FOR OFFMCIAL USE ONLY
RaPid Ne. 7536
PROJECT COMPLETION REPORT
EGYPT
ABU QIR GAS DEVELOPMENT PROJECT (LOAN 2103-EGT)
DECEMBER 13, 1988
Energy and Industzy Division
Industry and Energy Operations Division
Europe, Middle East & North Africa Regional Office
This document has a restricted distribution sknd nnay be used by recipients only in the performance of their offcial duties. Its contents may not otherwise be disclosed without World Bank authorization.
Public Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure Authorized
KO omciaL WE ONLY
THE WORLD SANK Washton. D.C. ZW33
U.SA.
Ol*ew d IWiutmi
December 13, 1988
MEIIRANDUK TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT
SUBJECT: Project Completion.Report on Egypt
Abu Qir Gas Development Project (Loan 2103-EGT)
Attached, for information, is a copy of a report entitled 'Project Completion Report on Egypt - Abu Qir Gas Development Project ;Loan 2103-EGT)"
prepared by the Europe, Middle East and North Africa Regional Of'ice. Full evaluation of this project has not beer, made by the Operations Evaluation Department.
Attachment
This document has a restricted disiribution and may be used by recipients only in the performance
! of
their official duties. Its contents may not otherwise be disclased without World Bank authorization.PROJECT COMPLETION REPORT EGYPT
ABU QIR GAS DEVELOPMVIT PROJECT (LOAN 2103-EGT)
TABLE OF CONTENTS
Pae No.
Preface ...
Basic Data Sheet ... i
Highlights .... ***.**.e...*... .. ... O..* iv
I Introduction ...,,,... 1
II Project Identification, Preparation and Appraisal ... 2
III Project Implementation ... ... ... 3
Lackground ,,,,,... 3
Implementation Schedule ... . ... . 3
Abu Qir Reservoir Study ... ... .. . 5
Achievement of Physical Project Objectives ... 6
Performance of Consultants and Contractors ... , 6
Reporting ... , ... . . 7
Project Costs ... ... 8
Disbursements ,,,,,,... 9
IV Operatlng Performance .. ... 9
V Institutional Performance . ... 11
VI Economic Performance ,,, .. , , 12
VII Financial Performance ... . ,,,... 13
VIII Role of the Bank . . ...,19
IX Conclusions .. ,., . ... . 20
This document has a restricted distribution and may be used by recipients only in the performance of their offcial duties. Its contents may not otherwise be disclosed without World Bank authorization.
TaWb 2 of Contents (Cont.)
Page No.
AW4EXES
1. Project Costs - Appraisal Estimate and Actual Cost 22
2.
Accuuaulated Disbursemnts ... . 24 3. Actual Production*erformance
... ... 25 4. Economic Analysis - Incremental ... ... 0. 265.
Income Statement -EGPC
... *046646 286.
Balance Sheet - ZGPC ... 297.
Income Statement -Af;.
Qir ... . 30 8. Revalued Capital Assets - Abu Oir ... 31 9. Financial Rate of Return - Abu Qir(Phase I, II, & III) ... * 32 10. Comments from the Borrower ... 33 MAPS
IBRD 15695R IBRD 15795R
PROJECT COMPLETION REPORT EGYPT
ABU QIR GAS DEVELOPENMT PROJECT (LOAN 2103-EGT)
PRIPACI
This report reviews the results of Abu Qir Gas Development Project partly financed by Loan 2103-EGT. The loan, made to Egypt General
Petroleum Corporation (EGPC) with the guarantee of the Arab Republic of Egypt, for the equivalent of US$90 million was approved on March 23, 1982.
It was fully disbursed in December 1986, ibout 12 months later than the appraisal forecast. The proceeds of the loan financed drilling services and materials, process ani utility equipment and materials for the offshore platform, submarine pipeline and its installation, supply and installation of an LPG plant, consultant services, studies and training. The project was basically completed with a 15 month delay, mainly due to procuremnhnt
and coordination delays. The physical objectives of the project !Fave been realized. This project copoletion report has been prepared by Energy and Industry Division, E1ENA region, and is based on the information obtained during completion mission and from the Appraisal, President's and
Supervision Reports, as well as other documents and files. The
implementing agency submitted final completion report containing its views on the project execution and supplied additional data for this PCR.
In accordance with the revised procedures for project performance audit reporting, this Project Completion Report was read by the Operations Evaluation Department (OED), butthe project was not audited by OED staff.
OED sent ccpies of the draft report to the Borrower for comments. The comments received have been attached to the Report as Annex 10.
PROJECT COMPLWTION REPORT EGYPT
ABU QIR GAS DKVMLOMW PROJECT (LOAN 2103-KGT)
BASIC DATA SHUT Key Prolect Data
Appraisal
Item Expectation Actual
Project Costs (US$ MM) 189.0 177.1
Overrun - (-) 61
Loam Amount (US$ MK) 90.0 90.0
Disbursed (US$ MK) 90.0 90.0
Cancelled (USS HM) Nil Nil
Repaid (US$ M0) (12/31/87) 12.5 12.5
Outstanding (US$ MM) (12/31/87) 77.5 77.5
Cumulative Estimated and Actual Disbursements (USS million)
FY83 FY84 FY85 FY86 FY87
Estimated 30.0 80.0 90.0 Nil Nil
Actual 8.6 41.1 78.0 88.5 90.0
Actual/Estimated (S) 28.7 51.7 86.7 98.3 100.0 Other Project Data
Original
Item Plan Actual
First Mention in Files Aug. 1979 Aug. 1979
Appraisal Feb. 1981 Feb. 1981
Negotiations Aug. 1981 Feb. 1982
Board Approval Date Oct. 1981 Mar. 23, 1982
Loan Agreement Date Dec. 1981 May 3, 1982
Effectiveness Date Jul. 1982 Dec. 23, 1982
Project Completion Date March 31, 1984 Oct. 31, 1986
Closing Date Dec. 31, 1985 Dec. 31, 1986
Borrower - Egyptian General Petroleum Corporation (EGPC)
Executing Agency - Western Desert Operating Petroleum Company (WEPCO)
Fiscal Year of Borrower - July 1 - June 30 Follow on Project - None
Staff Input (weeks)
FY60 FY81 FY82 FY83 FY84 FY8S FY86 FY87 FY88 Total Preparation 3 42 - - --
Appraisal - - 32 - - - - - - 32
Negotiations - - 12 - - - - 12
Supervision - - 9 9 19.2 8.4 3.6 3.2 4 56.4
iotcl 145.4
Field Mission Data
Month/ No. of No. of Staff Report
Item Year Weeks Persons Weeks Date
Identification Aug. 1979 1 2 3 8/10/79
Prepa. !tion Jun. 1980 1 6 6 6/20/80
Pre Appraisal Oct. 1980 2 5 10 Nov. 1981
Appraisal Feb. 1981 3 5 13 5/20/81
Supervision I Jun. 1982 3 3 9 7/23/82
Supervision II Feb. 1983 3 3 9 2/28/83
Supervision III Sep. 1983 3 3 9 3/3/83
Supervision IV Feb. 1984 3.4 3 10.2 3/5/84 Supervision V Sep. 1984 2.4 2 4.8 10/15/84 Supervision VI Apr. 1985 1.8 2 3.6 5/13/85
Supervision VII Jan. 1986 1 2 2 3/25/86
Supervision VIII Jul. 1986 1.6 2 3.2 9/9/86
Supervision IX Jul. 1987 1 1 1 8/15/87
Completion Feb. 1988 1 3 3
Total 86.8
Country Exchange Rates Name of Currency Egyptian Pound (LE) Appraisal Year Average US$1 - 0.7 LE
Intervening Year's Average US$1 - C.7 LE Completion Year's Average US$1 - 0.7 LE
Iv
PROJECT COMPLETION REPORT EGYPT
ABU QIR GAS DEVELOPMENT PROJECT (LOAN 2103-ZOT)
HIGHLIGHTS
1. The loan under review in the amount of $90 million, was to help finance Phase II development of the Abu Qir Gas Field off Alexandria.
Egypt General Petroleum Corporation (EGPC), a state enterprise was the borrower, and Western Desert Operating Petroleum Company (WEPCO), a joint partnership of EGPC and a foreign company, was the implementing agencv.
2. The project had several objectives; the main one was to raise the level of production of gas from 100 MMCFD to 200 MMCFD, of condensates from 69,000 metric tons per year to 146,000 metric tons per year and extract liquid petroleum gas (LPG) from all of the produced gas to reach a level of 58,000 metric tons per year. This objective has been realized. Another objective was to assist Egypt to develop an infrastructure for the gas subsector considering that gas was assuming importance in the energy
economy, particularly due to the possibility of oil exports declining from the late nineties. Studies for Abu Qir gas reservoir management, for a gas pipeline network covering all gas producing areas and important consumption centers and for gas tariffe were accordingly provided for. These studies have been satisfactorily carried out. The recommendations made for the optimal development and production of the field have been adopted. EGPC has also since laid a gas pipeline network in lower Egypt. On the gas tariffs, initially the then prevailing gas price structure appeared to be satisfactory in that the average sales realization would cover the long run marginal cost of production. Currently, however, in spite of recent gas prices increases, it is seen that the tariff level requires further upward adjustments and 7.ecommendations to this effect are made in the PCR.
3. The project was completed about fifteen months behind schedule at a cost of $177.1 million, approximately 6 percent less than the appraisal estimate of $189 million. The difference is mainly attributed to lower outlay required on drilling, consultancy and technical services. Further, some of the costs of the studies were covered by grant funds made available to EGPC by other agencies subsequent to loan approval.
4. The economic reevaluation projects that the economic rate of
return (ERR) from the project will be 36.5 percent, which is satisfactory;
but substantially short of 122 percent expected at appraisal. The lower ERR is largely due to the sharp drop in actual and projected international petroleum prices. On the basis of the criteria established under the project, the project's financial objectives have been met. These criteria include use of US$1- L.E. 0.70 for EGPC's transactions. The return on net revalued assets in FY88 is 18% which exceeds the minimum of 15% stipulated in the financial covenant under this loan. However, since revision of exchange rates in 1987 if the assets were now to be revalued at the prevailing market exzhange rate of US$ - 2.2 L.E. an increase in natural gas tariffs of 5% in real terms (or 30% in nominal terms) would be required to achieve the stipulated financial
rate of return in 1988-89. Subsequent increases may be necessary depending upon exchange rate and inflation rate movements.
5. EGPC is a mature and competent institution. The arrangements it had made vLth WEPCO to implement the project were satisfactory. VEPCO imple_ented tW4s project efficiently in spite of initial procurement delays. Th"ire are lessons to be learnt to avoid at least some of the delays as discussed in the report.
6. Experience in carrying out the project has highlighted the following lesons:
(a) The implementing agency should assure itself right at inception that the project management consultants are adequately equipped to coordinate all activities and to
closely monitor the progress of the project impiementation;
(b) It is necessary that bidding documents should be prepared with a greater deg,ee of prec.sion and detail, in order to keep procurement lead time to the minimum; and
(c) Sector issues such as energy pricing cannot be effectively pursued only through the vehicle of project lending.
PROJECT CUOPLETION REPORT EGYPT
ABU QIR GAS DEVELOPHENT PROJECT (LOAN 2103-3GT)
I. INTtODUCTION
1.01 The Abu Qir Gas Development Project was one of four successive projects in the Petroleum sector in which the Bank GrouF , -ticipated in financing between 1979 and 1982. All the projects were aimed at expanding the production and use of natural gas. The context was the remarksble nrogress Egypt had made in developing its oil resource over twenty years through a well conceived policy of inviting international oil companies to explore for hydrocarbons adopting generally the production-sharing type of contracts. By the late seventies however, apprehension was growing that oil production could be soon peaking out and in the later nineties Egypt could conceivably become a net importer of petroleum products. Testing of new areas such as in the Western Desert and harnessing of natural gas for domestic use to replace petroleum products assumed urgent relevance. The
four Bank Group financed projects were the project under review (Loan 2103-EGT approved March 23, 1982) and the following:
a) Loan 1732-EGT, approved June 19, 1979, for a project aimed at retrieving and utilizing naturai gas previously flared in the Gulf of Suez (Project Performance Audit Report - No. 6880 issued or June 30, 1987);
b) Credit 1024-EGT, apprcved May 20, 1980, for construction of a netural gas distribution system in Cairo to replace higher value liquid
fuels in households, commercial establishments and power plants (Project Performance Audit Repnrt - No. 6860 issued on June 24, 1987); and
c) Loan 1928-EGT, approved December 9, 1980 for reviving interest in the oil and gas prospects of the Western Desert and assisting GPC, a subsidiary of EGPC to explore, and appraise any discoveries made in its concession block in the Western Desert (Project Performance Audit Report No. 6862 issued on June 26, 1987).
1.02 The prnject under review had the objective of increasing natural gas production from Abu Qir offshore field by 100 MMCFD, where in an earlier phase (Phase I) EGPC had developed a capacity for producing the
first 100 MMCFD as from February 1979. The project also provided for recovery of LPG from all of the natural gas. Condensates would be recovered from the incremental gas productic as in the first phase.
1.03 All the four projects were completed successfully and have played their part, in Egypt being able to produce presently almost 5 million toe of natural gas, amounting to a little over 20Z of total oil and gas
consumption in the domestic market and 102 of the country's production of oil and gas. As is known, currently oil and gas constitutes 882 of
commercial energy used, and accounts for 402 of foreign trade receipts.
1.04 The project under review had an overall cost of $177.1 million (appraisal estimate, $189 million) and the Bank loan of $90 million thus met about 5OZ of the cost. The project was implemented by Western Desert Petroleur Company (WEPCO) on behalf of Egypt General Petroleum Corporation
(EGPC), the Borrower. EGPC is a state owned holding corporation
administering the oil and gas sector. WEPCO is jointly owned by EGPC and Philips Petroleum of USA, having been established as an operating company to develop certain oil fields and produce oil. however, WEPCO agreed to develop the Abu Qir Gas field and produce natural gas from it, wholly to the benefit of LGPC subject to all costs of development and production of gas, being borne by LGPC.
1.05 This report is based on the findings of two Bank missions, one a brief and preliminary mission in July 1987, and the other more extended in February 1988. Documents and reports available in the project files have been consulted. WEPCO prepared a brief project completion report and cooperated fully with the mission by helping it to acquire supplementary data for this report
II. PROJECT IDENTIFICATION, PREPARATION AND APPRAISAL
2.01 The project was identified during the visits of the missions of the Energy Department in mid-1980. Pha3e II development of the Abu Qir Gas field covered by the Project was based on a study undertaken by consultants who had prepared a development plan and the basic engineerin3 design for the phase.
2.02 The project was appraised in February 1981. The following were the major components.
(a) Fabrication and installation of two offshore platforms one for drilling and production and the other for
living quarters and utilities;
(b) Drilling of nine wells from the drilling and production platform;
(c) An 18 inch submarine pipeline of 15km length from the drilling and production platform to Abu Qir Onshore terminal and a 14 inch submarine pipeline between the
two platforms;
(d) Onshore gas/condensat3 separation and stabilization facilities;
(e) LPG plant to process 250 MHCFD gas;
(f) A 24 inch pipeline to Alexandria area and distribution lines to selected bulk consumers facilities;
(g) Technical assistance and training relating to
engineering, drilling, reservoir evaluation and planning for pipeline network in Egypt and some studies.
-3-
2.03 The Bank loan provided foreign currency financing for drilling (other than rig hire), engineering and related services, offs}ore
platforms, submarine pipelines, associated onshore and offshore fa-ilitieq, LPG plant, consultancy services, most of the studies and training.
European Investment Bank finar zed the drill rig hire charges and ZGPC financed tLe local costs and provided the foreign exchange for the Alexandria trunk pipeline and the distribution lines,
III. PROJECT IMPLEHENTATION
Backaround
; 01 EGPC, the borrower, nominated WEPCO for implementing the project, except for the Alexandria trunk pipeline and distribut.on lines, which was entrusted to Petroleum Pipeline Co (PPC), a subsidiary of EGPC in late 1983, after initial assignment to Petroleum Gas Company, another subsidiary of EGPC (PETROGAS). WEPCO was assisted by ENPPI, a joint engineering enterprise between EGPC and Brown & Root (USA) for engineering, design, procurement and project -anagement.
3.02 The original project implementation schedule based on the
development plans made by the consultants provided for project completion by June 1984. However, owing to various delays which are discussed in para 3.03, the project was completed in October 1986, after a delay of over two years. Project components other thar the Alexandria trunk line were
thowever completed by September 1985 involving a delay of about 15 months, at which time the project could be commissioned partially with gas being supplied to power stations and fertilizer plants not dependant on the laying of the line and LPG and condensate also being produced.
Implementation Delays
3.03 The major reasons which caused the de±ays in project
implementation were procurement and some lack of coordination among the various agencies. The planning for procurement itself had been carefully done. Thus for offshore items, packages for procurement were made with a view to achieving the least cost solutior, and transfer of technology. The need however was for good engineering, project supervision and
coordination. This part of the work, due to the philosophy of dependance on local agencies, although they had collaboration with foreign
consultants, was not well executed to start with. All the same a turnkey approach would not have been advisable and it is open to question if such an approach would have avoided some of the delays which were beyond
anyone's control. For the onshore items, mainly the LPG plant, a single responsibility contract was awarded and the execution was highly
satisfactory. In this case, subpackaging would have been of no particular advantage and in fact could have led to difficulties in matching equipment.
In what follows, the delays are listed and commented on.
(i) Delay in the mobilization of the offshore drilling rig which the drilling contractors were acquiring new from Argentina and the fabr ..ation of which was delayed by the Falkland Island hostilities.
(ii) Delay in fabrication of jackets and decks of the offshore platforms due to poor performance of the contractor and delay in installations due to bad weather.
(iii) Delays caused in obtaining third party inspection certifications as the contractors contested the
inspector's findings.
(iv) Delay in construction of the 14 inch submarine pipeline between the two platforms due to poor quality of the
l'ne pipe supplied by the contractor, not approved by the third party inspector and eventually replaced by the supplier.
(v) Delay by WEPCO in awarding contracts for offshore hook up.
(vi) Delay in completion of Abu Qir Reservoir Study due to consultants having had to be changed during the study.
(vii) Delay in the construction of the Alexandria Gas trunk line in delayed assignment to PPC as well as due to land acquisition problems.
(viii) Poor coordination among various agencies, WEPCO and EGPC. All these delays necessitated extension of the loan closing date initially by six months to June 30, 1986. Additional extension by six months of the closing date to December 31, 1983 was made to extend validity of letters of credit beyond June 1986 and payment of
retention money to contractors. In the following the major implementation problems are discussed.
Drilling
3.04 As a result of the then worldwide shortage of offshore drilling rigs, in April 1981 WEPCO awarded a drilling contract to Reading and Bates as so as to make it worthwhile fir them to fabricate a new cantilever type jack up drilling rig and make it available on site in October 1982. This rig was being fabricated in Reading & Bates yard in Argentina when the Falkland Island hostilities broke out. The rig arrived tn Alexandria in FeLruary 1983 about four months behind schedule. WEPCO saved about three weeks of mobilization time and about $0.5 million in costs by changing mode
of transpor,ation from wet towing to dry towing of the drilling rig.
Platforms
3.05 WEPCO engaged Petrojet, a local construction company for
fabrication, transportation and installation of the offshore drilling cum production platform (P-2) and the platform for the living quarters and utilities (Q-2). Petrojet i" turn subcontracted to Mcdermott of USA with the deck only to be fabricated by the Alexandria Shipyard. The platform was supplied about 13-112 months later than the contracted date. The main reason was Petrojet's inexperience and lack of resources in keeping with
the magnitude and complexity of the job. Other contributing reasons were procurement delays, lack of coordination with the subcontractors and poor workmanship which third party inspectors (Germanischer Lloyds) refused to certify but which Petrojet contested over prolonged periods. Due to these delays, WEPCO had to go to the additional expense of storing and
maintaining living quarter modules which had been supplied by ether contractors on time.
Submarine Pipeline
3.06 The 18 inch pipeline was satisfactorily completed with minor delays mainly caused by the breakdown of the pipelaying barge and bad weather conditions. The 14 inch bypass line between P-2 and P-1 existing platform was delayed as the line pipe supplied was not up to the standard and was rejected by the third party inspector (Lloyds). The sup lier replaced the stock of pipes. About one year was lost in the pricess.
Offshore hook up
3.07 Due to inadequate response to the bids originally issued, there was readvertisement with the bidding documents undergoing revision and detailing. Some time was thus lost in selecting a contractor for the hook- up.
LPG plant
3.08 In this case there was a plethora of 33 bidders at the
prequalifying stage. Rebidding had to be done due to poor soil data at the first bidding. There were 13 voluminous bids which had to be %nalyzed to select one single responsibility contractor. All these led to a late award of the contract. The LPG plant was brought on stream in December i985 instead of the original schedule of September 1983. The LPG contract was amended to incorporate LPG pumping units. This additional work was
completed in October 1986. The execution of the LPG plant project component on a single responsibility contract basis proved to be highly satisfactory. The plant performance has fully met the design criteria and is operating very efficiently.
Abu Qir Reservoir Study
3.09 This study was originally awarded to a consultant. However,
during the execution of the study, WEPCO found the methodology and approach of the consultants unsatisfactory. This study was so crucial to the
determination of Abu Qir reserves, that WEPCO decided to reorganize it;
reevaluating geological data by one consultant, and then providing that data to a reservoir consultant to assess the gas reserves of Abu Qir field.
The reservoir study was completed in October 1986 and the results were reviewed by WEPCO and Bank staff. The expectations from the reservoir have been confirmed.
3.10 During supervision, Bank missions had interacted with WEPCO and EGPC with a view to minimizing delays and finding remedies to
implementation difficulties. It is creditable that with all the problems encountered, some of which were beyond anyone's control, the overall
commissioning of the platforms, onshore terminal and plants was only about
better advantage in future projects.
Achievement of Physical Project Objectives
3.11 As noted above, the physical objectives of the project were successfully achieved. As part of the project execution the following studies had been prescribed. (A study for computerization is discussed in
; section VII).
(i) Abu Qir Reservoir study;
(ii) National Gas Pipe line grid Study;
(iii) Feasibility study for a gas system for upper Egypt;
(iv) Gas tariff study for Abu Qir gas.
3.12 The resr voir study clarified the position regarding adequacy of Abu Qir Gas reserves for the production profile in view and --ovided an optimum gas recovery scheme, which could form the basis for the development
plans underlying phase II and for future gas development.
3.13 The National Gas Pipeline grid study was completed by the Italian consultants appvinted by EGPC under an Italian grant based on which a
pipeline network interconnecting all sources of natural gas in lower Egypt, with Cairo as the focal point has been also completed. For upper Egypt, a
feasibility study for a pipeline to Kima about 600 kms from Cairo was carried out, but the project has so far not been approved for
implementation. The Gas tariff study was carried out internally by EGPC in September 1984, about 15 months later than the stipulated date. Bank staff reviewed it in November 1984 and accepted iL in principle. The
tariff structure as reviewed in the study forms the basis for adjustment in gas tariffs.
Performance of Consultants
3.14 WEPCO and EGPC employed foreign consultants to carry out various studies included in the project, to provide technical assistance and to provide third party inspection during project execution. Except for
consultant engaged initially for the Reservoir study, all others performed satisfactorily and provided valuable assistance in the transfer of
technology to WEPCO and EGPC staff associated with them. As for local consultants, ENPPI had initial difficulties in carrying out project design, engineering and preparation of bid documents (e.g. LPG plant) because of the shortage of experienced staff and lack of adequate interactions with other agencies who wTere to feed data. The delays in procurement and project implementat:.on could have been avoided, had ENPPI been better equipped for preparing the design and procurement documents. After the compietion of the project, it is concluded that in spite of the original delays caused by ENPPI's actions, the design and engineering for the various project components have proved to be good on the test of actual performance. In future ENPPI could do better if it collaborater with its
foreign partners more actively in accepting overall project responsibility.
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The third party inspection personnel effectively contributed to the success of the project by alerting WEPCO to design, construction and commissioning mistakes in the construction of offshore platforms, submarine pipelines and
the LPG plant.
Performance of Contractors
3.15 The overall performance of the contractors for the various project components was satisfactory. The major delays in construction of offshore platforms were caused by Petrojet. This local contractor lacked
experience, resources and sufficient construction equipment. Although Petrojet subcontracted to Mcdermott and others, it could not play its coordinating role well, neither with the subcontractors nor with the third party inspectors and in hindsight, it is seen that Petrojet should have been given an associate role only with competent foreign contractors being
in the lead and reporting to WEPCO. The experience with the LPG plant which was constructed on a turnkey contract basis has been good. The
turnkey arrangement aided in speedy implementation of the project after the initial procurement delays were overcome.
Reporting
3.16 WEPCO complied fully with the reporting requirements. It forwarded to the Bank regular progress reports on the physical and financial progress of the project in sufficient detail and also made available technical data, copies of reports and studies and any other information sought by the Bank, without hesitation.
?roject Costs
3.17 The final project cost compares with SAR estimates as follows US$ million)
SAR estimate Actual Cost Local FIE Total Local F/E Total
Drilling 0.8 32.1 32.9 0.8 39.5 40.3
Offshore Platforms 1.0 7.0 8.0 1.8 7.9 9.7
Offshore Process & Utilities 3.0 24.8 27.8 9.1 24.2 33.3 Submarine Pipeline 6.5 11.5 12.0 0.6 13.2 13.8
Power Supply 0.5 2.5 3.0 0.6 4.2 4.8
Onshore Terminal 1.0 1.0 2.0 1.2 4.0 5.2
Trunk Line and
distribution 9.0 10.3 19.3 12.9 18.6 31.5
LPG plant 6.7 22.5 29.2 1.2 29.7 30.9
Project Engg., Management,
Procurement & Construction 0.8 9.0 9.8 1.7 3.1 4.8 Supervision
Technical Assistance 0.4 2.2 2.6 - 0.6 0.6
Reservoir Studies 0.1 0.6 0.7 0.1 0.5 0.6
Other Studies 0.4 1.6 2.0 0.4 0.6 1.0
Training 0.2 0.3 0.5 0.2 0.3 0.5
Seismic Survey - 1.0 1.0 0.1 0.1
Base Cost 24.4 126.4 150.8 - - -
Physical Contingency 2.4 12.6 15.7 - - -
Price Contingency 6.2 17.0 23.2 - - -
Total Project Cost 33.0 156.0 189.0 30.6 146.5 177.1
3.18 The table below gives the cbtegory wise breakdown of the Bank loan as at appraisal, and actual.
Appraisal Actual Estimate
(in US$ million)
Drilling 16.5 17.0
Offshore 23.5 25.0
Submarine pipeline 11.5 11.0
Power Supply/Utilities 2.5 4.0
LPG plant 22.5 27.0
Consulting Services 7.9 6.0
Contingencies 5.6 _
Total 90.0 90.0
-9-
Review of Project Costs
3.19 Annex 1 gives a detailed comparison between the SAR ?stimates and actual project cost. The $12 million project underrun may be mainly attributed to some reduction in costs in the consultancy and technical services and some cost savings in changing the mode of transportation of the drilling rig rram wet towing to dry towing and thus saving about three weeks of mobilization time. The cost overruns in the offshore platforms, utilities, submarine pipe line and LPG plant were caused by implementation delays, bad weather and redoing of certain jobs rejected by inspectors, amendment to LPG plant contracts for additional tasks required, and
increase in the cost of materials and services used in the drilling phase.
The Alexandria trunk pipeline and distributions lines cost about 362 more than the appraisal estimates, mainly due to later implementation of this component as well as allocations made towards centralized tele control
systems for the lower Egypt pipeline network. The cost of studies was lower as some of the studies were covered by other grant funds made available to EGPC (e.g. Italian grant) for the feasibility study of Gas
system in Upper Egypt and the Pipeline grid study.
3.20 A comparison of the project financing plan prepared at appraisal and the actual financing is made below.
US$ Million SAR Actual Estimate
Bank 90.0 90.0
EIB 35.0 35.0
EGPC foreign costs 31.0 21.5
EGPC local costs 33.0 30.6
EGPC Interest during construction 11.0 15.0 200.0 192.1
The Bank loan of US$90 million was fully utilized. EIB provided US$35 million for hire of the drilling rig, helicopter services and a part of offshore platform expenditure. EGPC provided its own resources to cover
the remaining costs.
3.21 Disbursements
Annex 2 presents actual disbursement schedule as compared to the original disbursement schedule. Disbursements were seriously behind
schedule during the first two years of the project because of the initial procurement and implementation delays described in para 3.03 in this
report. The loan was fully disbur3ed by December 31, 1986 a year later than the original closing date.
IV. OPERATING PERFORMANCE
4.01 In 1979 WEPCO completed the first phase of the Abu Qir development comprising nine wells and gas production commenced in February 1979. The
Phase II development of Abu Qir, which formed the project, was designed to provide an additional ',00 MHCFD of gas, 77,000 tons per year of condensates and 58,000 tons per year of LPG. The appraisal report had estimated
commencement of production at the end of 1984 with full production being achieved in 1985 and subsequent years. As has happened, due to project
implementation delays, production could commence only at the end of 1985, and full capacity production was achieved during 1987. Additional gas production has been over 100 MMCFD and condensate output, 125,000 tons/yr, exceeding expectations. LPG output is lower at about 50,000 tons/yr, due to the LPG being richer in butane (152 propane, 852 butane) than had been assumed at appraisal. It is expected to increase to the desig8.ed LPG
output when !GPC is ready to use 702 propane and 302 butane LPG mixture for distribution in the market.
4.02 The Abu Qir gas reserves had been estimated by the consultants (under LN 1732-EGT/Gulf of Suez Project) at about 2.6 TCF at appraisal. It was, however considered that after additional dat& were obtained from the nine new wells of the Project, a reevaluation of the reserves should be made and reserves confirmed before further investments were undertaken.
The first reevaluation done by consultants did not progress satisfactorily.
On WEPCO's suggestions, the Bank agreed to the engagement of new
consultants, in fact two sets of consultants. One consultant performed a thorough geological study of the Abu Qir field. The second, reservoir consultants prepared a reservoir study based on the latest geological report from the geologicel consultants and the production data. The Bank staff joined WEPCO in reviewing the results of this latter study with the consultants. The final report indicated gas reserves of about 1.8 TCF
adequate for Phase II expansions. The deliverability profile given in this report has conformed to the past production data. This study has also indicated the areas of the reservoir which are not yet being drained and has provided new knowledge about the Abu Qir Field. WEPCO has reported
that all equipment and facilities are operating satisfactorily. An inspection of the project by Bank staff in February 1988 showed good housekeeping, efficient preventive maintenance, cost conscious operations
and effective management by operations and other staff. At present, all operations are being efficiently run by WEPCO staff, many of whom had the benefit of being trained during the design, construction and commissioning
stages of thL Project both abtoad and on-the-job when associating with the foreign consultants and contractors' personnel. Bank financing supported 53 manmonths of training in various disciplines.
Environmental and Safety Aspects Safety
4.03 WEPCO is operating its offshore and onshore facilities with strong emphasis on safety. Adequate provision for fire prevention, detection, and
fire fighting is provided. The stringent safety codes of International Oil and Gas industry are being strictly followed and its compliance is
regularly inspected by safety experts reporting directly to top WEPCO management. The staff is regularly given instruction in safety procedures
for offshore platform submarine pipelines, and gas processing plant. WEPCO is in close contact with Philips Petroleum Company and takes full advantage of its practices and training facilities for its staff in fire detection, prevention and safety measures required to be taken in all production and processing operations.
-11l-
1
Environment
4.04 The offshore gas platforms are located about 39 km from Abu Qir onshore. Since natural gas which is produced from the wells does not contain any sulfur or carbon dioxide contents, it does not pose any
environmental hazards. All gas and liquids are transported by submarine pipelines to onshore Abu Qir Gas processing plant. There is no contact of produced hydrocarbons externally. The submarinie gas line is closely monitored for leaks.
4.05 At the Abu Qir plant, which is located away from the dense populated areas of Alexandria, WEPCO has taken adequate measures for -he protection of the environment against pollution and safety hazard from naturpl gas liquids, cheMically treated water and other pollutants. There are adequate fire detection and prevention measures at the plant. However, no formal reporting on environmental impact is being done by WEPCO. In view of the expanding population due to industrialization in Abu Qir area, greater attention is needed to be given to environmental impacts of the activities of the operating companies in the area.
V. INSTITUTIONAL PERFORMANCE
5.0; EGPC, the state owned oil and gas corporation has performed
commendably in shaping an effective strategy for the development of the gas subsecter. International oil companies (IOCs) which have a large presence in Egypt exploring for hydrocarbons had historically relinquished gas fincs. Oil finds were alone developed, IOCs retaining operatorship, but otherwise accepting EGPC in joint partnership for supervision of the
production, sharing costs and of the oil produced. It was a good decision that GOE/EGPC took a few years back to make use of the technical expertise in these joint companies for extended activities to cover appraisal of relinquished gas finds, development of gas fields and production of gas and LPG. Such extended activities would be conducted on behalf of EGPC at its
cost. To keep technical control by EGPC to the minimum, cons-dering that the Chairmen of the joint operating companies were already the nominees of EGPC, a focal point of contact within the EGPC was provided in the person of a Vice-President, Gas Department. He is assisted by a small core of
technical personnel in interacting on progress of gas projects and matters concerning day to day gas ope:ations and supply.
5.02 WEPCO has been successfully operatinig and maintaining the offshore and onshore Abu Qir gas production facilities since February 1979. The WEPCO personnel were thoroughly trained in international oil company
standards and got training in institutions abroad, as well as hands on training in seismic survey, drilling, production, processing and project management during the design, construction and operation of the Abu Qir
Phase I project. For Abu Qir Phase II operations, WEPCO formed a project management team headed by an experienced Project Manager who organized a
team of project engineers. The Project Team was reEponsible for design, construction and commissioning of both onshore and offshore project components. The project team was assisted by foreign consultants and ENPPI, the Egyptian consulting company (with its foreign partners) who
discharged the various responsibilities assigned to them by the WEPCO project team. After commissioning, the responsibilities of the Project
were taken over by the Operations Department. The operations staff had been trained in various suppliers' and consultants' facilities abroad in offshore drilling, production, pipeline, safety and other operations.
Other operating staff had been trained in LPG plant operations both abroad and in working with consultants in the initial operating phase of the
plant. WEPCO staff both in Projects and Operations are very competent, and have acquired useful experience. The Bank mission inspected operations in February 1988 and was satisfied with WEPCO's operational capabilities and quality of performance.
5.03 WEPCO makes cash calls on EGPC for all of the gas related
investments and operations as well as for a share of its common expenditure allocable to gas activities. EGPC has adequate arrangements for scrutiny of WFPCO's demands. Good budget control procedures exist. Procurement procedures are well formulated. There appeared to be some need for a larger degree of delegation cf financial powers to WEPCO, which could be secured without dilution of its accountability. For example, WEPCO could make payments to foreign vendors and contractors without every claim having to be passed to EGPC, so long as the purchase orders and contracts have had earlier approval, or a post audit could be taken up.
VI. ECONOMIC PERFORMANCE
6.01 The market for Abu Qir gas is expected to be fully developed in FY88. The project will provide an incremental annual production of about 40,000 MMCF of gas, about 125,000 tons of condensate and about 50, 000 tons of LPG compared with the appraisal estimates at 36,500 MMCF of gas, about 77,000 tons of condensate and about 58,000 tons of LPG. The build up of production vis a vis appraisal estimates is shown in the tables at Annex 3.
The following table indicates main gas users and type of fuel replaced:
Z Consumption Users Fuel Replaced of Total Abu Q3.r gas Fertilizers and Industrial
plants Naphtha 20
Dekhela Sponge iron plant Fuel Oil 13
Power Plants Fuel Oil 65 80
others Fuel Oil 2
Condensate is used to upgrade crude oil and LPG to satisfy tne domestic market demand. Fuel oil replaced by gas can be exported and the LPG
production reduces the need for imports. The project thus has a beneficial effect on Egypt's balance of payments.
Cost and Pricing of Gas
6.02 A criterion for the pricing of Abu Qir Gas was that the average price level should, as on July 1, 1984, not be less that the marginal cost of production and an allowance to account for the depletion of the gas
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reserves. This requirement had technically been satisfied. However, on the basis of the data currently available on actual operating costs and prevailing tdriffs and the more realistic exchange rate of $1 - 2.2 LE the
long-term marginal cost for Abu Qir gas is $0.75/MCF (equal to LE 75/toe), including $$0.15/MCF towards depletion against a sales realization for Abu Qir gas in 1988 in the Alexandria area of about $0.45/HCF or about (equal
to LE 45/toe). in Section IX containing conclusions, this and other facts are cited to recommend gas price increases on a national level.
Economic Rate of Return
6.03 Using the appraisal methodology (Annex 4) the ERR for the project is 36.52. The cost stream includes all capital costs and operating costs involved in the project development and operation of the field. For the purposes of deriving the benefit stream, gas has been assumed to release
fuel oil and some naphta for export. LPG produced will avoid corresponding import of LPG. Condensate is blended into crude oil releasing
corresponding quantity of crude oil for export. The ERR is fully
satisfactory, but substantially belo.; the appraisal estimate of 122Z. The main reason for the lower ERR is the decline in international petroleum
prices, which occurred as the project was cumpieted. The appraisal projection was based on a crude oil price in 1981 of 034/bbl, which was assumed to increase by about 32 p.a. in real terms reaching to S60Ibbl. and petroleum products were assumed to have simiiar rates of increase in
prices. Crude oil prices actually dropped below $15.0/bbl in 1986 and ever since have been marked by producers' Lforts to raise the prices to
$18.O/bbl and market forces which often have frustrated the efforts. The delay in gas market development in Alexandria and a part of the gas
replacing naphta and not the more valuable gas oil as was projected, has affected the ERR only slightly, particularly as the project costs were lower than the estimates (142 lower for the WEPCO components).
VII. FINANCIAL PERFORMANCE
7.01 The appraisal report of February 1982 examined the main features of EGPrc's prevailing financial situation and the finances of the Abu Qir gas Field, treating it as a financial entity. EGPC's financial situation has continued to remain satisfactory, largely a result of earnings from export of petroleum. Due to implementation delays of about 15 months, the Bank financed Phase II development project had an impact on the revenues from FY87 only, partially in that year and more fully from FY88. In a latter paragraph, the financial viability of the Abu Qir field is
considered. But it may be mentioned here that the expectation at appraisal that "in effect, Abu Qir would be operated as an autonomous enterprise for accounting purposes within EGPC's accounting system" has not materialized.
WEPCO compiles accounting data on investments and operating costs only.
Gas is delivered free at WEPCO's battery limits to Petroleum Pipeline Company, a subsidiary of EGPC, which transports the gas through its
pipeline net work in lower Egypt, mixing the gas from all sources. The gas is then marketed to consumers by Petrogas, another subsidiary of EGPC, including marketing within the proximate areas of Abu Qir where Abu Qir gas is presumed to go. In the absence of a cos,ing system to collect detailed costs and apportion them by sources of gas, by products where more than one product is handled and such other allocations, the best that can be done is
to develop a proforma income statement based on estimates and
approximations. EGPC should develop a good costing system for which it has the necessary expertise as well as consultant studies completed under the Gulf of Suez project (Loan 1732-EGT).
EGPC's Financial Position
7.02 EGPC's unconsolidated income statements for 1983-1987 are summarized below. Details are shown in Annex 5.
EGPC's Unconsolidated Income Statement (in LE million)
1983 1984 1985 1986 1987
Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jul-Jun
Export Revenue 1,255 1,318 1,427 827 843
Local Revenue 1,565 1,914 1,852 1,834 1,993
Total Sales Revenue 2,820 3,232 3,279 2,660 2,836 Other non-operating Revenue 200 '49 253 188 378
Total Revenues 3,020 3,j81 3,532 2,848 3,214
Operating Expenses & Taxes 1,813 2,190 2,264 1,896 2,120
Net Profit 1,207 1,391 1,268 952 1,094
Net profit to sales
revenues (2) 43 43 39 36 39
EGPC uses the exchange rate of 1 LE = $1.44.
7.03 The close correspcndence betweer: the export revenue and net profit is noteworthy. In 1986 and the first half of CY 1987, the decline in
export earnings was an aberration brought by the constrained export market and low international prices for petroleum. It seems unlikely that the export prices would get to be lower then what they had dipped to in 1986.
7.04 The unconsolidated balance sheets of EGPG are shown in Annex 6. A summary for FY85 - FY87 is given below.
- 15 _
EGPC's Balance Sheet (in LE million)
FY85 FY86 FY87
Assets
Fixed Assets (Net) 275 540 577
Projects in progress 510 357 354
Investments 2,057 2,416 2,632
Working Capital 167 205 290
Total Assets 3,009 3,518 3,853
Equity and Liabilities
Equity 300 300 300
Reserves 2,442 2,895 3,164
Long term firanicing 267 325 389
Total Equity and Liabilities 3,009 3,518 3,853
Current ratio 1.2 1.1 1.1
Debt Equity ration 10:90 9:91 9:91
7.05 It will seem ftom the financial statements that EGPC is conservatively capitalized with a low debt equity ratio and its net
profits, as a percentage of sales revenue is high. Sufficient information on EGPC's assets, directly owned and through 'investments' is not available
to review profits as a proportion of assets. However, on the basis of available information it can be concluded that the fina.n_al situation of EGPC remains satisfactory and with upward domestic price revisions for which there is much scope and urgent need the position would remain good.
7.06 The following statement shows how about 852 of financing for EGPC's projects in the period 1984-1986 could be covered by internally
generated funds.
EGPC's Investments (LE million)
1984 1985 1986
Internal source: 437 404 360
External source (net)
Local lcans 4 16 7
Foreign loans 35 58 50
Investment in projects 476 478 417
Abu Qir Field Present Finances
7.07 An income statement in respect of Abu Qir gas operations (Phases I and II) for the years 1981-1988 has been prepared, making use of investment and production cost data available !#ftn WKPCO anci estimating revenues from consumer tariffs and net backs to WEPCO on a notional basis (statement is at Annex 7). Operations of Phase II were reflected in the income from FY86, but the full effect was realized in FY88. A summary of the financial results for FY86 and FY87 together with estimates for FY88 is given below.
Corresponding appraisal report data are juxtaposed.
Abu Qir Income Statement (LE million)
1986 1987 1988
Present
Actual SAR Actual SAR Estimates SAR Gas Production (MMCF) 43.0 73.0 61.5 73.0 73.0 73.0 Condensate ('000 tons) 137.0 146.0 182.0 146.0 216.0 146.0 LPG ('000 tons) 14.0 58.0 30.0 35.9 35.9 58.0 Sales Revenue 14.0 62.2 23.1 66.2 56.6 92.1 ODerating Income -15.9 20.7 0.3 20.4 28.1 30.3
Net Income -6.3 8.4 -11.6 9.0 16.1 19.8
Operating Ratio 0.99 0.67 0.99 0.67 0.50 0.67
7.08 The financial results have been poore. than projected, firstly due to a 15 month delay in implementation and secondly due to sale prices
having been lower than expected. At appraisal, 't was assumed that the price of gas (notional to WEPCO) would be increased from LE 0.17/MCF in
198, to LE 0.85/MCF in 1987. In fact, the price was maintained at LE 0.17/0.18/MCF until FY85. The average realization thereafter increased to LE 0.35/MCF in FY87, following a major price adjustment in May, 1987.
Although the gas price increases were lower than appraisal expectation, due to the annual inflation being lower than assumed in the appraisal
estimates, the operating expenses have been lower. As a result, the net income in FY88, the first year of full production, is expected to be close to the SAR anticipation.
Financial viability of Abu Qir Gas Operation
7.09 It is necessary to test this against one main criterion adopted at appraisal. There was to be a return of not less than 10Z on net revalued
fixed assets in the first three years of operations of the Abu Qir project and 15% thereafter. This criterion was premised on GOE having agreed to
increase gas prices to a level which would be above the marginal cost of
- 17 -
production of the field. In addition, as the subsequent widening gap between the official exchange rate accordeo to EGPC and the market exchange rate was not anticipated a mechanism for revaluing assets and calculating production costs on the basis of the market rate was not stipulated. The exchange rate used in the SAR (February 1982) is US$l= LE 0.70 which was the Central Bank pool rate for handling exports of petroleum, raw cotton and rice; pipeline
revenues; imports of essential fo d stuffs, insecticidesand fertilizers, etc.
On the basis of the existing natural gas prices and official exchange rate of US$1=0.70, Abu Qir gas operations are expected to show a positive net income and yield a rate of return of 18Z on net revalued assets as shown below.
Rate 1$ - 0.7 LE (in LE million) Sales revenue expected in FY88
5L
6 ExpensesOperating costs (50% foreign cost) 11.5
Royalty 5.5
Depreciation 11.6
28. 6
Operating income 28.0
Less Administrative overheads O 8
Net profit (before interest charges) 27.2 Value of revalued assets (75% foreign 152.0
costs)
Return on net revalued assets (%) 18
@ (Calculated on revalu.ed assets and a 20 year life).
This compares favorably with the 15% for FY88 assured by EGPC during loan negotiations. However, given the magnitude of the divergence between official exchange rate accorded to EGPC and the market rate of exchange if the assets were to be revalued at the prevailing market exchange rate of 1US$=2.2 LE an increase in natural gas prices of 5Z in real terms or about 30Z nominal would now be necessary to achieve the stipulated financial rate of return.
Subsequent increases may be necessary depending upon exchange rate and inflation rate movements.
7.10 The different covenants stipulated are summarized in the following and extent of compliance is discussed.
(i) Review of computer needs of EGPC aud implementation of consultants recommendations on financial management and accounting practices as were made under a provision in Bank .oan to EGPC (1732-EGT)i
EGPC has implemented some of the recommendations of the consultants but much remains to be done.
Progress made towards review of computer needs is little, pending full implementation of the
recommendations on financial management and accounting practices.
(ii) Maintenance by EGPC of debt service coverage of not less than 1.5 times:
This is being done.
(iii) Maintenance of separate accounts for the project:
This was done for costs incurred by WEPCO and not for revenues generated by Abu Qir sales.
(iv) Revaluation of Abu Qir fixed assets according to a method acceptable to the Bank for the purpose of computlng rates of return on revalued assets:
Since EGPC had no interest in preparing a profoma income account for Abu Qir field, this and other assurances bearing on Abu Qir field as such did not engage its attention. However from FY88, the Abu Qir field is seen to generate the kind of return expected but based on the premises of the appraisal report concerning exchange rates.
(v) Tariff structure for Abu Qir to yield stated rate of return and other requirements.
Complied with on the basis of the exchange rate of
$1 - LE 0.7 permitted for EGPC by GOE.
(vi) Non-incurrance of debts related to Abu Qir field unless the project debt service coverage for the field is at least 1.5 for any year.
In the absence of the Abu Qir field becoming an independent financial entitv, the condition bec e impractical.
- 19 -
VIII. ROLE OF THE BANR
8.01 Bank had always emphasized the importance of exploiting the gas potential in developing countries. In Egypt such interest of the Bank resulted in three out of four Bank supported projects in the early eighties being gas related. This project for Abu Qir was jointly conceived and prepared by the Pank and EGPC/WEPCO. Assistance was continuid through the successive stages of preparing bidding documents, tendering ard procurement and later in project implementation. A particularly useful cointribution was made when Bank staff participated In discussiors with consultants who reevaluated the reservoir. One conclusion is that there would be further scope for expansion of the field. Bank staff monitored the progress of the project both through the reports and data received and field visits. From time to time, snags and difficulties were discussed such as for example the delay that was occurring in the construction of the Alexandria trunk
pipeline with its adverse impact on market development. EGPC/WEPCO always appreciated advice given by the Bank staff. The one area where progress could not be made was for EGPC to prepare all of the separate financial statements for the Abu Qir field operations, in particular the 'profit and
loss' statement. EGPC had however appreciated the need for introducing good costing systems and collection of direct as well as indirect costs on production, transportation and distribution of gas. Consultants have prepared costing manuals and have trained EGPC personnel in costing.
Although Abu Qir is not being operated as an 'autonomous enterprise for accounting purposes' as envisaged in the appraisal report, it is seen that EGPC would move in that direction once the costing system, now under
implementation, is extended to cover all activities.
8.02 The Bank endeavored to get EGPC to look at some major questions in the subsector through this project and numbers of studies were indicated.
One good outcome has resulted from the study for the pipeline network in lower Egypt. Although the study ultimately was not financed under the project, presently there is a nearly complete network in existence. On prices and tariffs for gas, where a major thrust was to be made, the
results have been slow in coming. The Gas Tariff study referred to in para 3.13 helped to emphab'ze that, whatever may be the way the prices for gas are determined, these should enable recovery of marginal costs together with a depletion allowance. EGPC has consistently made out its case for
increases in prices of petroleum products including natural gas to the Govert:ment. The macro issues covering such price increases have been under continuous discussion between the Bank and the Govertunent at the higher levels.
8.03 On inviting IOCs to explore for hydrocarbons, Egypt has been successful over the years. But until recently gas prone prospects rarely interested IOCs, nor would they develop gas finds. This lack of enthusiasm had been a subject of dialogue between GOE/EGPC and Bank staff, more with a view to displaying Bank's deep interest in Egypt making conditions
conducive for IOC risk investments in gas. The ratification by Egypt's Parliament in February 1988 of several agreements for exploration, which incorporate liberal terms for gas development augurs well for a leap in gas production and GOE/ EGPC have to be commended for the new measures.
IX. CONCLUSIONS
9.01 The physical objectives of the project have been achieved, although with a delay of 15 months, but with some cost savings. An
additional 100 MMSCFD of natural gas is available, as also LPG and condensates. All facilities and plants have been constructed to good
design standards, are operating efficiently and are -maintained well. The reservoir is known to be good and has a further potential for adding to production beyond Phase It. WEPCO staff h. :e been trained adequately and are performing competently. The associated engineering consultants, namely ENPPI have been learning by experience. But for major assignments in
future, it appears necessary chat they should have a more active
collaboration with their foreign partners and have the benefit of a greater number of experts working with them. WEPCO has a capable project
management team, which can handle future prijects of this nature.
9.02 The economic rate of return at 36.5% is satisfactory. This is however lower than the 122% expected during appraisal and is a consequence of the decline in internatiknal petroleum prices not anticipated when the appraisal was done. The financial performance of Abu Qir gas field is
satisfactory on the basis of the criteria established univer the project.
-These criteria include use of US$l = L.E. 0.70 for EGPC's transactions. The return on net revalued assets in FY88 is 18% which exceeds the minimum of 15%
stipulated in the financial covenant under this loan. However, since revision of exchange rates in 1987, if the assets were now to be revalued at t'ie
prevailing market exchange rate of US$ = 2.2 L.E. an increase in natural gas tariffs of 5% in real terms (or 30% in nominal terms) would oe required to achieve the stipulated financial rate of return in 1988-89. Subsequent
incrteases may be necessary depending upon exchange rate and inflation rate movements.
9.03 The average price of natural gas, after the last (May 1987) adjustments is 75% of its LRMC. For Abu Qir gas, the average realization
s $0.45/'MCF as compared with LRMC (for Abu Qir expansion) of $0.75/MCF (para 6.02). But what is really relevant for a common pricing policy for gas in a gas net work is a comparison of the average sales realization from all of the ga4 from offhsore and onshore fields, whether associate gas or non-associated gas, flowing thrcugh the network and the IRMC cost of new gas that would be added from new fields awaiting development/expansion.
For all of its gas, EGPC presently realizes an average of $0.40/MCF (equal to 40 LE/toe). The LRMC cost, including an allowance for depletion, on the basis of data avaiiable concerning new fields and likely output as well as costs of development, production and incremental transportation and
distribution, is estimated (by the completion mission) at $0.55/MCF (equal to 55 LE/toe). It is this gap that should be closed first. An increase of the gas prices at five percent per year, in real terms, would result in
attainment of LRMC by 1994. EGPC is planning to implement Abu Qir's Phase III development. The proposed extension will have the effect of enhancing
the financial viability even on the basis of market exchange rate.
9.04 At the appraisa', it had been intended, and EGPC had agreed that Abu Qir would provide cost data for the evolution of a proper gas tariff
- 21 -
for Abu Qir gas in the first instance, which could then be used to
determine a national average price for gas. Although ZGPC has accepted the principle of marginal cost. Pricing much remains to be done in setting up appropriate gas costing system. EGPC's preoccupation has been apparently with the earnings from exports of petroleum, which have dominated the profit picture. But some recent apprehensions over the long term
dependability of export earnings and in any case, the increasing conviction that gas has a significant role to play in the economy, have helped to draw attention to gas operations being run profitably and gas investments
yielding satisfactory returns. In that perspective, it is time that EGPC organizes a good costing system and compiles data to analyze the effects of gas prices and tariffs on return and profitability.
ANNEX 1 Pago 1. of 2
EGYPT
A.U QIR GAS DEVELWKENT PROJECT Projectc Completion Report
AFOAWAL ZSWETZn ACTUAL COST
(UNO mLlLL) (US *U .oSn)
_ ^erlen P Tt-tl Loa eoe 1 eogn .::r
CR'LL!9C 9 WELLS1
McorLsg.s (tubulars ad wellhead) - 4.6 4.6 0.4 9 6
Services and consu blos 0. 9.3 10.1 0.4 2.2.6
12S (canctilever Jck-up) - 16.2 16.2 1S.7 :.5
IobL1rzatlon and dembllla2atlon 2.0 2.0 - 2.0 1.;
Sub-Tocal 0.6 S221 32.9 0.8 39.5 '0 3
OFFSHORE PLA'FORMS
6-pil2 platfer - 3.1 3.1 - 2. 2
:-piL. plaform- 1.9 1.9 - 1.2 :
Ttansp*rt and installatlin 1.0 2.0 3.0 1.6 S 3 5.
Sub-Toetl 1.0 7.0 0 16 7 9 9
OFFSHCoR£ POCSS AND UTL.ITIES
Materials and equipm: mtodules 22.8 22.6 - 12.6 12.5
:starLLatlon 3.0 2.0 5.0 9.1 11.6 25 7
Sub-Total 3.0 24.6 27. 9.1 2'.l 33.;
S:isR AR£ P3PELSNS
Mategtas 3 7 3.7 0.1 2.2 2.3
'a.otrr:rcton 0.3 7.6 6.3 0.5 1: ::. 5
Sub-Total 0.S 11.5 12.0 O.6 13.2 :3 3
aO ER 5:?? Y
Material snd equipment - 1.3 1.3 - 1.9 1.9
:nscailation 0.5 1.2 1.7 0.6 2.3 2.9
Sub-Tot&l 0.s 2._5 3.06 o 2 a
CNSHORE -RYM!WAL
Materials and equlpeant 0.2 1.0 1.2 0.4 3 1 5
Con.scr_ec:on 0. 0.6 0.s ° 9
Sub-Total :-0 1.0 2.0 1 2 * 0 5
- 23 -
ANNEX I Page 2 of 2
EGYPT
ABU QIR GAS DEVELOPMENT PROJECT Project Completion Report
L£AZSAL ussTrU AC JAL COS-
(US& S1LLA) (CUSS 4LLLjo.
Lis Fer Total LacaL For.gn
a:sr:^
s L.5 9.3 10.6 2.6 5 2.i
Zonscz:ofl 7 5 1.0 0.5 10.5 ;
Sub-toecal 90 10.3 19.3 12.9 lo 6 3. 5
L?' ?:S-AN .7 22 5 29.2 1.2 29.7
V?NS: LANTS Ai(D TECHIICAL SERV!CXS
pro.*c: EnLneer,.g Managemnet, P:zc"remnt and Coastruction
S,P*-v.sion 0 5 9.0 9.5 1.7 3
.c,r- :a. AsiSstance 0.6 2.2 2.6 - 5 :i
l$sorvo0: EvaLuation 0.1 0.6 0.7 0.1 0 5
5t:'°les 0.6 1.5 2.0 0.6 0 6
~:^tralrng 0.2 0.3 0.5 0.2 0.3 5
SO,smLc survey - 1.0 1.0 - 0.1
Sub-Tocnl 1.9 16.7 16.6 2.* 5.2 7 6
lasic Cast £stiaete 24.i 126.6 150.6 - -
?%ys.za. ConULnency 2.6 12.6 15. 0
?P : a : - c C2 17. 0l 2-
EstLirtated :.Zlect Cost =IL. W -'
