World Bank Document · 2017. 2. 27. · KOC Karamay Oil Corporation LPEB Liaohe Petroleum...
Transcript of World Bank Document · 2017. 2. 27. · KOC Karamay Oil Corporation LPEB Liaohe Petroleum...
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Document of
The World Bank
FOR OFFICLAL USE ONLY
Report No. 11121
PROJECT COMPLETION REPORT
CHINA
KARAMAY PETROLEUM PROJECT( LOAN 2426-CHA)
SEPTEMBER 11, 1992
Industry and Energy Operations DivisionChina and Mongolia DepartmentEast Asia and Pacific Regional Office
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
Currency Unit - Yuan (Y)
Appraisal (Sep 1983) $1.0 - Y 1.98(Feb 1992) $1.0 - Y 5.48
FISCAL YEAR
January 1 to December 31
WEIGHTS AND MEASURES
1 cubic meter (CM) - 35.3 cubic feet (CF)1 thousand cubic meters (MCM) - 35.3 MCF1 million cubic meter (MMCM) - 35.3 MMCF1 billion cubic meter (BCM) - 35.3 BCF
1 thousand cubic meters of natural gas - 9.31 kilocalories1 ton oil equivalent (TOE) - 10.2 million kilocalories
I barrel (bbl) 0.85 SG crude oil - 0.135 tons- 0.159 CM
- 42 US gallons1 kilogram coal equivalent (KGCE) - 0.64 kg oil equivalent (KGOE)
ABBREVIATIONS AND ACRONYMS
CNOOC China National Offshore Oil CorporationCNPC China National Petroleum CorporationCNTIC China National Technical Import CorporationCOCOM Coordination Committee for Multilateral Export ControlEOR Enhanced Oil RecoveryGOC Government of the People's Republic of ChinaITC International Tendering Company of CNTICKOC Karamay Oil CorporationLPEB Liaohe Petroleum Exploration BureauLPG Liquified Petroleum GasMIS Management Information SystemMOF Ministry of FinanceMOPI Ministry of Petroleum IndustryPCR Project Completion ReportSPC State Planning Commission
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THE WORLD BANK FOR OMCIAL USE ONLYWashington, DC 20413
U S A.
Omce of ir1ctn.CW-CaIOpematmn, lvaluatwHn
September 11, 1992
MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT
SUBJECT: Project Completion Report on ChinaKaramav Petroleum Proiect (Loan 2426-CHA)
Attached. for information, is a copy of a report entitled "Project
Completion Report on China - Karamay Petroleum Project (Loan 2426-CiA)" prepared
by East Asia and Pacific Regional Office. No audit of this project has been made
by the Operations Evaluation Department at this time.
Attachment
| This document has a restricted distribution and may be used by recipients only in the performanceof their olilcial duties. Its contents may not otherwise be disclosed without World Bank authorization.
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FOR OFFICIAL USE ONLY
PROJECT COMPLETION REPORT
CHINA
KARAHAY PETROLEUM PROJECT(Loan 2426-CHA)
TABLE OF CONTENTSPage No.
Preface .iEvaluation Su-ary ............. .. .. .. .. . ii
PART I PROJECT REVIEW FROM BANK'S PERSPECTIVE
Project Identity .................. . 1Background ............... ... . . . . .Project Objectives and Description .1Project Design and Organization. 2Project Implementation .......... ... ... . 2Project Results. 4Project Sustainability .......... ... ... . 8Bank's Performance. 8Borrower's Performance. 9
Project Relationship ............ ..... . 9Consulting Services. 9Project Documentation and Data. 9
PART II PROJECT REVIEW FROM BORROWER'S PERSPECTIVE .10
Report of Karamay Oil Corporation .10Report of Liaohe Petroleum Exploration Bureau .12
PART III STATISTICAL INFORMATION ..... . . . . . . . . . . . . 13
Related Bank Loans .3.... .. . . . . . .. . . . . . 13
Project Timetable .13Loan Disbursements ............ ..... . . 14Project Implementation .15Project Costs and Financing .16Project Results .17Status of Covenants ............ ..... . . 18Use of Bank Resources .......... .... ... . 25
Annex 1 Economic Analysis . t
Annex 2 Key Financial Indicators.
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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PROJECT COMPLETION REPORT
CHINA
KARAMAY PETROLEUH PROJECT(Loan 2426-CHA)
PREFACE
This is the Project Completion Report (PCR) for the Karamay Petro-leum Project in China, for which Loan 2426-CHA in the amount of S100.3 millionwas approved on May 29, 1984. The loan was closed after two extensions onMarch 31, 1991. On May 26, 1989, an amount of $7 million from the loan wascanceled at the request of the Government. The last disbursement was made onJuly 25, 1991 and a final undisbursed amount of $3.8 million was canceled.
The PCR was jointly prepared by the Industry and Energy Operations
Division of the China and Mongolia Department of the East Asia and PacificRegional Office (Preface, Evaluation Summary, Parts I and III), and the Bor-rower (Part II).
Preparation of this PCR was started during the Bank's PCR mission in
February, 1992, and is based, inter alia, on the Staff Appraisal Report; the
Loan and Project Agreements; supervision reports; correspondence between theBank and the Borrower; and internal Bank memoranda.
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PROJECT COMPLETION REPORT
CHINA
KARAMAY PETROLEUM PROJECT(Loan 2426-CHA)
EVALUATION SUMMARY
Obiectives
1. The objectives of the project were: (a) to provide support inexpanding the exploration program in the Karamay oil belt and its southernextension; (b) to evaluate the potential of heavy oil in the Karamay and
Liaohe oil fields; and (c) to transfer modern technology which would in turn
enhance efficiency in both exploration and production.
Implementation Experience
2. The project was implemented successfully. Its scope was expanded toinclude heavy oil production consequent to the success of the pilot schemes.
As a result, the project costs increased by 28 percent. Most of the physicalcomponents were completed largely on schedule. However, the initial delays in
procurement (about two years) led to significant delays in implementation of
the various technical assistance and training components. These delays could
be attributed to a number of reasons, including lack of experience with Bank
procedures, fragmentation of responsibilities among various Chinese agencies
and cumbersome internal clearance procedures.
Results
3. The project objectives have been substantially met. Specifically,
both light oil and heavy oil reserves have been augmented. Oil productionwhich was declining at the inception of the project began to rise with produc-
tion at the close of the project being 1.5 times that at the start. An opti-
mal thermal recovery scheme for heavy oil is in place. The most satisfying
result, however, is that technology transfer in exploration--seismic data
acquisition and data processing, reservoir engineering, heavy oil production
etc.--has taken place with the cooperation of foreign institutions, consul-
tants and service and supply contractors. The Karamay Oil Corporation (KOC)
has now a pool of geoscientists and petroleum engineers who have been trained
in state-of-the-art technology, who also possess modern equipment, instruments
and tools. It is the application of this newly acquired technology that led
to the discovery of the additional oil-in-place and its production.
Sustainability
4. The significant increases in original oil-in-place during the proj-ect period and the success achieved in recovering heavy oil economically indi-
cate that the project will run its full course. Oil production, which was 4.0
million tons at the start of the project, was 5.75 million tons in 1990, and
is planned to reach a peak of 6.7 millions in 1995/96 before natural decline
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sets in. As for keeping up with modern technology, the China National Petro-
leum Corporation (CNPC) and KOC regularly exchange knowledge and experience
with other participanta in the world oil industry. Therefore, it is expected
that the economic benefits derived from this project would be sustained (Part
I, para. 7.1).
Findings and Lessons Learned
5. This was the third Bank-financed petroleum project in China. It
followed the Daqing and Zhongyuan projects after about 16 months. But the
beneficiary was another unit of CNPC, namely KOC, which is situated in the
remote area of Xinjiang province of China. KOC's lack of experience with Bank
procedures, together with the continuing inadequacy in interagency coordina-
tion within China, resulted in procurement delays as in the case of the other
two projects. KOC did not have the authority to procure Bank-financed goods
directly, nor was it allowed to process loan disbursement applications
directly. KOC had to procure through an authorized agent, the China National
Technical Import Corporation (CNTIC), and disbursement applications were cen-
trally processed by CNPC, formerly the Ministry of Petroleum and Industry.
Delegation of greater authority for direct procurement and filing of disburse-
ment applications to the project executing agencies would be desirable. On
the Bank's part, project implementation schedules when prepared should provide
for a time reserve for unforeseen problems.
6. The Bank played a catalytic role in the transfer of modern technol-
ogy to KOC. The Bank assisted KOC in picking the functional areas which
needed strengthening and in the designing of the technical assistance program
and of the training subcomponent. The Bank's involvement during the procure-
ment phase and throughout the project implementation was appreciable. Bank
staff assisted in selection of equipment, preparation of terms of reference
for studies, interaction with consultants and review of consultant studies.
However, in retrospect it appears that one or two studies assigned to consul-
tants had a wider scope than was strictly necessary for the purposes of the
project. The Bank could have assisted in trimming the scope to the needs and
helped to avoid the protracted time consultants took to complete the studies
(Part I, para. 8.1).
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PROJECT COMPLETION REPORT
CHINA
KARAMAY PETROLEUH PROJECT(Loan 2426-CHA)
Part I. PROJECT REVIEW FROM BANK'S PERSPECTIVE
1. Project Identity
Project Name: Karamay Petroleum Project
Loan Number : 2426-CHARVP Unit : East Asia and Pacific RegionCountry ChinaSector : EnergySubsector Petroleum
2. Background
2.1 For over three decades until the end of the 1970s, China was remark-
ably successful in following a policy of self-reliance in the development of
its energy resources. However, the rate of oil and gas discovery started
declining in the early 1980a. This adverse trend arose out of several fac-
tors. Mainly, the prospective areas were becoming more complex to explore,
and exploration and production techniques required updating to add to the
reserves/recover a higher proportion of the oil-in-place. State-of-t'^r art
technology had to be sought and manpower skills upgraded. Sophistica 1 d
equipment, instruments and appliances were to be introduced.
2.2 . In the early 1980s, GOC requested the Bank to provide technical
assistance to enhance the productivity of Chinese oil companies, firstly by
the identification of technological constraints and next, by facilitating
effective appraisal and exploitation of hydrocarbon prospects through the
selection of technologies which could be adopted rapidly to improve the qual-
ity of ongoing exploration and production efforts.
2.3 Karamay was the third project of a series of five Bank-financed
petroleum projects in the country. This project has not only augmented t.f
light and heavy oil reserves of KOC, resulting in a reversal of a potential
decline in production to one of steady increase; it has also provided training
for KOC staff in China and abroad. A pool of geoscientists and engineers well
versed in modern methods of exploration and production of heavy oil has been
created. The project also provided sophisticated equipment, laboratory and
tools, which are now being utilized for accelerated exploration and develop-
ment in Xinjiang province.
3. Proiect Oblectives and Description
3.1 The objectives of the project were (a) to provide support in expand-
ing the exploration program in Karamay oil belt and its southern extension;
(b) to evaluate the potential of heavy oil in the Karamay and Liaohe oilfields
and to evolve the optimum method of thermal recovery to enhance the production
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of heavy oil; and (c) to transfer modern technology which would in turn
enhance efficiency in both exploration and production.
3.2 The project comprised of (a) exploration and evaluation of light-oil
potential in the KOC operating area; (b) evolving the optimum recovery method
for heavy oil in KOC and Liaohe areas; and (c) transfer of technology for oil
exploration and heavy oil production, which were to be achieved through:
(i) consultant studies (geological, reservoir engineering, training, utiliza-
tion of South China sea gas and costing); (ii) carrying out of high-resolution
and 3D seismic surveys, processing and interpretation; (iii) upgrading of data
processing facilities; (iv) acquisition of computer equipment (hardware and
software) and other sophisticated oilfield equipment; and, (v) establishing of
a center for training of skilled workers and professionals.
4. Proiect Design and Orxanization
4.1 The exploration and appraisal for light oil was designed to progress
through successive stages. Conventional, high-resolution and 3D seismic sur-
veys would be followed by pinpointed exploration/appraisal/development drill-
ing and thereafter more light oil would be produced. For heavy oil, the ongo-
ing "huff and puff" pilot scheme of steam injection would be closely examined
by consultants and modifications and improvements suggested for incorporation
with a view to putting in place an optimal recovery method. The technical
assistance component was elaborated for implementation as follows: (a) 2D
(conventional and high-resolution) and 3D seismic surveys using modern equip-
ment were planned before exploratory and delineation drilling was done, so
that the success ratio of finding hydrocarbons could be raised; (b) pilot
schemes for recovery of heavy oil were carefully designed using a multitude of
data from Karamay and Liaohe and tested for reliability as possible in the
laboratory, before field experimentation; (c) all opportunities for training
were planned to be availed of, namely suppliers of equipment had to projide
training in the operation and maintenance of the equipment, consultants carry-
ing out studies had to associate KOC personnel with them, service contractors
like the foreign seismic survey parties had to coopt KOC staff in the crews,
specific institutional courses in petroleum subjects abroad were to be
attended by selected professionals and a training center for skilled workers
and professionals was to be organized with assistance from competent consul-
tants. Such attention to project designing together with monitoring of the
progress contributed to the achievement of all the objectives.
4.2 KOC implemented the project with the assistance of consultants and
contractors. It established a project team under the immediate direction of
the Deputy General Manager to provide guidance and supervision for the execu-
tion of the project. The Liaohe heavy oil component was implemented by Liaohe
Petroleum Exploration Bureau (LPEB).
5. Prolect Implementation
5.1 The project was implemented successfully. In addition, the heavy
oil component, which according to the original design of the project was lim-
ited to evolving the optimum method of recovery of heavy oil, was expanded in
scope to include systematic production of heavy oil employing steam injection,
incorporating recommendations made in the consultant studies. This involved
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drilling of several wells to produce heavy oil. As a result, KOC maintained a
steady increase both in light and heavy oil production. Delays occurred, how-
ever, in procurement and the execution of various technical assistance compo-
nents, with the closing date of the loan having to be extended by two years.
These delays can be attributed to a number of reasons: (a) a lack of coordi-
nation between related agencies--for example, KOC procures through an agent,
the International Trading Corporation, disbursements are made by China
National Petroleum Corporation (CNPC) and this tripartite allocation of work
took time to move in harmony; (b) the slow process of soliciting and evalua-
tion of bids; (c) protracted contract negotiations; (d) frequent revision of
scope of contractual work and lack of clear understanding between client and
consultant regarding contract administration (in the case of the reservoir
study); (e) certain suppliers not fulfilling their contractual obligations in
time; (f) the export restrictions and delays (of a supplier country) under the
procedures of a coordination committee for multilateral export control (COCOM)
in issuing export licenses--downgrading of the computers for seismic data pro-
cessing to expedite its export had to be done; (g) complications due to fail-
ure in following the Bank's guidelines for evaluation of bids (in the case of
the training simulator). In future projects, the possibilities of such impe-
diments bedeviling procurement should be kept in view in drawing up implemen-
tation schedules.
5.2 The deviations in implementation from what was envisaged during
appraisal were mainly the following: (a) time slippage by about one to two
years in the completion of the different components for reasons explained in
the previous paragraph; (b) expansion of the project scope to include produc-
tion of heavy oil; (c) of the five studies (geological, reservoir engineering,
training curricula and training methods, costing and utilization of South
China Gas), the last two were carried out by Chinese experts and not by out-
side consultants. The costing study was satisfactory. The South China Gas
utilization study, carried out in house by CNOOC, following a request from the
Ministry of Energy to the Bank that CNOOC had the competence to make the study
and should be so conducted, did not cover overall gas development economics
and also omitted end user investments, which the Bank considered to be crucial
elements of the study.
5.3 Project Costs. The total financing required (including front-end
fee of $0.25 million) amounted to $965 million equivalent, as compared to the
appraisal estimate of $754 million equivalent (Table 5A in Part III).1/ The
overrun is largely explained by the expansion in the scope of the project to
include production of heavy oil through drilling of injection/production
wells, and import of casings, tubing and other equipment and material for this
purpose. Ninety delineation and 1,126 development wells for production of
1/ KOC has calculated the actual project cost in US$ equivalent at $743.09
million in Part II or as within the "budget" (para. 3.2 of Part II). This
is due to KOC accumulating local currency costs to the end of 1991 and
converting these costs to USS at the exchange rate as at the end of 1991.
The PCR mission has taken th. local currency costs, year by year, and
converted the yearly costs to USS, using each year's exchange rate. The
exchange rate changed by gradual steps from $1 - Y 1.98 in 1984 to Sl -
Y 5.24 in 1991.
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heavy oil were drilled during the period 1985-89. The appraisal report had
estimated that 160 wells would be drilled for delineation of heavy oil in
Karamay. All the wells were shallow, going to a depth of about 600 meters.
The other reason for cost overrun was that the foreign seismic crews were
awarded additional survey work and an extension of contract by two years,
resulting in more line kilometers being shot and more 3D coverage being car-
ried out than was envisaged at first. On the other hand, savings (partly
offsetting the increase in survey costs) in seismic data processing were
achieved, due to more work being done at the data processing center than was
estimated at appraisal. The total project cost increased by about 28 percent
(36 percent in local costs and 14 percent in foreign exchange).
5.4 Proiect Financing. A comparison of actual project financing with
appraisal estimates is set out in Table 5A, Part III. Possible cofinancing
with export credits did not materialize. Instead, tubular goods were cen-
trally procured by MOPI and resold to various oilfields in local currency.
The financing requirements for all the local currency were met by KOC's own
resources.
5.5 Disbursement. A comparison of actual disbursements with appraisal
estimates is presented in Table 3, Part III. As noted earlier, procurement
and related disbursements were delayed and the closing date was extended by
two years. Actual costs of imported goods and services financed by the Bank
were close to the appraisal estimates; the Bank loan disbursements constituted
89.5 percent of the approved loan of $100.3 million. In May 1989, on a
request from GOC, the Bank agreed to cancel $7.0 million of the loan, repre-
senting the allocation for purchase of certain equipment which was dropped
from the foreign purchase list. On closing of the loan, an undisbursed amount
of $3.8 million was canceled.
5.6 Loan Allocation. The original and actual loan allocation is shown
in Table 5B, Part III. Unallocated amounts ($13.8 million) were largely real-
located to equipment and seismic surveys.
6. Prolect Results
6.1 Proiect Oblectives. The project objectives have been substantially
achieved. Without the project, it is assumed that the consequences, in the
absence of any other action by COC/KOC, would have been: (a) light oil pro-
duction would have declined from 4 million tons in 1984 to about 2.9 million
tons in 1990 with a further reduction to about 1.4 million tons in 2004;
(b) heavy oil production would have remained insignificant; and (c) KOC per-
sonnel would not have been trained and would not have applied modern technol-
ogy in the areas where opportunities were opened up to them under the project,
nor would KOC have acquired relevant modern equipment. The project resulted
in the following: (a) seismic surveys, conventional, high-resolution and 3D,
were done using modern equipment and techniques, similarly in data processing
leading to release of precise locations for exploratory/appraisal drilling and
achievement of a success ratio of I in 3; (b) in sequel, more light oil as
well as heavy oil reserves were discovered and produced, with light oil pro-
duction maintained at or above 4 million tons per annum (para. 6.3) and heavy
oil production increasing from almost nothing to about 25 percent of total oil
production in 1990; (c) in respect of heavy oil, an optimum method for recov-
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ery through two-stage injection of steam was proved (huff and puff followed by
steam drive); (d) KOC professional and technical staff were trained in moderntechnology in many areas of exploration, reservoir analysis and oil produc-tion; and (e) KOC acquired relevant modern equipment, tools and instruments.
At Liaohe, however, while a design for a heavy oil pilot has been prepared byconsultants, and LPEB staff trained in modern heavy oil technology, the eco-nomics are not in favor of heavy oil production under the prevailing worldprices for crude oil. The details of the project results are discussed below.
6.2 Seismic Data Acquisition and Processing. The highlights were(a) the effective interaction of KOC personnel with three foreign seismic dataacquisition crews; and (b) the installing of modern data processing equipment,the operation of which KOC personnel have become proficient. The project hasenabled KOC seismic crews to carry out surveys at the edge of Junggar basin,which was not technically feasible earlier. The productivity of KOC crews hascome up to international levels thanks to the modern seismographs, new trans-portation and ancillary equipment. The refurbished data processing center,with its state-of-the-art trained geoscientists, operates at 95 percent avail-ability and carries out, besides normal processing of data, 3D processing andspecial processing, all at a high-quality standard. Interpretation of themore detailed and precise data in the basins under KOC control has indicatedthat oil in place, being proved by drilling, is likely to be thrice the ear-lier estimates taking into account the deeper oil-bearing structures and iso-lated potential oil sands.
6.3 Exploration/Development Drilling. In all, 370 exploration an!development wells were planned for light oil under the project. HoweverT, KOCdrilled 201 exploration/appraisal and 500 development wells (by March .989).KOC adjusted the drilling plans in various areas upon review of the explora-tion/appraisal results. Consequently, drilling was curtailed in WuerheHungchiba area, and major exploration/development was concentrated inHangshanzui--Chepaize and Karamay--Baiqukuan areas to maintain/improve lightoil production. Annual light oil Rroduction which would have declined from3.98 million tons in 1984 to 2.93 million tons in 1990 without the proiect,stayed around an average of 4.78 million tons during 1985-90 due to the proi-ect. Nevertheless, between 1991 and 1996 the median production is placed at4.4 million tons per annum, and thereafter a slow decline to 2.2 million tonsby the year 2000 is expected. With regard to heavy oil, it has been notedearlier that 90 exploration/delineation wells and 1,126 development wells weredrilled against the appraisal estimate of 160 exploration/delineation wells.Heavy oil production commenced at 20,000 tons in 1984. By steady steps itrose to 1.44 million tons in 1990. By the year 2000, the production isexpected to reach 2.68 million tons involving further investments beyond theproject investments.
6.4 Heavy Oil Pilots. KOC had designed its own pilot before the projectand had been experimenting with it in one production district. Under theproject, foreign consultants advised on the design and construction of thesurface facilities and KOC adopted most of the recommendations, appreciatingthe technical and cost advantages. The consultants had also prepared thedesign of a thermal recovery project to be tried out in one of the blocks ofthis production district. This was an expansion of the "huff and puff" forsteam injection into a two-stage technique of "huff and puff" and a steam
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drive. KOC has adopted it. For Fenchang in another production district, the
consultants had prepared a techno-economic study for development and proces-
sing of extra heavy oil. It is not economic to develop this area at present.
6.5 With regard to Liaohe comDonent, the consultant had designed a heavy
oil pilot and had imparted training to a number of technical staff of Liaohe
Petroleum Exploration Bureau (LPEB), abroad and in China. Thus, the transfer
of technology took place successfully. However, the economic evaluation of
the pilot showed that it would not be viable to invest in a heavy oil pilot in
the designated area under the present prices for heavy oil in the world mar-
ket.
6.6 Technical Assistance. This comprised five studies, training and
establishment of a training center: (a) The geological study was undertaken
for a comprehensive understanding of the structural geology of the Junggar
basin. KOC staff generally found that their own understanding of the basin
was confirmed by the consultants. But the benefits to KOC were primarily in
learning the consultant's research methods and methods of map compiling.
(b) The reservoir study was aimed at successfully developing the tight con-
glomerate Wuerhe reservoir. The recommendations of the consultants are being
implemented and production decline which would have been about 90,000 tons
annually, from the old fields in the reservoir is presently controlled at
15,000 tons annually. ROC engineers who participated in the study by the con-
sultants were exposed to modern technology in geological modelling, well log
analysis, well test analysis and reservoir simulation. (c) The costing study
was carried out by Chinese experts from other agencies and institutions. It
is a good study with several recommendations on costing of discrete opera-
tions, of light oil and heavy oil output separately, proper allocation of com-
mon costs, reconciliation with finance accounts of costs from costing data,
etc. KOC has accepted the recommendations. (d) The training study by con-
sultants was to devise the training curricula for skilled workers and profes-
sionals of KOC. The teachers were trained abroad, who in turn trained the
local instructors. They conduct seven different types of courses at the
training center. During the project period, about 1,900 skilled workers and
professionals were trained. The training simulator obtained under the proj-
ect, however, has not been commissioned due to a contractual snag under reso-
lution, with the consequence that this sophisticated training aid is yet to
benefit KOC trainees. Had the simulator been available as a training acces-
sory, the quality of the training would have been enhanced. (e) The South
China Gas Utilization study was carried out by CNOOC as mentioned in para.
5.2.
6.7 The overseas training part of technical assistance was effectively
implemented. Thirty-three technical personnel were trained in various petro-
leum subjects, in institutions abroad. Other opportunities which were availed
of for training in and out of the country have been discussed in the forego-
ing.
6.8 The computer center in Karamay was equipped with modern hardware and
software under this project to provide for the following: (a) database man-
agement for oilfield development plans based on reservoir simulation and risk
analysis; (b) reservoir engineering; and (c) storing and processing of admin-
istrative data.
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Economic Evaluation
6.9 The quantifiable benefits of the project are derived from the addi-
tional production of both light crude oil and heavy crude oil by virtue of the
accretion to the recoverable reserves made possible by the project. At
appraisal no economic rate of return (ERR) was indicated; however the pros-
pects for new discoveries of light oil and the heavy oil pilot project proving
economic were rated high. In the event, as Annex 1 brings out, the project
will have an economic rate of return of 31 percent, which is good.
6.10 The ERR has been based on incremental volume of production of oil
and the additional investment and operating costs under the project as well as
needed to sustain the incremental production in the future. KOC has main-
tained data on the cost of producing heavy oil, which commenced at 20,000 tons
of output in 1984 and has since risen (in 1991) to 1.64 million tons/year. In
1990, the cost of producing heavy oil was about $53/ton compared to a value of
about $95/ton at the field. In that year, light oil cost $33/ton to produce
compared to a value of about $110/ton at the field.
Financial Performance
6.11 KOC Finances. Salient features of KOC's finances (present and past)
are summarized in Annex 2. During 1984-90, KOC had a production growth of
4.5 percent annually, but annual operating costs registered an average
increase of 19 percent, outpacing the former by a larger margin than was
anticipated at appraisal. This was due to heavy oil production, the ratio of
which to total oil production changed from 0.5 percent in 1984 to 25 percent
in 1990. KOC's financial performance in this period was however good, the
financial ratios were satisfactory and the internal cash generation sufficient
to cover over 30 percent of capital investments and maintenance. GOC has
recently raised the prices for crude oil under the two-tier formula in force
from 1981, the upper tier of which applicable to production above 3.64 mn..llion
tons in a year at about $95/ton currently is not too short of the interna-
tional parity price as net backed to the field (see para. 6.10). The lower
tier at about $40/ton currently applicable up to 3.64 million tons remains far
short of such parity. In 1992 and beyond, this price will not adequately
cover the cost of production of the first portion of 3.64 million tons. With
the profits accruing in respect of the portion of the production above 3.64
million tons, KOC would make overall profits, but sharp drops in internal cash
generation will occur, specially after 1995/96 when total oil production is
expected to peak at 6.7 million tons. GOC, it is presumed, will in due time
make necessary revisions in the administered prices. KOC for its part should
optimize costs of operation. Norms and targets exist in all varieties of
operation, from exploration to production. A review of these norms and tar-
gets with a view to tightening them and also taking on more profit-making
activities, such as bidding for contracts in other parts of China or even
abroad, is recommended.
6.12 The conditionalities for this project did not include any tradi-
tional financial performance covenant. Instead, the Bank's objective to pro-
mote prudent financial management was achieved through KOC's compliance with a
covenant which required the extension of the financial planning horizon and
furnishing the Bank with a five-year rolling plan and its annual review.
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Further, ROC fulfilled its assurance that an evaluation of its costing would
be undertaken with the assistance of consultants (para. 6.6(iii)].
6.13 Proiect Finances. Financial projections made in respect of the
project as such (Annex 2) show that if present prices remain unchanged in con-
stant terms, the financial rate of return to KOC will be 11 percent, which is
minimally acceptable. No estimate of the return was made at appraisal. Pri-
marily, the low return is due to the higher costs of producing heavy oil, the
proportion of which in the total additional oil will keep rising; at the same
time the decline in light oil production which will set in after 1995/96 will
make the unit cost of its production also high. It will be recalled that the
project economic rate of return is estimated at 31 percent, which indicates
that COC's share of the net benefits of the project will be far larger than
KOC's. I
Environmental Impact and Safety
6.14 KOC has conducted its seismic, drilling and production operations in
line with modern industrial practices. It has paid due attention to environ-
mental and safety considerations. The oil and liquid wastes were collected
and treated. Since most of the operations were conducted in isolated barren
areas, the ecological hazards were minimized. Prior to the project, the
' safety procedures at Karamay were not satisfactory. However, the recommenda-
tions made under the safety study for the Daqing and Zhongyuan projects and
the heavy oil study were implemented by KOC, improving significantly the
safety standards.
7. Proiect Sustainability
7.1 During the project period 1985-90, original light oil-in-place
increased by 151 million tons to reach 195 million tons at the end of 1990.
Original heavy oil-in-place went up from zero to 110.2 million tons at the end
of 1990. In 1990 incremental production due to the project, of light and
heavy oil, accounted for 2.82 million tons out of a total production of 5.75
million tons. The planned production profile until 2004 shows that while the
total production would peak at about 6.7 million tons in 1995/96 and decline
to about 5.3 million tons by 2004, incremental production due to the project
and subsequent investments of a lesser order to sustain the gains in produc-
tion, would rise to about 4 million tons by 1995/96 and then gradually
decline. The production increases have thus been significant until now and
would tend to remain so over the next 10 to 12 years assuring sustainability
of the project. The other characteristic of the project, the technical
upgrading of KOC, would require efforts by KOC to maintain contact with the
outside world for exchange of technical knowledge and experience and acquiring
of useful new generation equipment to further improve its performance in the
future.
8. Bank's Performance
8.1 The Bank played a catalytic role in the transfer of modern technol-
ogy and institution building. Bank assisted KOC in picking the functional
areas which needed strengthening and in the designing of the technical assis-
tance program and of the training subcomponent. The Bank's involvement during
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the procurement phase and through project implementation was appreciable.
Bank staff assisted KOC in selection of equipment, observance of procurement
procedures, preparation of terms of reference for various studies, review of
consultant studies, and overall interaction with consultants. The interaction
with the consultant engaged to propose optimum methods for recovery of heavy
oil enabled the Bank to advise KOC to take up regular production of heavy oil,
appropriately expanding the scope of the project to include such production.
As noted in earlier paragraphs, heavy oil has become an important product of
KOC for sustaining its economic success.
8.2 China has appreciated the role of the Bank in all the five energy
(oil and gas) projects approved by the Bank between 1983 and 1986. Bank
involvement gave it a window to modern technology and the practical means of
acquiring it. With their familiarity with technical progress in different
aspects and different countries, of hydrocarbon exploration, development and
production and with the know-how on how to get the best consultants, contrac-
tors and suppliers of sophisticated equipment, Bank staff were in a unique
position to assist China in the fulfillment of its longing to catch up on
modernization.
9. Borrower's Performance
9.1 In spite of delays in procurement, the physical components were
largely completed well within two years of the original schedule. In KOC, the
coordination and monitoring of project implementation was satisfactory. Proj-
ect expenditure was kept under control through periodic reviews of physical
and financial progress. KOC staff were highly motivated to absorb new skills
and use new technology. The sophisticated equipment imported through the
project is being effectively utilized.
10. Proiect Relationship
10.1 The Bank and KOC developed a good working relationship and a spirit
of cooperation prevailed throughout the course of project preparation and
implementation.
11. Consultant Services
11.1 The consultants in general performed well and their reports were
professionally prepared to the satisfaction of the client. Moreover, the
consultants readily agreed to work with KOC personnel and pass on expertise in
research and analytical methods.
12. Proiect Documentation and Data
12.1 Both the Staff Appraisal Report and loan documents provided an ade-
quate framework for project implementation. Supervision reports provided an
adequate review of the progress of the project. However, many supervision
missions did not include a Financial Analyst and gaps in financial information
and the financial progress of the project prevailed. KOC's own contribution
to the PCR and its ready supply of documents during the PCR Mission went a
long way in making the PCR as complete as possible.
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PROJECT COMPLETION REPORT
CHINA
KARALAY PETROLEUM PROJECT(Loan 2426-CHA)
Part II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE
A. Report of Karamay Oil Corporation 2/
1. Prolect Achievements
1.1 KOC fully completed the exploration and development ororam. Withthe use of advanced technology and modern equipment, KOC found 264 milliontons (Mt) of oil-in-place (151 Mt light and 113 Mt heavy oil). In 1990, oilproduction was 5.75 Mt tons or 115 percent of projection for the year.
1.2 The foreign seismic survey contract was extended by two years untilApril 1989 and the three foreign crews shot 17,334 km, and also performed 3Dseismic survey. The results provided better data for enlarging the reservoirareas and KOC's own quality of seismic survey work was enhanced.
1.3 As for drilling during 1985-89, 291 exploration wells were drilled--201 for light oil discovery and 90 for heavy oil discovery. Sixty-eight per-cent of the wells had commercial zones of oil.
1.4 The seismic data processing center at Urumchi was upgraded with theaddition of a Cyber 855S computer. The center processed 193,196 km of stan-dard-line km and 463 km2 of 3D data. The results enabled an efficient drill-ing program and reservoir evaluation. The imported Sperry 1100172 computerlocated in Karamay is assisting in storina and processing of oil field techni-cal data. It has, by enabling a better understanding of the reservoir, madecontributions in raising oil production.
1.5 The consultants completed the study for the design and test of proj-ects for thermal recovery of heavy oil in Karamay. By 1989, the heavy oilpilot testing was completed. Development wells drilled for heavy oil andrecovery through steam injection using 36 steam generators helped to producegood quantities of heavy oil going up to 1.44 mt in 1990.
1.6 The consultants' work on the conceptual process design of surfacefacilities for commercial development of heavy oil in District No. 9, designand study for the thermal recovery of heavy oil in District No. 9 Block 8 andfeasibility study for development and processin1 ef Vevvy oil in Fengchangarea were useful. The last is to be implemented.
1.7 The consultants' training program in Canada for 14 KOC staff iscommended.
1.8 The consultants did a good job in respect of the traininx study andestablishment of the training center for training skilled workers and Profes-sionalrs. Comprehensive teaching material for seven courses (drilling, produc-tion, downhole, mud, cementation well testing and logging) were provided. Sixprofessional teachers trained by the Council are qualified to give lectures on
2/ Summarized from a comprehensive report prepared by KOC. A copy of thereport is in the project file.
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the seven courses. The consultants provided a useful list of equipment andinstruments for the center. About 1,000 skilled workers and professionals arebeing trained each year at the center.
1.9 Thirty-three professionals were trained in academic institutionsabroad--two obtained PhDs, 1 Masters, and 30 others instructions in petroleum
subjects.
1.10 Studies as required in the Project Agreement were undertaken. Thegeological study by consultants was not remarkable for its findings, but KOC
staff got an insight into the research and organization methods of the consul-tant. The consultants carried out the reservoir study. There were someissues about the scope of the work which were resolved. The results of the
study were appreciated by KOC as well as the incidental training of KOC staff.Costing study was done by domestic consultants who, it was felt, would have a
better grasp of the financial system in China. KOC agrees that the lacunaspointed out exist and need remedying. (The training study is discussed inpara. 1.8. The South China Sea Gas Utilization study was done by CNOOC.)
1.11 Equipment procurement proceeded without undue problems except forclaim adjustments on completion of contracts and the one case of an unful-filled contract for the training simulator. Six contracts for technical ser-vices and 37 contracts for purchases were handled. Seventy-two percent of the
loan amount was utilized in these contracts. ICB procedures were applied to
56 percent of the loan amount.
2. Suggestions from KOC
2.1 Procurement procedures need to be streamlined and the functions and
responsibilities of agencies involved in procurement clearly defined lestschedules are not adhered to.
2.2 Responsible agencies should give prior assurances about conformingto procurement schedules, accept and work to the time limits for processingeach phase.
2.3 Standard procurement documents for different modes of procurement
should be prescribed.
3. Role of World Bank and KOC
3.1 Bank staff made significant contributions in the light of inexperi-
ence of KOC in the implementation of the project. Assistance was given in
expediting decision-making, preparing terms of reference for consultants,execution of the thermal recovery of heavy oil, review of technical specifica-
tions, evaluation of bids, and enhancement of procurement efficiency.
3.2 KOC was responsible for implementation of the project. A projectteam under the Deputy General Manager provided guidance and coordination.Specific assignments of tasks to concerned departments was made. A technical
cooperation department for purchase of equipment was nominated. KOC compiledTORs, procurement documents, evaluation reports and project progress reports.
CNPC authorized KOC to have direct contact with the World Bank in procurement/
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implementation activities.3/ The project was implemented on schedule andwithin the budget. All covenants were observed.
3.3 KOC had developed an effective relationship with the Bank.
B. Report of Liaohe Petroleum Exploration Bureau (LPEB) 4/
3.4 Project Achievement. Project objectives were all basically met.Two wells were picked, in consultation with the consultants for coring. Core,water and oil samples were flown to Canada. Petrophysical, geological, reser-voir engineering, drilling and completion technology studies were carried outby consultants associating LPEB experts. A thermal recovery (steam injection)technology and a technology to monitor it were devised. Conceptual design ofsurface gathering and transportation was prepared. A pilot block of 1 km2 wasselected to verify the results of the study. However, further implementationwas deferred on economic considerations.
3.5 Proiect Economics. Eighty-seven wells would have been drilled inthe 1 km2 area selected. An investment of $162 million would have been made.But sale of oil, gas and condensate which would have been produced would haveearned $120 million at world parity prices. On the face of it, it was notadvisable to launch the field experimental project.
3.6 Proiect Delay. The study had a one-year delay for various rea-sons.5/
3.7 Experience Gained. LPEB is setting up heavy oil pilots using ther-mal techniques to improve heavy oil production from Shugong field (not part ofthe Bank project, but using experience gained in designing a pilot forLiaohe). LPEB benefited from the close working with the Canadian consultantand drew a number of lessons for administering such consultancy contracts moreefficiently in future.
3/ Apparently, this was for follow-up after the International Trading Corpo-ration initiated procurement on behalf of KOC and had placed the orders;also, disbursements applications were processed by CNPC.
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PROJECT COHPLETION REPORT
CHINA
KARAMAT PETROLEUM PROJECT
(Loan 2426-CiA)
PART III. STATISTICAL INPORMATION
Table 1; RELATED BANK LOANS
Year of
Loan Title Purpose approval Status Comments
Zhongyuan-Wenliu Petroleum ex- 1983 Satisfactory Closing Date
Petroleum Proj- ploration/ Original: 12/31186
ect (Ln. 2252) development, TA Actual : 12/31/90
and training
Daqing Oilfield- Reservoir 1983 Satisfactory Closing Date
Grotaiza Reser- Development TA Original: 06/30/86
voir Development and Training Actual : 06/30/90
Project (Ln.2231)
Weiyuan Gas Gas Field re- 1985 Satisfactory Closing Date
Field Technical habilitation TA Original: 06/30/90
Assistance Proj- and Training Latest estimate:
ect (Ln. 2580) 06/30/92
Liaodong Bay Gas Field 1986 Completed Loan closed on
Petroleum Proj- appraisal, TA Satisfactorily 12/31/89 (as orig-
ect (Ln. 2708) and Training inally scheduled)
Table 2: PROJECT TIMETABLE
Item Actual Date
Identification Mission May 2, 1983
Appraisal Mission September 15, 1983
Loan Negotiations April 16, 1984
Board Approval May 29, 1984
Loan Signature June 25, 1984
Loan Effectiveness September 25, 1984
Loan Completion March 31, 1991
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Table 3: LOAN DISBURSEMENTS
Cumulative Estimated and Actual Disbursements($ million)
Bank FY 85 86 -87 88 89 90 91
Appraisalestimate 8.0 40.0 94.0 100.3 100.3 100.3 100.3
Actual 4.3 29.1 40.7 65.3 77.9 86.1 89.5
Actual as % ofestimate 53.8 72.8 43.3 65.1 77.7 85.8 89.2
Date of finaldisbursement: July 25, 1991
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Table 4: PROJECT IMPLEMENTATION
EstimatedCompletion Date
AppraisalProject Components estimate Actual/PCR estimate Months of Delay/a
A. Karamay
1. ExplorationSeismic field acquisition June 1986 Completed April 1987 10 monthsSeismic data processing December 1986 Completed June 1988 18 monthsDrilling of explorationand delineation wells December 1988 Completed December 1989 12 months
2. Heavy OilFeasibility and design December 1984 Completed March 1988 39 months
Field pilot tests June 1989 Completed December 1990 18 months
3. Accuisition of EquipmentTender document and bidanalysis December 1987 Completed July 1989 19 months
Receipt and installation December 1988 Completed June 1990 18 months
4. StudiesHeavy oil study December 1987 Completed March 1988 3 monthsTraining study December 1987 Completed July 1988 7 months
Geological study December 1987 Completed September 1988 9 monthsReservoir study December 1987 Completed January 1991 49 months /b
Cost Study December 1988 Completed October 1987 10 months earlier
5. TraininaEstablishment of TrainingCenter December 1985 Completed September 1989 45 mcr!:i /c
Training of Professionals December 1987 Completed December 1990 36 monitis
B. Liaohe Heavy Oil Pilot
1. Heavy oil study and design December 1984 Completed January 1990 73 months /d
2. Heavy oil pilot June 1989 Canceled Canceled
/a The initial lag from appraised estimate were caused by the delays in (a) the procurementprocess leading to the signing of the finalized contracts, and (b) implementation of the
contracts. Overall, the appraisal estimate vas too optimistic.Lb Reservoir Study. This study was delayed by the reasons given in para. 5.1. Basically, KOC
modified the scope of work and the consultants were delayed in finalizing the repo t.
c Trainin . No delays occurred during the contract execution./d Liaohe Heavy Oil Stud. There were initial delays, as discussed above. The contract wft
signed in January 1988, about three years behind the appraisal estimate.
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Table 5: PROJECT COSTS AND FINANCING
A. Project Cost.
Aporateal gEtiat n YnM n ctual m on
1xc Onge Total Locl Exchange oreignLocal chng Totaal ocal TEhang Total Local Exchange rotal Local Eachange Total
Seisic Surveys 20.0 24.0 44.0 39.6 47.3 67.1 52.26 26.42 80.66 205.22 93.2$ 300.50Seismic data processing *.0 6.0 16.0 15.9 15.6 31.6 31.33 3.65 14.96 44.50 32.04 96.34Exploration and delineation well 298.0 132.0 430.0 390.0 261.4 651.4 396.67 178.00 374.67 1,557.62 699.04 2,256.66Heavy oil pilota3. 5 3 1l. 17.0 10.9 22.8 33.7 3.07 8.59 13.66 12.04 *3.00 57.04Supporting facilitia and arvic 2.0 10.5 32.3 9.9 20.6 24.7 101.23 *5.00 146.23 397.57 176.72 574.29Imported * uipmnt 6.0 27.0 33.0 11.9 53.5 65.4 65-.3 43.34 128.52 334.52 232.90 567.42Training of technical assietance 2.0 6.0 8.0 3.9 11.9 15.8 4.60 3.26 7.86 13.06 17.90 35.96
Total base Cost 341.5 239.0 560.5 676.0 433.7 1.109.7
Physical contingencies 34.0 21.0 55.0 67.3 41.6 108.9Price contingencies 68.5 33.0 101.5 135.6 65.3 200.9
Total Proiect Cost 444.0 273.0 717.0 079.0 540.6 1,419.5 654.34 310.26 964.60 2,569.72 1 316.89 3,988.61Front-and fo 0.3 0.3 - 0.6 0.6 - 0.25 0.25 - 1.60 1.60Charges on use of foreign exchange 36.2 36.2 71.7 - 71.7 - - - - - -
Total Finance 460.2 273.3 753.5 950.7 541.2 1.491.7 654.34 310.51 964.65 2.569.72 1320.49 3.890.21
In nck Pln 460.2 - 460.2 950.7 - 950.7 634.34 223.00 677.34 2,569.72 675.77 3,445.49Sunslier credit or GOS 173.0 173.0 - 342.6 342.6 - - - - - -isa - 100.3 100.3 - 196.6 196.6 - 67.51 67.51 - 444.72 444.72
Total 480.2 273.3 753.5 950.7 541.2 1,491.9 654.34 310.51 964.65 2,569.72 1,320.49 3,990.21
B. Proiect Financing: IBRD Loan Allocation
Planned(Loan Agreement) Actual$ million Z $ million Z
KaramaySeismic surveys and interpretation 18.4 100 28.42 31.8Seismic data 7.7 100 3.65 4.1Heavy oil studies pilot 6.0 100 8.59 9.6Equipment for exploration and supportfacilities 38.5 100 33.34 37.2
Computer center 5.0 100 8.54 9.5Laboratories 1.1 100 1.46 1.6Training center 1.65 100 0.73 0.8Overseas training 0.5 100 0.00 0.0Consultants services 3.3 100 2.53 2.8
LiaoheHeavy oil study/pilot 3.3 100 1.99 2.2Consultant's services 0.8 100 0.00 0.0
OthersFee 0.25 100 0.25 0.3Unallocated 13.8 100 0.00 0.0
Total IBRD 100.3 100 89.50 100.0
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Table 6: PROJECT RESULTS
A. Economic Impact
Appraisal Actual
Economic Rate of Return Not Calculated 31%
B. Financial Impact
Appraisal Actual
Financial Rate of Return Not Calculated 11%
C. Studies
Studies Status Impact of Study
Heavy oil study Completed Transfer of modern technology.
Improved heavy oil production by
8 times.
Training study Completed The Study has been a successful
vehicle for transfer of modern
technology. It has enhanced
capacity/capability of training
center, students and teachers.
Geological study Completed Improved comprehension of
structural geology of Junggar
Basin; KOC's engineers learned
modern research methods and map
compiling methods.
Reservoir study Completed Improved production and arrested
decline from 90,000 tons per
annum to 15,000 tons per annum.
Cost study Completed Strengthened financial
management and improved cost
control.
Heavy Oil Study Completed Improved comprehension of heavy
Liaohe oil reserves and heavy oil
production methods.
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Table 7: STATUS OF COVENANTS
Section Covenant Status
Prolect Agreement
Section 2.08 KOC shall (a) carry out under terms of refer- Complied
ence satisfactory to the Bank, a study of
reservoir engineering in Wuerhe area; (b)review the results of such study with the
Bank; and (c) agree with the Bank on anaction plan.
Section 2.09 KOC shall (a) carry out under terms of refer- Compliedence satisfactory to the Bank, a regional
sedimentological and structural study toinvestigate the composition and distributionof reservoir bodies; (b) review the results
of such study with the Bank; and (c) agreewith the Bank on the consequent course ofaction.
Section 2.10 KOC shall: (a) under terms of reference Compliedsatisfactory tb the Bank, carry out the studyfor the pilot projects under Part B (i) andthe techno-economic study under Part B (ii)of the Project, and shall review the findings
of such studies with the Bank: (i) withrespect to the study on the design of thepilot projects; and (ii) with respect to the
techno-economic study; and (b) agree with the
Bank on the consequent action plan.
Section 2.11 KOC shall carry out a study under terms of Compliedreference satisfactory to the Bank, of KOC'scosting.
Section 2.12 KOC shall carry out under terms of reference Compliedsatisfactory to the Bank, a design of train-ing methods for skilled workers and shallreview the findings and agree with the Bankon the consequent action plan. The consul-
tants to assist KOC in carrying out such adesign shall be appointed.
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Table 7: (cont'd)
Section Covenant Status
Section 2.13 KOC shall exchange views periodically with Compliedthe Bank on the results of the seismic pro-gram under Part A of the Project at Wuerhe-Hungchiba and Hongshanzui-Chepaizi areas, andagree with the Bank on the consequent impacton the design of the exploration program.
Section 2.14 KOC shall review periodically with the Bank Compliedthe exploration program of KOC for the Proj-ect.
Loan Agreement
Section 3.01 (a) The Borrower declares its commitment to Compliedthe objectives of the Project as set forth inSchedule 2 to this Agreement, and, to thisend, shall carry out Part E of the Projectthrough MOPI with due diligence and efficien-cy and in conformity with appropriate admin-istrative, financial, engineering and petro-leum industry practices, and shall provide,promptly as needed, the funds, facilities,services and other resources required for thepurpose.
(b) Without any limitation or restriction Compliedupon any of its other obligations under theLoan Agreement, the Borrower shall cause KOCto perform in accordance with the provisionsof the Project Agreement all the obligationsof KOC therein set forth, shall take or causeto be taken all action, including the provi-sion of funds, facilities, services and otherresources, necessary or appropriate to enableKOC to perform such obligations, and shallnot take or permit to be taken any actionwhich would prevent or interfere with suchperformance.
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Table 7: (cont'd)
Section Covenant Status
(c) The Borrower shall relend the equivalent Complied
of $96,200,000 out of the proceeds of theLoan to KOC under a subsidiary loan agreementto be entered into between the Borrower andKOC, under terms and conditions which shallhave been approved by the Bank, which shallinclude, inter alia, same interest rate asspecified in Section 2.07 of this Agreement,and a repayment period not exceeding 20years. The Borrower shall bear the foreignexchange risk.
(d) The Borrower shall exercise its rights Complied.
under the Subsidiary Loan Agreement in suchmanner as to protect the interests of theBorrower and the Bank and to accomplish thepurposes of the Loan, and, except as the Bankshall otherwise agree, the Borrower shall notassign, amend, abrogate or waive the Subsid-iary Loan Agreement or nay provision thereof.
Section 3.02 (a) In order to assist the Borrower in Complied
carrying out the studies under Part E of theProject, the Borrower shall employ consul-tants and experts as necessary whose selec-tion, qualifications, experience and termsand conditions of employment shall be satis-factory to the Bank, in accordance with prin-ciples and procedures described in the"Guidelines for the Use of Consultants byWorld Bank Borrowers and by the World Bank asExecuting Agency" published by the Bank inAugust 1981.
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Table 7: (cont'd)
Section Covenant Status
(b) The Borrower shall complete the studies Complied
and review the findings with the Bank:
(a) by December 31, 1985 with respect to
the gas utilization study under Part
E (i) of the Project;
(b) by March 31, 1985 with respect to
the study on the design of the pilot
projects for heavy oil recovery un-
der Part E (ii) of the Project; and
(c) by December 31, 1986 with respect to
the techno-economic study under Part
E (iii) of the Project.
(c) Thereafter, the Borrower shall agree Complied
with the Bank on the consequent action plan
based on the studies referred to in (b)
above.
Section 3.03 (a) The Borrower undertakes to insure, or Complied
make adequate provision for the insurance ot,
the imported goods to be financed out of the
proceeds of the Loan against hazards incident
to the acquisition, transportation and deliv-
ery thereof to the place of use or installa-
tion, and for such insurance any indemnity
shall be payable in a currency freely usable
by the Borrower to replace or repair such
goods.
(b) The Borrower shall cause all goods and Complied
services financed out of the proceeds of the
Loan to be used exclusively for the purposes
of the Project.
Section 3.04 (a) The Borrower shall furnish to the Bank, Complied
promptly upon their preparation, the plans,
specifications, reports, contract documents
and work and procurement schedules for Part E
of the Project, and any material modifica-
tions thereof or additions thereto, in such
detail as the Bank shall reasonably request.
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Table 7: (cont'd)
Section Covenant Status
(b) The Borrower shall: (i) maintain rec- Compliedords and procedures adequate to record andmonitor the progress for Part E of the Proj-ect (including its cost and the benefits tobe derived from it), to identify the goodsand services financed out of the proceeds ofthe Loan related thereto, and to disclosetheir use in such Part of the Project; (ii)enable the Bank's representatives to visitthe facilities and works sites included inPart E of the Project and to examine thegoods financed out of the proceeds of theLoan related thereto and any relevant recordsand documents; and (iii) furnish to the bankat regular intervals all such information asthe Bank shall reasonably request concerningPart E of the Project, its cost and, whereappropriate, the benefits to be derived fromit, the expenditure of the proceeds of theLoan related thereto and the goods and ser-vices financed out of such proceeds.
(c) Upon the award by the Borrower of any Compliedcontract for goods, works or services to befinanced out of the proceeds of the Loan, theBank may publish a description thereof, thename and nationality of the part to whom thecontract was awarded financed out of suchprice.
(d) Promptly after completion of the Proj- Compliedect, but in any event not later than sixmonths after the Closing Date or such laterdate as may be agreed for this purpose be-tween the Borrower and the Bank, the Borrow-er, with the Assistance of KOC, shall prepareand furnish to the Bank a report, of suchscope and in such detail as the Bank shallreasonably request, on the execution andinitial operation of the Project, its costand the benefits derived and to be derivedfrom it, the performance by the Borrower andthe Bank of their respective obligationsunder the Loan Agreement and the accomplish-ment of the purposes of the Loan.
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Table 7: (cont'd)
Section Covenant Status
Section 4.01 (a) KOC shall maintain records and accounts Compliedadequate to reflect in accordance with con-sistently maintained appropriate accountingpractices its operations and financial condi-tion, including, without limitation to theforegoing, separate accounts reflecting allexpenditures on account of which withdrawalsare requested from the Loan Account on thebasis of statements of expenditures.
(b) KOC shall retain, until one year aftet Compliedthe Closing Date, all records (contracts,orders, invoices, bills, receipts and otherdocuments) evidencing the expenditures onaccount of which withdrawals are requestedfrom the Loan Account on the basis of state-ments of expenditures, and shall enable theBank's representatives to examine such rec-ords.
Section 4.02 KOC shall: (a) have its accounts and finan- Corr'iedcial statements (balance sheets, statementsof income and expenses and related state-ments) for each fiscal year audited, inaccordance with appropriate auditing princi-
ples consistently applied, by independentauditors acceptable to the Bank.
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Table 7: (cont'd)
Section Covenant Status
(b) furnish to the Bank as soon as available, Compliedbut in any case not later than six monthsafter the end of each such year: (i) certi-fied copies of its financial statements forsuch year as so audited; and (ii) the reportof such audit by said auditors of such scopeand in such detail as the Bank shall havereasonably requested, including, withoutlimitation to the foregoing, separate opin-ions by said auditors in respect of theexpenditures and records referred to in Sec-tion 4.01 (b) of this Agreement, as to wheth-er the proceeds of the Loan are made avail-able to it and withdrawn from the LoanAccount on the basis of statements ofexpenditures have been used for the purposefor which they were provided; and
(c) furnish to the Bank such other informa- Compliedtion concerning said accounts, financialstatements, records and expenditures, as wellas the audit thereof, as the Bank shall fromtime to time reasonably request.
Section 4.03 KOC shall: (a) by October 1 of each year, Compliedreview with the Bank, KOC's current andfuture finances, including its trend of pro-duction costs, budget variance analysis,future investment program and related financ-ing arrangements; and (b) submit to, andreview annually with the Bank, as part of thereview of KOC's finances referred to in (a)above, its financial statements based on therolling five-year plans.
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Table 8: USE OF BANK RESOURCES
A. Staff Inputs
Stage of Project Actual Staff-Weeks
Through Appraisal 43
Appraisal through board approval/effectiveness 64
Supervision 154
Total 261
B. Missions
Stage of Number of SW in Specialization
Project Cycle Month/year persons field represented
Through AppraisalIdentification May 1983 7 4
E, PE, G, FA
Appraisal Sep 1983 6 3 PE, G, FA
Appraisal throughBoard Approval May 1984
Post AppraisalSupervision
Supervision Jul 1984 2 1 PE, G
Supervision Oct/Nov 1984 5 2 PS, PE, FA
Supervision* Oct 1984 1 3 PS
Supervision* Dec 1984 1 2 PS
Supervision* May 1985 1 4 PS
Supervision May 1985 5 1 C, FA, PE, PS
Supervision* Sep 1985 1 3 PS
Supervision Nov 1985 3 3 PS, FAG
Supervision Mar/Apr 1986 1 4 PS
Supervision Aug/Sep 1986 5 2 C, FA, PS, PE, FA
Supervision Feb 1987 4 1 G, PE, PS, FA
Supervision Oct 1987 3 2 PS, FA, PE
Supervision* Mar 1989 3 1 PS, G, PE
* Procurement supervision in combination with other projects, but only SW
which were spent for supervision of Karamay Petroleum project have been
counted.
E - Economist PE - Petroleum Engineer
FA - Financial Analyst PS - Procurement Specialist
G - Geologist
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CIHINA
KARAHAY PETROLEUM PROJECT ANNEX 1Economic Analysis
(in million US$)
Incremental oil -- Total Coats----------- Total Net Nemo itemsunder Project Incremental due to Project Benefits Benefits Total oil Price of oil b/
a/ Prodn light heavy
Year Light Heavy Capex OM O&M Total HIT S/ ton S/ tonMM tons Light Heavy $110
1984 6.29 6.29 (6.29) 4.001985 O-1" 1.06 195.94 29.59 6.21 231.74 180.60 (51.14) 4.95 201 160.801986 0.33 1.52 204.95 33.08 15.14 253.16 282.35 29.18 5.44 195.00 156.001987 0 49 1.75 258.06 35.95 22.94 316.95 164.08 (152.87) 5.65 99.00 79.201988 0.61 1.64 262.47 36.42 30.38 329.27 218.88 (110.39) 5.49 126.00 100.801989 1.06 1.29 142.60 31.40 50.46 224.46 182.55 (41.91) 5.43 99.00 79.20 a1990 1.44 1.38 71.90 33.87 63.37 169.14 275.98 106.84 5.75 120.00 96.001991 1.64 1.49 100.24 51.58 72.18 224.00 306.99 82.99 5.91 120.00 96.001992 1.80 1.74 67.32 58.69 79.22 205.22 323.97 118.75 6.18 113.15 90.521993 1.96 1.98 45.28 65.18 86.26 196.72 375.33 178.61 6.45 117.53 94.021994 2.07 2.13 41.87 68.20 91.10 201.17 421;26 220.09 6.58 123.37 98.701995 2.18 2.32 41.87 72.40 95.94 210.21 465.11 254.89 6.76 127.02 101.621996 2.28 2.30 37.30 70.07 100.34 207.71 510.83 303.12 6.73 135.68 108.551997 2.38 1.75 14.08 58.88 104.74 177.71 503.86 326.15 6.17 144.94 115.951998 2.48 1.11 0.00 46.45 109.14 155.59 482.94 327.35 5.53 154.82 123.861999 2.58 0.67 0.00 27.89 113.55 141.44 479.75 338.32 5.09 165.38 132.302000 2.68 0.54 0.00 22.53 117.95 140.48 514.62 374.14 4.97 176.66 141.332001 2.58 0.53 77.10 22.03 113.55 212.67 532.63 319.96 4.77 188.71 150.972002 2.48 1.03 93.59 45.19 109.14 247.93 635.84 387.91 5.14 201.58 161.262003 2.38 1.34 99.93 56.04 104.74 260.71 703.39 442.69 5.22 215.32 172.262004 2.80 1.65 108.38 69.23 100.34 277.95 786.98 509.03 5.36 230.01 184.01
ERR= 30.7w
a/ garamay oil is transported to refineries as follows: By pipeline to KaramayRefinery (1 am ton); to Dushanzi Refinery (2.5 mm tons); Urumchi Refinery (1.5 nun tons);and by train fron, Urumchi to Lanzhou (the excess) at about a freight of 60 yuan/ton.
b/ Future prices are based on Bank projections. Transportation costs to Refineries are deducted.
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Ainex 2_ 2
. (1 o~ r
CHINA
KMAIAAY PETROLEUM PMOJECT
Key Fina nciat Indicators
(in mittion yumns)
4 Opp U act 85 Opp OS ct 066pp S6 act 87 pp 87 ct ea act 89 ct 90 act 9l priv
Sales
Crude (PR tons) 4.1 4.3 4.3 4.8 4.8 5.0 5.3 5.6 5.5 5.3 5.6 5.6
Av. Price realized
C.-ude (Yuan/ton) 135 138 14? 144 175 163 175 156 167 225 255 32)
Revenues (M Yuan) 503 568 619 663 784 781 858 838 s8s 1143 1370 1886Operating Expenses 408 396 442 524 s03 584 559 627 629 a88 1133 1505Net Income SS S4 76 68 11? 87 119 83 100 103 94 154
Total Assets
LonJ-term Debt 74 110 123 435 237 S69 297 649 802 1082 1160 1069Equ ty 1652 1475 1997 1626 1956 1752 2022 207r 2424 2783 3186 3519Debt Service 22 If 23 18 36 14 48 40 72 65 82 103Capitat Expenditur S52 699 n20 71 640 1116 640 1373 1096 1013 925 lIe?Net govt. take 122 262 278 331 422 363 441 329 .38 604 422 Mi
Ope ating Ratio 0.82 0.70 0.77 0.79 0.68 0.75 0.69 0.75 0.71 0.78 0.83 0.o0Deb /Equity Ratio 4/96 7/93 6/94 21/19 11/89 25/75 13/8? 24/T6 5/1% 26/r2 211rl 13/tDebt Service coverage
(times) 10.8 7.8 12.1 16.1 8.9 26.8 7.5 118 .6 3 L 9 S.8 I 2Current Ratio 2.0 2.2 2.1 4.5 2.0 1.S 1.9 t I I.? 2.4 I 6 1 SUnit Cost of Prodn.
(luan/ton) OJ S2 92 99 95 147 97 102 104 158 192 2S9Lireit Cost o0 Prodn.
(V/ton) 44.4 41.5 28.8 31.0 25.5 28.6 26.0 21.3 28.0 31 s 36.1 41.2
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CHINA ANNEX 2
KARAMAY PETROLEUM PROJECT Page 2 of 2
Financial Analysis
(in million yuans)
Incremental oil Sales Capex due O0m Total Salem L Net Cash
under Project Revenue to Project Coets Costs Income tax Flow
a/ l/
Year Light Heavy
MM tons
1984 9.90 9.90 (9.90)
1985 0.11 1.06 467.60 486.02 88.81 574.82 56.47 (163.69)
1986 0.33 1.52 728.40 638.50 150.22 788.72 115.22 (175.54)
1987 0.49 1.75 843.90 822.02 187.57 1009.59 122.62 (288.31)
1988 0.61 1.64 809.65 796.91 202.82 999.73 135.26 (325.35)
1989 1.06 1.29 814.00 619.02 355.31 974.33 105.71 (266.04)
1990 1.44 1.38 968.95 376.76 509.56 886.31 106.37 (23.73)
1991 1.64 1.49 1364.11 549.31 678.18 1227.49 169.08 (32.46)
1992 1.80 1.74 1534.26 368.89 755.72 1124.62 200.30 209.35
1993 1.96 1.98 1702.90 248.15 829.88 1078.04 234.17 390.70
1994 2.C7 2.13 1797.37 229.45 872.96 1102.41 247.72 447.24
1995 2.18 2.32 1916.50 229.45 922.52 1151.98 269.02 495.50
1996 2.28 2.30 1925.33 204.38 933.88 1138.27 255.93 531.14
1997 2.38 1.75 1658.02 77.18 896.66 973.84 121.46 562.72
1998 2.48 1.11 1347.89 0.00 852.64 852.64 53.92 441.34
1999 2.58 0.67 1140.49 0.00 807.97 807.97 45.62 286.90
2000 2.68 0.54 1098.08 0.00 810.80 810.80 43.92 243.35
2001 2.58 0.53 1013.29 422.50 790.36 1212.86 40.53 (240.10)
2002 2.48 1.08 1223.24 512.90 934.38 1447.28 48.93 (272.96)
2003 2.38 1.34 1281.83 547.60 980.55 1528.15 51.27 (297.60)
2004 2.28 1.65 1370.69 593.90 1039.59 1633.49 54.83 (317.63)
FRR= 10.8i
a/ Two tier pricing of a lower price upto 3.64 mm tone of total production and of a higher
*lmost near international parity (adjusted for transportation to refineries) prevails.
b/ Incremental capex is made up of both project investments and futtire iniveetmenta
required to etiutaiin the pro )ect objectivetvc