Documentof ' /

The World Bank

FOR OFFICIAL USE ONLY

Report No. 3264-AR

STAFF APPRAISAL REPORT

ARGENTINA

REFINERY CONVERSION PROJECT

June 15, 1981

Industrial Projects Department

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

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CURRENCY EQUIVALENTS(as of May 1, 1981)

Currency Unit = Argentine Peso ($a)US$1 = $a 3,190US$ 1 million = $a 3,190 million$a 1 million = US$313$a 1,000 = US$0.313

WEIGHTS AND MEASURES

1 Barrel (bbl) of CrudeOil (0.85 SpecificGravity/350 API) = 0.135 Metric Ton

1 Barrel (bbl) = 0.159 Cubic Meter1 British Thermal Unit

(Btu) = 0.252 Kilocalories1 Cubic Foot (cu ft) = 0.028 Cubic Meter1 Standard Cubic Foot

(SCF) of Natural Gas = 1,000 Btu1 Metric Ton of Crude Oil = 44.4 x 106 Btu1 Mile = 1.609 Kilometers1 Gallon = 3.785 Liters

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

API American Petroleum Institutebpd Barrels Per DayERE Esso Research and EngineeringFCC Fluid Catalytic CrackerFMIP Financial Management Improvement ProgramFWI Foster Wheeler InternationalGdE Gas del EstadoGDP Gross Domestic ProductHDPE High Density PolyethyleneICB International Competitive BiddingIRR Internal Rate of ReturnLDPE Low Density PolyethyleneLGO Light Gas OilLIBOR London Interbank Offered RateLPG Liquified Petroleum GasPOIP Plant Operations Improvement ProgramPVC Polyvinyl ChlorideTOE Tons of Oil Equivalenttph Tons Per Hourtpy Tons Per YearVCM Vinyl Chloride MonomerYCF Yacimientos Carboniferos FiscalesYPF Yacimientos Petroliferos Fiscales

FISCAL YEAR

January 1 to December 31

FOR OFFICIAL USE ONLY

ARGENTINA

REFINERY CONVERSION PROJECT

TABLE OF CONTENTS

Page No.

I. INTRODUCTION ............................................ 1

II. INDUSTRY AND HYDROCARBON SECTORS ........................ 2

A. Industrial Development ............................. 2B. Hydrocarbon Sector ................................. 3

1. Energy Base ................................... 32. Institutional Framework ........... . ............ 43. Hydrocarbon Exploration and Production ........ 44. Refining ...................................... 55. Natural Gas ................................... 66. Investment Program ............................ 77. Energy Conservation ........................... 7

III. THE COMPANY ............................................. 8

A. Background ......................................... 8B. Production Performance ............................. 9C. Organization and Management ........................ 11D. Accounting and Financial Management .... ............ 12E. Operating Results and Financial Position ... ........ 13

IV. REFINERY PRODUCTS MARKET AND MARKETING .... .............. 16

A. Historical Consumption and Production .... .......... 16B. Demand Forecast Through 1990 ....................... 18C. Supply of Selected Refinery Products Through 1990 .. 19D. Supply and Demand Balance .......................... 20E. Distribution and Transportation .................... 22F. Marketing Organization and Policies of YPF .......... 22G. Petroleum Products Pricing ......................... 23

V. THE PROJECT ............................................. 25

A. Project Objectives and Scope .......... .. ........... 25B. Project Description ............... .. ............... 26

1. Refinery Conversion Scheme ..................... 262. Plant Operations Improvement Program .... ....... 273. Financial Management Improvement Program ....... 284. Training Program ............................... 285. Industrial Energy Audit ........................ 29

C. Raw Materials and Infrastructure ................... 29D. Utilities ........... . .......... ..................... 30

1. Lujan de Cuyo Refinery ......................... 302. La Plata Refinery .............................. 31

E. Project Management and Implementation .............. 31F. Project Schedule ................ .. ................. 33

This report was prepared by Messrs. Y.T. Shetty, N. Krishnamurthy, A. McNamaraand Mrs. P. Urbano of the Industrial Projects Department.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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TABLE OF CONTENTS (Cont'd) Page No.

G. Staffing and Training .............................. 33H. Environmental Considerations ....................... 33

VI. CAPITAL COST, FINANCING PLAN AND PROCUREMENT ............ 34

A. Capital Cost Estimates ............................. 34B. Financing Plan ..................................... 36C. Procurement ........................................ 37 aD. Allocation and Disbursement of Bank Loan .... ....... 37

VII. FINANCIAL ANALYSIS ..................................... 38

A. Production and Production Costs .................... 38B. Revenues ........................................... 40C. Financial Projections for the Project .... .......... 40D. Financial Rate of Return and Sensitivity Analysis 41E. Analysis of YPF Refinery Division with the Project 41F. Financial Covenants for the Company .... ............ 43G. Auditing and Reporting Requirements .... ............ 43H. Major Risks ......................................... 44

VIII. ECONOMIC ANALYSIS ....................................... 45

A. Economic Justification ............................. 45B. World Petroleum Prices ............................. 45C. Transportation Savings ............................. 46D. Economic Rate of Return ............................ 46E. Foreign Exchange Benefits .......................... 47F. Other Economic Benefits ............................ 47

IX. AGREEMENTS ............................................. 47

ANNEXES

3-1 Company's Historical Income Statements3-2 Company's Historical Balance Sheets

5 Project Implementation Schedule

6-1 Capital Cost Estimate6-2 Working Capital6-3 Disbursement Schedule for Bank Loan

7-1 Assumptions Used in Financial Analysis7-2 Production Costs at 100% Capacity7-3 Project--Projected Income Statement7-4 Cost and Benefit Streams for Financial Rate of Return Calculation7-5 Refinery Division--Projected Income Statements7-6 Refinery Division--Sources and Application of Funds7-7 Refinery Division--Projected Balance Sheets

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TABLE OF CONTENTS (Cont'd)

8-1 Assumptions Used in Economic Analysis8-2 Cost and Benefit Streams for Economic Rate of Return Calculation

MAP

IBRD - 15312 - ARGENTINA - Oil Industry Locations

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DOCUMIENTS AVAILABLE IN Tl{E PROJECT FILE

A. Financial and Market Information

Al Audited Annual Reports of YPF (1977-80)

A2 Company Annual Reports (1978 and 1979)

A3 Draft Pricing Strategy, Secretariat of Fuels, August 1980

A4 File containing all Statements and Tables prepared by YPF,Gas del Estado

A5 Additional Information (tables and statements prepared by theMission)

B. Technical Documentation

Bl Contract with Foster Wheeler International

B2 Draft Prequalification Document for Selection of Contractorfor Detailed Engineering, Construction and Erection of theConversion Project for Lujan de Cuyo and La Plata

B3 File of information given to the Mtission by YPF at Lujan de Cuyoand La Plata Refineries and in Buenos Aires

B4 Foster Wheeler Preliminary Estimate of the Investment of theConversion Project for the Lujan de Cuyo and La Plata Refineries,October 1980

B5 Foster Wheeler Technical Proposal, May 1980 (selected cases)

B6 Invitation to Bid for the Consulting Contract for the Lujan de Cuyoand La Plata Refineries

B7 YPF Feasibility Studies of the Refinery Conversion Project,Octrober 13, 1978, September 17, 1980 and October 31, 1980

I. INTRODUCTION

1.01 The Government of Argentina and Yacimientos Petroliferos FiscalesSociedad del Estado (YPF), a fully owned Government oil compaay and thelargest enterprise in Argentina, have requested a Bank loan of USq200 millionto finance YPF's proposed Refinery Conversion Scheme and relaLed investments.The main objective of the Scheme is (i) to redress the imbalance in theproduct slate of YPF's two main refineries--La Plata and Lujan de Cuyo (seeMap IBRD-15312)--by converting the surplus residual fuel oil, a heavy petro-leum product, into higher value light and middle distillates which are indeficit in the country, and (ii) help bring the supply and demand of light and

* heavy distillates in Argentina into better balance. The current fuel oilsurplus is expected to increase further in the future as Argentina increasinglysubstitutes many current uses of fuel oil with natural gas, thus reducing thelarge quantity of associated gas currently being flared (about 350 million cuft/day in 1979 approximately equivalent to 58,000 barrels of oil per day).With the steep increases in crude oil prices since 1973, a higher conversionof crude to more valuable lighter products has assumed still greater importanceall over the world as discussed in "Background Paper on Petroleum Refining inDeveloping Countries," dated July 17, 1980.

1.02 The Project will include, in addition to the Refinery ConversionScheme, the following four components: (i) a Plant Operations ImprovementProgram (POIP); (ii) a Financial Management Improvement Program (FMIP);(iii) a Training Program; and (iv) an Industrial Energy Audit. Except for theIndustrial Energy Audit which would be carried out under the auspices of theSecretariat of Fuels, all the other components of the Project relate to YPF.Total financing required for the Project is estimated at approximately US$878million, including US$439 million in foreign exchange. The proposed Bankloan of US$200 million includes US$175 million for the Refinery ConversionScheme with the rest for the other four components. The proposed improvementprograms for YPF aim at upgrading the financial management and accountingsystems as well as improving the operational efficiency of the existingrefineries at La Plata and Lujan de Cuyo with special reference to energyconservation and pollution control. The Training Program will be geared tomeet the needs of the improvement programs as well as the requirements of theproposed Refinery Conversion Scheme. The Industrial Energy Audit will reviewthe scope and potential for energy conservation in selected industrialenterprises.

1.03 The proposed loan will be the second Bank operation with YPF. Thefirst loan (US$27 million) was for an Oil and Gas Engineering Project 1/ (ReportNo. P-2745-AR, June 4, 1980) whose primary objectives are to: (i) improveinformation on countrywide oil and gas reserves as a basis for a rationalprogram of field development; (ii) assist YPF in locating favorable geologicalhydrocarbon structures; and (iii) study the optimum development and utilizationof natural gas primarily to avoid waste and to determine related investmentrequirements. The proposed second loan to YPF fits well into the country'soverall objective of developing its hydrocarbon resources.

1/ Which became effective on December 2, 1980.

1.04 The Government and YPF approached the Bank in early 1980 tofinance the Project. Subsequently, an identification mission consisting ofMessrs. E. Segura, E. Tortorelli and Ms. P. Urbano visited Argentina in Mlarch1980, followed by a preappraisal mission in June. The Project was appraised inOctober 1980 by a mission consisting of Messrs. Y. T. Shetty (Chief), E. Segura,N. C. Krishnamurthy, A. McNamara and Ms. P. Urbano, all of the IndustrialProjects Department.

II. INDUSTRY AND HYDROCARBON SECTORS

A. Industrial Development

2.01 Argentina is a semi-industrialized country with a per capita incomeof about US$2,300 in 1979, fairly evenly distributed. Post-war growth ofGross Domestic Product (GDP) averaged 3.5% in real terms but has been subjectto strong cyclical fluctuations. Manufacturing now represents the principalsector in the generation of GDP, its share exceeding 35%. Manufacturingoutput has been increasing at an annual rate of about 5% since 1950, primarilyon account of the rapid expansion of the chemical, metal and engineeringindustries.

2.02 The first comprehensive Industrial Promotion Law was enacted in1958 providing incentives to local investors to exploit Argentina's naturalresources, decentralize and diversify industry, and expand exports. Subse-quently, a number of revisions were carried out expanding and/or modifyingthese incentives. In July 1977, the Government promulgated a new law which nolonger excludes foreign-owned enterprises from benefits and considerablysimplifies the administrative procedures.

2.03 During 1972-76, Government ownership of enterprises increasedconsiderably. Besides expanding its traditional participation in the oil, gasand steel sectors, a petrochemical industry development program was elaboratedin 1973 which assigned an increased role to the public sector. Further, thepublic sector took over a number of enterprises, both large and small, whichfaced bankruptcy. While this Government intervention avoided large increasesin unemployment, fiscal burden of supporting these enterprises played animportant role in the monetary expansion and consequent inflation. TheGovernment which came to power in March 1976 moved to modify the previouspolicies and to limit the state's direct participation in manufacturingactivities.

2.04 In the case of petroleum and petrochemicals, the Government hasannounced its intention to revise its role in the sector. Responsibility forenergy development, particularly the hydrocarbons, will remain largely with

the present public sector enterprises--crude petroleum and petroleum refiningwith YPF and natural gas with Gas del Estado (GdE). However. the share of YPFin oil exploration and production is expected to decline in the future as theGovernment is encouraging private participation in those areas. For core orfirst generation upstream petrochemical refining projects, the Governmentintends to develop projects with majority public sector ownership (throughFabricaciones Militares) but with substantial private participation. Projectsusing these core products, the so-called second generation plants, are to bemajority-owned by the private sector, but may have some participation fromgovernment-owned enterprises. All further (third generation) transformationplants will be completely owned by the private sector.

2.05 One of the major policy objectives of the present Government is toreduce its fiscal deficit and to achieve greater efficiency of the public sector.The Government is now also encouraging the private sector to mobilize privatesavings for industrial investments so as to reduce the need for allocation ofindustrial investment funds from the Government budget. In addition, it isencouraging public sector enterprises to mobilize, through flexible compensationpolicies, the technical expertise of the private sector to improve theperformance of public sector enterprises.

B. Hydrocarbon Sector

1. Energy Base

2.06 Argentina has a substantial and diversified energy base. Provenreserves of crude oil are estimated at 2.4 billion barrels (bbl) or 330million tons equivalent and those of natural gas are estimated at 21.2 trillioncubic feet, i.e., 520 million tons of oil equivalent (TOE). The exploitablehydroelectric power potential is estimated at 2.5 billion TOE, but the installedcapacity to date allows the harvesting of only about 7% of this potential.Coal reserves are put at 450 million tons, of which 224 million tons areclassified as measured, 200 million tons as indicated and 26 million tons asinferred; most consist of highly volatile bituminous steam coal of a relativelylow quality. Apart from hydroelectric power there is also potential forrenewable energy based on vegetable fuels (firewood, bagasse), geothermal,nuclear, wind and solar energy. A large-scale expansion of hydroelectricpower generation is underway, and a gradual expansion of nuclear generationbased on domestic natural uranium is planned. As a primary developmentobjective in the energy sector, the Government aims at eliminating petroleumimports by attaining self-sufficiency by the mid-1980s and building upexports as more reserves are identified with increased encouragement toprivate investment. Another important objective is to make increased use ofassociated natural gas in the country to minimize the flaring of this premiumsource of energy.

2.07 Petroleum and gas, while accounting for only 14% of identifiedenergy reserves, currently meet about 82% of domestic energy demand. Totalenergy demand in 1980 is estimated at 42.8 million TOE, of which 56% isaccounted for by petroleum products, 26% by natural gas, 10% by hydro/nuclearcombined, 4% by coal and 4% by vegetable fuels. This high share of oil in the

total energy consumption in Argentina 1/ is expected to decline as the shareof natural gas, hydropower and other sources of energy increases in thefuture.

2.08 Argentina has attained a high degree of self-sufficiency in hydro-carbons. In 1979, imports accounted for only about 13% of domestic petroleumneeds and 20% of natural gas consumption. In that year, the country imported12.6 million bbl of crude oil, 10.4 million bbl of petroleum products,425,300 tons of liquid gas and 65 billion cu ft of gas at a total cost ofnearly US$1,055 million, 2/ equivalent to 18% of total merchandise imports.As mentioned, Argentina plans to achieve self-sufficiency in crude oil by 1985and possibly emerge as an exporter by 1990. In the case of natural gas also,the country could emerge as a net exporter if the current plans to supply gasto Brazil and Paraguay materialize. Meanwhile, Argentina is continuingto honor the 20-year gas import contract with Bolivia, signed in 1972 beforethe discovery of large domestic gas reserves.

2. Institutional Framework

2.09 Development of oil, gas and coal resources is the responsibilityof three State-owned entities: YPF, GdE 3/ and Yacimientos CarboniferosFiscales (YCF), respectively. All three organizations are under the Secretariatof Fuels, of the Ministry of Works and Public Service. The Secretariat ischarged with responsibilities to: (i) regulate fuel prices; (ii) regulate theplanning and investment activities of YPF, GdE and YCF; (iii) approve oilexploration and production contracts negotiated between YPF and privatecompanies; and (iv) develop new sources of energy and carry out overall energyplanning and conservation. The Secretariat also has direct control overthree of the nine major State-owned power utilities.

3. Hydrocarbon Exploration and Production

2.10 Argentina's hydrocarbon bearing areas cover about 1.2 millionsq km onshore and 0.6 million sq km offshore. Of the 10 known basins, theCuyo basin is probably the best explored and the rest are yet to be adequatelyexplored. Cumulative discoveries of crude from the early 1900s have amountedto about 5.6 billion bbl, of which 3.1 billion bbl have already been pro-duced. Exploration activities have been surging since 1976 and the declinein known reserves has been reversed largely because of the resumption ofexploration by private firms after the Government launched a policy ofencouraging such investments to complement YPF's efforts. Recent increasesin crude output have been brought about mainly by private firms. Thesefirms now provide nearly one-third of the crude output, up from 27.5% in1975. Associated with this development, there has been an increase in thecrude processed through secondary recovery. During 1976-79, the output of

11 For example, in the U.K. the share of oil in the total consumption ofenergy is 38% compared to 56% in Argentina.

2/ Including US$353.5 million worth of crude oil, US$468.5 million worthof petroleum products, US$119.6 million worth of liquid gas and US$112.9million worth of natural gas.

3/ GdE is responsible for imports, processing and marketing of naturalgas and liquified petroleum gas (LPG).

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crude oil increased by 18% from about 145 million bbl to 171 million bbl.During the same period, YPF's share in total production declined from74% to 67%.

4. Refining

2.11 There are 12 refineries in Argentina with a total capacity of705,600 barrels per day (bpd) of which YPF accounts for 65% as shown in thefollowing table:

Argentina - Capacity, Production and Utilization of Refineries (1977-79)(in '000 bbl)

AnnualCompany Capacity a/ Crude Processed (m.bbl) Capacity Utilization (%)

T_-(m.bbl) 1977 1978 1979 1977 1978 1979

YPFLa Plata 79.1 63.2 64.2 67.8 80 81 86Lujan de Cuyo 43.8 39.5 41.0 41.3 90 94 94San Lorenzo 11.8 10.4 9.7 11.2 88 82 95Campo Duran 11.8 6.5 5.2 2.8 55 44 24Plaza Huincul 8.3 7.3 7.4 7.9 88 89 95Dock Sud 1.4 1.2 1.3 1.4 86 93 100

Sub-total 156.2 128.1 128.8 132.4 82 83 85

ShellDock Sud 39.1 21.5 20.3 21.4 55 52 55

EssoCampana 31.3 20.2 20.2 19.5 65 65 62Galvan 5.8 2.5 2.4 3.3 43 41 57

Sub-total 37.1 22.7 22.6 22.8 61 61 62

Isaura b/Bahia Blanca 4.7 3.1 3.0 3.0 66 64 64

Astrasur b/Comodoro Rivadavia 2.1 1.9 2.0 1.9 91 95 91

DAPSA b/Lomas de Zamora 0.7 0.4 0.6 0.7 57 86 100

Total 239.9 177.7 177.3 182.2 74 74 76

a/ On the basis of 340-day operation per year.b/ Private Argentine companies.

2.12 Most of the above twelve refineries are small and only four of themhave a capacity of more than 100,000 bpd (4.7 million tpy) each. La Plata(YPF) is the biggest refinery with a capacity of 232,650 bpd (about 10.8million tpy). The second biggest refinery is Lujan de Cuyo (YPF) with acapacity of 128,800 bpd (6 million tpy). The La Plata and Lujan de Cuyorefineries account for about 50% of total refining capacity in Argentina.Although the major refineries of YPF are based on advanced refining processes(such as catalytic cracking, hydrocracking, delayed coke, etc.), their relativecapacity to produce lighter and middle distillates is below those of theprivate sector. In fact, whereas in 1979 YPF accounted for 73% of the totalcrude processed in the country, it generated only 69% of the total middle andlight distillates and 79% of total fuel oil. As noted earlier, the RefineryConversion Scheme aims at converting the surplus fuel oil produced at thetwo major YPF refineries into higher-value middle distillates.

2.13 In 1979, the average capacity utilization in all Argentine refinerieswas about 76% compared to 85% in the YPF refineries (and 60% in the privatesector refineries). This is partly because the private refineries were not ableto get an adequate allocation of domestic crude as the country is not yetself-sufficient in oil (para 3.05) and the Government has restricted import ofcrude. In 1980, however, the Government modified its crude allocation policy togive the private refineries a larger share of domestic crude and also allowedthem to import part of their crude requirements. As petroleum products demandincreases in Argentina and refinery configurations are converted to betterreflect the demand pattern for different products, the average capacityutilization in the refinery sector is expected to increase to about 80% by 1985and 90% by 1990 (para 4.08).

5. Natural Gas

2.14 Output of natural gas, which in Argentina is largely associated withcrude, increased at an annual rate averaging about 6% during the 1970s.Natural gas output is concentrated in Santa Cruz and Neuquen, but the fastestgrowth in recent years has taken place in the Tierra del Fuego fields (MapIBRD-15312). During the last three years (1976-79), Argentina's gas reservesnearly tripled to 21.2 trillion cu ft as a result of the Government's newemphasis on exploration. Currently, gas production is running at about 1.2billion cu ft/day, but about 30% of this production is being flared due tolack of demand, and inadequate gas gathering and distribution systems.However, use of gas is expected to grow rapidly between now and the turn ofthe century to account for nearly a third of domestic energy consumption,thus reducing the amount of gas flared. The country is expanding its gasgathering and distribution system to meet this objective. As an example, amajor effort to increase gas use is underway in Buenos Aires, the capitalcity, where all heating systems are to be converted to natural gas by 1985.More generally, because of the considerable scope for gas use in industry,power generation and commercial sectors and the proposed changes in the relativeprices of fuel oil and gas as discussed below, gas demand is expected to grow atabout 10% a year through the mid-1980s. The above measures are geared to shiftfuel demand to natural gas.

2.15 The natural gas now being flared amounts to 350 million cu ft/dayand in terms of energy content is almost equivalent to Argentina's pretroleumand natural gas imports combined. The principal reasons for the gas flaring

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had been: (i) oil producers were reluctant to invest in gas gathering anddistribution systems because of the low delivery price paid by GdE, the agency incharge of processing and marketing of natural gas as well as liquified petroleumgas (LPG); and (ii) fuel oil was priced nationally about 10% below the consumerprice for gas to encourage the use of surplus fuel oil near refineries.Corrective measures are being taken to increase gradually natural gas pricesto levels attractive to producers and raise fuel oil prices to a higher levelthan natural gas prices. At the same time, under the Project surplus fuel oilwill be converted into middle distillates to allow natural gas to increase itsshare of the energy market. In addition, as part of the Bank-financed Oil andGas Engineering Project (Report No. P-2745-AR, June 4, 1980), the Governmentis carrying out a Gas Utilization Study. This Study will analyze the optimumscope for natural gas output and use on a regional as well as national basis,together with an assessment of alternative uses for fuels replaced by gas andof related investment requirements.

6. Investment Program

2.16 The investment program in the oil and gas sector during 1980-85aims at: (i) achieving self-sufficiency in crude oil; and (ii) expandingand adapting the transport infrastructure for moving oil and gas from produc-tion sites to the processing and consumption centers. The investment planningis based on the assumption that total energy demand will increase by 5% a year,while petroleum demand will grow at a lower rate (4% a year) as a result ofthe intended large-scale substitution of natural gas (mainly for fuel oil),expansion of hydroelectric power production and energy conservation efforts.

2.17 The Government is currently updating the investment program for theoil and gas sector. Based on projects prepared by YPF and GdE, total investmentin the public sector during 1980-89 are expected to total about US$16 billion(in 1979 prices); private sector investments, though more difficult to forecastprecisely, are likely to range from a minimum of US$5 billion (assumingmaintenance of the current share of the private sector in oil exploration anddevelopment) to about US$10 billion (assuming a continuation of the Governmentpolicy to encourage a greater participation of private firms in the sector).Exploration and field development are expected to absorb nearly 80% of thetotal investment. It is anticipated that these public and private sectorefforts will lead to the discovery and development of at least 2 billion bbl ofadditional crude reserves which would help maintain the reserves/productionratio at 15 years throughout the 1980s. Transport and distribution of gas wouldrequire about 13% of the investment (US$1,960 million) and refining (mainly forsecondary processing) about 7% (US$1,000 million) of the public sector total.

7. Energy Conservation

2.18 Until recently, energy conservation measures in Argentina, as inmost other countries, were lacking. The most important energy conservationtool, namely, pricing, was not used effectively due to the Government'sconcern with inflation. However, the Government has now become increasinglyaware of the high use of energy particularly in the industrial sector, whichcurrently consumes nearly half of petroleum products. Therefore, it is nowdeveloping a program for the conservation of energy resources by increasing theprice of energy (para 4.18) and by encouraging their more efficient use in existingand new industrial enterprises. As an initial step, the Government plans tocarry out an energy audit of major energy-consuming industries, with a view to

identifying priority areas and measures for energy conservation. Under theproposed project, the Bank would finance part of the cost of the audit whichwould (i) review the present pattern of energy consumption in major energy-intensive industries and the scope for substitution; (ii) identify the scopefor conservation in major industries and reduction of waste through retro-fitting in industry; and (iii) review the potential for developing retro-fitting equipment production in the country. The Government will consult withthe Bank on the selection and terms and conditions of the consultants to under-take the study, and discuss the results of this study with the Bank andsubsequently prepare a program for implementing the recommendations of thestudy by December 31, 1982 and then carry it out (para 5.11).

III. THE COMPANY

A. Background

3.01 Yacimientos Petroliferos Fiscales Sociedad del Estado (YPF), apublic sector company, operates in every branch of the petroleum and naturalgas sectors, except in the marketing of natural and liquified petroleum gas(LPG) which is the responsibility of Gas del Estado (GdE). In 1979, YPFaccounted for 50% of exploration, 67% of crude oil production, 96% of naturalgas output and 73% of petroleum refining, with the private sector accountingfor the rest. With total assets of US$5.9 billion, an equity base of US$2.65billion, gross sales of over US$4.5 billion and total personnel of 35,700 in1979, YPF is the largest enterprise in Argentina and one of the largest oilcompanies in Latin America.

3.02 YPF is charged with negotiating and monitoring exploration and pro-duction contracts with private companies. Based on recent changes in Governmentpolicy, exploration and production by private firms under contract with YPF havebeen increasing. Private sector participation is on the basis of service-riskcontracts with YPF awarded through competitive bidding. Under these contracts,ownership of crude oil remains with YPF, with the private companies receiving afee for their exploration and production activities. The service fee is estab-lished as a percentage of the international price of crude, which is normallyset at the time of bidding for exploration contracts and which is adjustedannually on the basis of a composite index of international prices,variation in exchange rates and inflation rates. Reference crude pricesemployed in recent awards have been about 55% of international prices with aceiling of 60%. As noted above, the Government until recently allocated crudeprimarily to YPF's refineries. As a result of policy changes aimed at mini-mizing processing and marketing costs of petroleum products, domestically-produced crude from 1980 is allocated according to individual refineries' shareof the market for petroleum products.

3.03 A number of international companies participate along with YPF invarious petroleum commercial activities. Esso (Exxon) and Shell are active inexploration, refining and marketing; Cities Service and Amoco, in production;and TOTAL, Occidental, Union Oil of California and Union Oil of Texas, in ex-ploration. About 30 domestic companies are producing hydrocarbons as contractorsof YPF and an additional 15 specialized firms provide services to Argentina'spetroleum industry. YPF owns and operates the country's entire network of crudeand petroleum product pipelines, while the natural gas pipelines are operated byGdE. YPF also owns tankers to transport crude especially from southernproduction centers not served so far by pipelines.

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B. Production Performance

3.04 The following table shows the trend of oil and gas production byYPF and other producers during 1976-79:

Argentina - Crude Oil and Natural Gas Production 1976-80

1976-80AverageAnnualGrowth

1976 1977 1978 1979 1980 Rate (%)A. Crude Oil (million bbl)

YPF a/ 107.5 118.2 111.9 115.0 116.1 2.0Risk Contractors 38.1 39.3 53.2 57.8 62.0 13.0

Total Crude Oil 145.6 157.5 165.1 172.8 178.1 5.2

3B. Natural Gas (million m )

YPF c/ 10,275 11,532 11,447 12,546 13,204 6.5Others - b/ 131 57 485 N.A. N.A.

Total Natural Gas 10,275 11,663 11,504 13,031 N.A. N.A.

a/ Excluding crude oil produced through YPF contracts with private firms.b/ Negligible.c/ Including gas produced by YPF contractors.

Total oil production has increased at an annual rate of 5.2% since 1976.Based on YPF's policy to enlarge the role of the private sector in oil production,YPF's own production has remained stable in recent years and major productionincreases have been achieved by private firms under risk contracts. Productionof natural gas is entirely associated with the production of oil and has,therefore, followed a similar rate of growth.

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3.05 The recent development of refinery operations in Argentina betweenYPF and other companies is shown below:

Argentina - Total Crude Oil Processed in Refineries(in million barrels)

1976 1977 1978 1979 1980

YPFLocal 107.6 112.6 116.3 123.4 124.2Imported 14.9 15.5 12.6 9.0 9.8

Sub-Total 122.5 128.1 128.9 132.4 134.0

OthersLocal 36.4 43.1 45.0 46.8 50.8Imported 6.9 6.5 3.4 3.0 4.8

Sub-Total 43.3 49.6 48.4 49.8 55.6

All CompaniesLocal 144.0 155.7 161.3 170.2 175.0Imported 21.8 22.0 16.0 12.0 14.6

Total 165.8 177.7 177.3 182.2 189.6

Of the total crude processed by YPF, local crude accounted for 88% in 1976,rising to 92% in 1980. With the increase in crude oil production in Argentina,the import dependence of YPF and other refineries has declined from about 22million barrels in 1976 to 14.6 million barrels in 1980, accounting for lessthan 8% of the total crude oil processed in the country. The country isexpected to be self-sufficient in crude oil by 1985.

3.06 ; YPF owns and operates six of the 12 refineries in the country(para 2.11), and has a total refining capacity of 460,000 bpd or about 65%of Argentine refining capacity. Plantwise capacities and recent trends ofcapacity utilization (1978-80) for YPF are shown below:

Trend of Capacity Utilization in YPF Refineries(in million barrels unless otherwise noted)

Capacity Production Capacity Utilization (%)1978 1979 1980 1978 1979 1980

La Plata 79.1 64.2 67.8 69.3 81 86 88Lujan de Cuyo 43.8 41.0 41.3 41.5 94 94 95San Lorenzo 11.8 9.7 11.2 11.9 82 95 101Campo Duran 11.8 5.2 2.8 2.8 44 24 24Plaza Huincul 8.3 7.4 7.9 7.2 89 95 87Dock Sud 1.4 1.3 1.4 1.3 93 100 93

Total 156.2 128.8 132.4 134.0 83 85 86

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YPF-s refineries are operating well with the exception of the small refinery atCampo Duran (32,000 bpd capacity), which is not able to reach high capacitybecause the crude oil supply from nearby sources is being depleted and therefinery's interior location makes it difficult to transport imported crudefor processing there. Excluding Campo Duran, the average capacity utilizationin YPF refineries was close to 91% in 1980. With the proposed Plant Opera-tions Improvement Program (POIP) included in the Project (para 5.05), theaverage capacity utilization is expected to go up to at least 95%. Besides,this program will help to conserve energy through increased yields and controlpollution especially in La Plata and Lujan de Cuyo, the two largest refinerieswhich account for nearly 79% of YPF's total refinery capacity.

C. Organization and Management

3.07 As mentioned, YPF is one of the three State-owned entities 1/ in theenergy sector under the Secretariat of Fuels, within the Ministry of Works andPublic Service. YPF reports to the Secretariat through the Director-Generalfor Fuels (para 2.09), and was established in 1922 as a Government departmentfor developing the oil and gas resources of Argentina. In 1977, its statuswas changed to a State company under the Law of State Corporations, therebyincreasing its operational autonomy. The Secretariat of Fuels is now involvedprimarily in investment and pricing decisions. The main objective of thechange in the status of YPF is to encourage it to function more efficientlyalong commercial lines without depending on government budget support.

3.08 According to the Law of State Corporations, YPF cannot be declaredbankrupt and can only be dissolved by law through the National Executive PowerCommittee of the Government. At present, all the shares of YPF belong to theFederal Government which has deposited them with the Sindicatura de EmpresasPublicas (the Syndicate of Public Enterprises), the Governnment's holding andauditing company.

3.09 The direction and management of YPF is exercised by a Board ofDirectors consisting of nine members including a President, a Vice-Presidentand seven Directors, all appointed for a term of three years and eligible forreappointment without limitation. The Board meets twice a month to formulatepolicies and overall development programs for the Company; it has an ExecutiveCommittee which consists of the Vice-President and two Directors who are incharge of three General Directorates namely Operations; Administration; andCivil Works and Contracts, besides being members of the Board. The Company,in accordance with Argentine Law, must have its accounts audited annually bythe Sindicatura General de Empresas Publicas.

1/ The other two organizations are Gas del Estado (GdE) and YacimientosCarboniferos Fiscales (YCF), the latter responsible for developing coalresources.

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3.10 Overstaffing was a problem in YPF prior to 1977. Since then therehas been a considerable reduction in total employment. declining from 51,700 inMarch 1976 to 34,806 in March 1980, a reduction of about 33%. However, duringthe same period, the number of professionals has increased slightly from 2,430to 2,440, raising their share from 4.7% to 7% of total employment. By adoptingincreased flexibility in compensation policies, YPF has been able to attractmore competent personnel, some from the private sector. Although generalsalary increases in Argentina are overseen by the Ministry of Economy, YPF nowhas sufficient freedom to determine adequate salaries and salary increases onan individual basis. With stabilization in the management situation, theintroduction of a flexible compensation policy, the reduction and restructuringof personnel, and the generally more dynamic approach toward formulating andimplementing its increasingly complex tasks, YPF appears to have made consider-able progress in improving its organization and operations since 1977.

3.11 YPF has already initiated two important measures to further improveits organization and management. In January 1980, it appointed TOTAL, apetroleum company of France, to review the operations of the La Plata refineryand recommend measures for modernizing its operation and improving its efficiency.Following submission of the TOTAL report in September 1980, YPF has developedwith the help of TOTAL a Plant Operations Improvement Program for the La Plataas well as the Lujan de Cuyo refineries to supplement the proposed RefineryConversion Scheme to serve those refineries. Secondly, YPF appointed ArthurAndersen & Co. in January 1980 to study the accounting and financial managementsystems of the Company and develop a program to streamline, upgrade and expandthose systems. Arthur Andersen have completed their study and preparation ofthe Financial Management Improvement Program. YPF is, therefore, consideredready to derive maximum benefits from the comprehensive financial and operationalimprovement programs which the Company will implement with Bank assistance aspart of the Project (para 5.02).

D. Accounting and Financial Management

3.12 Since 1977, YPF's accounting system and procedures have been revisedcompletely from the previous Government budgetary system to a financialaccounting more suited for the changed status of YPF from a Government depart-ment to semi-autonomous industrial enterprise. YPF is now improving thereliability and timely availability of accounting data as well as establishingan integrated information system for accounting, costing, cash managementand budgeting. With substantial additional recruitment of experienced stafffor the finance and controller's departments, supplemented with technicalassistance from Arthur Andersen, YPF is introducing a comprehensive costaccounting system throughout its operating departments. At the same time,YPF is integrating its management information system to serve not only itsaccounting needs but also its cash management, budget forecast and control,monthly reports, and cost accounting and control. The work of Arthur Andersenis currently concentrated in the important areas of development and imple-mentation of cost accounting and management information systems. YPF willsubsequently use their services for introducing long-term capital budgetingand financial planning. Arthur Andersen will also organize training for YPFpersonnel to improve the overall financial management of the Company (para 5.22).

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Thus, substantial improvements in the Company's accounting and financialmanagement have taken place recently and further steps are underway. However,continual substantial efforts will be needed to complete the transformation ofYPF's management information system into an effective management tool to serveits diverse and complex operations. With continuity in management and theassistance of outside consultants, it is expected that YPF will establish anadequate information system within a reasonable period.

E. Operating Results and Financial Position

3.13 The following table summarizes the sales and financial data ofthe Company shown in greater detail in Annexes 3-1 and 3-2:

YPF - Selected Sales and Financial Dataa!(in current US$ million equivalent) b/

Aug. 1, 1977- July 1, 1978-June 30, 1978 Dec. 31, 1978 1979 1980

Gross Sales 3,817.7 2,141.5 5,823.6 7,571.2Sales Discounts & Taxes 1,123.7 643.4 1,705.5 2,397.6Net Sales 2,694.0 1,498.1 4,118.1 5,173.6Cost of Goods Sold 2,468.9 1,188.7 3,380.6 3,908.5Operating Profit(Before Tax) 1.9 172.4 260.7 597.9Other Income c/ 706.5 216.6 836.7 616.9Contribution to Govt./Income Tax d/ 103.2 71.0 482.7 330.2Net Profit with Revaluation Gains 605.2 318.0 614.7 113.4Net Profit (Loss) w/o Revaluation Gains 19.7 118.0 ( 60.9) (241.8)Cash Generation e/ 307.0 364.2 559.6 749.1Current Assets * 894.1 1,556.0 1,628.8Current Liabilities f/ * 875.7 1,198.2 1,427.0Net Fixed Assets * 3,351.0 5,654.9 8,824.6Equity * 1,751.7 3,234.9 5,261.6RatiosOperating Profit/Net Sales 0.1% 11.5% 6.3% 11.6%Return on Revalued Ave.Net Fixed Assets * * 13.5 1.7

Current Ratio f/ * 1.0:1 1.3:1 1.1:1Quick Ratio f/ 0.3:1 0.7:1 0.8:1 0.7:1Long-term Debt/Equity Ratio * 31/69 29/71 23/77Debt g//Equity Ratio * 48/52 46/54 42/58

* Balance sheet items adjusted for inflation for 8/01/77 to 6/30/78 arenot given in the audit report.

I Adjusted for inflation according to general index set by the Government;accounting periods changed since 1978 (para 3.16).

b/ Average exchange rates used for conversion into US$: August 1977-June 1978, $a 598;July-Dec. 1978, $a 878; January-Dec. 1979, $a 1,317; January-Dec. 1980, $a 1,837.

c/ Mostly from revaluation gains; in 1979, revaluation gains amounted toUS$676 million.

d/ Contributions to Government were replaced by income tax in 1980.e/ After interest and contribution to the Government.f/ Excluding short-term bank payables rolled over and reclassified as long-term debt./ Including short-term bank payables rolled over.

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3.14 Analysis of YPF's financial statements is complex because (a) theaccounting system has gradually been changing since 1977 from a budgetarysystem to a financial accounting system, and (b) YPF's accounting periods havebeen somewhat irregular in the recent past (closing dates were July 31, 1977.June 30, 1978 and December 31, 1978). The comparability of audited statementsfor periods prior to June 30, 1978 is, therefore, limited. Operating profits,as an indicator of the Company's profitability, improved significantly in thesecond half of 1978 primarily due to a reduction in payroll expenses followingthe retrenchment of surplus staff, combined with the introduction of moreefficient management and procurement practices. However, during 1979, t

operating profits as a percentage of net sales declined, as selling pricesdeteriorated sharply in real terms. To improve the financial position of YPF,in connection with the Oil and Gas Engineering Project, the Government decidedas a first step to increase--starting from January 1980--retail prices ofpetroleum products and gas by 1.5 to 2% a month in real terms above the non-agricultural wholesale price index. These increases helped improve the Company'soperating profit margin from 6.3% in 1979 to 11.6% in 1980. The price increasescontinued until the end of March 1981 and resulted in price increases of 25%in real terms for YPF products during 1980/81.

3.15 YPF's profitability as reflected by net profit is significantlybetter than that shown by operating profit because of the Company's substantialrevaluation gains. YPF's current ratio was 1:1 in 1978, improved to about 1.3:1in 1979 but declined slightly to 1.1:1 in 1980. The quick ratio also improvedfrom 0.7:1 in 1978 to 0.8:1 in 1979 but declined slightly to 0.7:1 in 1980.The low liquidity ratios of YPF are mainly due to high short-term borrowings,largely to make up for the non-availability of sufficient long-term financingfrom local sources in the light of high inflation. Local financial institutionslend mostly for short periods with interest rates to be established every month,and those short-term loans are normally rolled over. Besides, current liabilitiesinclude sales and other taxes (which amount to about 43% of the retail price ofsome petroleum products) collected by YPF, which are to be paid to the Governmentwithin 37 days. 1/ Thus, YPF can use that amount for about five weeks asworking capital, while it sells petroleum products to private retailers on acash basis. YPF prudently tries to minimize local borrowings, by keeping itsinventory levels low and selling mostly for cash. It-borrows in foreign markets(enjoying as it does,a high credit rating) to finance foreign as well as localcosts. Because of the above factors, YPF's liquidity position though tight isconsidered manageable.

3.16 The Company currently has a very sound -capital structure as a resultof large gains from revaluation of assets. Such accounting practice isconsidered essential under the high inflation rates experienced in Argentinain recent years. Total equity of YPF at the end of 1980 was at the satisfactorylevel of about 50% of total assets.

1/ The time allowed in the past-was 52 days. It was reduced to 37 days in 1979.For any delay in payment beyond the specified period, YPF has to pay amonthly interest of 5%.

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3.17 The following table shows the sources and application of fundsfor 1980:

YPF - Sources and Application of Funds, 1980(in US$ million) a/

SourcesFunds from operations 113.4Increase in provision for retirement, etc. 122.3Increase in deferred credits 8.8Decrease in long-term investments 3.4Decrease in working capital 794.3

Total 1,042.2

ApplicationsIncrease in other assets 78.6Increase in fixed assets 943.0Payment of long-term debt 15.0Increase in intangible assets 1.6Increase in deferred charges 4.0

Total 1,042.2

a/ At the average exchange rate for 1980 of US$1 = $a 1,837.

The above figures show that only about 11% of YPF-s 1980 investment require-ments was financed from self-generated funds from operations. The restof the financing was derived mainly through working capital reduction. Thishighlights the fact that despite YPF's satisfactory capitalization ratios,its cash flow and operating profits (based on the current revenue/cost struc-ture) are not adequate at present to finance a reasonable part of the projectedlarge investment program of YPF--US$12.5 billion during 1980-89. The realincreases of crude and petroleum product prices in 1980/81 are not yet adequateto enable the Company to earn a reasonable return on its assets which couldthen be channeled for reinvestment. Agreement has been reached with theGovernment that it will take measures to ensure that the ex-refinery prices ofYPF's products are adequate to provide YPF, operating efficiently, with fundssufficient to cover all costs and expenses before interest, to earn a reasonablereturn on its revalued net fixed assets in service, and to meet sound financialratios (paras 7.11 and 7.12). Also, an understanding has been reached with theGovernment that the domestic retail prices of petroleum products will bemaintained in real terms at the May 1, 1981 level using the non-agriculturalwholesale price index for periodic adjustment of the retail prices.

3.18 Currently, YPF does not prepare financial projections for all itsoperations including oil exploration and production, refining, marketing, etc.A capital budgeting and financial planning system will be established under theFinancial Management Improvement Program, a part of the Project. Agreement hasbeen reached with YPF that it will submit every year within four months of the

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closing of the previous fiscal year 12-month projections of income statements,sources and applications of funds and balance sheets for the Company as a whole,the first such projection being due by end-April 1983 (para 7.12).

IV. REFINERY PRODUCTS IARKET AND ILARKETING

4.01 As mentioned, the Project is designed to convert a significant part ofArgentina's existing and projected fuel oil surplus into lighter and middle pe-troleum distillates in deficit in the country. The Project would, thus, correctthe existing unbalance between the demand and supply of petroleum products inArgentina, and the marketing of the project output is not expected to be a problem.Still, to put the Project in proper perspective, this Chapter discusses in detailthe various aspects of petroleum products market and marketing.

A. Historical Consumption and Production

4.02 Although consumption of refinery products in Argentina over the last19 years (1960-79) has increased by an average of about 3.9% annually, thegrowth rate has fluctuated substantially from year to year, in line with theeconomic growth and changes in relative prices of refinery products. Thehistoric consumption and production of refinery products is shown below:

Argentina - Historic Supply and Consumption of Refinery Products(in '000 barrels)

Production Imports Exports a/ Consumption

1960 85,703 13,835 1,456 89,0071965 122,127 9,631 8,492 139,0141969 145,143 14,730 4,167 145,1431970 154,104 10,270 4,992 154,2391971 174,350 9,621 6,172 156,5351972 169,188 4,782 1,454 b/ 162,1501973 172,152 7,997 1,330 179,6091974 169,823 6,609 1,370 175,8361975 157,836 9,798 2,602 165,9131976 165,658 8,598 2,982 165,1701977 176,858 11,554 4,860 169,5631978 173,293 4,078 7,403 172,4771979 c/ 176,966 10,265 4,167 183,064

Average Annual Growth Rate (%)

1960-79 3.9 -1.6 5.7 3.91960-70 6.0 -3.0 13.1 5.61970-79 1.5 0.0 2.0 2.0

a/ Including bunkers for all flag ships.b/ Excluding bunkers.c/ Preliminary estimate.Source: U.S. Department of Energy, International Petroleum Annual

for 1965-78. U.S. Department of the Interior, Bureau of Mines,World Petroleum Statistics for 1960. Secretariat of Fuels,Argentina for 1979.

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4.03 As a result of a continued high rate of growth of the Argentineeconomy in the early 1970s, total consumption of refinery products increasedat an annuai rate of 5.2% during the 1970-73 period. However, during the nextthree years (1974-76), consumption fell continuously because of the country'seconomic slump and the world oil and economic crisis. Consumption started itsupturn in 1977 with the introduction of the economic stabilization program.Past apparent consumption, production and balance of principal refineryproducts, for 1960 and 1979 are shown below:

Argentina - Consumption and Production of Refinery Products(in millions of bbls)

1960-79 Average1960 1979 Rate of Growth

Consump- Pro- Consump- Pro- Consump- Pro-tion duction Balance tion duction Balance tion duction

Gasoline 17.2 17.1 (0.1) 42.4 37.2 (5.2) 4.8 4.2Gas Oil &

DieselOil 15.5 11.7 (3.8) 53.3 49.9 (3.4) 6.7 8.0

Kerosene &Jet Fuel 11.4 7.9 (3.5) 9.7 9.5 (0.2) -0.8 0.9

Fuel Oil 39.2 41.5 2.3 52.0 56.9 4.9 1.5 1.7Other a/ 5.6 7.5 1.9 25.7 23.4 (2.3) 8.3 6.1Total 88.9 85.7 (3.2) 183.1 176.9 (6.2) 3.9 3.9

a/ Includes naphtha, lubricants, grease, asphalt, LPG, etc.

During 1960-79, consumption of various refinery products grew at differentrates, changing significantly the relative consumption pattern of main products.While gasoline, gas oil and diesel oil increased their share in total consump-tion, the shares of kerosene and fuel oil declined, as less kerosene was beingused with the improvement in the standard of living, and as residual fuel oilwas gradually being replaced by natural gas.

4.04 During the same period (1960-79), production of refinery productsincreased at an average annual rate of only 3.9% or about the same rateas consumption. Similarly, the share of gasoline and gas oil and diesel oil intotal refinery products went up while that of fuel oil and kerosene and jetfuel declined. A product-by-product comparison of production and consumptionshows that the deficit occurs mostly in gas oil, diesel oil and in gasoline.

4.05 In 1979, the surplus of fuel oil in Argentina was about 4.9 millionbarrels. The surplus is expected to increase sharply in the future followingthe planned switch-over from the use of fuel oil to that of natural gas inindustrial enterprises and utility companies to economically utilize the largequantities of associated gas currently being flared and that likely to bediscovered through ongoing exploration. As noted previously, the RefineryConversion Scheme of YPF is designed to convert a major part of this surplusfuel oil into lighter products (such as gasoline, gas oil, diesel oil, etc.)to bring about a better balance in the supply and demand of refinery products.

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B. Demand Forecast Through 1990

4.06 Until recently, the Government had kept the domestic petroleumproduct and gas prices low compared to international prices. Starting inearly 1980, however, the Government has been gradually increasing theseprices. Furthermore, to encourage substitution of natural gas for petroleumproducts (especially for home heating, power generation, steam generationin industries and chemicals production), the Government intends to keepthe gas prices slightly below (on an energy equivalent basis) the priceof residual fuel oil; this should reduce the demand for residual fuel oil.As for kerosene, which is used primarily for household cooking, the demand isexpected to decline gradually as per capita income increases and as peopleswitch over to the use of gas for cooking. Further, the demand for diesel oilused in power stations is expected to decline sharply from 1982 onwards asadditional gas gathering and distribution systems are completed and thepower stations substitute gas for diesel oil. However, gas oil and dieseloil consumption by other consumers (such as railways and in truck transporta-tion) is expected to increase significantly while their consumption (bunkergas oil and diesel oil) in shipping is forecast to show only a marginalincrease. Apart from gas oil and diesel oil (for uses other than in powergeneration and shipping), the refinery products for which demand is expectedto grow fast are naphtha (for the petrochemical industry), gasoline (formotor vehicles and aviation) and jet fuel (for aviation).

4.07 Taking the above factors and the historical trend of consumption intoconsideration, the Bank staff estimates 1/ of refinery products' demand for theperiod 1980-1990 are shown below:

Argentina - Demand for Selected Refinery Products 1980-90(in '000 barrels)

Gas Oil &Gasoline Diesel Oil Kerosene Jet Fuel Naphtha Fuel Oil

1980 (est.) 46,420 51,075 5,000 5,220 4,530 50,3851981 48,276 52,863 4,843 5,598 4,530 49,8451982 50,208 54,713 4,749 6,038 4,969 47,6431983 52,216 56,628 4,686 6,479 5,787 43,9251984 54,305 58,610 4,623 6,982 5,787 39,0001985 56,477 60,661 4,560 7,485 8,050 42,8551986 58,736 62,784 4,466 8,051 8,050 44,0351987 61,086 64,982 4,372 8,617 8,177 40,6881988. 63,529 67,256 4,246 9,246 8,177 37,2101989 66,070 69,610 4,089 9,875 8,177 34,8451990 68,713 72,046 3,930 10,565 8,177 32,745

Average Annual Growth Rate (%)

1980-85 4.0 3.5 -1.8 7.5 12.1 -3.21980-90 4.0 3.5 -2.4 7.3 6.0 -4.2

1/ Demand estimates prepared by YPF for fuel oil, gasoline, and gas oiland diesel oil were on average about 20-25% higher than Bank estimatesfor 1990, partly because of lower increase in prices assumed by YPFfor those products.

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Gasoline demand is expected to increase by 4.0% p.a. between 1980 and 1990,slightly below the annual rate of 4.8% achieved in 1970-79. The rate ofgrowth in demand for diesel and gas oil at 3.5% p.a. is expected to besignificantly lower than the rates achieved in the past, as consumptionof diesel oil in power plants declines with the switch over from diesel oilto natural gas. During 1980-90, demand for kerosene is expected to declineannually at about 2.4% and for fuel oil at 4.2% in response to the increasedavailability of gas following investments in gas gathering and distributionsystems and in response to the pricing and other measures aimed at promotingthe substitution of kerosene and fuel oil with gas. In the light of the large-scale expansion of the petrochemical sector envisaged for 1980-85, naphthademand is projected to grow at 12.1% per year; thereafter, plans for furthergrowth of the petrochemical sector are not clear at present. Therefore, it isassumed that there would be only a marginal increase in naphtha consumption(0.3% per year) during 1985-90. Considering the expansion of aviation inArgentina, demand for jet fuel is expected to increase by 7.3% p.a. during the1980's.

C. Supply of Selected Refinery Products Through 1990

4.08 A review of the future production programs of all domestic refineriesin operation along with that of the YPF Refinery Conversion Scheme, which isthe only project in the refinery sector approved by the Ministry of Economyintending to add capacity, 1/ indicates the following domestic productionforecast of selected refinery products:

1/ A new refinery project is in the intial stages of consideration bythe private sector. This is not included in the projections.

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ARGENTINA - Production Forecasts

('000 barrels unless otherwise noted)

Gas Oil 6 Sponge AcicularGasoline Diesel Oil Kerosene Jet Fuel Naphtha Fuel Oil LPG Coke Coke

- -- '000 tons------ - -TPF

1979 (Actual) 24,110 36,425 3,673 4,120 3,150 45,118 221 644 -

1985 38,448 37,247 9,851 2,560 3.150 27,934 888 1,051 1291990 43,955 39,778 9,894 2,560 3,150 17,794 888 1,051 129

bago1979 (Actual) 6,422 7,252 158 516 - 4,762 60 210 -1985 8,351 9,495 210 666 - 6,269 77 271 -1990 9,395 10,682 235 749 - 7,053 87 305 -

Shell1979 (Actual) 5,908 4,906 392 394 - 5,765 98 46 -1985 8,593 7,136 570 573 - 8,385 143 67 -1990 9,668 8,028 642 645 - 9,434 160 75 -

lhaura1979 (Actual) 503 881 157 - - 88 - - -1985 629 1,101 196 - - 110 - - -1990 707 1,239 221 - - 124 - - -

Astr aur1979 (Actual) 270 390 69 - - 967 - - -1985 270 390 69 - - 967 - - -1990 270 390 69 - - 967 - - -

DAPSA1979 (Actual) - 82 - - - 220 - - -

1985 - 82 - - - 220 - - -

1990 - 82 - - - 220 - - -

TOTAL1979 (Actual) 37.213 49,936 4,449 5,030 3,150 56,920 379 900 -1985 56,291 55,451 10,896 3,799 3,150 43,885 1,108 1,389 1291990 63,995 60,199 11,061 3,954 3,150 35,592 1,135 1,431 129

X of YPF in TotalProduction

1979 (Actual) 65 73 83 82 100 79 58 72 _1985 68 67 90 67 100 64 80 76 1001990 69 66 89 65 100 50 78 73 100

Note: The increase in fuel oil production by Esso and Shell is entirely due tothe:expected increase in capacity utilization.

The production forecasts are based on the assumption,that the capacity util-ization in the refinery sector as a whole will increase from 76% in 1979to 80% in 1985 and 90% in 1990 (para 2.13).

D. .Supply. and'Demand Balance

4.09 Based on above projections, the forecast supply/demand balance forselected refinery products for 1979, 1985 and 1990 is given below:

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Argentina - Supply and Demand Comparison for MajorRefinery Products in 1979. 1985 and 1990

(in '000 barrels)

Annual Average1979 1985 1990 Growth Rate 1979-90 (%)

(Actual)

GasolineDemand 42,351 56.477 68,713 4.5Supply 37.213 56,291 63,995 5.0Surplus (Deficit) (5.138) (186) (4,718)

Gas Oil & Diesel OilDemand 53,339 60.661 72,046 2.8Supply 49,936 55.451 60.199 1.7Surplus (Deficit) (3,403) (5.210) (11.847)

KeroseneDemand 4,830 4.560 3,930 -1.9Supply 4.449 10.896 11,061 8.6Surplus (Deficit) (381) 6,336 7,131

Jet FuelDemand 4,913 7.485 10,565 7.2Supply 5.030 3,799 3,954 -2.2Surplus (Deficit) 117 (3,686) (6,611)

NaphthaDemand 4.440 8.050 8,177 5.6Supply 3,150 3,150 3,150 0.0Surplus (Deficit) (1,290) (4,900) (5.027)

Fuel OilDemand 51.975 42,855 32,745 -4.3Supply 56,920 43,885 35,592 -4.4Surplus (Deficit) 4.945 1,030 2,847

4.10 Even after the commissioning of the Refinery Conversion Scheme in1985, there would still be a deficit in some refinery products (e.g., gasoline,gas oil and diesel oil, naphtha and jet fuel). and surplus of fuel oil andalso kerosene. Kerosene surplus is expected to reach around 6.3 millionbarrels in 1985, rising to 7.1 million by 1990 because of the expecteddecline in consumption due to the substitution of natural gas for kerosenefor household use. The fuel oil surplus in 1985 would be about I millionbarrels, rising to 2.8 million barrels in 1990; without the ConversionScheme, the fuel oil surplus in Argentina in 1985 would be 16.2 millionbarrels, increasing to 28.2 million barrels in 1990. Considering therelatively small quantities involved, no major problem is foreseen inmarketing surplus fuel oil and kerosene in neighboring countries such asColombia, Bolivia, Chile and Paraguay, which are projected to continue toimport large quantities of these products. In case no further refinerycapacity is installed, the deficit for gasoline, gas oil and diesel oil,

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naphtha and jet fuel would worsen beyond 1985. Agreement has been reachedwith YPF and the Government that they would periodically exchange views withthe Bank on the plans for expanding the refinery capacity in Argentina.

E. Distribution and Transportation

4.11 Buenos Aires and the San Lorenzo region in the eastern part ofArgentina account for about 50% of the total consumption of petroleum products,Mendoza and the surrounding areas in the western part account for an additional25%, and the other parts of the country account for the remaining 25%. Themain marketing area of the (YPF) La Plata Refinery is the Buenos Aires region,while the main marketing zone of the (YPF) Lujan de Cuyo Refinery is theMendoza region where demand for petroleum products is also growing fast (MapIBRD-15312).

4.12 Argentina s system of pipelines is owned and operated by YPF totransport crude and petroleum products between strategic locations. About 45%of crude and one-third of petroleum products are moved by pipelines, theremainder being transported by coastal tankers, rail and road. Crude oil pipe-lines total some 1,700 km in length, have 0.43 million tpd (3.2 million bbl/day)capacity, and are concentrated in Neuquen and the northern region (Map IBRD-15312).Crude from the southern production centers is transported by tankers entirelyowned and operated by YPF. Product pipelines are 2,950 km in length and have acapacity for nearly 0.4 million tpd (3 million bbl/day). Storage capacity forcrude oil and petroleum products is about 18 million bbl each or about 40-daysupply which is adequate in light of Argentina s relatively high degree ofself-sufficiency.

4.13 The Lujan de Cuyo Refinery is about 1,000 km away from the SanLorenzo and Buenos Aires regions, the major consuming centers of refineryproducts. There is a network of product pipelines from Lujan de Cuyo to SanLorenzo and La Matanza (near Buenos Aires). However, as the supply of refineryproducts from Lujan de Cuyo increases substantially following the ConversionScheme, along certain sections of the pipeline where there is no surpluscapacity available for product movement, either additional pumping stationswill have to be established or the existing pumping stations expanded.Although these facilities will not involve significant investments, they arenevertheless essential for the movement of products. Agreement has been reachedwith YPF and the Government that they will expand the transport capacity of thepetroleum product pipeline from Lujan de Cuyo to La Matanza and construct/pro-vide the facilities for the transport of crude oil from Neuquen to Lujan-deCuyo in time for the Conversion scheme.

F. Marketing Organization and Policies of YPF

4.14 The marketing organization of YPF for refinery products is dividedinto two units, each under a Marketing Manager. One unit deals with thedistribution to industrial consumers, shipping companies, commercial aviationand the armed forces, and the other deals with distribution to the generalpublic. There are nine sales regions, each under the responsibility of aregional sales manager. Currently YPF sells about US$12 million worth ofrefinery products every day of which about US$8 million (two-thirds) is accountedfor by sales to the general public. There are about 1,900 persons engaged inthe marketing operation, including 1,600 for distribution to the general public.

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4.15 There are about 6,000 petrol stations in the country of which2,800 are outlets for YPF products, including 33 operated by YPF itself andthe rest run by private dealers. YPF estimates that the net additions to thenumber of stations served by YPF will be about 20 per year during the nextdecade. From its experience in running its own petrol stations, YPF hasestimated that a station has to sell at least 130,000 liters/day to breakeven. The average sale per station serving as YPF outlet is 170,000 liters/day.Average freight distance from the pipeline and storage depots to the petrolstations served by YPF is 250 km.

4.16 The marketing margin is fixed by the Government. It currentlyaverages about 11.63% of the retail price, including 6.31% for the dealers andthe rest for the Company. The marketing margin is reasonable and is adjustedperiodically along with the adjustment of retail prices. Further, YPF isencouraging dealers in rural and semi-urban areas to sell soft-drinks, bottledLPG and briquets (for home heating) so that they can earn additional incomeand remain in petroleum distribution business even though their sales ofpetroleum products have not yet reached the economic level.

4.17 YPF has recently strengthened its marketing team and has prepared apreliminary marketing plan for the medium term (1980-85) which includes:(i) rationalization of the service station network by increasing the number inareas with good potential for sales and closing uneconomic stations in areas wheresales are low; (ii) continuing the program for improving the operations of thestorage and delivery stations to reduce loading time and freight charges; (iii)achieving better inventory control by installing volumetric meters in the storage anddelivery stations; (iv) utilization of more transportation companies for contractdistribution in order to reduce the risk from strikes; (v) increasing the share ofprofitable products (e.g., jet fuel) in total product mix and discontinuing orreducing the share of nonprofitable products (e.g., asphalt); (vi) implementingmodifications in existing facilities to increase the quantity of jet fuel tomeet the growing demand; (vii) studying and developing improved methods forthe transportation and distribution of asphalt taking advantage of the existinginfrastructure; (viii) promoting a reduction in the number of products toreduce the costs of stocks and storage and restructuring the sales networkand discontinuing storage facilities which are not necessary in the light ofreduced number of products distributed; and (ix) developing new visual identi-fication systems for YPF for service stations, delivery plants, delivery tankwagons, storage tanks, publicity materials, etc. Agreement has been reachedthat YPF will finalize the marketing plan by March 31, 1982, and carry out theplan by June 30, 1985.

G. Petroleum Products Pricing

4.18 Between early 1976 and mid-1978, the Government enacted priceincreases for petroleum products at all levels. Measured in current US dollarterms, increases over this period were about 40% for crude prices, 114% forretail prices of petroleum products and 85-90% for natural gas. However, in anattempt to slow down inflation (which was running at the rate of 175% in 1978and 160% in 1979), the Government, during 1978 and 1979, kept these increasessignificantly below increases in the overall price level and in fuel importcosts. As a result, at the end of 1979, prices of petroleum products inArgentina were below international levels.

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4.19 However, in connection with the appraisal of the Oil and Gas EngineeringProject (Report No. P-2745-AR, June 4, 1980), the Government conveyed to theBank its intention to increase petroleum prices during 1980 by 1.8% per monthin real terms over and above the increase in non-agricultural wholesale pricesstarting from January 1980. This approach was actually followed until the endof March 1981 when the new Government came to power. An understanding has beenreached with the new Government that domestic retail prices of petroleum productswill be maintained in real terms at the May 1, 1981 level. The retail pricesin Argentina in May 1981 were substantially higher than in the US and were atlevels comparable to those in India as shown below:

Retail Prices for Selected Petroleum Products(US$ per gallon)

Premium Regular Kerosene and Diesel Fuel Diesel Fuel ForGasoline Gasoline Gas Oil for Transport Power GenerationPrice a! Tax Price a/ Tax Price a/ Tax Price Tax Price Tax

Argentina b/ 2.09 1.32 1.72 1.03 1.26 0.62 0.78 0.27 0.60 (0.02) d/U.S. c/ 1.32 0.12 1.24 0.12 1.13 NA 1.13 NA NA NAIndia c/ 2.15 1.18 2.07 1.18 0.74 0.21 0.74 0.21 NA NAFrance c/ 3.17 1.81 2.97 1.70 2.73 1.04 2.05 1.04 NA NA

a/ Includes tax.b/ As of May 1, 1981.c/ As of December 15, 1980.d/ The tax on diesel oil for power generation is negative.

Sources: Energy Week, Harcourt Brace Jovanovich, Inc., Dec. 15, 1980 andPrice Resolution, May 1, 1981 for Argentina.

4.20 Current petroleum product prices at the consumer level compare favorablywith other countries. There is a need, however, to further rationalize the structureof petroleum product prices to induce optimum consumption patterns consistent withthe resources available and energy conservation goals. For example, whileretail gasoline prices are relatively high, the crude prices are extremely low(US$11.8/bbl) compared to the FOB international price of US$35/barrel. Also,the retail prices of diesel and fuel oil 1/ are low relative both to theircurrent economic value and to other hydrocarbon product prices. The spread inprices between crude and final products do not accrue to the refineries, but aretaxed heavily by the Government (taxes range from 6% of retail price for fueloil to 58% for premium gasoline) and these taxes are used to finance federal andlocal transport related programs and to compensate crude importers for thedifference between international and domestic crude prices.

4.21 The new Government which came into power in Aarch 1981 plans to continuethe policy of revising the price of petroleum products periodically to reflectadequately the changes in internal price levels and international petroleum prices.

1/ The domestic fuel oil price in May 1981 was US$126/ton compared to theFOB international price of US$195/ton.

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In order to ensure a rationalization of petroleum prices, an understal. ing hasbeen reached with the Government that domestic crude oil price paid to YPF willbe raised to levels comparable to those of private petroleum companies underrisk-sharing contracts negotiated by the Government in 1980, and that domesticprice of petroleum products will be maintained, in real terms at least at theMay 1, 1981 level. Agreement has also been reached with the Governmentthat ex-refinery product prices will be set at a level that would provide YPF,operating efficiently, with funds sufficient to cover all its costs andexpenses before interest, to earn a reasonable return on its revalued net fixedassets in service, and to meet sound financial ratios (paras 7.11 and 7.12).Furthermore, the Government has agreed that the level and inter-product pricestructure at the consumer level between natural gas and petroleum productswill be rationalized following the completion of the Gas Utilization Study(financed under the Oil and Gas Engineering Loan).

V. THE PROJECT

A. Project Objectives and Scope

5.01 The primary objectives of the Project are to convert Argentina'ssubstantial surplus low-value residual fuel oil to higher-value refineryproducts in short supply, improve the performance of YPF's major refineries,strengthen the company's financial management system, training of YPF opera-tional staff, and study the potential for energy saving in the industrialsector.

5.02 The proposed Project includes five components: (i) the RefineryConversion Scheme to convert annually a total of about 4.2 million tons (28million barrels) of fuel oil from the La Plata and Lujan de Cuyo refineries toabout 3.9 million tons (26 million barrels) of higher-value lighter distillatesand coke; (ii) a Plant Operations Improvement Program (POIP), with particularemphasis on energy saving and pollution control aspects at the La Plata andLujan de Cuyo refineries based upon the recommendations made by TOTAL, theFrench petroleum company; (iii) a Financial Management Improvement Program(FMIP) for YPF, with particular attention to establishment of cost centers,and introduction of systems for cost-control, management information, capitalbudgeting and financial planning based upon a study carried out by ArthurAndersen & Co.; (iv) a Training Program for YPF, with particular emphasis onthe needs of its refinery division; and (v) an Industrial Energy Audit of themajor industrial enterprises of Argentina, to determine the scope for energysaving in those units along with the related investment requirements. Thecomponent (v) will be carried out with the assistance of consultants under theauspices of the Secretariat of Fuels of the Ministry of Works and PublicService, while the rest of the components will be carried out by YPF with thehelp of capable and experienced engineering firms for project design, engine-ering, procurement, and implementation.

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B. Project Description

1. Refinery Conversion Scheme

5.03 The La Plata Refinery and the Lujan de Cuyo Refinery togetheraccount for 79% of YPF's total refinery capacity in its six refineries, and51% of the total Argentine refining capacity. Individually, the La Plataand Lujan de Cuyo refineries are capable of processing 220,150 bpd and128,950 bpd of crude oil, respectively. Although both the refineries havesecondary processing facilities in the form of coking and fluid catalytic-cracking, the respective capacities are relatively small and a large proportionof reduced crude 1/ is directly blended into the fuel oil pool. The RefineryConversion Scheme is designed to process almost all of the reduced crude ateach location into feedstocks for subsequent conversion into light or middledistillates as well as coke in the proposed coking and fluid catalyticcracking (FCC) plants. Coking plants have relatively low investment costsper unit of distillates produced compared to other conversion schemes suchas hydro-cracking. Coking plants, however, can only be used if low-sulfurcrudes are available, which is the case in Argentina where a large portionof the domestic crude oil has a low-sulfur content.

5.04 Through linear programming, YPF's Technical Department studieda number of configurations for the Refinery Conversion Scheme to optimize theoutput of both the La Plata and Lujan de Cuyo refineries. These alternativesincluded several combinations of conversion processes such as catalyticcracking and delayed coking and diasphalting as well as expansion of theexisting vacuum distillation capacity. They were then ranked according totheir revenue/investment ratios. Subsequently, three alternatives with thehighest ratios were investigated in detail from a technical as well as economicpoint of view to select the basis for a feasibility study. The final projectconfiguration was agreed during appraisal by modifying the one used in thefeasibility study. The capacity of the hydrotreater in Lujan de Cuyo wasreduced to reflect a higher proportion of low-sulfur crudes in the totalfeed than originally envisaged. Similarly, the capacity of the vacuum unitin La Plata was marginally reduced due to less than originally anticipatedresidue from the low-sulfur crude available to La Plata. A fluid catalyticcracker was also added at La Plata in the light of revised projections offuel oil demand showing a further erosion due to an aggressive program for

11 Reduced crude is the crude fraction obtained after initial distillationof crude petroleum and which can be subjected to vacuum flashing andvacuum distillation.

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switching over from the use of fuel oil to natural gas in industrial andpower plants and consequent need for additional conversion capacity. Thefinal project configuration thus derived is given below:

Scope of Refinery Conversion Scheme

Capacity (m 3/day)

At La Plata RefineryVacuum Fractionation 5,000Fluid Catalytic Cracking (FCC) 4,500Delayed Coking 3,000Hydrotreating of Light Gas Oil (LGO) 1,100LPG Merox Treatment 2,383Gas Separation Unit Of suitable capacity to

handle gases from FCCand delayed coker units

At Lujan de Cuyo RefineryFluid Catalytic Cracking (FCC) 3,300Delayed Coking 3,200Hydrotreating of LGO 1,900LPG Merox Treatment 1,410Gas Separation Unit Of suitable capacity to

handle gases from FCCand delayed coker units

Concurrently with the implementation of the conversion subproject at La Plata,the Company plans to carry out the following: (i) replacement of two of theold existing coking chambers with a capacity to produce about 123,000 tons peryear of acicular coke; (ii) replacement and/or additions of pumps, drives,pipes, fractionators to ensure a sustained sponge coker charge stock capacityof 1,500 m3/day; and (iii) modification of the furnaces in the Topping Units 4and 5 and improvement in the vacuum system so that the Conversion Scheme,supplemented by the proposed debottlenecking, would enable both refineries tooperate close to their design capacity on a sustained basis.

2. Plant Operations Improvement Program

5.05 Based upon the study carried out by TOTAL for La Plata and by astudy made by the specialists of Lujan de Cuyo, YPF has prepared a programfor plant operations improvements in the La Plata and Lujan de Cuyo refineries.The improvement program will include: (i) energy conservation measures;(ii) pollution control measures; (iii) better maintenance to avoid unnecessaryshutdowns; (iv) modernization of instrumentation; (v) improvements in productionprocesses; (vi) better transportation management in relation to the selectionand leasing of vehicles for product distribution, contract maintenance, etc.;(vii) introduction of a standard costing system; (viii) establishment of amanagement planning unit in each refinery; (ix) organizational changes on thelines of refineries in developed countries to increase efficiency of operation;(x) improvement in wage policy to minimize turnover of professionals; and (ix)optimization of process units through a dynamic mathematic model.

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5.06 The implementation of the POIP is being initiated with technicalassistance from TOTAL. The total cost of the POIP is estimated at US$113million. Two important components of the POIP--energy conservation andpollution control subprojects--will be financed out of the proceeds of theproposed loan and the rest will be financed by YPF with its own internallygenerated funds. The energy conservation and pollution subprojects of POIPare estimated to cost about US$50 million including US$26 million in foreignexchange.

5.07 The Energy Conservation Subproject will include: (i) improvement inthe accuracy of instrumentation to locate and minimize leaks; (ii) maximiza-tion of the use of flared gas: (iii) maximization of the recovery of LPG--butaneand propane; (iv) optimization of the steam balance, loss prevention andcondensate recovery; (v) introduction of air preheat and forced drought wherenecessary to save energy (which would save up to 7% of energy in each refinery);(vi) better combustion control of furnaces and boilers (which would save up to2% of energy in each refinery); (vii) chemical cleaning of boilers (whichwould save about 1% of energy in each refinery); and (viii) switch-over fromthe use of fuel oil to refinery gas wherever possible.

5.08 The Pollution Control Subproject will concentrate on the La PlataRefinery, with particular attention to overcoming the water pollution problemthere. (At Lujan de Cuyo, acceptable standards of pollution control havealready been adopted.) Measures to be taken to solve the water pollutionproblem include: (i) direction of all clean water that can be separated fromthe oily water into side channels: (ii) reduction in the leakage and lossesfrom the cooling water system: (iii) maximization of the use of tank trapsfor rainwater collection; (iv) improvement in the operation of API separators;and (v) reducing leakages and losses of water before it enters the API separator.As for overcoming the air pollution problem, modification of the existingfixed roof type for storage tanks is needed to prevent substantial losses ofhydrocarbons due to thermal variations: and (vi) installation of necessarypollution control equipment.

3. Financial Management Improvement Program

5.09 The program is based on the recommendations of a detailed study ofYPF's financial and accounting system completed by Arthur Andersen & Co. inSeptember 1980. As noted, the program will initially concentrate on theestablishment of cost centers and the introduction of the management informationsystem (para 3.12). Subsequently, the program will emphasize the introductionof medium-term capital budgeting and financial planning.

4. Training Program

5.10 The training program will concentrate on training YPF personnel inmodern financial management systems, energy saving and pollution control tech-niques, better operating and maintenance practices. This program excludes thetraining of selected personnel in operation and maintenance of the RefineryConversion Scheme which will be carried out as part of the Scheme in vendorworkshops and plants selected by the engineering contractor.

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5. Industrial Energy Audit

5.11 The Industrial Energy Audit will examine and recommend the nec-essary measures to improve efficiency in the use of energy in major indus-trial undertakings, excluding YPF refineries which have already been studied.Agreement has been reached with the Government that the Bank will be givenan opportunity to comment on the recommendations of the Audit and that therecommendations will be implemented expeditiously.

C. Raw Materials and Infrastructure

5.12 Main raw materials for the Refinery Conversion Scheme will be:(i) residual fuel oil--about 2.5 million tpy for La Plata and 1.7 million tpyfor Lujan de Cuyo--for conversion to higher value distillates, and(ii) refinery gas to replace fuel oil in utilities. The residual fuel oilwill be supplied by the existing refineries in those locations. The crude oilsupply to the La Plata Refinery is assured from the oilfields at CuencaNeuquen, Santa Cruz, Chabut and Tierra del Fuego through pipelines and/orshipping. Currently, the La Plata Refinery meets about 90% of its crude oilrequirement from local sources and the rest from imports. The import dependenceof La Plata is expected to decrease in the future with increased local crudeproduction from the oilfields mentioned above.

5.13 The Lujan de Cuyo Refinery, which relies at present entirely onthe oilfields at Mendoza for crude, requires about 20,500 m3/day (128,945 bpd)of crude at full production but is presently getting only 18,500 m3/day(116,365 bpd), 15% less than its requirements, because the oil productionin the Mendoza region is going down with the depletion of the known reservesthere. The shortfall is expected to increase from the current daily level of3,000 m3 to 6,200 m3 by 1985 and 13,430 m3 by 1990, unless measures are takento increase the oil supply to the refinery from more distant oilfields. Thisrequires the building of a 560-km pipeline to connect the refinery to theNeuquen region where substantial proven reserves of low sulfur, high qualitycrude oil exist. YPF has prepared plans for building this pipeline which isestimated to cost about US$120 million. YPF has carried out a feasibilitystudy for this pipeline and has shown that the construction of this pipelineis the optimal alternative for the supply of oil to the Lujan de Cuyo Refineryas well as for the use of the Neuquen oil. The construction of the pipelineis expected to take two years compared to four years for the ConversionScheme. Agreement has been reached with the Government and YPF that thefacilities for the transport of crude oil from Neuquen to Lujan de Cuyo willbe constructed in time for the proposed conversion facility at Lujan deCuyo.

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5.14 The available primary and secondary reserves of crude oil in theoilfields serving and/or expected to serve the refineries at La Plata andLujan de Cuyo are given below:

Available Crude Oil Reserves by Provinces as of Dec. 31, 1979(in million bbl)

Primary Secondary Total

Neuquen 509 90 599Santa Cruz (North) 347 213 560Santa Cruz (South) 44 - 44Chubut 248 192 440Tierra del Fuego 38 5 43Mendoza (North) 154 167 321Mendoza (South) 28 14 42Salta 39 - 39Jujuy 9 9Rio Negro 91 203 294La Pampa 24 35 59

1,531 919 2,450

5.15 The available oil reserves as of December 31, 1979 in Argentinawere 2.45 billion barrels which are adequate to meet the needs of the existingrefineries at 90% production fot about 12 years. Prospects for furtherexploration and increased domestic production are considered bright given thelarge hydrocarbon-bearing areas (estimated at 1.2 million sq km onshore and0.4 million sq km offshore) and limited exploration in nine of the ten basins(para 2.10). Agreement has been reached with the Government and YPF thatadequate arrangements will be made to meet the crude oil requirements of LaPlata and Lujan de Cuyo refineries.

D. Utilities

1. Lujan de Cuyo Refinery

5.16 Water Supply: The refinery currently receives water from Mendozariver about 2 km away through the Lujan de Cuyo thermal electricity plant.Raw water is passed through a system of decanters and filters. Filtered wateris in part demineralized in conventional zeolite system to produce boiler feedwater; the rest is used for circulating cooling water makeup, potable watersupply (after chlorination) and for firefighting water storage. The mainsupply system is designed for 860 liters per second and the refinery presentlyconsumes at the rate of only 465 liters per second. The boilerfeed watertreatment plant has a total capacity of 660 tons per hour (tph) against thepresent requirement of maximum 410 tph. Main water supply and boiler-feedwater systems have adequate overcapacity to cover the additional requirementsof the Conversion Scheme. No major additions to the recirculating coolingwater system is envisaged.

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5.17 Steam: Currently, the installed steam generation capacity totals410 tph. To provide for the incremental steam requirement for the ConversionScheme of 80 tph and to provide spare capacity, total new generation capacityof 150 tph is planned.

5.18 Electric Power: The refinery receives power supply from the adjacentthermal power station at 13.2 KV and is stepped down to 2.3 KV for supply tohigh voltage motors and to 415 V and 210 V for other plant prime movers andlighting. These arrangements are adequate.

5.19 In addition to 12 MVA purchased from the thermal power plant, therefinery generates 4 MVA. Incremental requirements of 4 MVA for the Conver-sion Scheme will be met by additional purchases from the thermal power plantwhere present generation capacity of 120 MVA is planned to be raised to 360MVA by 1982. Power supply is dependable with very few breakdowns or voltageand frequency fluctuations.

2. La Plata Refinery

5.20 Water Supply: The present facilities include decantation andfiltration facilities for 3,610 tph river water, treatment of 660 tph filteredwater for boiler water feed and treatment of 100 tph water for potable uses.The facilities will be expanded to initial filtration capacity of 4,260 tphand 860 tph for boiler feedwater treatment.

5.21 Steam and Power Supply: No major additions to steam generation andpower generation facilities for the Conversion Scheme are envisaged.

E. Project Management and Implementation

5.22 As mentioned, YPF will be responsible for the implementation of allthe components of the Project except the Industrial Energy Audit which willbe carried out under the auspices of the Secretariat of Fuels of the Ministryof Works and Public Service. For the execution of the Refinery ConversionScheme, and the Plant Operations Improvement Program, YPF has established aProject Management Unit at its headquarters in Buenos Aires, supplemented bytwo project teams--one at the La Plata Refinery and the other at the Lujan deCuyo Refinery. The Financial Management Improvement Program will be executedunder the supervision of the Finance Director of YPF with the assistance ofArthur Andersen & Co. The proposed training program will be implemented underthe direction of the Training Manager of YPF.

5.23 The Refinery Conversion Scheme, the main component of the Project,will be carried out in two phases. The Phase I includes basic process designand engineering, detailed engineering for critical parts, and preparation ofbidding documents. Phase II will include detailed engineering, constructionand erection. Separate contractors will carry out Phase I and Phase II toavoid conflict of interest. For Phase I, YPF has selected Foster WheelerInternational (FWI), of the U.S., a capable firm with extensive experience indesigning and building refinery projects, after following procedures satisfactoryto the Bank. FWI has selected Merox process for sulfur removal from LPG, EssoResearch (ERE) Process for fluid catalytic cracking and FWI's own technologyfor delayed coking. These technologies are modern and commercially proven and

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are acceptable. FWI will also serve as Technical Advisor to YPF during theimplementation of the Refinery Conversion Scheme and direct the start-up andcommissioning of the Scheme with the help of process and equipment vendors andthe engineering contractor. FWI will provide the process guarantees while theengineering contractor will provide the mechanical guarantees for the Scheme.FWI will assign specialists to the office of the engineering contractor tosupervise and approve detailed engineering and oversee the procurement work ofthe contractor. FWI specialists will be supplemented with specialists fromYPF in carrying out this task.

5.24 As for Phase II, which includes detailed engineering, procurement ofequipment and supplies and construction, YPF considered three alternativeapproaches to execution: (i) lumpsum turnkey contract restricting bidding toonly those prequalified contractors who have local subsidiaries and/or partners;(ii) lump sum turnkey contract with bidding open to all prequalified contractorsirrespective of whether they have local subsidiaries and/or partners; and(iii) fixed fee contract for detailed engineering and procurement services,construction and erection, and with equipment to be procured under internationalcompetitive bidding (ICB) on a reimbursable basis, with a bonus/penaltyclause for timely completion, and with bidding open to all prequalifiedcontractors. After detailed review of the three approaches mentioned, YPF hasopted for alternative (iii) which reflects the implementation arrangementsnormally recommended by the Bank as most cost effective for process industries.

5.25 The Plant Operations Improvement Program which will be implementedunder the direct control of the Refinery Division Manager, Mr. Fabiani, withtechnical assistance from TOTAL, of France, who carried out the study and maderecommendations for the improvement of the operations of the La Plata Refinery.TOTAL recommendations for energy saving at La Plata are also applicable tothe Lujan de Cuyo Refinery.

5.26 The Financial Management Improvement Program will be carried outunder the direction of the Finance Director of YPF with technical assistancefrom Arthur Andersen & Co. who carried out the financial management studyfor YPF. The Training Program will be carried out under the direction of theTraining Manager of YPF in collaboration with TOTAL and Arthur Andersen.Special attention will be paid to the training of YPF personnel in financialmanagement. As already noted, the Industrial Energy Audit will be carriedout with the help of consultants under the auspices of the Secretariat ofFuels.

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F. Project Schedule

5.27 The implementation schedule for the Refinery Conversion Schemeis given in Annex 5. The contract with FWI was signed by YPF on May 1, 1981and the process packages and the bidding documents prepared by FWI will beready for release to potential engineering contractors by September 1981.The potential bidders will be allowed six months to bid and the contract withthe selected engineering contractor is expected to be signed and becomeeffective by June 1982, the zero date for the Scheme. From the zero date,the Scheme is expected to take 32 months until commissioning. On this basis,the date for commercial production is assumed to be June 1985.

5.28 Implementation of the Plant Operations Improvement Program (POIP)has already been initiated. The two components of this program which havebeen selected for financing by the Bank, i.e., energy conservation and pollutioncontrol components, are expected to be implemented over a four-year periodstarting from April 1981. Implementation of the Financial Management ImprovementProgram (FMIP) has also started and is scheduled for completion by December1983. The Training Program will be implemented concurrently with the POIPand FMIP. The Industrial Energy Audit will be carried out over a 12-monthperiod starting from September 1981 when the consulting firm for the audit isexpected to be selected.

G. Staffing and Training

5.29 The Refinery Conversion Scheme is expected to employ at peak ofconstruction about 3,500 people and is estimated to require a permanent staffof 320. The other parts of the Project are not expected to create additionalpermanent employment as they are mostly improvement and training programs. Anumber of key personnel have already been selected for project execution.While most of the training of operators and maintenance crews under theTraining Program will be carried out in the existing YPF refineries, a limitednumber of selected personnel will be trained at facilities abroad similar tothe arrangements under the Conversion Scheme and in vendors' workshops. ThisScheme as well as other components of the Project will also benefit from thecomprehensive training program to be financed by the Bank for the YPF RefineryDivision as a whole with special attention to operation and maintenance,financial accounting and management.

H. Environmental Considerations

5.30 The two sites for the Conversion Scheme differ quite considerablyfrom an environmental aspect. The refinery at Lujan de Cuyo has a verymodern plant for the handling of liquid effluents that was completed in 1979at a cost of US$2.5 million. It involves API separators, flotation, oxidationand biological treatment facilities. Sour water is stripped and neutralizedbefore it enters the treatment system. The effluent that is returned tothe Mendoza river meets the Argentinian specification for industrial effluents(National Decree No. 2125/78), which is comparable to Bank recommended stan-dards. The capacity of the treatment facilities will be expanded to handleadditional loads consequent upon the Conversion Scheme taking into accountthe overcapacity presently available in existing facilities.

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5.31 At La Plata there is clearly a liquid effluent problem and the TOTALreport has recommended specific measures to reduce the contaminants to anacceptable level. Those measures are included in the POIP. For the incre-mental quantities of effluents from the Conversion Scheme, new facilities fortreatment to required standards will be created.

5.32 Air pollution at both sites is not a major problem because of the lowsulfur content of Argentine crude. However, in this regard as part of the POIP,YPF will investigate the possibility of reduction and control of pollutantemissions at source (stacks, tank farm and process units) to applicable normsand will then take the necessary steps. Assurances have been obtained thatboth refineries related to the Project will meet satisfactory environmentalstandards.

VI. CAPITAL COST, FINANCING PLAN AND PROCUREMENT

A. Capital Cost Estimates

6.01 Total financing required for the Project including the RefineryConversion Scheme, the Operations Improvement Program, the Financial ManagementImprovement Program, the Training Program and the Industrial Energy Audit, isestimated at approximately US$878 million equivalent of which US$439 millionwould be in foreign exchange. The capital cost estimates, details of which aregiven in Annex 6-1, are summarized in the table on the following page.

6.02 The base cost estimate for the Refinery Conversion Scheme is expressedin May 1981 prices and is derived from estimates made in October 1980 byFoster Wheeler International (FWI) based on data for a similar facility FWI iscurrently implementing in Spain, having already procured the equipment andbulk of materials. Basic information on the location factor for Argentina wasdeveloped by the FWI office in Buenos Aires. Adjustments were made for thedifferences in soil conditions and the ocean and inland freight costs for thetwo refinery locations. The cost estimates are based on the assumption thatthe Government would allow exemption from the Compre Argentino regulationsfor the Project in line with other Bank-financed projects (e.g., Segba Hydro-electric Project) and no customs duties, value added tax, or consular chargeswould be payable on equipment and materials imported for the Project. Theestimates include (i) a physical contingency of 10%; and (ii) price escalationfor foreign costs based on the forecast of international inflation rates indollar terms of 9% for the last eight months of 1981, 8.5% for 1982 and 7.5%for 1983 and onwards; the same international rates have been used for localequipment and materials assuming that the difference in the domestic andinternational rates will be accounted for by adjustments in the foreignexchange rate. On civil works and erection, however, in the light of ex-perience in recent years, higher annual increases in dollar terms have beenused: 20% for the last eight months of 1981, declining to 8% in 1982 andonwards. Initial working capital requirements for the Project are estimatedat US$22.4 million equivalent excluding the cost of spare parts for two yearswhich are included under the equipment and material costs (Annex 6-2).

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6.03 The financing requirements for the Plant Operations ImprovementProgram are estimated at US$50 million (including US$26 million in foreignexchange) based on estimates prepared by TOTAL. The cost estimates for theFinancial Management Improvement Program and the Training Program have beenprepared by the Bank in consultation with YPF and Arthur Andersen & Co. Thecost of the Industrial Energy Audit has been estimated in consultation withthe Secretariat of Fuels.

Summary of Capital Cost Estimates a/

$a Billion US$ MillionLocal Foreign Total Local Foreign Total %

I. Refinery Conversion Scheme

Engineering and Licenses 10.8 158.2 169.0 3.4 49.6 53.0 6.0Equipment and Materials b/ 270.6 409.5 680.1 84.8 128.4 213.2 24.3Erection 323.5 80.7 404.2 101.4 25.3 126.7 14.4Civil Works 116.8 49.8 166.6 36.6 15.6 52.2 5.9Construction Supervision 49.8 14.4 64.2 15.6 4.5 20.1 2.3Start Up c/ 31.9 16.9 48.8 10.0 5.3 15.3 1.7Base Cost Estimate (BCE) 803.4 729.5 1,532.9 251.8 228.7 480.5 54.6

Physical Contingencies(10% of BCE) 80.4 73.0 153.4 25.2 22.9 48.1 5.5

Price Escalation 378.0 214.3 592.3 116.3 69.6 185.9 21.2Installed Cost 1,261.8 1,016.8 2,278.6 393.3 321.2 714.5 81.3

Working Capital 63.8 7.7 71.5 20.0 2.4 22.4 2.6Interest During Const. - 273.7 273.7 85.8 85.8 9.8Total for Conv. Scheme 1,325.6 1,298.2 2,623.8 413.3 409.4 822.7 93.7

II. Plant Operations Improve-ment Program 76.6 82.9 159.5 24.0 26.0 50.0 5.7

III. Financial ManagementImprovement Program 3.2 3.2 6.4 1.0 1.0 2.0 0.2

IV. Training Program 1.6 3.2 4.8 0.5 1.0 1.5 0.1

V. Industrial Energy Audit 0.6 6.4 7.0 0.2 2.0 2.2 0.3VI. Total Financing Required 1,407.6 1,393.9 2,801.5 439.0 439.4 878.4 100.0

a/ The costs expressed in $a have been calculated from the US$ cost usingan exchange rate of $a 3,190 = US$1.00 as of May 1, 1981.

b/ Includes spare parts, freight and insurance, port handling and othercharges.

c/ Includes costs of training in vendor workshops.

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B. Financing Plan

6.04 The financing plan for the Project agreed with the Government andYPF is shown below:

Project: Financing Plan

US$ MillionTotal _

I. Debt

IBRD:- YPF 198.0 22.6

- Government a/ 2.0 0.2

200.0 22.8

Foreign Commercial Sources 421.0 47.9

Sub-total 621.0 70.7

II. Equity

Internally GeneratedFunds/Government 257.4 b/ 29.3

III. Total 878.4 100.0

a/ For the Industrial Energy Audit.b/ Including US$0.2 million equivalent for the Industrial Energy Audit.

6.05 The Project is expected to be financed on a 71/29 debt/equityratio. The proposed Bank loan of US$200 million will cover nearly 23% ofthe total costs. YPF will borrow an additional US$421 million equivalent by wayof export credits and commercial bank loans from foreign sources. YPF hasreceived offers from a number of international merchant and commercial banks forarranging necessary funds. The commercial loans are expected to be made undercofinancing arrangements with the Bank loan.

6.06 Of the Bank loan of US$200 million, US$198 million is proposed tobe extended to YPF and US$2 million to the Government (for the IndustrialEnergy Audit) for 14 years including three and one-half years of grace atthe prevailing rate of interest. An interest equalization fee of 10% of the

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Bank lending rate on top of the Bank's standard lending rate will be chargedto YPF. The Government will bear the cross exchange risk between the currenciesdisbursed by the Bank and the US dollar. YPF will bear the exchange riskbetween the US dollar and Argentine peso. Of the additional external financingof US$421 million for the Project, about 35% is likely to be in export creditsand the rest in commercial bank loans. Export credits are expected to be for 14years at 8.5% interest per annum, with the repayment of principal to begin sixmonths after the forecast start-up of the Project. The down payment of 15% onexport credits will be met from commercial loans. Commercial loans will alsocover all other financing requirements not covered by the Bank, export creditsand equity. It is assumed that these commercial loans would be for eight yearswith interest about 7/8% above LIBOR which is assumed to average 14% during theimplementation period of the Project.

6.07 On the basis of the financing plan given above, the Project willrequire about US$257 million equivalent from internally generated funds of YPFor government funds. The financial projections indicate that YPF should beable to generate these funds during the project implementation period.However, because of the Government's substantial influence on the prices ofpetroleum products and to ensure availability of necessary resources tocomplete the Project, assurances have been received from the Government that itwill meet any shortfall in funds to finance the Project.

C. Procurement

6.08 The engineering contractor selected will be responsible for pro-curement of equipment. With its help YPF will prepare a list of goods andservices for financing with export credits under competitive bidding bycountries providing such credits. The rest of the items will be procuredunder the international competitive bidding (ICB) procedures of the Bankexcept for: (i) items costing less than US$100,000 equivalent each, notexceeding the aggregate amount of US$4 million, which will be procured byinternational shopping subject to the prior approval by the Bank of the listof items involved; and (ii) agreed proprietary and process and time criticalitems, whose aggregate cost is estimated not to exceed US$20 million, whichwill also be procured through international shopping. A preference of 15% orthe customs duty, whichever is lower, will be allowed to qualified localmanufacturers bidding under the ICB procedures. Construction and civil workswill be bid competitively as part of the main engineering contract underconsortium arrangements.

D. Allocation and Disbursement of Bank Loan

6.09 The final make-up of the items for Bank financing will be determinedby the supply capacity and price competitiveness of the potential exportcredit sources, and the final recommendations of the engineering contractor.;entative allocation of the Bank loan is given below:

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Allocation of Bank Loan

Amount Application a/(US$ million)

I. Refinery Conversion Scheme- Engineering and Licenses 10.0 100% of foreign expenditures- Equipment, Materials & Spares 55.0 100% of foreign expenditures

and 100% of local expenditures

- Construction & Erection 105.0 56% of foreign and localexpenditures

II. Plant Operation Improvement ProgramEquipment, Materials & Spares 19.0 100% of foreign expenditures

and 100% of local expendituresIII. Financial Management Improvement

Program 1.0 90%

IV. Training Program 1.0 90%

V. Industrial Energy Audit 2.0 90%

VI. Unallocated 7.0

Total 200.0

a! For foreign expenditures 100% of c.i.f. value and for local expenditures100% of ex-factory value. Except for the Engineering and Licences category,both foreign and local expenditures will be eligible for Bank financing.

6.10 About 30% of the Bank loan is expected to be disbursed against localcurrency expenditures. The Bank loan would be used to finance the FWI contractand part of the main engineering contract including local currency costs.Retroactive financing of US$8 million is envisaged to meet expendituresincurred from May 1, 1981, by way of initial payments on: (i) the FWI contract(which became effective May 1, 1981) to have Bank participation in thiscrucial contract for basic engineering; and (ii) on the Plant OperationsImprovement Program which is already underway. The Bank loan is expected tobe disbursed fully by June 30, 1985, according to the schedule presented inAnnex 6-3. Any surplus funds remaining in the loan account after projectcompletion will be cancelled.

VII. FINANCIAL ANALYSIS

A. Production and Production Costs

7.01 The financial analysis of the Project is done in current terms inUS$ and the major assumptions are detailed in Annex 7-1. This analysisconsiders only the results of the conversion facilities to be installed underthe Project. For preparing the financial analysis of the Refinery Division,the financial performance of the Project is consolidated with the existingoperations, including present facilities at the La Plata and Lujan de Cuyorefineries.

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7.02 It is assumed that the Project will start commercial production onJune 1, 1985 with capacity utilization increasing gradually from 60% in thefirst year of operation to 80% in the second and 95% in the third and sub-sequent years. Because of the Company's experience in operating its existingfacilities at high capacity and the provision for training under the Project,the attainment of 95% capacity utilization from the third year of operation isconsidered realistic.

7.03 Fuel oil is the major input for the Project. At 95% operation, itwill convert about 4.2 million tpy of fuel oil--2.5 million tons from the LaPlata Refinery and 1.7 million tpy from the Lujan de Cuyo Refinery--intoapproximately 3.9 million tpy of higher-value petroleum products such asgasoline, gas oil and diesel oil, LPG, kerosene and coke. In addition, itwill produce 224,500 tons of refinery gas as a by-product, a large part ofwhich will be used internally to replace fuel oil in the production of utilitiesand the surplus would be supplied to the nearby power plants. The price offuel oil as well as of other petroleum products is fixed by the Government.As of May 1, 1981, the local fuel oil prices per ton were equivalent toUS$90 ex-refinery and US$126 retail. Labor costs are based on prevailingsalary scales in YPF refineries. Utility costs are based on prevailing unitrates in Argentina. Maintenance and insurance costs are estimated at 4% and1.5%, respectively, of the total capital investments on machinery, buildingand civil works, and construction and erection. Depreciation is calculated ona straight-line basis on the assumed 12-year life of the Project. General andadministrative costs are assumed to be one-third of the payroll cost.

7.04 The following table (derived from Annex 7-2) shows the annualproduction costs of the Project at 95% capacity utilization:

Project: Annual Production Costs at 95% Capacity Utilization(in May 1981 terms)

US$ million Percentage (%)

Fuel Oil 356.7 66.7Catalysts and Chemicals 4.6 0.8Utilities 19.5 3.6Maintenance Materials 17.2 3.2Payroll 3.2 0.6Depreciation 67.0 12.5Financial Charges 59.6 11.1Insurance 6.2 1.1General and Administrative 1.0 0.4

535.0 100.0

At 95% capacity utilization, the principal input, fuel oil, is expectedto account for 67% of the production costs (including depreciation andfinancial charges). Depreciation and financial charges represent only 24% ofthe total, reflecting low investment cost per unit of output of the Projectcompared to a grassroot refinery.

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B. Revenues

7.05 As noted, Argentine ex-refinery prices as well as retail pricesfor petroleum products are controlled by the Government, which, during January1980-March 1981, increased those prices at an average monthly rate of 1.8% inreal terms above the non-agricultural whole-sale prices. 1/ This helped checkthe deterioration in real prices in the face of high inflation (85% in 1980)and achieve a real increase of 2% over the consumer price index in 1980. Thecurrent Government policy of granting price increases to public sector under-takings aims at compensating them for the real increases in their cost ofproduction and encourage them to cut production costs by increasing theirefficiency of operation. To achieve this, the Government follows the non-agricultural price index, not the consumer price index, as the representativeindex for price adjustment. Further, the Government is committed to setex-refinery product prices at a level that would allow YPF to cover all itscosts and expenses before interest, and to earn a reasonable rate of return onits revalued net fixed assets in operation. Revenue projections for theProject and YPF's Refinery Division are based on this new pricing policy.2/

C. Financial Projections for the Project

7.06 Financial projections for the Project based on the above assumptionsare given in Annex 7-3, and summarized below:

Project: Summary of Financial Projections(in current US$ million)

Year Ending Dec. 31 1985 1986 1987 1990

Sales Volume ('000 tons) 1,386 2,851 3,514 3,762Sales Revenue 386 770 920 1,127Production Costs 311 559 704 899Net Profit After Tax 50 93 98 117Depreciation 73 82 91 125Cash Generation 123 174 190 242Net Profit/Sales (%) 13 12 11 10Return on Revalued Net Fixed Assets (%) 6 10 10 10Debt Service Coverage (Times) - 3.2 2.7 2.7

1/ In 1980, the non-agricultural wholesale prices increased by 60%, whilethe consumer prices increased by 85%.

2/ Using 10% as a reasonable rate of return on revalued fixed assets inoperation.

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7.07 Total revenues of the Project are expected to increase froni US$386million in 1985 to US$920 million in 1987 when the maximum capacity utilization(i.e., 95%) is expected to be reached. The Project is expected to showprofits from the first year of operation; and the return on sales is expectedto average around 10.5%. The Project is expected to generate adequate cash tomore than meet its debt service obligations.

D. Financial Rate of Return and Sensitivity Analysis

7.08 The cost and benefit streams for the financial internal rate ofreturn (IRR) are shown in Annex 7-4. The return is satisfacctory at 24.6%before tax and 17.2% after tax. The financial rate of return is sensitive tochanges in refinery product prices, operating costs and changes in the levelof capacity utilization. The following table shows the results of the sensi-tivity analysis on the financial rate of return:

Financial Rate of Return Before Tax

1. Base Case 24.62. Capital Costs up 20% 21.13. Operating Costs up 20% 17.64. Revenues down 20% 12.05. Attainment of only 75% capacity

utilization 21.16. Combination of delay of one year,

(2) and (5) 17.1

E. Analysis of YPF Refinery Division with the Project

7.09 Details of consolidated financial projection for the YPF RefineryDivision with the Project are given in Annex 7-5 to 7-7 and summarized below:

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Summary of Financial Data forYPF Refinery Division with Project

(in current US$ million)

Year Ending Dec. 31 1981 1982 1983 1985 1986 1987

Income and Cash Flow

Net Sales 2,582.2 2,938.2 3,284.0 4,418.1 4,876.1 5,271.5Variable Costs 2,041.6 2,288.2 2,503.8 3,264.6 3,577.0 3,890.7Fixed Costs 269.0 291.9 314.0 403.1 426.7 452.7Depreciation 118.6 138.8 157.6 277.3 299.2 331.8Interest 46.7 58.0 60.8 58.9 131.2 127.9Net Profit After Tax (PAT) 71.2 108.1 166.0 277.6 296.1 313.9Gash Generation 189.8 246.9 323.6 554.9 595.3 645.7

Balance Sheet Items

Current Assets 663.3 719.8 785.4 975.1 1,097.6 1,097.6Surplus Cash (Deficit) 96.9 149.6 338.3 710.6 979.3 1,251.3Current Liabilities 770.4 714.7 793.0 898.6 971.4 981.8Net Fixed Assets 1,423.3 1,544.3 1,660.1 2,775.5 2,961.2 3,138.8Long-Term Debt 204.0 210.1 354.3 763.0 745.0 702.0Equity a! 1,271.3 1,579.5 1,916.8 2,867.7 3,331.5 3,880.2

Ratios

PAT/Net Sales (%) 2.8 3.7 5.1 6.3 6.1 6.0PAT/Net Fixed Assets (%) 5.0 7.0 10.0 10.0 10.0 10.0PAT/Equity a! (%) 5.6 6.8 8.7 9.6 8.9 8.1Current Ratio 1.0:1 1.3:1 1.4:1 1.9:1 2.1:1 2.4:1Quick Ratio 0.3:1 0.4:1 0.6:1 1.0:1 1.2:1 1.5:1Debt/Equity Ratio 14/86 11/89 17/83 21/79 18/82 15/85Debt Service Coverage 5.1 5.3 6.3 10.4 5.3 5.0

(times)

a! Net of revaluation surplus.

Sales of the Refinery Division are expected to increase sharply from 1985due primarily to the commissioning of the Project. The share of the Projectin total sales revenue is expected to increase from 15% in 1985 to 23% in 1987with the production build-up in the Project. The debt/equity ratio of theRefinery Division reaches 21/79 in 1985 and declines subsequently to 15/85 in1987, with repayment of debt and increased retained earnings, provided nofurther expansion is undertaken.

7.10 The projections show that the quick ratio would be low at 0.3:1 ifsurplus cash which builds up impressively is excluded from the ratio calculation.Therefore, YPF and the Government (the shareholder) would need to allocatesufficient funds from surplus cash to current assets to maintain the quickratio at least 0.6:1. Should the anticipated surplus cash fail to materialize,YPF and the Government will have to provide necessary funds to help YPFmaintain a quick ratio at that level (para 7.12). Even after allocation ofsurplus cash to current assets, there would be, according to the

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projections, excess funds which are expected to be used by YPF to finance partof investments on oil exploration and production. Should there be surplus evenafter this, it is expected to be partly distributed as dividends to the Govern-ment and partly retained in the Company for future investments.

F. Financial Covenants for the Company

7.11 Financial statements for the Company show a satisfactory debt/equityratio (42/58 at the end of 1980) but the ability of the Company to generatecash to firnance large new investments in oil exploration and production arelimited, particularly because of inadequate crude oil prices. As noted, anunderstanding has been reached with the Government that domestic crude oilprices paid to YPF will be raised to levels comparable to those paid to privatepetroleum companies under risk sharing contracts negotiated by the Governmentin 1980 and that domestic price of petroleum products will be maintained, inreal terms at May 1, 1981 levels using the non-agricultural wholesaleprice index for periodic adjustment of retail prices. Agreement has also beenreached with the Government that ex-refinery product prices will be set atlevels that will provide YPF, operating efficiently, with funds sufficient tocover all its costs and expenses before interest, to earn a reasonablereturn on its revalued net fixed assets in service, and to meet sound financialratios (para 7.12), and that inter-product price levels and natural gas priceswill be rationalized following the completion of the Gas Utilization Study.

7.12 As of the end of 1980, the quick ratio of YPF was 0.7:1. With thisratio, the Company was able to function because of its current practice ofcollecting sales and related taxes and using them as working capital for aboutfive weeks (as officially allowed) before paying them to the Government.Agreement has been reached with the Government and the Company that YPF willmaintain at all times a quick ratio of at least 0.6 to 1. Further, the followingagreements have been reached with YPF and the Government: the Company will (i)not incur any long-term and/or roll-over short-term debt, if, after incurringsuch debt, the debt/equity ratio of the Company will exceed 60/40; (ii) maintaina projected debt service coverage of at least 1.4 times; and (iii) not, withoutprior Bank consent, declare dividends or make any other cash distributions if,after such payments, the quick ratio falls below 0.8 to 1. Currently, YPFprepares financial projections for the Company for three months. To facilitatesound financial planning and capital budgeting, the Company will prepare andsubmit to the Bank 12-month financial projections within four months of the endof every fiscal year. It was agreed that the system will be introduced by YPFby 1982 with the first such projection due by end of April 1983 (para. 3.18).

G. Auditing and Reporting Requirements

7.13 The Company's accounts are audited by the Sindicatura General deEmpresas Publicas, a Government auditing agency. Three officials of theSindicatura are assigned to YPF who attend Board meetings and have the authorityto call special meetings of the Board if there are any serious issues. YPFwill submit to the Bank audited annual financial reports within six months ofthe end of each fiscal year and will give prompt attention to audit recommen-dations. The audit reports will contain comments by the auditors whether thecovenants in the Loan Agreement for the new Refinery Conversion Scheme arecomplied with. In addition to the annual audit reports, the Company willsubmit quarterly financial statements within 75 days after the end of eachquarter and until Project Completion monthly project progress and procurementstatus reports in the format and scope agreed with the Bank. Finally, within

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four months after the Closing Date of the Project, the Company will prepare andfurnish to the Bank a Completion Report on the Project dealing with its implementa-tion, initial operation, and the costs and benefits derived and expected to bederived.

H. Major Risks

7.14 Risks associated with project technology, start-up and operationsare moderate, as the Project is based on commercially proven technology, andadequate arrangements have been made under the Project for training personnelfor operation and maintenance. However, commissioning problems and difficul-ties in attaining and maintaining a high operating rate cannot be ruled out.Considering the involvement of capable and experienced engineering and operatingfirms in the design, engineering, construction, erection commissioning andoperations of the Project and the Company's experience in operating theexisting refineries at high capacity, the risk of abnormal problems, shut-downsand low operating rate is not, however, considered serious.

7.15 The main risks associated with the Project concern potential delaysin implementation, particularly civil works, and inadequate cost controls dueto shortcomings in financial management. However, these risks have beenreduced by: strenghtening the Project Team with technical advisory servicesfrom FWI during the entire period of project development, implementation andinitial operation; involving capable and experienced firms for project design,engineering and implementation; prequalifying local construction firms withparticular attention to their past performance in Argentina; and introducingcost control systems with the help of Arthur Andersen & Co. Further, theproject management aspect will be continuously monitored by the Bank duringproject implementation.

7.16 No significant commercial risk is foreseen. Even on the basis ofconservative market forecasts, the production capacity of the Project fallsshort of the expected demand except for sponge and acicular coke. YPF hasalready entered into a long-term contract with Great Lakes Carbon, of theU.S., to sell 250,000 tons per year of sponge coke. An additional 178,500tons of sponge coke as well as 123,000 tons of acicular coke are likely to beavailable annually for exports at 95% operation. As demand for sponge andacicular coke is growing in the world because of the expansion of steel andaluminum production, no major problem is foreseen in exporting them.

7.17 The financing plan assumes that about US$257.4 million equivalent(29% of the total financing required) will come from internally generatedfunds of YPF; the ability to do so, however, depends on the Government allowingYPF prices adequate to earn a reasonable return on investment at efficientproduction. Measures have already been taken by the Government toward thisobjective. Should the internally generated funds fall short of the require-ments, the Government will meet the deficit by injecting the necessary fundsby way of additional share capital.

7.18 An external risk facing the Project is that it depends on the timelycompletion of a complementary project--a crude oil pipeline--which is criticalto ensure adequate supply of crude oil to the Lujan de Cuyo Refinery. Todiminish this risk, assurances have been received from the Government that thefacilities for transporting crude oil from Neuquen to Lujan de Cuyo will becompleted in time for the Project.

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VIII. ECONOMIC ANALYSIS

A. Economic Justification

8.01 YPF has six refineries of which only three, La Plata, Lujan deCuyo and San Lorenzo have conversion facilities so far. About 40% of theproduct mix of the La Plata Refinery and 25% of that of Lujan de Cuyo areresidual fuel oil. In 1979 the La Plata and Lujan de Cuyo accounted for 38.4million barrels (5 million tons) of residual fuel oil--about 68% of the totalfor the country in that year. The Refinery Conversion Scheme is designed toconvert the surplus low-value residual fuel oil into higher-value lighterrefinery products such as gasoline, jet fuel, gas oil and diesel oil.Currently, Argentina is surplus in residual fuel oil but deficit in lighterrefinery products. The Conversion Scheme would help reduce the need forimports of lighter products by helping YPF achieve a better balance in theproduct mix in the two refineries.

B. World Petroleum Prices

8.02 A review of long-term inter-product prices for refinery productsin the world shows the following approximate relationship assuming the crudeoil price as 100: Gas, 137; motor gasoline (96 RON), 150; kerosene, 140; jetfuel, LPG, gas oil and diesel, 133; and fuel oil, 74. By applying the aboveindices to the mid-1980 crude oil price of US$257/ton (US$35/bbl), the followingrefinery product prices and derived:

Estimated Prices Per Ton of Selected Refinery Products(May 1981 US$ in real terms)

Gas 352LPG 342Gasoline (Premium) 385Gasoline (Regular) 373 a/Kerosene and Jet Fuel 360Gas Oil and Diesel Fuel 342Fuel Oil 190

a/ Assumed at 97% of the premium gasoline price.

The above prices have been used for the economic rate of return calculation.However, the actual prices of petroleum products may periodically vary fromthese general relationships because of periodic distortions in the supplyand demand for particular petroleum products.

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C. Transportation Savings

8.03 At full production of the Project, Argentina would overcome the needfor importing about 3.9 million tons of light petroleum products per year, thussaving the country about US$119 milion (calculated on the basis of US$30/tonsavings in freight, port handling and inland transportation differential). Inaddition, the Project would avoid the need to transport about 1.7 million tonsof fuel oil from Lujan de Cuyo to Buenos Aires for export. This would saveannually another US$26 million equivalent in fuel oil transportation cost(assuming it costs US$15/ton for transporting fuel oil from Lujan de Cuyo toBuenos Aires). Thus the gross annual transportation savings to Argentinabecause-of the Project would be US$145 million.

D. Economic Rate of Return

8.04 Detailed assumptions used in the economic rate of return calcula-tions are shown in Annexes 8-1 and 8-2. The benefit stream is based on theprice and transport cost savings assumptions discussed above (para 8.03).Operating costs have been derived by making appropriate adjustment to thefinancial costs to reflect the opportunity costs of the inputs; no shadowpricing is used for labor cost as the Project will employ mostly skilledemployees. Transfer payments such as taxes and financial charges have beenexcluded. Based on the assumptions outlined above and assuming a 12-year lifefor the Project, the economic rate of return of the Project is estimated at48%. Sensitivity tests carried out on the economic rate of return show thefollowing results:

Argentina - Sensitivity Tests on Economic Rate of Return

Assumptions Rate of Return (%)

1. Base Case 48.22. Capital Costs up 10% 45.53. Capital Costs up 20% 43.24. Operating Costs up 10% 44.85. Operating Costs up 20% 41.16. Benefits down 10% 41.67. Benefits down 20% 33.78. One-Year Project Delay 48.09. Attainment of only 85% Capacity Utilization 46.410. Attainment of only 75% Capacity Utilization 44.611. Combination of (3) and (8) 43.012. Combination of (3), (8) and (10) 39.5

As shown in the above table, the economic rate of return is sensitive tochanges in refinery product prices, capital and operating costs, delays inconstruction, and capacity utilization. A 20% drop in revenue would reducethe return to 34%. A one-year delay in the Project combined with a 20%capital cost increase and the ultimate attainment of only 75% capacity utiliza-tion (as against 95% assumed) would reduce the return to 40%. Therefore, evenunder conceivable adverse conditions, the Project still yields an attractiveeconomic rate of return.

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E. Foreign Exchange Benefits

8.05 In 1981 terms, the net foreign exchange outflow due to the RefineryConversion Scheme during the construction period (1981-84) would be aboutUS$74 million. However, the net outflow turns into a significant net foreignexchange savings of about US$156 million in 1985, with the expected start-upof the Scheme in June 1985. The annual net savings would rise to US$722million in 1987 as the Scheme attains 95% capacity utilization. The netsavings would steadily increase further as the debt service obligationdeclines over the years.

F. Other Economic Benefits

8.06 Operations of the existing YPF refineries at La Plata and Lujan deCuyo are expected to be improved as a result of the Plant Operations ImprovementProgram prepared and to be implemented with the help of TOTAL of France. Themanagement and organization of YPF will be streamlined with the implementationof the Financial Management Improvement Program prepared by Arthur Andersen.Further, as a part of an institution-building effort, YPF staff will be trainedin modern practices of refinery operation and maintenance, accounting andfinancial management. Finally, the efforts of the Government for energy conser-vation will be accelerated through a study on energy conservation prospectsin the petrochemical and other industrial sectors. Based upon the study, anenergy conservation program for the industrial sector will be developed andimplemented.

IX. AGREEMENTS

9.01 The following major agreements have been reached:

A. From the Government that it will:

(i) prepare a program for implementing the recommendationsof the Industrial Energy Audit by December 31, 1982(paras 2.18 and 5.11);

(ii) take measures to ensure that the ex-refinery prices ofYPF's products are adequate to provide YPF, operatingefficiently, with funds sufficient to cover all its costsand expenses before interest, to earn a reasonable returnon its revalued net fixed assets in service and to meetsound financial ratios (paras 3.17, 4.21, 7.11 and 7.12); and

(iii) meet any shortfall in funds to finance the Project (para 6.07).

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B. From the Government and the Company that they will:

(i) exchange views periodically with the Bank on the plans forexpanding the refinery capacity in Argentina (para 4.10);

(ii) expand the transport capacity of the product pipeline forthe Lujan de Cuyo refinery in time for the Conversion Scheme(para 4.13);

(iii) finalize the marketing improvement plan by March 31, 1982 andcarry out the plan by June 30, 1985 (para 4.17);

(iv) construct in time for the proposed conversion facility atLujan de Cuyo refinery the facilities for the transport ofcrude oil from Neuquen (para 5.13);

(v) make adequate arrangements to meet the crude oil require-ments of La Plata and Lujan de Cuyo refineries (para 5.15);

(vi) ensure that both refineries related to the Project will meetsatisfactory environmental standards (para 5.32); and

(vii) ensure that YPF will follow prudent financial practices andabide by the financial, auditing and reporting covenants, asenumerated in paras 7.11, 7.12, and 7.13).

9.02 Based on the above agreements reached, the Project is consideredsuitable for a Bank loan of US$200 million equivalent on terms discussed inpara 6.06.

Industrial Projects DepartmentJune 15, 1981

ARGENTINA: YPF REFINERY CONVERSION PRoJECT

COMPANY'S HISTORICAL INCOME STATEMENTS -/(in US$ Million)b/

8/01/77 to 6/30/78 7/01/78 to 12/31/78 1979 1980Unadjusted Adjusted Unadjusted Adjusted Unadjusted Adiust Unadjusted Adilusted

Gross Sales 2,726.9 3,817.7 1,796.9 2,141.5 4,330.1 5,823.6 6,399.2 7,571.2Discounts 120.9 169.2 70.2 83.6 158.5 213.1 244.8 288.9Taxes 681.8 954.5 469.7 559.8 19122.3 1,492.4 1,793.5 2_108.7Net Sales 1,924.2 2,694.0 1,257.0 1,498.1 3,049.3 4,118.1 4,360.9 5,173.6

Cost of Goods Sold 1,833.1 2,468.9 1,033.8 1,188.7 2,667.1 3,380.6 3,241.0 3,908.5

Gross Profit 91.1 225.1 223.2 309.4 382.2 737.5 1,119.9 1,265.1

Administrative Expenses 88.1 122.2 61.7 73.1 161.2 199.4 241.0 268.4Marketing Expenses 72.7 101.0 54.0 63.9 213.4 277.3 344.4 398.8 1Financial Charges 858.2 - 525.5 - 1,058.5 - 1,060.4 - 4

Other Income c/ 49.2 69.2 57.6 68.7 148.8 188.6 228.4 261.7Adjustment for Previous Year 21.6 52.3 33.9 (52.1) (20.7) (27.6) 48.9 66.2Revaluation Gain - 585.4 - 200.0 - 675.6 - 355.2Special Tax d/ 87.4 103.2 59.6 71.0 - - - -Income Tax - - - - 341.5 482.7 296.9 330.2Net Profit (944.5) 605.2 (386.1) 318.0 (1,264.3) 614.7 (1,259.3) 113.4

a/ Adjusted column refers to accounts after revaluation.b/ Average exchange rates used for conversion into US$: Aug 1977 - June 1978, $a 598; July - Dec. 1978,

$a 878; Jan - Dec. 1979, $a 1,317; Jan - Dec. 1980, $a 1,837.c/ Including income from other sales of products and services.d/ Was abolished in 1979.

Industrial Projects DepartmentM- 1981

- 50 -

ANNEX 3-2

ARGENTINA: YPF REFINERY CONVERSION PROJECT

COMPANY'S HISTORICAL BALANCE SHEETS-/(in US$ million) b/

June 30, 1978s/ December 31. 1978 December 31. 1979 December 31.1980

Unadiusted Unadiusted Adiusted Unadjusted Adjusted Unadjusted Adiusted

ASSETS

Current AssetsCash and Bank 133.6 92.1 92.1 87.7 87.7 169.6 169.6

Accounts Receivables 470.4 436.2 460.4 878.4 915.6 611.6 653.5

Inventories 135.3 147.9 318.8 280.9 532.3 369.7 663.5

Other 22.4 22.8 22.8 20.3 20.3 142.2 142.2Sub-total 761.7 699.0 894.1 1,267.4 1,556.0 1,293.1 1,628.8

Long-term Receivables 1.2 1.7 1.7 4.5 4.5 83.6 83.6

Gross Fixed Assets 2,880.4 3,368.9 3,891.1 5,017.3 6,630.9 7,025.9 10,069.6

Acc. Depreciation 433.9 540.1 540.1 955.5 976.0 1,245.0 1,245.0

Net Fixed Assets 2,446.5 2,828.8 3,351.0 4,041.3 5,654.9 5,780.9 8,824.6

Investments 5.4 4.6 11.3 4.1 18.2 3.6 17.1

Deferred Charges 5.8 4.2 8.2 2.6 3.3 7.3 7.8

TOTAL ASSETS 3,220 _, , ,5 8.4 4&266.2 3192.9 2 7168.6 10o.

LIABILITIES

Current LiabilitiesTrade Pavables 622.1 521.3 521.3 898.0 898.0 1,379.9 19379.

Other 472.5 354.4 354.4 300.2 300.2 44.0 ' 48.0

Sub-total 1,094.6 875.7 875.7 1,198.2 1,198.2 1,423.9 1,427.9

ono-current Liabilities (Bank Payables) 901.5 859.3 859.3 1,488.7 1,488.7 2,272.2 2,272.2

Long-term DebtSuppliers' Credit 139.4 125.6 125.6 130.0 130.0 134.6 134.6

Local 360.2 84.7 84.7 71.2 71.2 225.9 225.9Foreign - 323.7 323.7 949.5 949.5 923.6 923.6

other 174.7 245.4 245.4 164.3 164.3 314.7 316.6

Sub-total 674.4 779.5 779.5 1,315.1 1,315.1 1,598.8 1,600.7

EquityShare Capital 140.5 157.7 1,890.5 105.2 2,831.9 75.3 5,261.6Reserves 1,751.0 2,235.2 - 3,392.2 - 1,798.9 -Retained Earnings (1,341.0) (1,367.2) (138.8) (2,175.9) 403.0 - -

Revaluation Surplus - - - - _-_-__

Sub-total 550.5 1,025.7 1,751.7 1,321.5 3,234.9 1,874.2 5,261.6

TOTAL LIABILITIES & EQUITY , L.249-2 WAL29 7 L23 L . L6.2

Current Ratio 0.7:1 0.8:1 1.0:1 1.1:1 1.3:1 0.911 1.1:1

Quick Ratio 0.6:1 0.6:1 0.7:1 0.8:1 0.8:1 0.6,1 0.7:1

L/T Debt/Equity Ratio 55/45 43/57 31/69 50150 29/71 46154 23t77Debt d/ /Equity Ratio 74/26 62/38 48/52 68/32 46/54 67733 42/58

a/ Adjusted column refers to accounts after revaluation.bt Average exchange rates used for conversion into US$: June 1978, $a 598; Dec. 1978, $a 878; Dec. 1979, $a 1,317;

Dec. 1980, $a 1,837.c/ Balance sheet adjusted for inflation not available for this period.dt Including bank payables rolled over and reclassified as long-term debt.

Industrial Projects DepartmentMay 1981

ARGENTINA - YPF REFINERIES CONVERSION PROJECTPROJECT IMPLEMENTATION SCHEDULE

al

3 141 8 9 3 1311411 8 1 22123124 27 28129130 31132133 34135136 3713839 4112 43444464748

Basl. EnWine-ring and Detailed Engineering of;

Critical Items

Pr-wluaiification of Phase 11 Contracors_

Bldding nf Phas- II C-nlrac-or_

Evaluation and Negotiaions

Towers and Vessels

Furnacas _____k

Rochangers _ An

Air Coolers

Pumps _ _ __-

Compressors

Piping -

Instruments

Electrical -. -

C-ii Works ... .......

Start Up and Commissioning

Issue Enquiry and Order

_villw~ _ C_ Dehvcry World Bank - 22320

a/ Starting from May 1, 1981

- 52 - ANNEX 6-1

ARGENTINA - YPF REFINERY CONVERSION PROJECT

CAPITAL COST ESTIMATE

$a Billion USS Million- Indirect Indirect

Foreign Local Foreign LocalExchange Component Exchange Component

Direct Component of of Local Direct Component of of LocalImports Local Purchases Purchases Total Imports Local Purchases Purchases Total

Refinery Conversion Scheme

1. Equipment and SparesVacuum Unit 13.7 7.7 11.5 32.9 4.3 2.4 3.6 10.3Fluid Catalytic Crackers 55.8 41.8 57.7 155.3 17.5 13.1 18.1 48.7

Delayed Cokers 52.6 39.2 59.0 150.8 16.5 12.3 18.5 47.3Gas Recovery 25.2 9.6 14.4 49.2 7.9 3.0 4.5 15.4

Hydro desulfurization 18.5 9.3 13.7 41.5 5.8 2.9 4.3 13.0

Amine Treatment 5.7 2.2 3.5 11.4 1.8 0.7 1.1 3.6Herox 3.5 1.9 2.6 8.0 1.1 0.6 0.8 2.5

Offsites 32.2 45.9 68.9 147.0 10.1 14.4 21.6 46.1Spares 7.7 5.1 7.7 20.5 2.4 1.6 2.4 6.4

Subtotal 214.9 162.7 239.0 616.6 67.4 51.0 74.9 193.3

2. Ocean Freight and 31.9 31.9 10.0 10.0

Insurance

3. Inland Freight andHandling 31.6 31.6 9.9 9.9

4. Engineering Services andRoyalties

Basic Engineering 19.1 19.1 6.0 6.0Detailed Eng. ofCriti.al Items 8.3 8.3 2.6 2.6

Detailed Engineering 118.7 10.8 129.5 37.2 3.4 40.6Royalties 12.1 12.1 3.8 3.8

Subtotal 158.2 10.8 169.0 49.6 3.4 53.0

5. Erection 80.7 323.5 404.2 25.3 101.4 126.7

6. Civil Works 4Q.8 116.8 166.6 15.6 36.6 52.2

7. ConbtLuctioni Supervision 14.4 49.8 64.2 4.5 15.6 20.1

8. Start UIp Costs 16.9 31.9 48.8 5.3 10.0 15.3

Base Cost Estimate (BCE) 436.3 293.2 803.4 1,532.9 136.8 91.9 251.8 480.5

(In Oct. 1980 prices)

Physical Contingencies 43.7 29.3 80.4 153.4 13.7 9.2 25.2 48.1

(t0% of BCE)

Price Escalation 128.2 86.1 378.0 592.3 41.6 28.0 116.3 185.9

Installed Cost 608.2 408.6 1,261.8 2,278.6 192.1 129.1 393.3 714.5

Working Capital 7.7 63.8 71.5 2.4 20.0 22.4

Interest DuringConstruction b/ 273.7 273.7 85.8 85.8

Total For Conversion 889.6 408.6 1,325.6 2,623.8 280.3 129.1 413.3 822.7Scheme

Plant Operation Improv.Program 31.9 51.0 76.6 159.5 10.0 16.0 24.0 50.0

Financial ManagementImprov. Program 3.2 3.2 6.4 1.0 1.0 2.0

Training Program 3.2 1.6 4.8 1.0 0.5 1.5

Industrial Energy Audit 6.4 0.6 7.0 2.0 0.2 2.2

Total Financing Required 934.3 459.6 1,407.6 2,801.5 294.3 145.1 439.0 878.4

a/ Price escalation for foreign costs is based on the forecast of international inflation rates in dollar terms of

9% for 1980-81, 8% for 1982, and 7% for 1983 onwards. The same international rates have been used for localequipment. On civil works and erection the following higher local rates of inflation in dollar terms have beenused of 20% for 1980-81 declining to 8% in 1982 and onwards.

b/ Assuming a 65:35 debt to equity ratio and capitalization of interest up to June 1985.

Industrial Projects Department

May 1981

- 53 -

ANNEX 6-2

ARGENTINA: YPF REFINERY CONVERSION PROJECT

WORKING CAPITAL REQUIREMENTS

Million US$

I. Current Assets

A. Accounts Receivable

30 days of credit sales 10.3

B. Raw Material Inventory

( i) Local ( 7-day requirements) 9.1(ii) Imported (120-day requirements) 0.3

C. Goods in Process Inventory

1 day of variable production costs 1.4

D. Finished Goods Inventory

6 days of cost of production 9.9

E. Operating Cash

7 days of cost of production 11.5

Total Current Assets 42.5

II. Current Liabilities

F. Accounts Payable

30 days of suppliers' credits 27.1

Working Capital Requirements 15.4

Working Capital RequirementsEscalated to 1985 Dollars 22.4

Industrial Projects DepartmentMay 1981

- 54 - ANNEX 6-3

ARGENTINA - YPF REFINERY CONVERSION PROJECT

ESTIMATED DISBURSEMENT SCHEDULE FOR BANK LOAN(US$ Million)

Bank Fiscal Yearand Quarter Disbursement Cumulative Undisbursed Amount

1982II 8.0 8.0 192.0

III 2.0 10.0 190.0IV 4.0 14.0 186.0

1983 I 8.0 22.0 178.0II 9.0 31.0 169.0III 13.0 44.0 156.0IV 16.0 60.0 140.0

1984 I 22.0 82.0 118.0II 24.0 106.0 94.0III 30.0 136.0 64.0

IV 24.0 160.0 40.0

1985 I 20.0 180.0 20.0II 12.0 192.0 8.0III 8.0 200.0 0.0

Industrial Projects DepartmentMay 1981

- 55 -

ANNEX 7-1

ARGENTINA: REFINERY CONVERSION PROJECT

ASSUMPTIONS USED IN FINANCIAL ANALYSIS

A. Financial Projections

1. The Argentine economy is characterized by high inflation. Inthis context, in order to reflect a reasonably accurate picture of YPF'sfinancial obligation, cash generation and liquidity situation, the financialprojections are made in current US$ terms. The output prices as well asproduction costs in current terms are projected to increase at an averagerate of 9% in 1981, 8.5% in 1982, 7.5% during 1983-85, and 6% in 1985 andonwards.

B. Inflation Accounting

2. Early in 1975, the Argentine Institute of Public Accountants issueda decree 1/ to regulate the use of monetary and non-monetary correctionfactors in the financial statement of public and private companies. Thisdecree called for (i) the restatement of all operating costs and revenuesof the current accounting year according to an index based on the level ofinflation at the close of the year; (ii) revaluation of all non-monetaryassets and liabilities according to an index based on the level of inflationat the close of the accounting year, and (iii) adjustment of all liabilitiesin foreign currencies based on the actual exchange rates at the close of theyear.

3 For the purpose of the financial projections, (i) above was appliedwith the exception that instead of the domestic monetary correction factor,the international inflation rate was applied as indexing factor. All revenuesand expenses were calculated in terms of constant May 1981 dollars and theninflated to current US dollars. The computation of the indexed values offixed assets, as required by (ii) above, was done by accumulating the yearlyamounts and then inflating these accumulated amounts by the same indexingfactor used for revenues and expenses (i.e., international price inflationrate). The difference between the indexed and yearly amounts was then creditedas revaluation surplus. Since the financial projections are expressed incurrent US$, adjustments as mentioned under (iii) above reflecting increases in interestcharges and principal repayments for foreign loans due to changes in exchangerate, are not applicable.

1/ Opinion No. 2, Argentine Technical Institute of Public Accountants

- 56 - ANNEX 7-1

Page 2

C. Product Mix

4. The Project is assumed to start commercial operations June 1, 1985,with a production build-up of 60%, 80% and 95% of capacity for the first,second, and third operating years, respectively. The product mix at 95%capacity utilization would be as follows:

Product Mix at 95% Capacity Utilization(in '000 tons per year)

La Plata Lujan de TotalRefinery Cuyo Refinery Project

Premium Gasoline 708.0 489.0 1,197.0Regular Gasoline 237.5 104.0 341.5Kerosene - 13.5 13.5Gas and Diesel Oil 435.0 396.8 831.8Refinery Gas 157.0 56.2 213.2LPG 292.3 210.9 503.2Acicular Coke 122.7 - 122.7Sponge Coke 369.2 169.3 538.5

Total Production 2,321.8 1,439.7 3,761.5

D. Product Prices

5. During 1974-79, local selling prices of petroleum products setby the Government declined in real terms. As a result, average selling pricein 1979 in real terms was about 20% lower than that in 1974. To improve thesituation, the Government, in January 1980, decided to increase selling pricesof petroleum products by an average of 1.8% per month in real terms over andabove the increase in wholesale prices of non-agricultural products. Thisprogram of price increases was continued until the end of March 1981 when thenew Government came into power. The new Government has agreed to maintainretail prices in real terms at May 1, 1981 levels. Further, it has agreedto ensure that, at efficient operation, YPF will get adequate funds tomeet all its costs and expenses before interest, earn a reasonable return(about 10% by 1983) on revalued net fixed assets in operation, and meetsound financial ratios. The revenue projections are based on the assumptionthat ex-refinery prices will be increased gradually in real terms from theMay 1, 1981 level to allow, by 1983, a 10% rate of return on revalued netfixed assets.

E. Production Costs

6 Financial production costs are detailed in Annex 7-2. Economiccosts are also shown for comparison. Requirements for raw materials andutilities were estimated by YPF's engineering staff and Foster Wheeler andverified by the Bank based on the experience of existing plants elsewhereof similar size and processes.

- 57 - ANNEX 7-1Page 3

7. Incremental labor requirements were estimated by YPF. Averageannual salary per person based upon the present pay level within Argentina'srefinery industry is about US$10,000. Annual insurance and maintenanceexpenses are estimated at 1% and 4%, respectively, of the total capital investmentsin equipment, machinery, erection, construction, building and civil works.General and administrative expenses are estimated at about one third ofpayroll cost. Depreciation of fixed assets is computed on a straight-linebasis using an economic project life of 12 years.

F. Interest Charges

8. The assumptions used for calculating debt service for the Projectare given below:

Amount Terms(US$ million)

IBRD 200 11% p.a.; 14 years, including3 1/2 years' grace period.

Commercial Bank and 421 -/ 14% p.a., 8 years. 4 years' graceExport Credits for commercial bank loans; 8.5%, 14 years,

3 1/2 years' grace for export credits.G. Income Taxes

9. In the past, contributions to the Government had been fixed by theGovernment annually as a percentage rate of YPF's operating and investmentcosts. This percentage rate had been variable, and, in 1979, it ammounted toabout 14%. From January 1, 1980, however, YPF is subject to a corporate incometax of 33%.

H. Financial Return

10. Annex 7-4 gives a breakdown of the financial costs and benefitsof the Project. The results of sensitivity tests are given in para. 7.09of the main text. The financial rates of return of the Project are 24.6%before taxes and 17.2% after taxes.

Including US$175 million for the Refinery Conversion Scheme and the restfor the other components of the Project.

2/ Including US$405 million for the Refinery Conversion Scheme and the restfor the other components of the Project.

ARGENTINA - REFINERY CONVERSION PROJECT

PROJECT BENEFITS AT 100% CAPACITY

(in May 1981 terms)

Annual Production ('000 Tons) Unit Price Project Benefits

Lujan de Economic Financial Economic Financial

La Plata Cuyo Total (US$) ('000 $a) (mil US$) (bil $a)

RevenuesRefinery Gas 165.3 59.2 224.5 352 95.9 79.0 21.5

LPG 307.7 222.0 529.7 342 130.8 181.2 69.3

Premium Gasoline 745.3 514.7 1,260.0 385 206.8 485.1 260.6

Regular Gasoline 250.0 109.5 359.5 373 178.4 134.1 64.1

Kerosene - 14.2 14.2 360 159.8 5.1 2.3

Gas & Diesel Oil 457.9 417.7 875.6 342 144.8 299.5 126.8

Acicular Coke 129.2 - 129.2 430 552.3 55.6 71.4

Sponge Coke 388.6 178.2 566.8 375 155.2 212.6 88.0

Total Revenues 1,452.2 704.0

Add: Transportation Savingsa) Freight, Port Handling and Inland Transportation

Charges on Erstwhile Importation of 3.9 Million

Tons of Light Products, at US$30/Ton. 118.8

b) Freight Charges on Erstwhile Transportation of1.7 Million Tons of Fuel Oil from Lujan de Cuyo

to Buenos Aires for Export, at US$15/Ton. 25.6

Total Project Benefits io5; == 704

Industrial Projects Department

May 1981

ARGENTINA - REFINERY CONVERSION PROJECT

PRODUCTION COSTS AT 100% CAPACITY

(in May 1981 terms)

Annual Consumption Unit Price Production CostsLujan de Economic Financial Economic Financial

La Plata Cuyo Total (US$) ('000 $a) (mil US$) (bil $a)

Variable CostsRaw MaterialsFuel Oil ('000 tons) 2,461.9 1,710.2 4,172.1 190.0 90.0 792.7 375.5Sodium Hydroxide ('000 kgs) 144.6 - 144.6 0.69 0.08 0.1 -

Catalysts ('000 kgs) 440.6 403.9 844.5 0.80 1.26 0.7 1.1Hydrogen (million Nm3) - 61.2 61.2 0.05 0.06 3.1 3.7

UtilitiesElectric Power (million kwh) 18.2 25.5 43.7 0.05 0.09 2.2 3.9Steam (million tons) a/ 1.8 - 1.8 15.0 8.08 27.0 14.5Cooling Water (million m3) 22.0 1.6 23.6 0.04 0.04 0.9 0.9Treated Water (million m3) 0.6 0.7 1.3 0.15 0.96 0.2 1.2 1

Total Variable Costs 826.9 400.8

Fixed CostsLabor 3.2 3.2Maintenance 17.2 17.2Insurance 6.2 6.2General & Administrative 1.0 1.0Depreciation -7.0

Total Fixed Costs 27.6 94.6

Total Production Costs 854.5

a/ Reflects credit of 300,000 tons for steam produced.

Industrial Projects DepartmentMay 1981

ARGENTINA : REFINERY 'ONVERSION PROJECIPROJIECT - PROJECTEDII INCOME STATEMENT

(IN CURRENI US$ MILLION)

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

EOUIVALENT CAPACITY UTILIZATION (ZI 35.00 72.00 86.75 95.00 95.00 95.00 95.00 95.00 95.00 95.00 95.00 95.00

NET SALES 385.95 769.94 920.41 1,V13.5'9 1,006.40 1,127.02 1,188.23 1,;55.30 1,328.28 1,407.75 1,490.06 t,583.66

VARIABLE COSTS 199.24 435.84 569.27 647.45 6H5.53 727.42 769.30 815.00 864.53 917.03 971.15 1,028.29FIXED COSTS 39.18 41.67 44.16 46.92 49.68 52.71 55.74 59.07 62.64 66.51 70.38 74.52DEPRECIATION EXPENSE 7?.90 81.70 91.20 101.60 tt2.90 t?5.20 138.60 153.10 168.80 186.00 204.50 224.60

NEr OPERATING PROFIT 74,63 210.73 2t1.78 217.62 219.36 221.69 224.59 228.13 232.31 237.41 244.83 256.25

INTEREST - 72.28 69.03 62.07 54.48 46.91 39.32 31.74 24.15 16.75 10.93 8.32

NET PROFIT BEFORE TAX 74.63 138.45 146.5 155.55 164.88 174.78 185.27 196.39 208.16 220.66 233.90 247.93

INCOME TAX 24.63 45.69 48.43 51.33 54,41 57.68 61.14 64.81 68.69 72.82 77.19 8t.82

NEt PROFIL AFTER TAX 50.00 92./6 9S.32 104.22 __11.47 117.tO 124.13 1.31.58 139.47 t47.84 156.71 166.11

CASN GENERATION t22.90 174.46 189.52 205.82 223.37 242.30 262.73 284.68 30R.27 333.84 361.21 390.71NET REVALUED FiXEE ASSETS IN SERVICE 857.10 927.60 983,20 1,042.20 1,104,70 1,171.00 1,241.30 1,315.80 1,394.70 1,478.40 1,567,10 1,661.10

NEI RETURN tlN SALES (Zt) 17.96 12.05 o.68 10.28 10.35 10.39 10.45 t0.48 t0.50 10.50 10.51 10.49RETURN ON NET REVALUED FIXED ASSFTS (X) 5.83 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10,00 10.00 10.00 _TIMES INTEREST EARNED - 2.28 2.42 2.68 3.03 3.50 4.16 5.15 6.78 9,83 15.34 20.97DEBT SERVICE COVERAGE RAlIO 307.25 3.17 2.70 2.29 2.43 2.71 3.05 3.4S 3.96 4.65 6.40 12.21

INDUSTRIAL PR)OJECfS DEPARTMENTDATE PREPARED:06/0

9/81

ARGENTINA - REFINERY CONVERSION PROJECT

COST AND BENEFIT STREAMS FOR FINANCIAL RATE OF RETURN CALCULATION

(In May 1981 Million US Dollars)

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

Financial Benefits - - - - 422 563 669 669 669 669 669 669 669 669 669 669

Financial Cost:

Capital Costs 136 182 201 54 25 - - - -

Working Capital - - - - 2 5 8 - - - - - - _ _ (15)

Variable Production Costs - - - - 240 321 380 380 380 380 380 380 380 380 380 380

Fixed Production Costs - _ - - 16 28 28 28 28 28 28 28 28 28 28 28

Total 136 182 201 54 283 354 416 408 408 408 408 408 408 408 408 423

Net Financial Benefits (Costs) (136) (182) (201) (54) 139 209 253 261 261 261 261 261 261 261 261 276 a,l

Financial Rate of Return: 24.6%

Industrial Projects Department

May 1981

ARGENTINA : REFINERY CONVERSION PROJECTREFINERY DIVISION - PROJECTED INCOMiE STATEMENT

(IN CUIRRENT US$ MILLION)

1981 1982 198.3 1984 1985 1986 1987

CRUDE THROUIGHPUI (OO0 M3) 19,202.00 19,980.00 20,402.00 20,589.00 20,589.00 20,589,00 20,589,00

NET SALES 2.581.98 2,938.13 3,283.96 3,559.72 4,275,79 4,827.63 5,231.46

VARIABLE COSTS 2,041.55 2,288.17 2,503.7? 2,?15.55 3,122.24 3,528.56 3,850.57FIXED COSTS 268.96 291.87 313.98 338.07 403.08 426.70 452.66DEPRECIATION EXPENSE 118.60 138.80 157.60 t79.90 277.30 299.20 331.80

NET OPERATINGi PROFIT 152.87 219,29 30X.59 326.20 473.17 573.17 596,43

INTEREST 46.65 57.95 60,81 59.84 58.92 131,20 127.95

NET PROFIT BEFORE TAX 106.22 161.34 247.78 266.36 414.25 441.97 468,48

INCOME TAX 35.05 53,24 81.77 87.90 136.70 145.85 154,60

NET PROFIT A1TER FAX 71.17 108.10 166.01 1/8,46 277.55 296,12 313.88

CASH GENERATION 189.77 246.90 323,61 358.36 554,85 595.32 645.68NET REVALUED FIXED ASSETS IN SERVICE 19423.30 1,544.30 1,660.10 1,784460 2,775.50 2.961.20 3,138.80

NET RETURN ON SALES (Z) 2,76 3.68 5,06 5.01 6.49 6.13 6.00RETURN ON NEr REVALUED FIXED ASSETS (X) 5,00 7,00 10.00 10.00 10,00 10.00 10.00TIMES INTEREST EARNED 2.53 2.87 3.73 3.98 5.71 3.26 3.45DEBT SERVICE COVERAGE RATIO 5,07 5.26 6.32 6,99 10.35 5.31 5.01

INDUSTRIAL PROJECTS DEPARTMENTDAlE PREPARED:o6/o9/81

ARGENTINA : REFINERY CONVERSION PROJECTREFINERY DIVISION - PROJECTED CASH FLOW SIATEMENT

(IN CLIRRENT USS MIL LION)

1981 1902 1983 1984 1985 1986 1987

SOURCES OF FUNDS

TOTAL EARNINGS 71.20 108.10 166.00 178.50 277.60 296.10 313.90DEPRECIATION 8lt60 138,80 157.60 179.90 277,30 299.20 331.80

FIJNDS FROM OPERATIONS 189.80 246,90 323,60 353.40 554.90 595.30 645,70

LONG-TERM LOANS 50.30 6.20 144.S0 309.20 100.40 - -

EQUITY INVESTMENTS 3.10 7.40 53,20 127.50 42.00 --

WORKING CAPITAL 35.00 - 9.30 - - - 5.20

TOTAL SOURCES OF FUNDS 278.20 260,50 530.60 795,10 697.30 595.30 650.90

USES OF FUNDS_____ ___________

REPAYMENT OF L.OANS - - - - - JB.10 43.00

INVESTMENTS IN FIXEIl ASSETS 129.60 161.80 337.60 620,90 423.30 299.20 3.31.80

INVESTMENIS IN OTHER ASSETS 51.70 4,80 4.30 4.00 5.00 4.20 4.10

INCREASE IN WORKING CAPIIAL - 41.20 - 31.30 35.60 5.10 -

TOTAL USES OF FUNDS 181*30 207*80 341.90 656,20 463.90 326*60 378.90

ANNUAL CASH SURPLUS 96.90 52.70 188.70 138.90 233.40 268.70 272.00

ACCUMlJLArED CASH SURPLUS 96.90 149.60 338.30 477,20 710.60 979,30 19251.30

INDUSTRIAL PROJECTS DIVISIONDATE PREPARED':06/05/81

ARGENTINA :'REFINERY CONVERSION PROJECTREFINERY DIVISION - PROJECTED BALANCE SHEET

(IN CURRENT US$ MILLION)

1981 1982 1983 1984 1985 1986 1987

ASSETS

CURRENT ASSETSOPERATING CASH 17.20 19.50 20.40 22.10 40.10 43.30 45.30ACCOUNI'S RECEIVABLE 121.00 131.30 144.00 155.00 182.00 193.00 205.10INVENTORIES 525.10 569,00 621,00 673,10 753.00 799.00 847,20

SUB-TOTAL 663.30 719.80 785.40 850.20 975.10 1,035.30 1,097.60CASH SURPLUS 96.90 149.60 338,30 477,20 710.60 979.30 1,251.30NET FIXED ASSETS 1,423.30 1,544.30 1660.10 1,784.60 29775.50 2,961.20 3,138.80CONSTRUCTION IN PROGRESS 11.20 34.80 220.70 678.70 - - -OTHER ASSETS 51.00 55.80 59.60 63.70 68,10 71,10 76.30

TOTAL ASSEIS 2,245.70 2,504.30 3,064.10 3,854.40 4,329.30 5,04690 5,564.00

LIABILITIES AND EQUITY

CURRENT LIABILII'IES 770.40 714.70 793.00 827,90 898.60 971.40 981.80LONG-TERM DEBT 204.00 210.10 354.30 663.20 763.00 745.00 702600EQUITYPAID-IN CAPITAL 908.30 915.20 968.10 1,095.00 1,137.10 1,337.10 1,137.10RETAINED EARNINGS 246.40 425.70 591,70 770.20 1,047.80 1,343.90 1,657.80REVALUATION SURPLUS 116.60 238.60 357.00 498.10 682.80 850.50 1,085.30

TOTAL EQUITY 1,271.30 1,579.50 1,l16.80 2,363.30 2,867.70 3,331.50 3,880.20

TOTAL LIABILITlES AND EQUITY 2,245,70 2,504.30 3.064.10 3.854,40 4,529.30 5.047.90 5,564.00

RATIOS

CURRENT RATIO 0.99 1.22 1,42 1.60 1.88 2.07 2.39QUICK RATIO 0.31 0.42 0.63 0,79 1,04 1.25 1.53CAPITALIZATION:oDEBT 0.14 0.12 0.16 0.22 0.21 0.18 0.15EQUITY 0.86 0.88 0.84 0.78 0,79 0.82 0,85

- 65 -

ANNEX 8-1

ARGENTINA - REFINERY CONVERSION PROJECT

ASSUMPTIONS USED IN ECONOMIC ANALYSIS

A. General

1. The economic rates of return for the Project are calculated in

constant May 1981 dollars. Project life is assumed at 12 years with noterminal value credited to the Project except that for working capitalrecovery.

B. Capital Cost Estimate

2. The economic capital cost of the Project is obtained by deflating

the financial installed cost in current prices to May 1981 prices:

Disbursement EconomicCapital Cost

Current US$ in May 1981Year % Million Deflator Prices

1981 20 142.9 .951 135.91982 30 214.4 .850 182.21983 35 250.1 .805 201.31984 10 71.4 .749 53.51985 5 35.7 .697 24.9

100 714.5 597.8

C. Working Capital

3. Economic working capital is estimated at US$15.4 million and includesinventories of raw materials and works in process. (ANNEX 6-2)

- 66 -

ANNEX 8-1Page 2

D. Operating Costs

4. Economic input costs as of May 1981 are detailed inAnnex 7-2. Labor, maintenance and other operating costs are base on thoseused for financial analysis.

E. Economic Benefits

5. Product prices used in the economic analysis are based on a recentBank study 1/ of long-term inter-product prices for refinery products whichshows the following relationships, assuming crude oil price at 100: motorgasoline, 150; naphtha, 135; gas, 137; kerosene, 140; LPG, gas oil and dieseloil, 133; and fuel oil, 74. At the long-term world crude oil price of US$257/ton(US$35/bbl) the following refinery product long-term prices are derived:

FOBUS$/ton

Premium Gasoline 385Regular Gasoline a/ 373Kerosene 360Gas and Diesel Oil 342Fuel Oil 190Refinery Gas 352LPG 342

a/ Assumed at 97% or premium gasoline price.

Acicular and sponge coke are valued at the FOB Rotterdam prices of US$430and US$375/ton, respectively.

8. At full production, the Project will produce about 4 million tons oflight refinery products which would otherwise be imported. With freight, porthandling and inland transportation costs averaging about US$30/ton, the Projectwould save the country about US$119 million per year. In addition, theconversion project at Lujan de Cuyo refinery will save the country anotherUS$26 million per year, which is the cost of transporting the 1.7 million tonsof fuel oil produced by the refinery to Buenos Aires for export if such fueloil is not converted. Total annual transportation savings resulting from theProject at full prodution thus amount to about US$145 million at 1980 terms.

Industrial Projects DepartmentMay l98i

- 67 -ANNEX 8-2

ARGENTINA: REFINERY CONVERSION PROJECT

COST AND BENEFIT STREAMS FOR ECONOMIC RATE OF RETURN CALCULATION

BASE CASE(in million US$ of May 1981)

Capital Working Production Costs Total Net (Cost)

Costs Capital Variable Fixed Revenues Benefit

1981 135.9 - - - (135.9)

1982 182.2 - - - (182.2)

1983 201.3 - (201.3)

1984 53.5 5.4 - - - ( 58.7)

1985 24.9 10.0 496.1 16.6 958.0 410.4

1986 - - 661.5 27.6 1,277.3 588.2

1987 - - 785.6 27.6 1,516.8 703.6

1988 - - 785.6 27.6 1,516.8 703.6

1989 - - 785.6 27.6 1,516.8 703.6

1990 - - 785.6 27.6 1,516.8 703.6

1991 - - 785.6 27.6 1,516.8 703.6

1992 - - 785.6 27.6 1,516.8 703.6

1993 - - 785.6 27.6 1,516.8 703.6

1994 - - 785.6 27.6 1,516.8 703.6

1995 - - 785.6 27.6 1,516.8 703.6

1996 - (15.4) 785.6 27.6 1,516.8 718.8

Economic Rate of Return: 48.1%

Industrial Projects DepartmentMay 1981

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