Embed Size (px)
Citation preview
Document of
The World Bank
FOR OFFICIAL USE ONLY
PERFORMANCE AUDIT REPORT
PEOPLE'S REPUBLIC OF BANGLADESH
PETROLEUM EXPLORATION PROMOTION PROJECT (CREDIT 1402-BD)
Operations Evaluation Department
This document bas a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
CURRENCY EQUIVALENTS
Currency Unit = Taka (TK) US$l .OO = TK 24.0 (January 1983: appraisal)
= TK 34.9 (June 1990: Credit closing)
WEIGHTS AND MEASURES
1 barrel (bbl) = 42 US gallons, 0.159 cubic meter 1 cubic foot = 0.028 cubic meter 1 MCF = 1000 standard cubic feet 1 MMCF = one million cubic feet 1 BCF = one billion cubic feet 1 TCF = one trillion cubic feet 1 metric ton of oil, 0.85 sp. gravity = 7.4 barrels
GLOSSARY OF ABBREVIATIONS
ADB Asian Development Bank GOB Government of Bangladesh HHS Hydrocarbon Habitat Study IOCs International Oil Companies MC Model Contract PCR Project Completion Report PAR Performance Audit Report PSA Production Sharing Agreement Petrobangla Bangladesh National Petroleum Company UNDP United Nations Development Program
FOR OFFICIAL USE ONLY
PERFORMANCE AUDIT REPORT
PEOPLE'S REPUBLIC OF BANGLADESH PETROLEUM EXPLORATION PROMOTION PROJECT
(CREDIT 1402-BD)
TABLE OF CONTENTS
Preface ............................................................. i Basic Data Sheet .................................................... ii Evaluation Summary .................................................. v
I . INTRODUCTION ................................................... 1
....................... PROJECT OBJECTIVES. DESIGN AND PROCESSING
A . Project Objectives ........................................ 2 B . Project Design and Description ............................ 2 C . Project Cost .............................................. 3 ....................... D . Project Processing and Organization 3
......................................... 111 . PROJECT IMPLEMENTATION 4
A . h e ~ i e w .................................................. 4 ........................ B . Seismic Work and Processing Center 4 C . Hydrocarbon Habitat Study (HHS) ........................... 5 ........ D . Model Production Sharing Contract and Legal Advice 5 .......... E . Other Studies, Technical Assistance and Training 7 F . Project Cost .............................................. 7
PROJECT RESULTS ............................................... V . PROJECT SUSTAINABILITY ........................................ 8
VI . FINDINGS AND LESSONS .......................................... 8
ANNEX: 1 . Comments from the Borrower (Ministry of Finance) 2 . Comments from the Borrower (Ministry of Planning) 3 . Comments from the Borrower (Petrobangla)
This document has a restricted distribution and may be used by recipients only in the performance of their official duties . Its contents may not otherwise be disclosed without World Bank authorization .
PERFORMANCE AUDIT REPORT
PEOPLE'S REPUBLIC OF BANGLADESH PETROLEUM EXPLORATION PROMOTION PROJECT
CREDIT (1402-BD)
PREFACE
1. This is a Performance Audit Report (PAR) on a Petroleum Exploration Project for Bangladesh, involving Credit 1402-BD in the amount of SDR21.4 million (US$23 million at the time of negotiations). The principal objectives of the Credit were to: (i) revive the interest and engender the participation of foreign investors in petroleum exploration efforts; (ii) ascertain the reservoir configuration and establish firmer reserve estimates of its existing gas fields as a basis for planning future development investments; and (iii) strengthen the capabilities of its national oil and gas corporation, Petrobangla. The credit was approved on September 16, 1983. The credit was closed on June 30, 1990, three years behind schedule. The last disbursement was made on October 10, 1990, and the undisbursed balance of SDR7.6 million was canceled.
2. The PAR is based on the Project Completion Report (PCR) prepared by the Asia Regional Office of the Bank and issued on June 24, 1990, the Staff Appraisal report, sector and economic reports, the credit documents, study of the project files, and discussions with Bank staff. An Operations Evaluation Department mission visited Bangladesh in July 1992 and discussed the effectiveness of the Bank's assistance with the relevant authorities.
3. The PCR provides a satisfactory account and assessment of the project experience and discusses the performance of the Bank, the Government and the executing agencies. The PAR elaborates on particular weaknesses in project design, its sustaina'bility and lessons learned which might be of use for other petroleum exploration projects.
4 . Following standard procedures, OED sent copies of the draft to the Borrower for comments. Comments received have been reflected in the report and attached to the PAR as Annexes.
PERFORMANCE AUDIT REPORT
PEOPLE'S REPUBLIC OF BANGLADESH PETROLEUM EXPLORATION PROMOTION PROJECT
CREDIT (1402-BD)
BASIC DATA SHEETS
KEY PROJECT DATA (Amount in SDR million)
As of July 31, 1992
Credit Original Disbursed Canceled Repaid Outstanding
CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS
Appraisal Estimate 7.7 8.6 3.6 3.1 .. - - Cumulative 7.7 16.3 19.9 23.0 - - -
Actual 0.0 3.0 6.1 3.1 1.1 1 .O 0.7
Cumulative 0.0 3.0 9.1 12.2 13.3 14.3 15.0
Cumulative actual as 2 estimate
STAFF INPUTS (Staff Weeks)
Identification 1.6 2.0 Preparation
Appraisal 11.1 Negotiations SupervisionlPCR 2.0 12 .1 25.3 18.4 19.5 6.5 6.0 3.8
Subtotal 1.6 13 .1 2.0 12.1 25.3 18.4 19.5 6.5 6.0 3.8
Identification/Preparation A p p r a i s a l Pos t A p p r a i s a l S u p e r v i s i o n I S u p e r v i s i o n I1 Superv is ion 111 Superv is ion I V S u p e r v i s i o n V Superv is ion V I Superv is ion V I I S u p e r v i s i o n V I I I Superv is ion I X S u p e r v i s i o n X S u p e r v i s i o n X I Superv is ion X I 1 Superv is ion X I 1 1
MISSION DATE
Date Number SW Month/ o f i n S p e c i a l i z a t i o n Performance Types of Year - - Persons F i e l d Represented I / Ra t ing 21 Problems 3 /
FA, GP E, FA, GP FA,E,PE,G,GP FA,GP FA,GP,G FA,GP,G FA,GP,G,PE,E,C G FA,GP,G GP,G,L,C FA,G,E,L,C FA,G,E,PS,GP FA,E,G FA,E,C FA,E,C E,FA,C
1 / C - C o n s u l t a n t ; E - Economist; FA - F i n a n c i a l Analys t ; G - G e o l o g i s t ; GP - Geophys ic i s t s ; L - Legal Adviser ; PS - Procurement S p e c i a l i s t
2/ 1 - No s i g n i f i c a n t problems, 2 - Moderate problems, 3 - Major problems - b e i n g addressed , 4 - Major problems - n o t adequa te ly addressed
31 M - Managerial , F - F i n a n c i a l , T - Technical , P - P o l i t i c a l , 0-Others
PROJECT TIMETABLE
Item
Project Brief Identification Pre-Appraisal Mission Appraisal Mission Credit Negotiations Board Approval Credit Signature Credit Effectiveness Credit Closing Credit Completion
Estimated Date Actual Date
Credit Title
Bakhrabad Gas Development Project (Cr 1091-BD)
Second Gas Development Project (Cr 1586-BD)
OTHER PROJECT DATA
Purpose Year of Approval Status
Gas field 1981 Completed development infrastructure, pipeline
Gas field 1985 Under Implementat ion appraisal and development , pipeline
PERFORMANCEAUDIT REPORT
PEOPLE'S REPUBLIC OF BANGLADESH PETROLEUM EXPLORATION PROMOTION PROJECT
CREDIT (1402-BD)
EVALUATION SUMMARY
Introduction
1. During th.. early eighties Bangladesh was experiencing serious budgetary and balance of payments problems. Export earnings were less than 30% of the import bill and over 50% of these limited earnings were derived from raw jute and jute goods. At the same time external aid inflows, which rose steadily until FY80, stagnated or declined. The net oil imports during FY82, amounting to 1.6 million toe and totalling USS543 million, consumed 87% of the country's total foreign exchange earnings (PAR, para. 1).
2. Bangladesh is endowed with natural gas but no oil has been discovered to date. International oil companies (IOCs) have been operating in Bangladesh under production sharing agreements (PSA) but their efforts have been largely unsuccessful. Total annual production at appraisal time was 65 billion cubic feet (BCF) of natural gas, equivalent to 1.6 million tons of oil and represented 50% of the total primary supply of commercial energy. As a follow-up to an earlier IDA operation (Bakhrabad Gas Development Project (Cr . 109 1-BD) , an energy assessment study was carried out in collaboration with the United Nations Development Program (UNDP)/Asian Development Bank (ADB) in 1981. The result of the study outlined the main objectives of the International Development
Association's (IDA) assistance in the sector, which were: (i) expanded production, distribution and use of natural gas; (ii) more efficient use of energy through improved energy conservation measures; and (iii) promotion of further oillgas exploration (PAR, paras. 2, 3 and 4).
Objectives
3. The project (financed through an IDA credit of SDR21.4 million) aimed at assisting Government of Bangladesh (GOB) in its efforts to: (i) revive the interest and engender the participation of foreign investors in petroleum exploration in Bangladesh, as a means of complementing GOB'S own national exploration efforts; (ii) ascertain the reservoir configuration and establish firmer reserve estimates of its existing gas fields as a basis for planning future development investments; and (iii) strengthen the capabilities of its national oil and gas corporation, Petrobangla (PAR, para. 5).
4. The project was designed along the standard mode of petroleum exploration promotion projects, many of which were being appraised by the Energy Department during its early years. It comprised a 3-lnited program of reconnaissance seismic surveys, hydrocarbon habitat study (HHS) and a technical assistance component. The project also included
detailed seismic surveys to help delineate some of the existing gas fields, establishment of a laboratory and purchasing of a computer seismic processing center (PAR, para. 6).
Implement at ion
5. The project, though it was a "run-of-the-mill" exploration promotion project, was delayed by three years. The main reasons for that was the delay in declaration of Credit effectiveness, delay in completing consultants studies and assigning the project implementation and monitoring responsibilities to a committee which did not have administrative nor financial authority. The project was completed by the end of 1989 at a cost of 65% (SDR13.6 million) of the appraisal estimate, though all the main project components were implemented. The undisbursed balance, SDR7.86million, was canceled (PAR, paras. 11 and 25).
Outcomes
6. The project failed to achieve its main objective of fostering the participation of foreign investors in petroleum exploration in Bangladesh. Response to the exploration promotion campaign was as follows: officials from 71 companies attended the seminars, almost all of them visited Bangladesh and 21 bought the promotional packages, but none made a bid for exploration acreage. One major reason for the lack of bids was that the stringent terms and conditions of the model contract (MC) issued by GOB, which formed the basis under which international oil companies would bid for acreage were poorly designed for the prospectiveness (for petroleum discoveries) of the acreage made available by the Government. MC c o n t a i n e d h e a v y u p f r o n t conditionalities not suited for
Bangladesh modest prospects. Furthermore, MC did not provide fair compensation for IOCs in case gas, and not oil, was discovered. The failure to include a reasonable and clear gas clause was important and surprising since Bangladesh has been known as a primarily gas prone geological province (PAR, paras. 16, 17, 18, 19 and 22).
7. Since the concept and design of similar Bank supported exploration promotion projects have proved to be successful elsewhere (e.g. Pakistan), the reasons for the low oil industry response would appear to be found in the rigid application of a Model Contract considered unsuitable for a gas-prone area like Bangladesh, and a negotiating environment perceived by the IOCs as lacking in transparency and full competition. The lukewarm reception was exacerbated by the parallel promotions in Myanmar and Pakistan under more attractive terms and prospects. In the past year or so, the acreages have been reopened for bidding (and kept open), including a block previously reserved for Petrobangla. Several IOCs are presently negotiating production sharing agreements on draft terms that represent a significant modification of the provision of the Model Contract. As the PAR recommends (para. 30), a key step is now for Petrobangla to be apprised of the latest in contractual developments, taking into account the high level of activity in the region and gas clauses applicable to gas- prone countries like Bangladesh.
8. Reconnaissance and detailed (production) seismic surveys were completed during the 1985186 dry season. Reconnaissance seismic was used as a part of the exploration promotion campaign launched in 1989. The results of the detailed seismic were used to locate appraisal wells
on existing fields. All the nine appraisal wells drilled under subsequent IDA and ADB financing were successful gas producers. A seismic processing center was purchased at a cost exceeding US$400,000 and was used for almost four years during project implementation to establish drilling locations for Petrobangla's gxs development program. ?'he center has fallen into disuse because of obsolescence of the hardware and software supplied under the project (PAR, paras. 13, 14 and 23).
9. The technical assistance component covered establishing a laboratory, some minor studies and training. A geochemical laboratory was installed and proved valuable in providing support to various geological and reservoir studies. On- the- job training with seismic contractors and with consultants was effective. Considerable outlays were allocated to other training (US$900,000 equivalent) and US$640,000 was spent on off -the-shelf packaged overseas courses. The overseas training did not prove effective since many of the courses were not relevant to Petrobangla's staff (PAR, paras. 20, 24 and 25).
Sustainability
10. Although the project failed to achieve its main objective of attracting IOCs to explore in Bangladesh, it did achieve some results likely to be sustainable in developing the country's discovered gas resources. The MC needs to be modified to suit Bangladesh conditions and reflect the general climate of the international petroleum market. In an attempt to improve their contractual terms, Petrobangla's management is currently reviewing the latest production sharing agreements (PSA) terms offered internationally and, in,
particular, those offered by neighboring countries. Petrobangla's staff could also update the technical studies, HHS, for use in future exploration campaigns (PAR, para. 26).
11. The detailed seismic surveys done over a number of gas bearing structures have led to optimum development drilling. Methodology and results of gas pricing and accounting system studies helped in structuring follow-up IDA operations (Second Gas Development Project, Cr. 1586-BD and Energy Sector Ad:justment , Cr. 1999-BD) (PAR, para. 28).
Findings and Lessons Learned
12. One of the main reason for the implementation delays was that responsibility for project implementation was given to a "project and implementation monitoring committee", which was not delegated the authority to make procurement decisions. The project agreement should have specified the authorities of the committee; or alternatively, prescribed effective implementation arrangements through the existing administrative units (PAR, para. 29).
13. Petrobangla had been involved in negotiating and concluding PSAs and was cognizant of their terms. What was needed was a literature search to apprise Petrobangla of the latest development in PSAs at the international level and an analysis of these development (PAR, para. 30).
14. There is still a need to adapt MC to local conditions and have its draft prepared in consultation with a selected sample of IOCs. In particular, MC should contain a "gas clause" designed to encourage IOCs to explore for and develop gas
discoveries in gas prone countries (PAR, para. 31).
15. IDA should have refrained from clearing/approving the MC and should have made a sustained effort to get the GOB to use it as a guide rather than a rigid straight jacket. Promotion efforts are unlikely to be successful if international oil companies perceive a lack of transparency and fairness in the negotiating process (PAR, para. 22).
16. The Bank reorganization of 1987, which led to the dissolution of the Energy Department and the dispersion of petroleum expertise, might have contributed to the approval of an unsuitable MC for Bangladesh (PAR, para. 19).
17. Overseas training, done through attendance of packaged programs and courses, proved ineffective. The allocation of some US$900,000 for
overseas training should have warranted retaining a petroleum training specialist to assess the needs, design a comprehensive, well balanced, on-the-job and overseas training program and monitor its implementation (PAR, para. 35).
18. As a result of this audit, the overall rating of the project has been changed from satisfactory to unsatisfactory. The reason for this change is that, as explained in paragraph 6 above, the project failed in its primary objective of fostering foreign investor participation in petroleum exploration in Bangladesh. Project sustainability is still uncertain unless the Government changes its model contract to include an acceptable gas clause and to increase the flexibility in fixed payments so as to increase the attractiveness of the country for foreign oil company exploration (PAR, para. 36) .
PERFORMANCE AUDIT REPORT
PEOPLE'S REPUBLIC OF BANGLADESH PETROLEUM EXPLORATION PROMOTION PROJECT
(CREDIT (1402-BD)
I. INTRODUCTION
1. During the early eighties Bangladesh was experiencing serious budgetary and balance of payments problems. Export earnings were less than 30% of the import bill and over 50% of these limited earnings were derived from raw jute and jute goods. At the same time external aid inflows, which had risen steadily until FY80, stagnated or declined. The net oil imports during FY82, amounting to 1.6 million toe and totalling USS543 million, consumed 87% of the country's total foreign exchange earnings.
2. Bangladesh has been endowed with natural gas; at the time of the project appraisal 11 on-shore and one offshore fields had been discovered. In 1982, total production was 65 billion cubic feet (BCF), equivalent to 1.6 million tons of oil and represented 50% of the total primary supply of commercial energy. Proven and potential gas reserves were estimated at 12 to 17 trillion cubic feet, equivalent to some 330 million tons of oil. Coal and peat have not been economically exploitable and Bangladesh has no oil reserves. Exploration for oil began as early as 1908 but has so far not been successful and Bangladesh has to import all its oil requirements. Geological and simulation models developed at time of the project appraisal suggested a probability of 20% of finding liquid hydrocarbon and 80% of finding natural gas.
3. International oil companies (IOCs) had been active in Bangladesh. Their latest efforts had been in 1976 when the Government entered into production sharing contracts with six foreign oil companies for offshore exploration, and later, in 1981 when Shell oil company was granted on-shore exploration rights in the Chittagong Hill Tracts. These efforts had been largely urisuccessful and each company, with the exception of Shell, had relinquished its concession. The Bangladesh National Petroleum Company (Petrobangla) had been conducting an active, but limited, exploration and gas development program. Due to limited resources Petrobangla's exploration efforts fell short of the country's need; even the magnitude and the extent of many of the discovered gas fields were not fully determined and their reserve estimates were highly uncertain. In consideration of these constraints, GOB renewed its preparedness to accept foreign participation in all on-shore exploration ventures.
4. As a follow-up to an earlier IDA'S operation (Bakhrabad Gas Development Project, Cr. 1091-BD) 'an energy assessment study was carried out in collaboration with the UNDPIADB in 1981. A report entitled "Bangladesh: Issues and Options in the Energy Sector" was issued in October 1982. It outlined the main objectives of IDA'S assistance in the sector, which were: (i) expanded production, distribution and use of natural gas; (ii) more efficient use of energy through improved energy conservation measures; and (iii) promotion of further oil/gas exploration.
11. PROJECT OBJECTIVES, DESIGN AND PROCESSING
A. Proiect Objectives
5. The main project objectives were to assist GOB in its efforts to: (i) revive the interest and engender the participation of foreign investors in petroleum exploration in Bangladesh, as a means of complementing GOB'S own national exploration efforts; (ii) ascertain the reservoir configuration and establish firmer reserve estimates of the existing gas fields as a basis for planning future development investments; and (iii) strengthen the capabilities of the national oil and gas corporation, Petrobangla.
B. Project Desinn and Description
6 . The project was designed along the standard mode of petroleum exploration promotion projects; many of which were being appraised by the Energy Department during the early years of its formation. An extra element was added to the project to help delineate the existing gas fields. The project comprised the following components:
a) A program of technical, financial and legal assistance to Petrobangla, including the review of the existing petroleum legislation and the preparation of a Model Contract (MC) along the lines of the Production Sharing Agreements (PSA) currently applied for International oil companies (IOCs) engaged in petroleum exploration ventures, with the goal of attracting foreign investment in petroleum exploration in Bangladesh.
b) 1500 line-kilometers of reconnaissance seismic to help in exploration promotion and 900 line-kilometers of detailed, production seismic to help delineate seven of the producing gas fields;
C) Purchase and operation of a seismic data processing center with the necessary hardware and software and equipment for a petroleum laboratory;
d) A Hydrocarbon Habitat Study (HHS) comprising collating and reinterpreting the existing data and integrating the newly acquired seismic, geological and geochemical data.
C. Project Cost
7. The following table gives itemized project costs:
Cat enor.-
1. Seismic Surveys
Appraisal Estimate Actual Local Foreinn Total Local Foreinn ~ o t a i ------------------ USSmillion-------------------
a) SW Delta 1.2 4.7 5.9 1.45 4.2 5.65 b) Detail 1.1 3.6 4.7 1 .OO 3.49 4.49 C) Data Processing 0.4 2.8 3.2 - 1.10 1.10 d) Processing Center - - - 0.5 0.5 - - 0.41 0.41
Subtotal 2.7 - 11.6 - 14.3 2.45 9.20 11.65
2. Hydrocarbon Study 0.6 3.5 4.1 - - 3.64 3.64
a) Training 0.1 0.8 0.9 - 0.64 0.64 b) Laboratory Equipment - 0.5 0.5 0.19 1.18 1.37 c) Accounting - 0.3 0.3 - 0.16 0.16 d) Legal Assistance 0.0 - 0.1 - 0.1 - - 0.17 0.17
Subtotal - 0.1 1.7 - 1.8 0.19 2.15 2.34
4. Contingencies Physical Price
Total
D. Proiect Processing and Organization
8. The project was processed fairly quickly; the identification mission visited Bangladesh during August 1982 and negotiations were concluded in April 1983. Credit effectiveness was delayed by some nine months due to delay in getting GOB'S approval of the project proforma and the appointment of the consultants for the HHS by Petrobangla.
9. Petrobangla was vested with overall responsibility for implementing the project. Seismic was to be carried out by two expatriate seismic crews with the exception of a small portion to be done by Petrobangla' crew under expatriate supervision. International consulting firmslexperts were hired to conduct HHS and provide technical, legal and financial assistance.
10. Section 2.02 of the Project Agreement stipulated that "A Project Implementation and Muuitoring Committee" consisting of the chief managers of Petrobangla's geological, geophysical and laboratory divisions and the manager of the hydrocarbon habitat study would be established to monitor the progress of work of each seismic party. The Committee would meet, at least biweekly, under the chairmanship of Petrobangla's Chairman or his designated representative".
However, responsibility for procurement, contract bidding evaluation, and policy decisions remained in the various committees in Petrobangla and GOB.
111. PROJECT IMPLEMENTATION
A. Overview
11. The project implementation was delayed by three years. Such a delay is unusual for a straight, run-of-the-mill, exploration promotion exercise with a limited number of components and a well focussed objective. Almost one year was lost waiting on the declaration of credit effectiveness and another waiting on a consultant to put a geological study in a format usable for exploration promotion. Another reason for the delay was that the internal systems and procedures of Petrobangla and GOB, which caused lengthy clearance and approval process, were not fully appreciated at the time of the project appraisal. Further, the project management was delegated to a "Project Implementation and Monitoring Committee". Members of that committee had other responsibilities and affiliations and had neither the authority nor the motivation to push for an expedient implementation.
B. Seismic Work and Processing Center
12. Except for 275 line-kilometers, seismic surveys were successfully carried out during the dry seasons of 1984185 and 1985186. The unfinished, and canceled part was in a difficult terrain where a special recording system did not produce the required quality results1. The detailed seismic, shot over gas fields and known gas structures, was increased by some 300 kilometers to 1200 kilometers and was completed two years later.
13. A seismic processing center was bought with the necessary hardware and software at a cost of US$410,000. It functioned satisfactorily during project implementation, where it was used, inter alia, to establish drilling locations for Petrobangla's successful gas development program (see para. 23). The center processed data from Petrobangla seismic crews. It was successfully used in locating wells and demonstrating that results could be obtained in the gasfields and in the western delta reconnaissance survey. It had since fallen into disuse because of unavailability of spare parts for the hardware. Audit findings showed that the purchased computer hardware became obsolete and that the manufacturer had since stopped providing support for such equipment. Long term support needs to be better integrated into the procurement process for such high technology purchases. Through some grant funds, Petrobangla has acquired a small center (researchlacademic type) which does not fully satisfy its needs2.
I Pet :obangla notes that the contractor's lack of experience i n such terrains contributed heavily to the fa i lure to obtain quality results (see Annex 3, para. 1 ) . The PCR agreed with th i s conclusion.
2 (See Petrogbangla's comnents, Annex 3, para. 2).
14. It is doubtful, even with the availability of spares that such a modest center would have an impact on the exploration activities. The capital cost of an average seismic processing center in the mid-eighties would run in millions of dollars in addition to the cost of continuous upgrading of the hardware and software. The high cost of the purchase and upkeep of the centers and the very nature of the technology and its evolution had led many small petroleum companies and countries to contract seismic processing to a few highly specialized international service companies3.
C. Hydrocarbon Habitat Study (HHS)
15. The HHS was the main technical study in support of the exploration promotion. Critical parts of the study were being ignored by the consultant but difficulties were rectified. The final report was presented in a format which could not be used for the promotion campaign. It took the consultant an additional year to put the report in an acceptable form and issue it in 1988, two years behind schedule and five years after credit approval. Compiling the report brought together a comprehensive data base which could be used, not only in promotion efforts, but by Petrobangla in assessing the country's hydrocarbon potential and in correlating the importance of various geological basins/structures. Should the promotion campaign wait for a sophisticated, four million dollar HHS to be completed, or would a quicker and simpler study have fulfilled that purpose? A viable alternative would have been to design the HHS in two phases: the first to serve the promotion campaign with no undue delay, followed by an optional second phase comprising full geological assessments and building a comprehensive data base to be conducted if and when required. Such a strategy might have captured, in time, the interest of IOCs in the mid- eighties, when they were canvassing the world in search for petroleum prospects.
D. Model Production Sharin~ Contract and Lena1 Advice
16. At the time of the project appraisal, GOB and Petrobangla were quite cognizant of the format and the content of production sharing agreements (PSA). In fact, they had negotiated and entered into several agreements with major IOCs in the seventies for off shore areas and one with Shell company in 1981 for an on- shore concession. However, a huge exercise was launched and two legal consultants were hired to prepare a model contract (MC). IDA proposed certain amendments to the draft and eventually cleared the final version of the document. Petrobangla's management then sought approval of MC at the ministerial and the cabinet levels. As a result, MC instead of being a tool to guide negotiations with foreign companies, became a straight jacket restricting the freedom of Petrobangla's negotiator^.^
3 ~ e t r o b a n g l a d i s ag ree s w i th t h i s conc lus ion (See Annex 3, para . 3 ) .
h he reg ion c l a r i f i e d t h a t t h e Model Contract (MC) was prepared by Pe t robangla ' s i n t e r n a t i o n a l c o n s u l t a n t s and f i n a l i z e d by GOB and Petrobangla. The dec i s i on t o c l e a r t h e MC w i t h t he Cabinet was made independently by t h e Energy Minis t ry and Petrobangla and was t h e s u b j e c t of much IDA p r o t e s t , s i nce Cabinet c l e a r ance r e s u l t e d i n almost a one-year de lay a f t e r t h e promotion meetings had a l ready been pub l i c i z ed i n t h e i n t e r n a t i o n a l p r e s s w i th Pe t robangla ' s endorsement. IDA and t h e c o n s u l t a n t s s t r ong ly advised t h a t t h e terms should be s u f f i c i e n t l y f l e x i b l e t o provide a b a s i s f o r nego t i a t i ons . The Bangladesh n e g o t i a t o r s , however, took t h e MC's con t en t s a s s ac ro sanc t , which a long w i t h t h e removal of t he most a t t r a c t i v e acreage from the bidding process ( s e e foo tno t e of para . 3 2 ) c r ea t ed a major d e t e r r e n t t o che implementation of a s u c c e s s f u l e x p l o r a t i o n promotion campaign. Petrobangla has noted t h a t t he Model Contract i s being r e c a s t i n l i g h t of t he mentioned problems ( s e e Annex 3, para . 4 ) .
17. It is an acknowledged geological probability that Bangladesh is more of a gas prone than an oil prone country; following the world deltaic regions (Mississippi, Po, Nile, Niger, Irrawady, etc.). During the appraisal exercise, a resource assessment computer model (RASP) was run and a 20% probability was assigned for the generation of liquid hydrocarbons (oil) and 80% probability for gas generation. Further, the exploration history of Bangladesh at the time of appraisal, showed that 45 wildcat (exploration) wells resulted in 12 gas discoveries, one of which had minor oil accumulation. The MC, as approved, was flawed since it largely ignored the above-mentioned principles particular to Bangladesh conditions and its hydrocarbon prospects.
18. The proposed MC dealt with the prospects of a gas find under two different scenarios:
i) If there would be an export market for gas, MC stipulated that, "the contractor shall not enter into any agreeinent for the export of any natural gas unless the price or the pricing formula and the agreement itself are previously approved by Petrobangla"; in addition Petrobangla had the right to retain, from their share, some 20% to 30% of the marketable gas for domestic use;
ii) If gas was discovered in the Western region and it could not be exported then Petrobangla, which had the right to access the domestic market, might compensate IOCs for relinquishing their right in the gas produced. IOCs would be paid for the locally used gas, providing certain limitations on the size of reserves were met, a very low price of USS0.02 per MCF of gas (about US$0.12/barrel of oil equivalent). Gas discoveries eligible for compensation had to be in the Western region, larger than 100 BCF and smaller than an undefined amount (one TCF minus whatever Petrobangla reserves and options under other contractual arrangements would be at the time). MC was silent regarding gas discoveries found outside the Western region and for which there would be no export market.
As such, the gas clause in the MC failed to provide the necessary assurances to IOCs for recouping their exploration investment if and when the gas was exported, nor did it provide fair compensation for IOCs if the gas was used domestically.
19. Moreover, the MC was loaded with conditionalities along the same lines of production sharing agreements (PSA) concluded for "hot" countries where oil had been proven and the prospects were of great interest to IOCs. It stipulated that the contractor should pay a signature bonus (administering fee), discovery bonus, production bonuses whether oil or gas was discovered. In addition, the contractor would be obliged to pay to Petrobangla, on a yearly basis, training fees, research fees and service fees. In other words, conditions were made extremely difficult for any interested IOC to seriously consider making a bid to explore in Bangladesh. Ironically, Bank and IDA had been in continuous dialogue with IOCs during the early and mid-eighties and were urging several countries to include a "reasonable gas clause" in their petroleum contracts. The Bank reorganization of 1987, which led to the dissolution of the Energy Department and the dispersion of petroleum expertise, might have contributed to the approval of an unsuitable MC for Bangladesh.
E. Other Studies, Technical Assistance and Training
20. Individual consultants were hired to assist in launching the exploration promotion campaign, to study the accounting practices in Petrobangla and its future subsidiaries and to help establish a geochemical laboratory. Other miscellaneous studies (gas pricing and Titas field reserve assessment) costing about US$ 0.1 million were also conducted. Training was done on the job with consultants performing the HHS and the accounting study and during establishing the geochemical laboratory. Additionally, 28 Petrobangla staff were trained abroad on short courses (2 to 4 months) mostly financed by IDA ($640,000) and other donors.
F. Project Cost
21. The project was completed at a cost of SDR13.54 million (about 65% of the appraisal estimate) even though all of the main elements of the project were implemented. The undisbursed balance of SDR7.86 million was canceled. Cost estimates at appraisal were, on the whole, on the high side, possibly as a result of assuming the continuation of the upward trend of the costs which dominated the petroleum service industry in the early eighties. The base cost estimate of most of the items, with the exception of seismic data processing and the laboratory, were close to actual costs. Savings resulted primarily from overestimating seismic processing cost by SDR2 million and from not using any of the allocations for physical and price contingencies estimated at SDR4.5 million, except for SDR 0.1 million for miscellaneous studies (PAR, para. 20).
IV. PROJECT RESULTS
22. The project has failed to achieve its main objective of engendering the participation of foreign investors in petroleum exploration in Bangladesh. The exploration promotion seminars, held in 1989, were attended by officials from 71 IOCs, most of whom visited Bangladesh and 21 bought the promotional packages, but not a single one made a bid for exploration acreage. The fact that GOB had awarded one block to a company well before initiating the promotional campaign might have discouraged a few companies from bidding but should not have led to what amounted to the abstention of IOCs. Since the concept and design of similar Bank supported exploration promotion projects have proved to be successful elsewhere (e.g. Pakistan), the reasons for the low oil industry response would appear to be found in the rigid application of a Model Contract considered unsuitable for a gas-prone area like Bangladesh, and a negotiating environment perceived by the IOCs as lacking in transparency and full competition. The lukewarm reception was exacerbated by the parallel promotions in Myanmar and Pakistan under more attractive terms and prospects.
23. The results of the detailed seismic surveys of the eastern gas fields were good. They were useful in planning the development program of the gas fields carried out under the Second Gas Development Project (Cr. 1586-BD) and other ADB financed projects. The improved structural interpretation helped to ensure that all nine of the appraisal wells drilled were "on structure" and were subsequently completed as gas producers.
24. The Geochemical Laboratory, though built at a cost of USS1.4 million, three times the appraisal estimate, proved valuable and was used to provide support for various geological and reservoir studies. The Seismic Processing Center has been closed since May 1990 due to obsolescence of purchased equipment and associated software (PAR, para. 13).
25. On-the-job training was well received by Petrobangla staff and had a strong impact since it was directly related to the use of new equipment and techniques under Bangladesh environment. The more formal overseas training courses, attended by some 28 staff and managers at a cost exceeding US$640,000, were not as useful. Staff considered them too academic and had difficulty in relating the subjects to their everyday problems. Providing a more focussed and better designed set of courses abroad and/or holding seminars delivered by expatriate experts in Bangladesh would have been more cost effective.
V. PROJECT SUSTAINABILITY
26. Although the project did not achieve its main objective, the work done under the project is likely to be of use in the future. The "model contract" needs to be modified to suit Bangladesh conditions and reflect the general climate of the international petroleum market. In an attempt to improve their own contractualterms, Petrobangla's management is currently reviewing the latest PSA terms offered internationally and, in particular, those offered by neighboring countries. The technical studies, HHS, prepared under the project can be updated by Petrobangla staff and used in future promotional packages.
27. In the past year or so, the acreages have been reopened for bidding (and kept open), including a block previously reserved for Petrobangla. Several IOCs are presently negotiating production sharing agreements on draft terms that represent a significant modification of the provision of the Model Contract. As the PAR recommends (paras. 30 and 31), a key step is now for Petrobangla to be apprised of the latest in contractual developments, taking into account the high level of activity in the region and gas clauses applicable to gas-prone countries like Bangladesh.
28. The detailed seismic surveys done over a number of gas bearing structures have proved useful and have lead to optimum development drilling under subsequent operations financed by IDA and ADB. Methodology and results of the studies on gas pricing and accounting systems helped in structuring follow-up IDA operations (Second Gas Development Project, Cr. 1586-BD and Energy Sector Adjustment, Cr. 1999-BD) .
VI. FINDINGS AND LESSONS
29. Proiect Management: Responsibility for project implementation was given to a "project and implementation monitoring committee". The responsibility for procurement, bidding, evaluation, contracting and policy decisions remained in the various committees in Petrobangla and GOB which led to considerable delays.
The project agreement should have outlined the authorities of the implementation and monitoring committee; or alternatively, designed more effective implementation arrangements through the existing administrative units.
30. Project Design: Petrobangla had been involved in production sharing agreements and was cognizant of their terms. What was needed was a literature search to apprise Petrobangla of the latest contractual development. Instead, a model contract was drawn up with heavy conditionalities and terms unsuitable for the prospects of Bangladesh.
3 1 . There is a need to adapt MC to local conditions and have its draft prepared in consultation with a selected sample of IOCs. In particular, MC should contain a "gas clausett designed to encourage IOCs to explore for and develop gas discoveries in gas prone countries.
3 2 . IDA should have brought to bear previous Bank and IDA experience in similar projects in other countries. Had it done so, IDA would have refrained from "clearing" the MC or, at a minimum, would have advised GOB that the MC be used as a guide for negotiators to help reach a production sharing agreement. IDA approval of the MC gave it a certain legitimacy and might have led Petrobangla's management to further formalize the contract form by seeking Bangladesh Cabinet endorsement5.
33. Studies: Hydrocarbon habitat studies, conducted in conjunction with an exploration promotion campaign, should be designed and phased so as to minimize the risk of delaying the promotion campaign. If necessary, a preliminary phase should be designed to advise IOCs of the country's potential in an expeditious manner. A second phase may be conducted, by interested IOCs or by the Government, if and when it is required.
3 4 . Computers: Manufacturer of the computer purchased for the process center conf inned what was reported by Petrobangla that support for the computer hardware and software had long been discontinued. IDA should have sought the advice of a computer expert to study the level of the technology offered and the useful life of the equipment proposed before clearing the purchase. This is particularly true in the ever evolving area of computer technology and seismic data processing. It is doubtful, even with the availability of spares, that such a modest processing center, costing less than half a million dollar, would have a significant impact on the exploration activities. At a time when many small companies and countries were contracting seismic processingto highly specialized firms, there was no justification for the purchase of the center unless it was meant for training of Petrobangla staff.
he region emphasized (and t he a u d i t ag r ee s ) w i th t he need f o r autonomy and ownership of r e s p o n s i b i l i t y among t he Bangladesh implementing agenc ies given rhe tendency t o seek numerous min i s t r y - and Cab ine t - l eve l approva ls , even on ope ra t i ona l and procurement ma t t e r s , whi le holding t h e donor agenc ies accountab le f o r having r a i s e d t h e i s s u e s f o r which d e c i s i o n s were r equ i r ed . An example under t h e p r o j e c t i s t h e repea ted involvement of government agenc ies and t h e percept ion by t he i n t e r n a t i o n a l o i l companies' ( I O C s ) of a l a ck of t ransparency and f a i r n e s s i n t h e nego t i a t i ons process . The s e p a r a t e , direcr: nego t i a t i on of i n d i v i d u a l d e a l s o u t s i d e t h e framework of t h e promotion campaign and t h e a l l o c a t i o n t o Petrobangla of reserved acreage (perce ived t o be t h e most a t t r a c t i v e by t h e i n t e r n a t i o n a l o i l companies) p r i o r t o t h e promotion campaign coupled w i th t h e perceived r i g i d i t y i n t he Model Contract (explained i n f oo tno t e above) dampened t h e i n t e r e s t of I O C s .
35. Training: Off-the-shelf training programs proliferated in the petroleum industry duringthe late seventies and early eighties. Many have proved valuable in addressing specific topics for short term (one week) training. However, these packaged programs would fall short of building well rounded expertise for a national petroleum company. The allocation of some US$900,000 for overseas training should have warranted retaining a petroleum training specialist to assess the needs, design a comprehensive, well balanced, on-the-job and overseas training program and monitor its implementation.
36. As a result of this audit the overall rating of the project has been changed from satisfactory to unsatisfactory. The reason for this change is that, as explained in paragraph 22 above, the project failed in its primary objective of fostering foreign investor participation in petroleum exploration in Bangladesh. Project sustainability is still uncertain unless the Government changes its model contract to include an acceptable gas clause and to increase the flexibility in fixed payments so as to increase the attractiveness of the country for foreign oil company exploration.
ANNEX 1
GOVERNMENT OF THE PEOPLE'S REPUBLIC OF BANGLADESH MINISTRY OF FINANCE FINANCE DIVISION
No.MF/Dev(g)/OG-2(18)/90 Dated: 1st June, 1993
Sub: Comments of Finance Division on the Draft Performance Audit Report on Petroleum Exploration Promotion Project (Credit 1402-BD)
Dear Mr. Albouy,
Please refer to your telex dated 25th May, 1993 on the above noted subject. This is to inform that total cost of the project was 21.4 million SDR; 7.855 million SDR (374) of the allocated fund was underutilized. The main reasons for underutilization was appreciation of SDR and over estimation of cost for seismic survey.
The objectives of the project were (i) revive the interest and engender participation of foreign investors in petroleum exploration in Bangladesh as a means of complementing GOB'S own national exploration efforts, (ii) ascertain the reservoir configuration and establish firmer reserve estimates of the existing gas fields as a basis for planning future development investments and (iii) strengthen the capabilities of the national Oil and Gas Corporation, Petrobangla.
Out of the 3 objectives noted above, number (i) objective has not been achieved, i.e. participation of IOCs could not be achieved due to certain rigidity of Model Contract. Relaxation of some of the conditions of Model Contract is under active consideration of the Government.
Executing agency has differed with certain paras. of the draft report which would be faxed separately by the agency. The comments of the executing agency seem to be reasonable.
Yours sincerely,
C.H. Saha Deputy Secretary Finance Division Dhaka. Fax No.88-02-246827
Mr. Yves Albouy, OEDD3 Chief Infrastructure h Energy Division Operation Evaluation Department Room No. T 9079, Tel. Ext. 31690 Fax No. 202-676-0559 The World Bank Washington D.C.
ANNEX 2
GOVERNMENT OF THE PEOPLE'S REPUBLIC OF BANGLADESH MINISTRY OF PLANNING PLANNING COMMISSION Energy Division
No.PC/NR/1(78)/1983/)/ Dated: 1st June, 1993
Comments of Planning Commission on the Draft Performance Audit Report (PAR) prepared by the OED of WB on the Petroleum Exploraaon Promotion Proiect (Credit No. 1402-BD)
1. Most of the observations made by the OED of WB on the performance of the PEPP (Credit No. 1402-BD) seems to be in the right direction. However, Planning Commission does not fully agree to the overall rating of the performance of the project as "Unsatisfactory" as stated in para. 18 of the summary for the following reasons:
(a) The project has assisted GOB in making a "Promotion Package" and a "Model Contract" for attracting IOCs in Petroleum Exploration, apart from some experience in conducting negotiations with the IOCs.
(b) The reconnaissance seismic survey provided some data and information on the sub-surface geology of some areas of the country, which otherwise were unknown.
(c) The detailed seismic survey over the known gas fields had helped in locating the sites for appraisal-cum-development wells drilled under SGDP of IDA.
(d) Most importantly, the lessons learnt and experience gained out of this project would assist in rectifying past mistakes, particularly in respect of Model Contract for future promotional activities in a more effective way.
2. It may be mentioned that GOB is now preparing a National Petroleum policy in which due consideration of some of the suggestions regarding a Model Contract are being provided.
ANNEX 3
COMMENTS BY PETROBANGLA ON THE DRAFT PERFORMANCE AUDIT REPORT ON THE PETROLEUM EXPLORATION PROMOTION PROJECT (CREDIT 1402-BD)
Para. 12
The failure to conduct 275 km of seismic was not only due to difficult terrain but also due to inefficiency or lack of experience of the contractor. Such terrain elsewhere in the world is being surveyed. The incompetence of the contractor crew was reflected in the PCR (page 12, para. 23) . Para. 13
The processing centre was brought by the contractor to process data acquired under the project and to train Petrobangla's personnel. For this job the contractor was paid US$ 1.1 million. At the end of the contract the processing centre was bought at a cost of US$ 410,000.00 for Petrobangla. The centre is now fallen in disuse as the hardware has become obsolete.
Para. 14
The doubt expressed regarding the impact of operating an own computer centre cannot be agreed to. Considering the cost incurred to process data by the contractor under the project and the volume of data processed by Petrobangla after acquiring the centre would indicate a less cost per km in seismic data processing. In addition, own processing center would mean more flexibility in processing requirements and interpretation. It also had a significant impact on training of Petrobangla manpower.
Para. 16
The problem arising out of a too strict Model Contract should have been foreseen during formulation. However, the Model Contract is now being recast in the light of the mentioned problems.
Para. 16
In the Model Contract, there are few items which are negotiable viz, cost recovery, production sharing, work programme, etc.
Para. 22
The project did achieve the objectives (c) and (d) as defined in page 2, para. 5.
Para. 25
Reference made to overseas training of officials is not correct. Petrobangla is getting benefit in different fields which had been acquired by the trainees.
8. Para. 36
A s explained i n Sec t ion 7 , s ince two of t h e t h r e e primary o b j e c t i v e s were achieved f u l l y and wi th necessary r e c t i f i c a t i o n s being made t o achieve t h e t h i r d ob jec t ive , i . e . investment by t h e I O C ' s , i t would seem t h a t t he a c t u a l r a t i n g of t h e p r o j e c t should be termed a s "near s a t i s f a c t o r y " , and not l l unsa t i s f ac to ryw a s mentioned i n t h e PAR.
