonnel. However, the Gevernment has now agreed to a Bank/UNDP energyassessment (para. 34).

31. Pricing. Prices of petroleum products, electricity, andcharcoal are Government-controlled. Whereas during the 1970s priceswere held at artificially low levels involving at times substantialsubsidies to consumers, the Government over the last two years hassucceeded in fully covering the costs of providing energy to consumers,and at applying energy pricing as an instrument to dampen growth ofenergy demand. In January 1983, consumer prices adjusted by end-useefficiency were between US$0.67 and US$1.38 per million BTU for charcoal(at official and parallel market prices, respectively), US$0.81 for LPG,US$2.37 for kerosene and around US$7.00 for electricity. Petroleumproduct prices have been changed relatively frequently in line withinternational (CIF) petroleum prices and exchange rate movements. Theywere increased in 1980-81 by over 200 percent, on weighted average, andpreferential prices for certain consumer groups were eliminated. Fueltaxes as a share of consumer prices have also been increased and nowrange from 21 percent on kerosene to 46 percent on gasoline.

32. As a result of this poLicy, the prices on petroleum productscover at least the full cost of imports (border prices) as well asdomestic costs of distribution, and internal transport costdifferentials are fully reflected in consumer prices. Electricitytariffs were increased in early 1982 by more than 100 percent. They nowamount to So. Sh. 2.0/KWh (USc/11.4) for industrial consumers and So. Sh.2.80/KWh (USc116.0) for residential consumers and are sufficient for ENEEto achieve financial balance. Official charcoal prices at So. Sh. 70/MTare low in relation to the non-controlled fuel-wood price and do notcover the long-run marginal cost of reforestation. However, prices onthe parallel charcoal markets, which serve the private consumers, areconsiderably above the largely ineffective official price, which isapplicable normally for the public sector.

33. Energy Investments. Energy-related investments in past yearshave been relatively low. Including resource surveys and energy sectorstudies, Government capital expenditure during 1974-82 totaled aboutUS$70 million, or less than 10 percent of public investment over thisperiod. The bulk was for the expansion of the Mogadishu powergeneration system and construction of the refinery which was financed byIraq. Government expenditures on petroleum exploration have becomesomewhat more important since 1981, with the activities financed underthe IDA Petroleum Exploration Promotion Project (Credit 1043-SO), whichis discussed in paras. 40 and 43. Exploration expenditures are Largelycommitted by foreign companies, which are estimated to have spent closeto US$100 million in the period 1980-1983.

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34. The =nbitious nature and unclear economics of major portionsof the Government's long-term energy investment program indicate theneed for a more systematic approach to energy planning. In this regard,an energy sector study has been financed under Credit 1043-SO. Itcompiles data, evaluates development options and formulatesrecommendations on future energy policies. The study will also serve asa basis for a Bank/UNDP energy assessment tentatively planned tocommence in mid-1984, to assist the Government in developing anappropriate energy sector strategy.

Petroleum Subsector

35. In the absence of domestic crude production, petroleumrequirements have to be met entirely through imports, which reached286,000 MT in 1982 (197,000 MT crude, 89,000 MT products). The 500,000tpy (10,000 BD) oil refinery near Mogadishu, a simple topping plant,meets part of domestic product requirements and produces considerablefuel oil surpluses which are exported. The utilization of the refineryhas never surpassed 60 percent of rated capacity, and operations werediscontinued from late 1980 until March 1982 as crude supplies from Iraqwere interrupted in the wake of the Gulf war. The refinery now runsmostly on crude supplied on a grant basis by Saudi Arabia. Additionalvolumes of gasoline, gas oil and jet fuel are imported for supplyingprimarily the extreme northern and southern regions of the country.

36. It is estimated that over the 1970-81 period, consumption ofpetroleum products grew by an av;erage of 14 percent per annum. However,in 1982 growrh slowed down ra about 6 percent, due to significantincreases in petroleum produict prices. Domestic consumption in 1982 hasbeen calculated at about 210,000 MT, but this may be an underestimate.Gas oil is the most important product, accounting for 54 percent ofconsumption in that year, followed by gasoline (21 percent), kerosene,jet fuel and fuel oil (8 - 9 percent each) and LPG (less than 1percent). The demand for LPG is low due to supply uncertainties and thelack of containers. The transport sector absorbs about 67 percent;electricity generation, 15 percent; industry and agriculture combined,11 percent; and commercial and residential uses, 7 percent. Governmentand public enterprises account for the entire fuel consumption for powergeneration and the larger part of consumption in the transport andindustrial sectors as well. Mogadishu and the surrounding regionsabsorb about two-thirds of all petroleum product consumption. Theremainder is consumed mainly in Berbera and Kismayo, with only afraction being supplied to the interior of the country.

37. Future Demand. Future petroleum product consumption willmainly be determined by GDP growth which is projected not to exceed 3 -

4 percent per annum, large investment projects in the major productivesectors that could lead to quantum jumps in energy requirements,suppressed demand, foreign exchange availability to finance petroleumimports, international and domestic fuel prices, and consumers' responseto future price changes. Increases in petroleum product demand areprojected to average 3.7 percent per annum during the whole 1983-92period, assuming that natural gas from Afgoy would be available for the

- I1 -

Mogadishu area by 1986. In the absence of this gas, the demand mightgrow at about 6 percent per annum.

38. Imports in 1982 of crude and petroleum products are estimatedat US$83 million (US$70 million net of product re-exports, mainly fueloil). Purchases of crude and also some products were financed in 1982through a grant from Saudi Arabia which is estimated to have amounted toUS$50 million in that year and which has been available to cover crudeimports from that country also in 1983. In line with domestic demand,petroleum imports are expected to increase significantly over the nextfew years. Total net imports are expected to peak at 308,000 MT in1986, and then fall below this level through 1992 due to the impact ofthe Afgoy natural gas, which would increase the exportable surplus offuel oil. However, measured in constant 1982 dollars, the net petroleumimports would exceed US$100 million by 1986, and US$130 million by 1992,assuming a 3 percent annual growth in real prices (from the 1982 level)after 1986.

39. Exploration. The responsibility for petroleum exploration andproduction rests with the Department of Mines and Hydrocarbons (DMH) ofthe Ministry of Mineral and Water Resources. DMH is also responsiblefor mining and quarrying and has a professional staff of 10, only abouthalf of which have some petroleum background. These have receivedtraining under Credit 1043-SO, including on-the-job training by theconsultants employed under the project. The 1983 budget of the Ministry(inclusive of Credit 1043-SO) amounted to about So. Sh. 14.4 million(about US$820,000 equivalent), of which about So. Sh. 12.8 million(US$730,000) is for petroleum exploration.

40. Until 1981, the Government awarded concession agreements underan outdated legal and contractual framework. Accordingly, under Credit1043-SO, IDA financed the preparation of a modern petroleum legislationin the form of a revised mining code, mining regulations and modelcontract. A modern petroleum accounting system has also beenprepared. The new legislation provides for improved financial benefitsto the country under a production-sharing type contract that includesincentives for the development of smaller fields together with anincrease of the Government's share for productive fields. It alsoprovides for competitive bidding on small blocks, specific workcommitments and acreage relinquishment, and information requirements.The Government has been conducting its latest negotiations with oilcompanies on the basis of this new framework, which was promuLgatedofficially in January 1984.

41. Nearly 90 percent of the roughly 1 million km2 of land andmarine area (to a water depth of 200 m) is underlain by sediments withsome petroleum potential. Exploration in the country began in earnestin 1948, and 57 wells have been drilled, several with minor shows of oiland gas. Currently, five groups are active in Somalia, headed by Arco,Agip (taking over the Cities Service concession), Texaco, Shell andQuintana, respectiveLy, operating under the previous contract regime.The remaining prospective areas in the south and the north were openedfor bids in early 1983 (see Map), based on a promotional report and ameeting with oil companies finaiced under Credit 1043-SO. As a result,

- 12 -

three bids were received for 10 blocks, all in the south. This was agood result under current international petroleum industry economicconditions. Negotiations between the Government and the companies havebeen completed for nine blocks and the contracts were signed in earlyMarch.

Afgoy Gas Development Program

42. Background. The Afgoy-Coriole area (see Map) was explored inthe early sixties by Sinclair Oil as part of a large concession area,but the company did not find the overall results sufficiently promisingto justify further efforts, and pulled out of Somalia in 1968. Amongthe wells drilled in this area, Coriole-l (1961) tested minor amounts ofoil and gas, and Afgoy-l (1966), located some 30 km from Mogadishu,flowed fairly dry gas at a stabilized flow of 6.4 MMCFD under a surfacepressure of 5,600 psi, although a later test showed less promisingresults. The gas discovery was deemed non-commercial for Sinclair, andthe well was plugged and abandoned and the area relinquished. The oilcompanies which took acreage in Somalia in 1979-81 did not show interestin the Afgoy-Coriole area, chiefly because the area was considered gasprone. The Government and IDA agreed that the area had a higherpotential for gas than for oil.

43. A seismic survey of the Afgoy-Coriole area was financed underCredit 1043-SO. This survey identified several interesting features andconfirmed that the Afgoy-l well is located on the flank of a promisingstructure. A detailed seismic survey was then carried out over thisstructure, financed by a US$1 million advance under the ProjectPreparation Facility (PPF). In all, 810 line-km were shot under the twosurveys, with results of good quality. On this basis, severalalternatives were considered for the development of the Afgoy gasresources, including the possibility of promoting the wholeAfgoy-Coriole block for a combined oil exploration/gas delineationpackage. However, in discussions with several major oil companiesoperating in Somalia it was found that, while the results of the seismicsurvey showed several interesting leads, the area wouLd not be soattractive under present market conditions as to interest any seriouscompanies in the gas project. As a result, it was decided that the areaaround the Afgoy feature be separated from the Afgoy-Coriole block fordevelopment by the Somali Government, while the rest of the block willbe promoted shortly to the internationaL oil industry for exploration,using the interesting results of the seismic survey as a promotionaltool.

44. Recent Findings. The newly acquired seismic data as well asthe data from the Afgoy-l well have been analyzed by the Government'stechnical consultants (Keplinger, McCord Lewis). Their interpretationindicates that the structure has a horizontal closure of about 10 km2

(3.8 sq mi) and a vertical closure of about 500 ft. It is an east-westelongated anticline about 5 km long and 2 km wide at theTertiary/Cretaceous boundary (about 12,500 ft), and separated fromnearby features by a clearly indicated fault. The structure isestimated to contain about 50 ft of producible sands within a 600 ftgross section with more than 200 BCF of recoverable gas. With proper

- 13 -

stimulation techniques, the sands should be able to produce about 5MMCFD per well. These conclusions have been verified by IDA staff andindependent consultants employed by IDA.

45. The deveLopment of the Afgoy gas resources would be undertakenin two phases in order to minimize financial exposure. The first phase,to be financed under the proposed project, would be to delineatesufficient gas reserves through two step-out wells from the Afgoy-1well, which would aLso be re-entered to provide a back-up producer wellat low cost. The productive capacity and deliverability of these wellswould be confirmed through production testing. The subsequent phasewould then consist of the installation of surface facilities, a pipeline

U to Mogadishu, and retrofitting investments to convert major potentialcustomers to natural gas.

46. Somalia's gas reserves, within the range of present reserveestimates, would have no export potential in the foreseeable future inview of the very large investments involved in gas exports and theexistence of several potential competing projects. However, especiallyin view of the short distance from Afgoy to Mogadishu, the gas is ofgreat interest to Somalia itself, and there is a clearly identifiedminimum demand for power generation (thereby permitting reduced crudeimports or releasing fuel oil from the local oil refinery for exports)that is sufficient to justify the development of the Afgoy gas field.In addition there is a potential demand for gas for local transport,household use, and for existing and new industrial plants. On the basisof the results of the delineation drilling, an evaluation of theeconomic uses of the gas would be undertaken under the proposedcredit. This work, together with det led engineering whereappropriate, would provide a firm deu2nd forecast as a/basis for thesizing of the subsequent gas pipeline; determi - need for suitableconversion investments; and prepare the subsequent gas developmentproject.

PART IV - THE PROJECT

Introduction

47. The proposed project was identified during the visit of a Bankmission to Somalia in January 1983 and appraised in September 1983.Credit negotiations were held in Washington, D. C., on February 6-10,1984. The Somali Delegation was headed by Col. Ahmed Mahmud Farah,Minister of MMW. A credit and project summary appears at the beginningof this report, a supplementary project data sheet is given in AnnexIII, and a more detailed technical description in Annex IV. No StaffAppraisal Report has been prepared.

Project Rationale

48. The principal thrust of the Bank's strategy for Somalia is tosupport the Government's focus on rehabilitation and other projects,where possible in directly productive sectors, with a quick yield andrelatively high return. The country's large external debt (para. 18)

- 14 -

also caLls for emphasis on activities that will increase exports orreduce imports. The proposed project meets both these criteria. Inaddition, the project provides for a power planning and gas utilizationstudy which will be an input for decisions concerning the timing andsequencing of investments aimed at exploiting the water and hydropowerresources of the Juba Valley. Through its association with the project,IDA would help to ensure competent execution of the delineation drillingand the establishment of an appropriate local gas corporation once thegas resources are developed.

Project Description

49. The project would include the following components: D

(a) The drilling of two wells on the Afgoy gasstructure, followed by the re-entry and completionas a back-up producer of the Afgoy-1 well, ifnecessary. With appropriate stimulation andmaintenance, each new well would be likely toproduce about 5 MMCFD for 13 years;

Cb) Drilling management (60 man-months at US$20,000 perman-month) to prepare and manage the drillingoperations as the owner's representative. Themanagement team would be headed by an experiencedexploration manager assisted by an experienceddrilling engineer, and include two drillingsuperintendants (alternating during drilling), amaterials man and an administrator/accountant;

(c) Petroleum technical consultants (13 man-months atUS$20,000 per man-month). A petroleum consultingfirm z.vuld provide during the period of drilling awell-site geologist and a petroleum engineer fortesting;

(d) Technical consultants (17 man-months at US$13,000per man-month) for the preparation and detailedengineering for the subsequent development project;

(e) Power consultants (18 man-months at US$13,000 perman-month) to undertake a power planning and gasutilization study, for which the terms of referenceand schedule were agreed during negotiations. Thepurpose of the study would be Ci) to provide athorough analysis for the Government of theinvestment requirements and options in the powersector, taking into account the availability of theAfgoy gas; and (ii) to determine with more precisionthe demand and economic uses for natural gas,investment requirements and gas pricing policy. Inview of the considerable overlap between the twotasks, they would be undertaken in a closelycoordinated manner; The study is planned to startin earLy 1985;

- 15 -

(f) Assistance to the Ministry of Mineral and WaterResources in the form of (i) equipment and furthertraining of the Ministry's personnel (about 18man-months of foreign study) (on-the-job trainingwould also be provided by the Ministry's consultantsfinanced under the project); and tii) the cost ofthe audit of the drilling operation by a qualifiedinternational auditing firm (6 man-months atUS$13,000 per man-month);

Project Cost

50. The estimated total project cost is US$24.5 million, includinga foreign exchange component of US$23.5 million. The drilling rig costshave been calculated at the quoted cost and mobilization fee for theonly rig now availabLe in SomaLia, while supplies and ancillary serviceshave been based on current prices for deliveries from nearby countries,primarily in the Middle East. The cost of consultancy services has beencalculated at rates from US$13,000 per man-month for power andengineering consultants and auditors to US$20,000 per man-month fordrilling management consultants, based on the rates currentLy beingcharged in Somalia; for drilling management and petroLeum technicalconsultancy services, account has also been taken of the need toestablish a functionaL operational base in Somalia (with officeequipment, telex, etc.), and the high travel costs that will be incurredduring project implementation especially by frequent changes inpersonnel on continuous duty during drilling operations. Physicalcontingencies of 20 percent have been included for all components, whileprice contingencies of 10 percent per annum have been included after1984, except for drilling services, materials and management, which havebeen calculated at early 1984 prices that are likely to hold for theperiod of the drilling (up to early 1985).

Financing Plan

51. The proposed IDA Credit (US$18.0 million equivalent, includinga Project Preparation Facility advance of US$1 million - para. 58)together with an EIB loan of US$5.5 million equivalent would finance allforeign costs. The Government will finance the estimated US$1 millionequivalent local cost component for storage of drilling supplies,counterpart staff, administration and right-of-way, includingcompensation to the local population for any damages from the projectoperations. All contracts for drilling and consultancy services wouldbe in foreign exchange and would be financed by external resources inview of the Covernment's tight foreign exchange position.

52. The EIB loan will be on the following terms:

(a) 15 years including five years of grace;

(b) An interest rate of 1 percent per annum, to be increasedto the EIB subsidized rate (maximum 8 percent per annum)from the time of commercial gas production; and

- 16-

(c) Repayments will be waived by EIB, if after three years itbecomes clear that there will be no commercial gasproduction.

The participation of the EIB is expected mainly to be in the form ofparallel financing. An understanding concerning co-financingarrangements has been worked out between EIB and IDA, with tentativelists of contracts suitable for EIB financing and IDA financing. IDA isexpected to finance primarily the drilling services and drillingmanagement contracts. Final lists of contracts will be establishedbefore procurement is initiated. All contracts financqd by IDA orjointly by IDA and EIB will be procured on a basis acceptable to IDA(Draft DeveLopment Credit Agreement, Section 2.03, and Schedule 3.)Contracts financed soley by EIB would be procured under itsprocedures. The Development Credit Agreement contains the cross-effectiveness and cross-default clauses normal for this type ofcofinancing (Draft Development Credit Agreement, Section 6.01(a) and5.01(a).

Project Implementation

53. The project will be implemented by the Ministry of Mineral andWater Resources, which has established a properly staffed project unitto be responsible for the project. The Government would undertake tomaintain the unit in a form satisfactory to IDA for the duration of theproject (Draft Development rredit Agreement, Section 3.02). This unitis based in the Ministry's Department of Mines and Hydrocarbons, isheaded by a geophysicist, and includes a geologist, an-administrativeofficer, an accountant and support staff. In addition, the Government'stechnical consultants are providing under Credit 1043-SO a residentexplorationist and specialists as required during the life of theproject. During drilling operations, a well-site geologist would bebased in Somalia, while a petroleum engineer would be present duringtesting.

54. The delineation drilling would be managed by a qualifieddrilling management company, headed by an experienced drilling engineerthat would prepare a detailed drilling program and bidding documents,assist the project unit in contract negotiations, and as owner'srepresentative, control the drilling operations and well completions, asper standard industry practice. The company would report to the projectunit within the Ministry on a reguLar basis, and on a daily basis duringdrilling, it would have full authority on its own for the operationaldecisions during drilling. The drilling itself will be undertaken by aqualified drilling company, which would be responsible for the supply ofmost materials.

55. Contracts for the various services will be prepared by thedrilling management company for the approval of the project unit. Thedraft drilling program has been provided to IDA, and is beingdiscussed. The agreed drilling program could only be changed with IDA'sapproval (Draft Development Credit Agreement, Section 3.05(b)). Thesigning of a satisfactory contract for drilling management was acondition of credit effectiveness (Draft Development Credit Agreement,

- 17 -

Section 6.01(b)). However, this contract has already been signed.

56. Local CapabiLities. In view of the discrete, one-time natureof the drilling operations, which will be under the responsibility ofqualified drilling management, no significant training uf localpersonnel has been included for this activity, except for on-the-jobtraining during all phases of operations. The staff assigned by theMinistry for the project unit is qualified to undertake the generalmanagement of the operation, assisted by its technical consultants, andmost of the accounting will be handled by the drilling management.However, greater local expertise will be required to manage the

* subsequent gas facilities (completed well, surface facilities andpipeline).

57. Under the credit, the Government would agree to establish notlater than March 31, 1985 an autonomous gas corporation to beresponsible for the subsequent gas development and operation of the gasfacilities (Draft Development Credit Agreement, Section 3.06). Duringnegotiations, an understanding was reached on a program for theestablishment of this corporation. It is expected that the project unitwould become the core of this corporation, to be established once theAfgoy reserves have been proven. Only a limited number of staff (about15 in all) would be required to operate the gas faciiities, with theassistance of a qualified foreign firm. This staff would be recruitedand trained (inclusive of on-the-job training) during pipelineconstruction and early operations, or in the period 1985-86.Accordingly, while some training of gas corporation personnel would befinanced under the present credit, this would mostly be handled throughthe subsequent development phase.

58. A US$1 million advance from the Project Preparation Facilitywas approved by IDA on February 9, 1983 to finance the seismic survey(completed in June 1983) and technical study (completed in February1984). This advance would be refunded out of the proposed credit.

59. Compensation for Land Acquisition and Land Use. In view ofthe relatively sparse settlement in the operational area, damages to thelocal population's land and crops are expected to be relatively minor.The need for acquiring land for the drilling and production facilitieswill be small and have minimum impact on agricultural output. TheGovernment would ensure prompt and adequate compensation for any damagesor land acquisition (Draft Development Credit Agreement, Section3.08). The project unit would be responsible for this matter. In thisregard, the unit would first survey the area to estimate the potentialfor possible damages and then liaise with the Local population andrecord any claims and include data on claims and compensations in theproject account. The Ministry disposes over a special account thatwould, if necessary, be used to pay compensation. This arrangement wasconfirmed during negotiations.

Procurement and Disbursement

60. To ensure appropriate flexibility, the drilling contractswould be made with the option for the Government to modify the drilling

- 18 -

program after the compLetion of each well. For drilling, there is onlyone rig available in Somalia. This rig wilL be available in mid-July,1984, with onLy a few possible jobs on the horizon. rn view of thepresent Low demand elsewhere for drilling rigs, it is therefore beingoffered on advantageous terms, with a competitive daiLy rate and nomobilization costs. No comparable rigs from outside Somalia couldpossibly be offered on such terms. Accordingly, the Government wouldprocure the services of this rig through a directly neogotiatedcontract. Contracts for the various ancillary services would be made onthe basis of the lowest evaluated bid from a shortlist of qualifiedcompanies for each service per sound industry practice, and for drillingsupplies on the same basis from qualified supply firms. The Governmentwould keep Keplinger, McCord Lewis, as technical consuLtants in X

continuation of the ongoing contract for which the firm was selected inaccordance with IDA's rules. The drilling management firm and all otherconsultants would be selected in accordance with IDA's guidelines.

61. IDA disbursements would be made against 100 percent of foreignexpenditures. For the few instances where joint financing of contractsmay occur, arrangements have been worked out with EIB according to whichIDA and EIB would effect disbursements sequentially against separateinvoices within pre-agreed respective limits. Both institutions wouldkeep each other closely informed of any disbursement request as well asof any disbursement made under said contracts. Because of the nature ofthe project, most of the proceeds of the credit are expected to bedisbursed in the first year after effectiveness, and the credit isexpected to be fully disbursed about three years after effectiveness.

62. Advance Contracting and Retroactive Financing. Themobilization of some drilling supplies can take considerable time. Inorder to permit early and efficient drilling operations, it maytherefore be necessary to commence procurement prior to creditsigning. To provide the necessary flexibility for the Government inthese matters, IDA and EIB would permit advance contracting fortechnical consultants, drilling management, drilling contractor(incLuding supplies) and technical consultants, and retroactivefinancing under the credit would be permitted of upto US$1.0 million(6 percent of the credit amount) for expenditures incurred betweenappraisal (September 5, 1983) and credit signing (Draft DevelopmentCredit Agreement, Schedule 1, para. 3(b)).

Accounting, Auditing and Reporting

63. The Ministry of Mineral and Water Resources would keepseparate project accounts, which would be audited by external auditorsacceptable to the Ministry and the Association, and the audit reportswould be submitted not later than six months after the close of thefiscal year (Draft Development Credit Agreement, Section 4.01(b)). Forthe complex drilling operation, also involving substantial cofinancing,the participation in the audit (for the years 1984 and 1985) by aqualified international auditing firm would be required. The Ministrywould also submit a project completion report not later than six monthsafter the closing date (Draft Development Credit Agreement, Section3.07(c)).

- 19 -

Benefits

64. The benefits of the projects under the gas deveLopment programwould be the following:

(a) Development of a domestic energy source close toMogadishu, which would replace imported fuel andsave scarce foreign exchange resources. Potentialforeign exchange savings/earnings (from fuel oilexports) by the early nineties could reach about

p US$22 million per annum at 1982 internationalprices; and

(b) The Covernment's petroleum administration is stillweak and dependent on outside technicalassistance. An important objective of the projectswould therefore be to ensure that the drilling andfield development is executed in a competent manner,and to develop an appropriate local gas projectauthority that subsequently would be able to operatethe gas facilities on its own. This authority wouldbe established formaLly during the period of thepresent project, but most training and technicalassistance (including an initial management-typecontract with an experienced pipeline company) wouldbe provided under the subsequent gas development;

65. Rate of Return. The ex-post rate of return of the Afgoy gasdevelopment would depend on the size and deliverability of reserves, theexistence of alternative sources of fuel, and on the economic value ofthe gas in various uses and the consumption profile. Furthermore, thevalue of gas cannot be determined simply by reference to the value ofdisplaced fuels, but must be assessed in terms of changes in totalsystem costs. No such complete evaluation can reasonably be undertakenat this stage. However, an initial study financed by IDA estimated theeconomic value of gas for power generation at between US$2.60 andUS$4.20 per MCF, depending on the assumptions used, while the cost ofthe gas under minimum demand assumptions would be Uf 1.95 per MCF, at10 percent rate of discount, giving a netback value- of between US$0.65and US$2.25 per MCF. A minimum economic rate of return of the gas

1/ The netback represents the gas price that wuuld cause theproject just to break even and is defined as the present valueof the net benefits of the project, excluding the cost of gasused, divided by the present value of gas consumed on theproject.

- 20 -

program has been calculated1 tt 17 percent, but this could well turn outto be substantially higher.- A 10 percent increase in investment costswould reduce the rate of return to 15.3 percent, and a 10 percentreduction in unit economic benefits would reduce the rate of return to15 percent.

Risks

66. The justification for the proposed project is based on aqualitative as.sssment of the geological, technical and economic risks,which are present in all drilling projects. The geological risk is thatinsufficient reserves of gas would be found. This risk is low in viewof the fact that the drilling would be done on a confirmed structurewhere the existence of gas hag already been proven. The wells will belocated carefuLly based on a detailed examination of the seismic data.The detailed seismic survey has not indicated any faults that couldcreate problems in this regard.

67. The technical risk is that the project may not be compLetedefficiently due to difficulties or serious cost overruns in drilling andtesting the wells. This risk is not high since the available geologicalinformation does not indicate any difficult pressure zones or otherabnormalities. Also, experienced contractors would operate the rig andprovide ancillary services, and the drilling operations would be managedby a qualified and experienced drilling management company. There isaLso a risk that locaL conditions including administration couLd causedelays leading to cost overruns. This risk would be reduced (a) by theexistence of continuous Government administration in the project unit,(b) by using a qualified drilling management, and tc) by requiring thatdrilling operations would only commence once all materials are availableon site. A serious cost overrun due to significant price increases isconsidered unlikely under present market conditions, which are projectedto change only slowly.

68. The economic risk is that the delineated gas reserves would betoo smalL or too costly to develop. This risk is also low in view ofthe fact that the existence of gas has already been proven and that the

1/ This rate of return has been calculated on the followingassumptions: (a) only the minimum demand for electric powerhas been included, for the period 1986-2003; (b) economicbenefits have been taken as the equivalent export price forfuel oil (US$2.80 per MCF equivalent; this figure is derivedfrom a market price CIF Mediterranean of US$170 per ton and a20 percent discount for the transport of small lots fromSomalia;) (c) investment costs in para. 50 have been used,with the cost of the subsequent Afgoy gas development(including retrofitting investments for power) estimated atUS$13 million and operating costs at US$600,000 per year; and(d) the drilling of a third new well has been assumed for 1991to accommodate the growth ir demand.

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overall development program could show a 10 percent rate of return withas little as about 40 5CF, against present reserve estimates of morethan 200 BCF. The development costs would increase if the existence ofvery tight sands should cause low deliverability and thus require alarger number of wells. However, in view of the test results of theAfgoy-l well (6.4 MMCFD), it in likely that with appropriatestimulation, the new wells could produce at leart 5 IMCFD, which wouldbe sufficient for a return of 15 percent.

PART V - LtCAL INSTRUNITS AND AUTHORITY

69. The Draft Development Credit Agreement between the SomaliDemocratic Republic and the Association and the Recommendations of theCommittee provided for in Article V, Section l(d) of the Articles ofAgreement of the Association are being distributed to the ExecutiveDirectors separately.

70. The Draft Development Credit Agreement conforms to the usualpattern of agreements on drilling projects. Special conditions of theproject are listed in Section 3 to Annex III to this report.

71. 1 am satisfied that the proposed credit would comply with theArticles of Agreement of the Association.

PART VI - RCOMMMDATION

72. I recommend that the Executive Directors approve the proposedcredit.

A. W. ClausenPresident

AttachmentsWashington, D. C.April 10, 1984

- Zz - Annex I

T A S L E 3A PAIE I

SOMLIA - SOCAL LOICATOURS DATA SHEErSUHALIA MEFEAz GRoUPS (IEiGILI AvERAGEs) /

NOSF (Chr RECENT TIfIa) lb

196ioaL 197001 ESTIMATSZZ- AFKLCA S. OF 5hURAL AFRICA S. Or SAARA&IRK CtsMMo SQ I)

TOTAL 637.7 637.7 637.7AGRICULTURAL 298.2 298.7 299.2

cw u CAPITA Cus$) 110.0 120.0 280.0 254.6 L147.9

END! CONUMPTION PER CAPITC1L sGRAHS Of COAL FlJtGVALI) 16.0 35.0 85.0 7,.. 724.2

POIUA?M -D YITL S=l=IC5POPULATIOS.Nf-TYEAR (THOUSANDS) 2450.0 3238.0 4392.0URBAS POPULAnTIN (L UF TUrAL) 17.3 23.1 30.9 N9.5 26.5

POPULAnICO PtUJECrECSPOPULATIOS N TEM 2000 ClL) 7.0SrATI.i1X1 POPULATIOt (CILL) 23.3YTUA SrTrbAOSARY MP. EAOED 2155

POPULATIO DENSITYPER SQ. la. 3.18 5.1 6.7 29.5 56.5PER SQ. 1I ACrI. LAND 8.2 10.8 14.3 94.1 U31.8

POPUrIrS AGF STRUCTURE CZ)0-14 YRS 43.8 46.5 43.5 45.0 45.9

15- YRS 53.6 5l.b 53.8 52.1 51.265 A31D AVE 2.7 1.9 2.7 2.9 2.8

POPULATION CGR0W PATE (;)TOTAL 1.8 2.6 2.8 2.8 2.8UlBmN 4.8 5.7 5.4 6.2 5.3

CRUDE BIKET RATE (PER THtUS) 48.2 48.2 48.3 47.9 47.6CWDE DEAMI ElAE (PEM TUOUS) 28.Y 26.8 25.3 19.2 IS.2CROSS REPRO 01; RUIE 3.2 3.2 3.2 3.2 3.2

FAMLY PLAZa;ACCEPORS. ANNLL (TdOUS) ..

USERS (- O HARRIED hUME) .. ..

FOOD AVD ZZITIOUEXDEl OF FOOD PRlOD. Eu CAPI196971-100) 97.0 100.0 62O 87.8 95.7

PSR CAPITA SUPPLY OFCUARIEF (2 OF REQUIREMENTS) 89.0 82.0 100.0 88.0 97.1PROTEINS (GRAMS PER DAY) 76.0 68.0 78.0 51.2 56.0OF WHICH A.LUL AMD PULSE 47.0 43.0 35.0/c I8.1 17.2

CHIUD (ACES 1-4) DEATM RATE 39.9 35.1 31.2 25.7 23.6

LIFE EPECr. AT 3LRIU (YEARS) 35.0 37.2 -'.8 47.4 S1.9INAN MORT. RArE (L THOUS) 175.0 158.5 14S.1 126.5 117.6

ACCESS TO SAFE hATE (ZPOP)TOL 15.0 33.0/d 24.7 25.4URBAN .. 17.0 51.07 56.a 7D.5RURAL 14.0 20.07; 18.3 12.3

ACCESS TO EXCRErA DISPOSAL(X OF POPUATION)

TOTAL -- 47.01 2.1URsAN .. .. 77.d7 65.7AURAL .. .. 35.07 21.9L

POPULATION PER PYSICUIA 36570.0 24530.0 14290.0 Z7420.6 L2181.6PDP. ER RIRSIME PERSON 410.0 4280.0 2330.0 3456.2 2292.0POP. PER HSPITAL BED

TOTAL 690.0 660.0 660.0/c 1183.2 1075.4URBx 140.0 280.0 .. 3E0.6 402.3RUMAL 5640.0 7390.0 .. 3177.5 3926.7

AURUSSLONS PER HOSPITAL DED .. ..

AVERACE SIZE OF WUDSEHOLDTOTAL -- '

URBAN '' ' RURAL .. .. 5.5t.

AVERAIE NO. OF PERSONSIROOHTOTAL .. ..URBAN .. ..RURAL ..

ACCESS TO ELEcr. (2 OF EWLLNS)TOTAL .. ..URBN .. ...RUItAL .. ..

- 23- Annex I

r A r A L E :a rAE z

SOALIA - SOCIAL INDICATORS DATA SlEETSRnALL sEvuIwa CROOn (WEIGHE AVENUES) in

MOST (MOS R ECENT SlTrAZC) /bRECENT lb LOW DICCDI MIDLCiIcomE

9gtlt! 1971-b ESTIMATE- AFRICi S. OF SAHARA AFRICA S. OF SAHARA

ADJUStEO EMOLLUIZIT rTIOSFKLW&RY: TOTAL 9.0 L1.0 41.0 63.9 97.2

HALE 13.0 17.0 53.0 73.b 103.1FEMALE 5.0 S .0 29.0 51.6 88.5

SeWOUAnY: TTAl. 1.0 5.U b.U 12.5 17.ZSAL Z.0 8.0 9.0 16.7 Z3.5FEMAlE 0.2 2.0 3.U 8.1 16.Z

vocArIONAL (C OF SEWUUAY) 26.4 3.1 Z:.9 7.3 5.2

PUPIL-,TACWn RATIOryISly 29.0 33.0 31.U 44.4 42.9stC%DAY 2U.0 26.0 16.U 25.1 23.7

ADULT LITfACT SATE (Z) 1.51j 5.0 60e07ft 36.5 37.1

CcNSmIrrtoMFA5SE E CQAS/TdaUUSaNO POr 1.L 2.1 .. 3.3 18.8RADIO IECEEVENS/TMusII POr 9.8 L5.4 20.4 45.3 97.8TV ReCEIVERSITNOUSASD POP .. .. .. 2.2 16.6NLVS1APE* (-flALLf ccsM.It;MlST-) CLtuLATIOSPER TdOUSAND POPULATID 0.8 1.4 ,, 4.7 18.Z

dEVIL AZIUAI. ATI13DaSCEICITA 0.6 1.5 ,, 1.0 0.6

TOTAL LAOR FORCE (WOOS) 1017.0 1257.0 1717.0FRLALE (PERCEST) 30.1 29.7 27.5 34.5 36.1AGA2CULTURE (PEcENT) 88.0 85.0 82.0 76.9 56.8INmUsr (PESCET) 4.0 6.0 8.0 9.8 17.5

VARTlCIPATION RATE (PERCENT)TOTAL 4L.5 38.8 39.1 40.9 37.0KALi; 56.7 55.2 56.2 53.0 47.1FLMALE 24.7 2z.6 21.7 28.S 27.0

EcOOMC OEPENCY RATIO 1.1 I.Z 1.2 1.2 1.3

INCM DVMtIBSUIIPERcENT OF PtIVATE IN;CdE

IlGHES ,5Z OF WOSEdOLDS .. ..dIC*MST 201 OF HOOSEdOLDS .. ..

ULMEST 201 OF lOUSeIUOLOS .. ..

LOUES? 401 OF UgtOStDLOS ._ ._

iouwon %Mt=GESTLIATEO aISOLOTME POVERT iCuLEVEL tUSS PER CAPITA)

URBAN ,, ,, 150.0tE 165.9 534.2

RURAL .. .. 11o.0r 87.4 Z55.9

ESTIMATED RELATIVE poE=TY INCOMELEVEL tUSS PER CAPITA)

gaBi3 .. .. 65.0/f 100.8 491.5RURAL __ . 50.Olr 64.6 188.1

ESTIMTED POP. 8ELj. IJSOLUtEPOVERtY INCOME LFVEL (2)

URBNM .. . 40.0/f 39.5

RURA. L. .. 70.@0f 69.0

nor AVAILAULENOr APPLLCABLE

N u T E S

/a The sroup arages for eacb indicator are popa:ionve4Ited arithmetic _ans. Coerage of cou£ntrie mong theindicators depends on availabilitr of data and is not unlfora.

/b Unless otherwise noted. -Data for 1960- refer to any yer between 1959 and 1961; 'Dta for 970- between 1969 and9I71; ad data for -4ot Recent Eacteare betwee 1979 and 1981.

/e 1977; /d 1976; /e 1975; If 1978; A 1962; A 1958; / Increae due to lteracy campaign of 1974.

Hay 1983

-24 - ANNEX I

Stot" tthatimjt c data ore droso fmo -em, s-marly J55A cm as om ucthrtosiw mM ntasal.. it 6jan1 ala 0. otaCd tugt tbyr amp -s, ha lftwetaiiLy

damoitm rdr at. agit tadgiatoolns. .aSraacre ar. saje dStf.ra. hasam. ca.itm..

it' nEon... smo.n art (1) th ea a-Crmey amop .8fth csubmohis mosy -0 (23 a a-IpY grmp 'Ath *VVaadotV higher, d-mroo teas tmcto M ocsary srt. of themOit catc ro-L septo I. meshb t1..' OiL tasmacrmog Stt Qa.- 'UtIot ba-. Nh Africa ad MiSt, bat" S. chasa McM.. .t osasrato.mtoa

ottgta . tot. Cot.-.. capW doess at aflM-. an jagt-lasi -Isitdc citbc a arse. Mom atmr ak M than _aIy m. am.rrva tha raomflw L. agarms0 MtnS. far that Lsadiatas. Vies. ao CooeWag at camtfl"mmom ds lodicotaws denSe - cmt aralahtl!ty at data aSd tam -teliss. c-me- mast s

-awtm S. niac -wamlfd, or oma tssioas ot -me-Sr Tlama afroma amt aty 'said. t. o amrcs toe eL.. at an Ladiatar- et i. El- M tow aCwatry aMraacnas."..

Ani, Ithooasoo mc.ha.) ft vMlptn Phjtce - isemt1m, t1ridod hr Votor .1 aractista41d.&- Te1 artas am. caoprlatag L." am as slas- -saw-m stoo. WjiE -%=tItflr. a-iA. nb! at aeatp lo-.L.tIOt as flUO data Ptatotto a. aif-maPants- Pagaata dimtdmd by Mbe. at crornlic

4gk1-L- tZitato at agrtLtgolat.. ro mmm iMpwtri or pwttacatly"I L -1W I,&owps-amCum,pwom. aroMs hsswma aftimaW as co Ito 11.1 itug. owrait 5 -a14ltJ,a.

5010 as seas dat. - -tesltm as0 I'ticll,d-tc! ta,a orl-P~io st!

CayP sM CAPITo tugs; - mI Par Copseo -tsaNam at Car,a ihft prisCms. a-Stal. to Pb1C aos Prtaato EMmmi as mpec1,aLiaI bompicAi as.o4_L.M asasf- &- athS a brad hass me". (5910.1 Moiti; tghbhiitatia --state AL. .-ptaa nematiAtalos-s smamotati mtatts

sun. sin.Mas c11Mi o b data. hrMa amt P"coi-ia.-btaltob-ats P-SaccLe artoriceli ca-filacar eat ate iLSaVd. PWart oampicalo. macens, ILari Match as

a Tianucmwrti rim cantoA - A-naI cntrotn caomptcse t or C sest. adtal ctio :as amttyL assEtS hr a p1t,sicLos (1a hp a asscal pe.Tas -amy C.-L as !i5cite. p.crw!aao -tarat, 5ae as hyre aemamaas MCI---daetfa Ott.) roe miss it-netie -camosia asas gmmshaaalol. cr.tsiy) to hii4nrass at cat 9lsqatria p.s aopite: asrooda eL"5sstcad rass at 1- ac t in iti". far eco1atsatsocam190. 5910. as i= SM. arIa 11mptiLAt InL.da flb pfLniemlLmtsao. hapgcal, An -or

Mopical= locaterol Mat I-rtcat as7 -tan, asa-L. ota,Woiaf a atta ryansu' Amnczai±ca ta14sa1i0tmtalLg a T i.ccss.! o.. med et.f .diCMz

&wooltibsoAllsoo W -Mu W i t's mamas omy o05d.FthAEaPsoote-t.at I ara awo art -91 act.. 'femMotta cmatt

~ casria: llS 110.as19w- dta araat lisa. tA. baahl (sanda Wa hainh,at -ytac E! tra as.6 ret

souiil ppzLTWby as aa as .sbstor stcrlts al forcitfty cbs Iamad tar nartAscel peccasas.

-euAIta L ..eSteL, as foa. lEa It.sCtcay mtabttSetose as fl.1 alae raa-al-wmSr. bat1toa alas6 sc-p-w-oe scrnctoras asyam.. lbs pera-ctr'. Ea fr tuirty rftsta l Mom Ithem IasSo i-csptfl p.rta.

ea -at dastta to t-artity mte-1.s W isam Soya! -as nt C-aair AMa - tlcrcs ewa of dL LSia-) - -acI. rott- aS rar -pta Z ata.e F.*Ec trsy to ebe -aateamd on attoa t. t-.9 A-Mcotas imttggot .las Mu to tirta -artAn as Peo og

mmltca ataralt lanitIty teSe tar prejntss. casino. at tatoa. i.,. ad caro dtlaaM rampattoety.StatIame mtaoga amatswY ataslatto thato. it atg.sh

atas cm "'th ft to .me W to r dant Moa. asd alas s. ag cdractactar roostas c-rac. The. to aihs-ol ety ekeo fantlttty cams Z~ty.SLea-o7tjwa

inl.- toe Cautasa I-ota .1t aL rsardntsa mat. taoM ortaeti-ti.tcatTil as tacate - ia togaS, Mta. asw fa-tal-sh 1s-rosl-, at am Coldasw asooot -- ast.. atstamy oritt7w ciLnina aI citaproary LamaS as paeasa.. a rarasta

asaato sm C.s wsstlad -Mh VW sto at toe "Wco)ms.4cadte-ar- prrtsy ashoal"Vos tcamlscoo: miaolt, lasts.. shi&dra "Mm 111.Itti atlo, pwaalota is CIO yar I20.0 asf ta rota at dsciga at rows. Mat adjasc far 112t te t loqth at prtany Snmostat for

.arUsracyasaet M s raatad. C b a a ttst tn epp aea ..ar t. a-t-ptota -sac ab-. s ow

s-o-ft-MAd-par P.Pcto,cae ar- meat. ti,aea (500 MMgrs) at ratdms sassL. atctl - thea r trais'tag l oe.gas 1st-- 5F- 960. ISM, as low0 dat. MOLL. meal,V adf to C.7t pwm,.1 atP; CowraasaSec- a-tat -

ft' m. ha. wrlstosltol lo-d - C-Pt"ta as seat far asr1tsotaot SLoo amatry aolidw.-LT; alug. ScYOr as iUNs aso. ftc.isal, aesaloam tacc of olood-F) - eacattmt t-AscMsAM

to ass, a mets o) eM -1 ooar) at p.atscwsss at stad"asr -Ly as as daPatt-na S9 astSsrY aattitotMe-

PataLlorta CtmCtm(ara)- rm lask roth, cmso of swIms Salt ttse Beta (tme) - Ucatac SalWta oio - r-a ae .trtc)a

~~Alnk10teAgettlameoSi - east tire Mhtr-emst,bs pa-1- on LI 7of rid-

bed, mreet ftac (a. chaatda A saL dattl P-s tr--1a at ai-am1--aof Strthma swIsLtl.9) - Peaa-mgr 'Crse sasste ate.

baa ftaftrEscs feta - A-asage ..shar-at d-ghtoro amuls wiJ. '.W Ia a11lt-sy akttake.-VLrpooto P""s it abs ascenlotoes, Poesot m-.P.Ltlc laat. tacst.r (as chamao VMaS-c - ALL tycam t matse-rn far "tIo

lentLs 7 -s; -- '4Tl tir-Yser oa -waoaft,o M 9w. tOm, as -- adkat -to-taatr P-li L. chain at rapac-lia; we s,. ,,tu. lIIa,-- reassare it -rtat fi - p.an St ralita at I.

taills Paoooloss, nrnr.haI(h at -oats shradatvasai to attorms; dwas far n tn as -was cam ha t sapeah tm taint.C esa N taaairara En taaadaoltat ters..trtrdostPasRy loaia - an asrea S wsad aal- Prmsme staTVadgcsc't rsl C .. twodam 1- cato TVa a-I- aissa 19 acae

meaat tii.tsrt5 a. tt-l gae) s's a lrt'satrr Saiss t I asack a imecaa S rgio I".asS _ tat_a_i stnt

ofli Mf=latTl- rtra-trcia or 9 daia eata oatnac ta arf drV ad a a. sferii.!

ols.Amncatr. oraltwsaalms ,,aaottdmmaaa s a'dafi t etse asstt.dt a_-Ske.-_

food ad tea caM a am a C_dttta se. ringasy 5e4 la.. tna =U.:- ocaim ea owl... Yea - ftmad a ntsr ofofansalat at so-) slusch an Sodlel ad somokseo trtlast (.4. t -haa si dar, aUsr aiotseaoistt dre-to ate- as

afro. as too ar laad). ftgraseg p"odntiaeti as -tCory aso ahIo "R"t.haa1a - iat eseqa acadaarsets -ftft.s; aSs-65. MM10 as stAtdate. 451am -a

Tar csicascal af IrIa (wtcmatS rnctnsttm - CAMocod En, Wlll 55_c (thomeadmi Esatsl astls-s p,"toga, lettidic jroSSr. lmIlots cppts cssla damcts d'I.aK. C-Fta o Pot .Ioccas SPoplas. MEartm - a sar1eot sooacris arm. a-

apratte. aSd sheapoa S. antci, in MppLtS- -asads ealo faa, -s5a. rMoorobll; 19600 1070 as atia datata fttia aso is tf." piacwseltsg e5d t-ts- it dloeatbotaso. "aMattntt5 . ras. &oar lerca asP.-M."eas at.LW tota"aerii..

tacaaaaar a.cgassd OW VolhtS ao Mhtoaia s." far mmmc M - I ---y,C, - Lamst ..- s iS. ac-at. farosac',. b-C&g asattli s ats Caaadafl selrasest,at r-aroaw. Osdy -atigte, m" 1--i&Lvteik .1 teal. to fwon: 196W. 1910 oS aul damo.

agp a.s -E dioetshtboto at pePcoclatl .5 atlstOs 15P-raa far mat tosasr, (C r - tCar taerti aasiae. ramattotOam o-Efotwctslat ftawaatd ttt; mi0-es, &In as 1to. date. .as lts iy. act.r oo sas as ca-a41o tF twi. lamr ftar; tWOS,

Par te"t e...a ot attacfar- Ms dor - Prate. -me,- ti war arpta pm7 aS, its:t a.-atMtgY at tea Wa jay ateaply aE.a" it rf taM- a ate. VcutttIa t ftat (r-.tc)- a - -IaS.. aS jfoal - Vwcntctnt,m ar

als t 0geoiar at met amassg ra day as JO sMa af saca4 -s -atata at ata. amLo as issai. Cmooo Lt l an- rt1r-scy-.p.!. asto.i. at fltsh SO gtas at-ld ha -&tamL araLo. 7bs. ISM. LIcM. l 11011 data. ?ho at teas at .W,.a -1,ict1moims- ramstetsdwtdm on lastc. ta ome ad 75 ama at tota Pr.t.. as 25 s.- mtsacifta ag-acarcr at C" wanottas. o5 ftwo si tosS. S toal psttt a a Mergfr- sa arId. ar Iaa hr row ga to ta- astooaa art tnt aittise wasing

tIt irdPad 1aes. t-O 0 as litS dam. rsmat taNWar ai - Pastiorm ptpmlotlms -ss1- as 45 asat t Pr- t-Itaras -ae n tt a-.I "Ie- Pftms. sppy wi fain tatr"L lserfete.

COtta ifmet I-t) 0-1ct utas a cOmaS) - Cal- daha am, clsbasd. St P-raErcoawttr ra fKIst Sm -t sad Moted - Racaiod by .cohaot Iage eras s-a Tsan, a smilO 55heat at-ss: frw meo da-loplss P-ta. rom P- sCatt. satsei 20 arcas. as P-M.i-at* w-rco atta ftotm Ste dac-sa rnt SLia caolt; IV0. 1970 as 9tea data. sati.

UIW fosea a nrc atm aaaama a.atit aligl t!aiemtoc r seep parort -mme sf yena; I-sL.,.aatVn1itc sl s11dm sh-st ha itte-p-d .a,t tainiatMhi santo-bfast ftrttlSe, ltat tact t deS - Sar1 dattos f Lfago, asec ma i.tSast-tialase bran !a len (551 a.cat. - milmea r-l-I

yaot. atag rat cm-a" iar OSRta.; IS"0. 11610 05 t"It d.At. Asael,ma sL r tom P-asaI l La thtla-os oca :. aL as - . a st1meoFis at V.i Wta (tarco .5 sotaSal- ttl stat adcaa -arasty adeoat dit pL- a- -Lto tmm-da nesltas L.at

mastat ast (C-te. -rIm. ascrfoft smahaaa to ata_:1 at"Masls..-"I,r sosply (aaS ceamtad ssEa astor ar -tratad bct tatteod "Srotacs P""a' Toa t.n.t tal "'r- 'ant' . jibes -`rt

.meotsoaacd acr.mC. - tmctt c- rass oriaWe .M ata. V,PLl. a.tnit!oS.L asatit -rtet tsaetr m t v It cantoHa'rr -Its) ofattss st , chaIr mametum 1 aZcols. - aasatSaa s L cm aM ty ie L.rm is-ard tn te caro

arIa ra apails f-ott.ota a. msaana L-ro - tars tea20 log atar lam -it. dts-m tar Cg5 osat ot 1iw1wa sM team aa.Efa a .casa ha cso.-src a halo wichLm ntsals scs-a at that tE.tt= Lr=sot t 51.ath.ceeaer!nlca-rr -lMeos

ba. asaa -re r -osmat -.saasc asi lolysht S th-maf. ra to tet or -arLso.- (Mes o .c! naofte at st hasseald da -at ha W -Po ma a i-oaroerciata t-rt at

,f day it tarshLta sh. foaiy'a sla -ast.arc.c o Sntateaess (ate t ctsatm -teat, steam, as

may bassto to. tLotiatia asd atara . -L"i as cithoot cn-c-an. at 5ia.kt ma aSaL1 3nC. OLagm1s0.-o -art -5 _ _or-s by .as-t e5.cato. ac tic tt.o Oor; a rarsa -rrecWrissa as stal. imcalraa. o 5563

-25- Annex IPage 4

CNP PER CAPITA: US$280 (1982) 1/

CENTRAL GOVERNMENT FINANCE1977 1978 1979 1980 1981 1982

(Million So. Sb)

Total Revenue 890 1420 1526 1421 2262 2687Current Expenditure 802 1362 1573 1670 2795 2880Current Surplus or Deficie (-) 88 58 -47 -249 -532 -193Other Expenditures2/ 820 1010 1671 1402 587 1854Overall Deficit 732 952 1718 1657 1119 2047

BALANCE OF PAYMENTS

1978 1979 1980 3' 1981 1982O(ilion US Dollars) (Pr. Est.)

Merchandise Exports (f.o.b.) 109 106 133 114 131Merchadise Imports (c.i.f.)31 -275 -394 -461 -442 -461Trade Balance -166 -288 -328 -308 -310

Services, Net -5 -12 -8 19 19Private Transfers, Net 28 36 57 64 11Current Account Balance -193 -264 -279 -225 -310Direct Investment Official Granr Aid 78 58 143 148 155

Private Net - 4 - - -Official, Net 79 84 87 73 99Errors and Omissions 7 19 21 -9 -19Overall Balance 21 -99 -28 -13 -37

RATE OF EXCHANGEFrom 1973 to June 1981 - US$l.00-6.295

From July 1, 1981, Somalia had a dual exchange rate:US$1.00 - 6.295 (for essential imports)US$1.00 - 12.59 (all other foreign transactions)

From July 1, 1982 - US$1.00-15.22 (unified)

From July 1, 1983 - US$1.00-15.22 (a managed float)Plus 25% premium on emigrants' remittances.

Laresr (Dec. 1, 1983) - USS1.00'17.58

11 Based on tentative estimates of National Accounts recently prepared by EPD.

2/ Includes mainly development expenditure largely financed from external assistance.

3/ The import data for 1978 and 1979 include Franco Valuta imports.

March 1984

-26- Annex I

Page 5

MONEY, CREDITS AND PRICES

Dec. Dec. Dec. Dec. Dec. Dec.1977 1978 1979 1980 1981 1982

(Hi =ion So. -Sh-.)

Bank Claims on Government (Net) -97.8 311.1 1,231.3 1.902.4 2.249.6 2,100.0Bank Claims on Private Sectorand Public Enterprises 1,280.7 1,404.6 1,725.8 1,977.2 2,296.0 2,923.8

Money Supply 1,325.1 1,728.0 2,335.2 2,783.2 3,674.0 4,108.4

(Percentage or Index Numbers)

General Price Index (1977-100) 100.0 110.0 136.2 217.1 313.2 388.7Annual Percentage Change in:

General Price Index 9.8 10.0 23.8 59.4 44.3 24.2Bank Claims on Private Sector

and Public Enterprises 29.8 9.7 22.9 14.6 16.1 27.3Money Supply 33.2 30.4 35.1 19.2 32.0 11.8

MERCHANDISE EXPORTS

Average 1977-79 1980 1981uS$ Min. Z USS Min. X US$ min. Z

Livestock 71.2 74.5 101.6 76.2 97.7 85.8Bananas 9.8 10.3 8.1 6.1 6.0 5.3Meat and Meat Products 2.1 2.2 1.0 0.7 0.3 0.3Hides and Skins 5.8 6.0 6.6 5.0 2.0 1.7Fish and Fish Products 1.5 1.6 0.3 0.2 1.0 0.8Others 5.2 5.4 15.6 11.7 6.9 6.1

Total 95.6 100.0 133.3 100.0 113.9 100.0

EXTERNAL DEBTUSS Min.

Public Debt (Dec. 31, 1982)1/ 1,369.5(of which disbursed) (991.6)

DEBT SERVICE RATIO _

Public Debt 1982 (estimate) 27.0(imcl. arrears)

IDA LENDING (March 30, 1984) USS Min.

Outstanding and Disbursed 134.50Undisbursed 59.90Outstanding inc. Undisbursed 194.40

1/ Excludes undisbursed commitments from East European countries, totalling US$154 million,which are not expected to be disbursed any further.

March 1984

- 27 - ANNEK IIrage I of 2

STATUS OF BANK GROUP OPERATIONS IN SOMALIA

A. Statement of IDA Credits (as of March 30, 1984) 1/

IDA UndisbursedNo. Year Borrower Borrower (USS Million)

Ten Credits have been fully disbursed 64.6

623-S0 1976 Somalia Drought Rehabilitation 8.0 0.34

635-SO 1976 Somalia North-West Agriculture 10.0 0.62

698-SO 1977 Somalia Somali Development Bank 5.0 0.48

699-SO 1977 Somalia Third Highway(Hargeisa-Borama) 7.0 2.58

738-SO 1977 Somalia Third Education 8.0 1.64

821-SO 1978 Somalia Technical Assistance 3.0 0.92

838-SO 1978 Somalia Fourth Port 5.5 0.21

905-SO 1979 Somalia Agriculture Extension 10.5 6.04

906-SO 1979 Somalia Central Rangelands 8.0 3.68

972-SO 1979 Somalia Bay Agriculture 12.0 9.69

1043-SO 1980 Somalia Petroleum ExplorationPromotion 6.0 1.38

1105-SO 1981 Somali3 Fourth Education 10.2 2/ 6.56

1236-S0 1982 Somalia Second Mog. Water Supply 15.0 2/ 5.33

1324-SO 1983 Somalia Fourth Highway 23.0 2/ 20.43

TOTAL 195.8 59.90

of which has been repaid 1.4

L TOTAL now held by IDA 194.4

TOTAL Undisbursed 59.90

1/ The status of the projects listed in Part A is described in a separatereport on all Bank/IDA financial projects in execution, which is updatedtwice yearly and circulated to the Executive Directors on April 30 andOctober 31.

2/ Credits approved in SDRs; principal and undisbursed amounts expressed in USdollars equivalent, computed at the March 30, 1984 exchange rate.

- 28 -

-ANNEX IIPage I of 2

S. Statement of IFC Investment(As of March 30, 1984)

Fiscal (Amount in US$ Million) wYear Obligor * Loan Equity Total

1981 Somali Molasses Co. Ltd. 0.375 - 0.375

Total gross commitments 0.375 - 0.375

less cancellations, terminations, 0.054 - 0.054

Total now held by TPC 0.321 - 0.321

- 29 -

Annex III

Supplementary Project Data Sheet

1. Timetable of Key Events

(a) Time taken to prepare project: 14 months

(b) Project prepared by: Government and IDA

(c) Identification mission: January 1983

(d) Appraisal mission: September 1983

(e) Negotiations: February 1984

(f) Planned date of effectiveness: July 1984

2. Special IDA Implementation Actions

A US$l million advance from the Project Preparation Facility wasapproved by IDA on Pebruary 9, 1983, to finance a seismic survey anda technical study, both of which have been compLeted (para. 58).

Advance contracting from IDA and cofinanciers would be permitted fortechnical consuLtants, drilling management and drilling contractor(including supplies), and, retroactive financing from date ofappraisal (September 5, 1983) of up to US$1.0 million (para. 62).

3. Special Conditions

(a) Before credit effectiveness, the EIB Loan Agreement would havebeen executed and all conditions precedent to the firstdisbursements wouLd have been fuLfilled (para. 52).

(b) An autonomous gas corporation would be established by March 31,1985 (para. 57).

- 30 -

Annex IV

Technical Summary

Ceology

1. Somalia is a country with a land area almost ihe size of Texas,and with a land and marine area of almost 1 million km (to a waterdepth of 200 m). NeLrly 90 percent of this area is underlain bysediments with some petroLeum potential. However, the geology of thecountry is known only from limited field geological studies,photogeologic interpretations, subsurface information out of the 57wells drilled, and from various reconnaissance and detailed geophysicalsurveys, often of old vintage and consequently of poor quality in termsof modern seismic.

2. Of the wells drilled so far, many had oil and gas shows, butthe only discovery has been a gas discovery at the Afgoy-l well nearMogadishu. The wildcat density is a low 1 well per 16,010 km , and mostwells were based on old seismic techniques current in the late 1950s andearly 1960s. Thus these wells were often poorly located, sometimes onrather undefined shallow structural features that were not reflected indepth since deep potential structures were evading the seismic detectiontechniques of those times.

3. Somalia has widespread and favorable thicknesses (up to anestimated 30,000 ft aggregate) of marine and deltaic Jurassic,Cretaceous and Tertiary sedimentary rocks. These rocks contain oil andgas as exemplified by the numerous oil and gas shows (encountered inabout 65 percent of the wells drilled), and also in some tests (gas inthe Afgoy-l well (1965-66) and 120 bbl of condensate per day in theCoriole-l well (1960). The Somalian sedimentary sequence also containssome oil seeps and favorable petroleum source potential, as demonstratedby geochemical studies, as well as potential porous and permeablereservoirs such as sandstones, reefs and biodastic lenses, which have tobe detected in a geologically favorable position.

4. Somalia possesses several types of structures of various sizesincluding anticlinal and fault controlled traps combined withstratigraphic possibilities which could contain major accumulations ofoiL and/or gas where properly located. There are some known surfacestructures capable of holding several hundred million barrels of oil orgas equivalent, but these have not yet been drilled. Overall, thepetroleum potential of Somalia can be considered as reasonablyfavorable, as indicated by the significant number of oil companiesinvolved or to be invoLved in exploration activities in the country.

- 31 -

The Afgoy Structure

5. The Afgoy structure, which is located about 30 km fromMogadishu, belongs to Block 9 (the Afgoy-Coriole block--see Map), whichwas explored in the early sixties by Sinclair Oil (with partners) aspart of a large concession area. Among the wells drilled, the Afgoy-1well was drilled in 1965-66 to a total depth of 13,652 ft. The well,which was located on the basis of a small turnover identified on a

V shallow depth seismic reflector, turned out to be a non-commercial gasdiscovT?y for the companies, which were exploring for oil. Gas wastested_ at a stabilized rate of (a) 6.4 MMCFD in the perforated

r interval of 12,710 ft - 720 ft with a small amount (8-10 bbl per MMCF)of 50-54' API condensate and some saltwater, and (b) 7 MMCFD with asmall amount of condensate from the perforated interval 12,540 ft -554 ft. These tested intervals are within a 600 ft thick sand and shalezone extending from 12,300 ft down to 12,900 ft with net producible saneintervals of close to 50 ft. There are possible hydrocarbon bearingzones between 7,250 ft -. 7,400 ft; 8,000 ft - 9,000 ft; 9,500 ft -10,500 ft; 11,000 ft - 11,500 ft and at the bottom of the well between13,550 ft and 13,652 ft. This last zone has also produced some gas andcondensate with a large amount of saltwater in an open-hoLe test.

6. In 1982-1983, a high quality seismic survey of approximately810 line-km was shot over the Afgoy-Coriole block, including some 200 kmof detail over the Afgoy structure. According to the Ministry ofMineral and Water Resources' technical consultants (Keplinger,McCord-Lewis) the results of this survey indicate a horizontal closureof around 10 km2 (see Map) with a vertical closure of more than500 ft. Keplinger's depth contour map also shows that the Afgoy-1 wellis located down deep by perhaps as much as 450 feet on the northwesternflank of the Afgoy anticline. Indeed the study clearly determines thatthe Afgoy feature's structural axis migrates southeastwards with

1/ A 1966 chromatograph gas analysis reads as follows (inpercent):

A. Hydrocarbons B. Inerts

Cl (methane) 68.16 Oxygen 1.00C2 (ethane) 5.50 Nitrogen diotrine 20.55C3 (propane) 2.09 Carbon .06C4 (iso-butane) .48 Carbon monoxide 0.00CS (iso-pentane) .26C6 (n-pentane) .21 Total Inerts 21.61C7 + (hexanes +) 1.07

Total Hydrocarbons 78.39

Calorific Value 854.6 Btu/CF.

- 32 -

depth: Afgoy-l lies at the apex of the shallow horizon but wyvl awayfrom the deep structure's apex at the depth of the gas sands.-

7. Finally, the technical consultants have also prepared a newappraisal of the gas reserves based both on a new interpretation of theAfgoy-l (computer porosity-permeability-water saturation calculations)and the recent seismic results. They estimate conservatively therecoverable Afgoy reserves to be about 200 BCF or about four times theminimum quantity required for the gas development program. Due to lackof thorough testing at the time of drilling and to the incomplete wellrecords, it is only possible to present an estimate of the Afgoy-ldeliverability, which could be about 5 MMCFD with proper re-entry andstimulation techniques. Wells located on the apex of the structurecould well have a higher delineability.

8. The technical consultants recommend the drilling of two weLls(see Map for the proposed locations) and subsequently the re-entry ofthe Afgoy-l well. The proposed Afgoy-2 delineator well would be drilledon the apex approximately 400 ft structurally higher than Afgoy-l and3.5 km south-southeastwards. In this structural position, the mainintervals described in para. 5 are expected to be reasonably developedand possibly under a coarser or cLeaner sand facies. Appropriatetesting of all interesting sand intervals would be undertaken afterinspection of the well logs. The second new well (Afgoy-3) wouLd belocated as recommended by the consultants in the crossing of two seismiclines. Following the testing, both of these wells (and the re-enteredAfgoy-1 after any necessary stimulation efforts) would be completed asproducers.

l

1/ This fact and the absence of gas/water contact at the Afgoy-llocation (according to the well logs) confirm the existence ofa 600 ft gross gas system or gross gas bearing sectioncontaining the three tested sand intervals referred to inpara. 5.

"T ~~~~~~~~~~~~~~~48PEOPtE'S AF SOMALIA

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O c e o n ;f? @ ~~~~~~~~~~~~~~~JANUARY 1984