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Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: ICR00004243

IMPLEMENTATION COMPLETION AND RESULTS REPORT

IBRD 7705‐CN

ON A

LOAN

IN THE AMOUNT OF US$80 MILLION

TO THE

PEOPLE’S REPUBLIC OF CHINA

FOR A

SHANXI COAL BED METHANE DEVELOPMENT AND UTILIZATION ( P100968 )

JUNE 18, 2018

Energy and Extractives Global Practice

East Asia And Pacific Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective June 30, 2017)

Currency Unit = Chinese Yuan (CNY)

CNY 1 = US$0.15 (At closing)

US$1 = CNY 6.78 (At closing)

FISCAL YEAR

July 1 ‐ June 30

ABBREVIATIONS AND ACRONYMS

CBM Coal Bed Methane

CMM Coal Mine Methane

CPS Country Partnership Strategy

DSCR Debt Service Coverage Ratio

EIRR Economic Internal Rate of Return

EMP Environmental Management Plan

EPC Engineering, Procurement, and Construction

FIRR Financial Internal Rate of Return

FM Financial Management

GHG Greenhouse Gas

GOC Government of China

ICR Implementation Completion and Results Report

LNG Liquefied Natural Gas

MRC Mixed Refrigeration Cycle

M&E Monitoring and Evaluation

O&M Operations and Maintenance

PAD Project Appraisal Document

PDO Project Development Objective

PMC Project Management Consultant

RAP Resettlement Action Plan

SCBMC Shanxi Coal Bed Methane Company Limited

SOE State‐owned Enterprise

SPC Special Purpose Company

TA Technical Assistance

TTL Task Team Leader

Regional Vice President: Victoria Kwakwa

Country Director: Bert Hofman

Senior Global Practice Director: Riccardo Puliti

Practice Manager: Jie Tang

Task Team Leader(s): Ximing Peng

ICR Main Contributor: Takayuki Doi

TABLE OF CONTENTS

DATA SHEET ............................................................................................................................1

I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES ........................................................ 5

A. CONTEXT AT APPRAISAL ........................................................................................................... 5

B. SIGNIFICANT CHANGES DURING IMPLEMENTATION ................................................................. 8

II. OUTCOME ...................................................................................................................... 11

A. RELEVANCE OF PDOs .............................................................................................................. 11

B. ACHIEVEMENT OF PDOs (EFFICACY) ........................................................................................ 11

C. EFFICIENCY ............................................................................................................................. 14

D. JUSTIFICATION OF OVERALL OUTCOME RATING ..................................................................... 16

E. OTHER OUTCOMES AND IMPACTS .......................................................................................... 16

III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME ................................ 18

A. KEY FACTORS DURING PREPARATION..................................................................................... 18

B. KEY FACTORS DURING IMPLEMENTATION .............................................................................. 19

IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME .. 20

A. QUALITY OF MONITORING AND EVALUATION (M&E) ............................................................. 20

B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE ..................................................... 21

C. BANK PERFORMANCE ............................................................................................................. 22

D. RISK TO DEVELOPMENT OUTCOME ........................................................................................ 23

V. LESSONS AND RECOMMENDATIONS .............................................................................. 24

ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS ............................................................ 26

ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION ......................... 31

ANNEX 3. PROJECT COST BY COMPONENT............................................................................. 33

ANNEX 4. PROJECT DIAGRAM ................................................................................................ 34

ANNEX 5. CBM PRODUCTION ................................................................................................ 36

ANNEX 6. EFFICIENCY ANALYSIS ............................................................................................ 37

ANNEX 7. BORROWER, CO‐FINANCIER, AND OTHER PARTNER/STAKEHOLDER COMMENTS .. 41

ANNEX 8. SUPPORTING DOCUMENTS .................................................................................... 44

ANNEX 9. ENVIRONMENTAL SAFEGUARDS ............................................................................ 45

ANNEX 10. SOCIAL SAFEGUARDS AND RESETLEMENT ............................................................ 46

ANNEX 11. TECHNICAL DEVELOPMENT (L‐TYPE HORIZONTAL WELL TECHNOLOGY) ............... 48

MAP (CHN43541) ................................................................................................................... 54

The World Bank Shanxi Coal Bed Methane Development and Utilization (P100968)

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DATA SHEET

BASIC INFORMATION Product Information

Project ID Project Name

P100968 Shanxi Coal Bed Methane Development and Utilization

Country Financing Instrument

China Investment Project Financing

Original EA Category Revised EA Category

Full Assessment (A) Full Assessment (A)

Organizations

Borrower Implementing Agency

People's Republic of China Shanxi Coal Bed Methane Company Ltd. (SCBMC)

Project Development Objective (PDO) Original PDO

The development objective of the project is to increase the production and utilization of CBM/CMM to replace coal as a fuel for thermal use and to reduce GHGs and local air pollutants associated with coal combustion. The project development objective will be achieved by (a) enhancing the subsectorâ s policy framework and ins tu onal capacity, and (b) supporting the exploration, production and liquefaction of CBM to increase market access. Revised PDO

The revised PDO of the project is to increase production of coal bed methane to reduce GHGs associated with coal combustion in theproject area.


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FINANCING

Original Amount (US$) Revised Amount (US$) Actual Disbursed (US$)

World Bank Financing IBRD‐77050

80,000,000 80,000,000 80,000,000

Total 80,000,000 80,000,000 80,000,000

Non‐World Bank Financing

Borrower 47,300,000 51,000,000 51,000,000

Local Sources of Borrowing Country

77,000,000 92,640,000 84,600,000

Total 124,300,000 143,640,000 135,600,000

Total Project Cost 204,300,000 223,640,000 215,600,000

KEY DATES

Approval Effectiveness MTR Review Original Closing Actual Closing

19‐May‐2009 18‐Sep‐2009 26‐Nov‐2012 31‐Dec‐2014 30‐Jun‐2017

RESTRUCTURING AND/OR ADDITIONAL FINANCING

Date(s) Amount Disbursed (US$M) Key Revisions

18‐Nov‐2013 22.48 Change in Loan Closing Date(s) Change in Implementation Schedule

19‐Feb‐2016 46.27 Change in Project Development Objectives Change in Results Framework Change in Components and Cost Change in Loan Closing Date(s) Reallocation between Disbursement Categories Change in Implementation Schedule

KEY RATINGS

Outcome Bank Performance M&E Quality

Satisfactory Satisfactory Substantial


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RATINGS OF PROJECT PERFORMANCE IN ISRs

No. Date ISR Archived DO Rating IP Rating Actual

Disbursements (US$M)

01 28‐Apr‐2010 Satisfactory Satisfactory .20

02 27‐Jun‐2011 Moderately

Unsatisfactory Moderately Unsatisfactory .20

03 08‐Apr‐2012 Moderately

Unsatisfactory Unsatisfactory 8.20

04 12‐Nov‐2012 Moderately

Unsatisfactory Moderately Unsatisfactory 8.20

05 20‐Dec‐2012 Moderately Satisfactory Moderately Satisfactory 8.20

06 24‐Jun‐2013 Moderately Satisfactory Moderately Satisfactory 21.30


08 24‐May‐2014 Moderately


09 24‐Jun‐2014 Moderately








SECTORS AND THEMES

Sectors

Major Sector/Sector (%)

Energy and Extractives 100

Non‐Renewable Energy Generation 99

Public Administration ‐ Energy and Extractives 1


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Themes

Major Theme/ Theme (Level 2)/ Theme (Level 3) (%) Environment and Natural Resource Management 100

Climate change 70

Mitigation 70

Environmental Health and Pollution Management 30

Air quality management 10

Water Pollution 10

Soil Pollution 10

ADM STAFF

Role At Approval At ICR

Regional Vice President: James W. Adams Victoria Kwakwa

Country Director: David R. Dollar Bert Hofman

Senior Global Practice Director: John A. Roome Riccardo Puliti

Practice Manager: Ede Jorge Ijjasz‐Vasquez Jie Tang

Task Team Leader(s): Jianping Zhao Ximing Peng

ICR Contributing Author: Takayuki Doi


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I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES

A. CONTEXT AT APPRAISAL

Context

1. Energy demand. Energy consumption in China increased from 990 million tons of coal equivalent in 1990 to 2,460 million tons of coal equivalent in 2006, reflecting the rapid growth of its economy. The average growth rate of 5.8 percent per year was more than triple the rest of the world.

2. Coal consumption. China’s rising energy demand was met largely by domestic coal, which accounted for 69.4 percent of primary energy consumption in 2006. Coal consumption increased from 1.06 billion tons in 1990 to 2.39 billion tons in 2006. Even with an aggressive fuel diversification policy, coal was expected to remain the dominant energy source for the foreseeable future. About 80 percent of urban households also relied on coal. By comparison, in the Organization for Economic Cooperation and Development countries, nearly 100 percent of the households and heat boilers relied on natural gas.

3. Air pollution. The rapid increase in energy consumption, and their primary reliance on coal, had contributed to China’s severe air pollution. In particular, the combustion of bituminous coal was causing serious atmospheric pollution from airborne particulates and emissions of sulfur dioxide (SO2) and carbon dioxide (CO2). In addition, the production of coal was estimated to result in the release of 18 billion m3 (270 million tons CO2 equivalent) of methane into the atmosphere in 2006, about 43 percent of the global methane release associated with coal mining. This level was expected to rise to more than 50 percent, by 2020, if no significant action would be taken.

4. Shanxi. Shanxi was the sixth largest energy consuming province in China. Its energy consumption was overwhelmingly dominated by coal, which accounted for 94.7 percent of the total energy demand in 2006, compared with the national average of 69.4 percent. The combustion of coal resulted in serious air pollution problems. Shanxi was the largest coal producing province in China, with coal production of 691.9 million tons in 2006, nearly one‐third of the nation’s total production. An estimated 6 billion m3 of coal mine methane (CMM) was released from coal mining operations in 2006, of which only 500 million m3 was captured and used. Shanxi was estimated to have the largest coal bed methane (CBM) resource amounting to about 10 trillion m3.

5. Government policy. The Chinese authorities were fully aware of the need to address environmental problems and to formulate policies focused on environmentally sustainable economic development. Efforts were being made to promote efficient use of energy and cleaner energy resources. The Government was also taking assertive action to diversify energy sources, including an accelerated nuclear power program, an ambitious gas penetration target, and significant hydropower and renewable energy development. The medium‐ to long‐term energy plan called for increasing gas consumption from the current 3 percent to 6 percent and 10 percent of the total energy demand by 2010 and 2020 respectively. China was deficient in natural gas resources, so the development of CBM was considered an integral part of the gas expansion program. The Government established a dedicated CBM/CMM development and utilization plan.


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6. Province policy. At the Shanxi provincial level, the Government was committed to improving its environmental performance through increased energy efficiency and diversification of its energy sources. A core element of Shanxi’s energy plan for the Eleventh Five‐Year Plan was to actively promote the development and utilization of CBM and CMM resources. A dedicated CBM/CMM plan was developed and had been under implementation since early 2000s.

Original Theory of Change (Results Chain)

7. The original theory of change reflected the Country Partnership Strategy (CPS)1 for China approved by the Board in May 2006 (CPS 2006–2010). One of the five key pillars of CPS 2006–20102 was to ‘Manage resource scarcity and environmental challenges’ to address key constraints to China’s future growth, especially through development of indigenous clean energy and mitigation of air pollution. If successful, the project was expected to directly contribute to this key pillar of CPS 2006–2010 by supporting the development of a clean fuel to replace the more polluting coal. Specifically, the project was expected to increase clean energy supply by harnessing the otherwise underused indigenous energy resources. It would facilitate sustainable development by enhancing the security of the energy supply and mitigating the negative environmental impact of energy production and consumption.

8. The proposed activities were designed to produce practical outputs, including gas and liquefied natural gas (LNG) production, capacity building, financial sustainability, and new policy making. The outputs were expected to promote CBM/CMM production and utilization at the Shanxi provincial level and contribute to one of CPS pillars ‘Manage resource scarcity and environmental challenges’ in the long run (see figure 1).

9. As part of its overall efforts to promote clean energy development in China, the World Bank supported the Central Government to develop a comprehensive set of institutional and policy initiatives necessary to establish and promote the CBM/CMM industry. This had led to the implementation of many important policy incentives aimed at creating an environment conducive to the development of the CBM/CMM sector. The World Bank’s direct support to Shanxi included the first large‐scale CMM capture and utilization project designed to reduce greenhouse gas (GHG) emissions. Through sector work, the World Bank also supported the provincial government to assess the development potential of CBM and CMM, evaluate the investment needs, and design an action plan to ensure timely and optimal implementation.

10. The involvement of the World Bank in this lending operation was expected to provide a platform for it to continue policy dialogue with the Shanxi Government for several years. It was also expected to increase the prospects for the implementation of the institutional and policy recommendations. The technical assistance (TA) component of the project was designed to assist Shanxi in the creation and implementation of an integrated development plan and policy framework. The investment component directly addressed the strategic issues of promoting gas market development, while also enhancing the

1 CPS dated May 23, 2006, Report No: 35435 2 CPS 2006–2010 includes five key pillars (a) Integrating China into the world economy; (b) reducing poverty, inequality, and social exclusion; (c) managing resource scarcity and environmental challenges; (d) financing sustained and efficient growth; and (d) improving public and market institutions.


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technical capacity of the sector. The capacity‐building elements of both components were envisaged to bridge the existing shortfalls in knowledge and skills and support the government advisers and planners, mine designers, technical staff, and mine management in their efforts to build a commercially sustainable CBM/CMM industry in Shanxi. The World Bank’s involvement was expected to bring knowledge and experience in market development, economic analysis of CBM projects, and best technologies in methane extraction through vertical wells and in converting CBM to LNG.

Figure 1. Original Theory of Change

Original Project Development Objectives (PDOs)

11. The objective of the project in the original loan agreement was ‘to assist Shanxi Province in increasing the production and utilization of CBM/CMM to replace coal as a fuel for thermal use and to reduce GHGs and local air pollutants associated with coal combustion’. The development objective of the project in the original Project Appraisal Document (PAD) was ‘to increase the production and utilization of CBM/CMM to replace coal as a fuel for thermal use and to reduce GHGs and local air pollutants associated with coal combustion’, slightly different but almost identical in essence. The PDO was expected to be achieved by (a) supporting the exploration, production, and liquefaction of CBM to increase supply and market access and (b) enhancing the subsector’s policy framework and institutional capacity.

Activities Outputs PDOs/Outcomes Long-term Outcomes

Exploration and development of CBM production wells

Construction of gas collection pipelines and CBM gathering to collect the CBM from each well and transport it to the LNG plant

Construction of a LNG plant

Program to assist the project entity in developing its capacity to construct and operate the facilities efficiently and safely, and to expand business activities in the area of CBM/CMM development to achieve long-term financial sustainability

Program to assist the key stakeholders in Shanxi Province to enhance their institutional and technical capacities for policy making and implementation to scale up the CBM/CMM industry in Shanxi

Manage resource scarcity and environmental challenges

<PDOs>

Assist Shanxi Province in increasing the production and utilization of CBM/CMM to replace coal as a fuel for thermal use

Reduce GHGs and local air pollutants associated with coal combustion

<Outcomes>

• Produce and capture 2,000 million m3 of CBM/CMM in Shanxi annually

• Utilize 1,500 million m3 of CBM/CMM in Shanxi annually

Produce 250 million m3 of CBM annually

Produce 200,000 tons of LNG annually

Train 300 of staff-week for both SECBMIH and Shanxi province

Complete the studies

Formulate and implement new policy incentives and rules

Enhance SECBMH’s financial sustainability


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Key Expected Outcomes and Outcome Indicators

12. The key performance indicators of the achievement of PDOs were planned to be measured by the increased volume of CBM/CMM produced and used, compared to the baseline in Shanxi Province. The main intermediate outcomes for the proposed project were (a) the quantity of CBM produced and LNG sold directly from the project’s investment and (b) new subsector policies, rules, and standards developed and implemented, and the development of new methodologies to assess the CBM/CMM resources and evaluate utilization options.

Components

13. The project consisted of two components.

14. Investment Component (US$202.6 million). The investment component included (a) the exploration and development of CBM production wells, (b) the construction of gas collection pipelines and a CBM gathering station, and (c) the construction of an LNG plant consisting of four modular, transportable liquefaction plants with individual production capacities of 50,000 tons per year for an ultimate processing capacity of 200,000 tons per year. The project diagram is illustrated in annex 4.

15. TA Component (US$1.7 million). The TA component included two subcomponents: (a) a program to assist the project entity in developing its capacity to construct and operate the facilities efficiently and safely and to expand business activities in the area of CBM/CMM development to achieve long‐term financial sustainability and (b) a program to assist the key stakeholders to enhance their institutional and technical capacities for policy making and implementation to scale up the CBM/CMM industry in Shanxi.

B. SIGNIFICANT CHANGES DURING IMPLEMENTATION

The First Restructuring

16. The project was restructured twice, once in in 20133 and again in 2016.4 The first restructuring in 2013 was level 2 and the changes included (a) modification of the project description in the legal agreements due to changes in the technical design5 of the LNG plant and location6 of drilling wells and (b) extension of the project closing date by 1.5 years, from December 31, 2014, to June 30, 2016. Neither the PDO, indicators, nor components were changed in 2013.

3 Restructuring paper dated November 18, 2013, Report No: RES11768. 4 Restructuring paper dated February 19, 2016, Report No: RES 22208. 5 The technical design of the LNG plant was revised to adopt the latest and higher efficiency technology called mixed refrigeration cycle (MRC). Although MRC had been used in United States and Europe, it had less application in China at that time. Through detailed reports and technical reviews, it was confirmed that MRC can be technically and economically justified. 6 The upstream drilling site was relocated from Zhengzhuang Block to Libi Block for larger amount of production based on a new feasibility study. No new safeguard policies were triggered and the environmental assessment category remained unchanged.


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The Second Restructuring

17. The second restructuring, in 2016, was level 1 and the changes are summarized in the following paragraphs.

Revised PDOs and Outcome Targets

18. The PDO was revised in the second restructuring in 2016. The revised PDO in the legal agreement and the second restructuring paper was ‘to increase production of coal bed methane to reduce GHGs associated with coal combustion in the project area’. The provincial level outcome, which was included in the original PDO, was excluded from the main targets. With the second restructuring, the project started focusing on the CBM development in the project area, considering the changing needs of the CBM industry and the responsibility of the implementation agency. In addition, the phrase “to replace coal as a fuel for thermal use” was deleted from the PDO. The rationale of this restructuring is described in paragraph 22.

Revised PDO Indicators

19. In line with the changes of PDO, the indicators were also revised. Both ‘volume of CBM produced annually’ and ‘volume of LNG produced annually’ were included as PDO‐level indicators. In addition, ‘avoided GHGs emissions annually’ was also added as one of the PDO‐level indicators. The original PDO‐level indicators (‘Total amount of CBM/CMM produced and captured in Shanxi annually’ and ‘Total amount of CBM/CMM utilized in Shanxi annually’) were removed because (i) the focus of the project shifted to the specific area rather than the provincial level, and (ii) the produced LNG can be exported and utilized outside of the Shanxi province. (See table 1.)

Table 1. The Original and Revised PDO Indicators

Original PDO Indicators Revised PDO Indicators

Total amount of CBM/CMM produced and captured in Shanxi annually (million m3)

Volume of CBM produced annually (million m3)

Volume of LNG produced annually (metric ton) Total amount of CBM/CMM utilized in Shanxi annually (million m3) Avoided GHGs emission annually (metric ton)

Revised Components

20. While the core structure of the project components remained, technical designs for the investment component (CBM and LNG development) were adjusted to incorporate the latest technology development of both gas drilling and liquefaction and the geologic conditions in the new location of the upstream gas drilling area. The activities in the TA component were also adjusted to be in line with the revised PDO and focus more on capacity building in the implementation agency.

Other Changes

21. Second Extension of Closing Date. The closing date of the project was further extended by one year, from June 30, 2016, to June 30, 2017. The primary purpose of the second extension was to allow the implementing agency to select the most appropriate technology based on observation of the


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performance of testing wells. A new advanced horizontal drilling technology was becoming mainstream in the global gas industry. To achieve higher production of CBM by the innovative technology, it was necessary to complete the test of the upstream gas drilling and acquire additional geographical data. The detail of the technology development is presented in annex 11.

Rationale for Changes and Their Implication on the Original Theory of Change

22. During an implementation support mission by the World Bank, an attribution issue was identified between the original PDO and the implementation arrangement. According to the original project design, the project included (a) investment in a specific gas drilling component and a gas liquefaction plant and (b) TA for capacity building for CBM/CMM development in Shanxi Province as a whole. In addition, the PDO‐level indicators referred to increasing gas production in of the entire Shanxi Province, whereas the investment activities were more discreet. Furthermore, the project implementing company (Shanxi Energy Coal Bed Methane Investment Holding Limited, later renamed Shanxi Coal Bed Methane Company Limited [SCBMC]) was to be responsible for both the investment component and the TA component. At appraisal, it was expected for the SCBMC, which is a special purpose company and operates a specific project, to motivate the relevant provincial agencies and institutions to implement the provincial‐level TA components such as policy studies and the development of data and information systems. These TA components were designed to encourage the private sector’s participation in CBM development in Shanxi province. CBM development and gas liquefaction were previously nonexistent in Shanxi, and the private sector had little interest when the project was appraised. However, investments from private companies were organically initiated when the government opened the market for both the public and private sectors. The provincial‐level TA, which was originally planned, became no longer necessary. Therefore, it was rational that the project focused on the investment component and capacity building for the SCBMC. In addition, the phrase “to replace coal as a fuel for thermal use” was deleted from the original PDO, because it turned out that CBM and LNG from the project could be used for various purposes such as power generation, city gas and car fuels. The PDO, outcome targets and indicators were revised to align to the workable project activities. All changes were still in line with the CPS approved in October 2012 (CPS 2013–2016)7. One of three main strategic themes of CPS 2013–20168 was ‘Supporting greener growth’. The revised theory of change properly reflected the CPS 2013–2016 and was expected to have a positive impact on this CPS’s main theme (see figure 2). In fact, the government strengthened the policy to accelerate the use of gas for heating purposes instead of coal in order to address the issues around air pollution. Although the project shifted to focus on the SCBMC’s activities, as a result, the project promoted advance clean energy supply in China and Shanxi Province by demonstrating advanced well drilling technology and the integration of production and liquefaction by a Chinese company.

7 CPS dated October 11, 2012, Report No. 67566‐CN 8 CPS 2013–2016 includes three main strategic themes (a) Supporting greener growth; (b) Promoting more inclusive development; and (c) Advancing mutually beneficial relations with the world.


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Figure 2. Revised Theory of Change

II. OUTCOME

A. RELEVANCE OF PDOs

Assessment of Relevance of PDOs and Rating Rating: High

23. Throughout the project (from appraisal to completion), the PDO remained highly relevant and fully aligned with the World Bank’s CPS 2006–2010 at appraisal and CPS 2013–2016 at the first and second restructurings). In particular, the project directly supported one of the key pillars in CPS 2006–2010—'Managing resource scarcity and environmental challenges’ and one of main strategic themes in CPS 2013–2016 —'Supporting greener growth’. In addition, the project achievements supported two of the six core messages in the 2013 strategic China 20309 that highlighted the importance to ‘accelerate the pace of innovation and create an open innovations system’ and ‘seize the opportunity to go green’.

24. Given the PDOs’ consistency with the CPS and the related World Bank’s strategy, the rating for Relevance is High.

B. ACHIEVEMENT OF PDOs (EFFICACY)

Assessment of Achievement of Each Objective/Outcome

25. Because the PDO and the indicators were formally revised in the level 1 restructuring in 2016, the original and revised PDOs are separately evaluated as follows. The original PDO had two parts

9 The 2013 strategic China 2030 identified six core messages (a) Implement structural reforms, (b) accelerate the pace of innovation and create an open innovation system, (c) seize the opportunity to go green, (d) expand opportunities and promote social security for all, (e) strengthen the fiscal system, and (f) seek mutually beneficial relations with the world.

Activities Outputs PDOs/Outcomes Long-term Outcomes

Exploration and development of CBM production wells

Construction of gas collection pipelines and CBM gathering to collect the CBM from each well and transport it to the LNG plant

Construction of a LNG plant

Program to assist the project entity in developing its capacity to construct and operate the facilities efficiently and safely in the area of CBM development to achieve long-term financial sustainability

Support greener growth

<PDOs>

Increase production of coal bed methane to reduce GHGs associated with coal combustion in the project area.

<Outcomes>

• Produce 100 million m3 of CBM in the project area annually when all wells are put into commercial operation

• Produce 160,000 metric tons of LNG in the project area annually

• Avoid 520,000 metric tons of GHGs Emission from the project area annually

Develop 126 CBM wells

Train 800 of staff-week for SCBMC

Enhance SECBMH’s financial sustainability

Transport CBM to the LNG plant

Convert CBM to LNG for sale on the market


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referred to as (PDO1‐a)—'to assist Shanxi Province in increasing the production and utilization of CBM/CMM to replace coal as a fuel for thermal use’ and (PDO1‐b)—'to reduce GHGs and local air pollutants associated with coal combustion’. The revised PDO had one part referred to as (PDO2)—to increase production of CBM to reduce GHGs associated with coal combustion in the project area.

Assessment of Achievement of the original PDO (PDO1‐a and PDO1‐b) Rating: Substantial

26. According to the project design in the original PAD, the TA included provincial‐level activities to organize policy studies and develop CBM/CMM data and the information inventory system. As described in paragraph 22, these parts of the TA became no longer necessary and were not carried out. The project focused on the specific investment component and capacity building only for the SCBMC. Although the activities in the SCBMC partly contributed to the provincial‐level CBM/CMM developments, the intended contribution was not fully made. Therefore, PDO1‐a is rated Modest (3). As for PDO1‐b, on the other hand, at the time of the level 1 restructuring, the PDO indicators had significantly exceeded the end target (see table 2). Although there was no indicator to directly measure the reduction of GHGs and local air pollutants, the produced CBM reduced the consumption of coal. GHGs reduction is almost proportional to the amount of CBM/CMM produced, captured, and used (see paragraph 30 and annex 6 for detail). Thus, PDO1‐b was substantially achieved in Shanxi Province and the wider area. Considering this high achievement ratio to the end target, the rating for PDO1‐b is High (5). Averaging the ratings for PDO1‐a (3) and PDO1‐b (5), the overall rating for the original PDO is Substantial (4).

Table 2. Achievement of the Original PDO Indicators Before the Level 1 Restructuring

Baseline End Target Actual

(at the Second Restructuring)

Achievement

Date December 31, 2008 (million)

June 30, 2016 (billion)

December 09, 2015 (billion)

December 09, 2015 (%)

Total amount of CBM/CMM produced and captured in Shanxi annually (m3)

300 2 8.1 405

Total amount of CBM/CMM used in Shanxi annually (m3)

200 1.5 4.5 300

Assessment of Achievement of the Revised PDO (PDO2) Rating: Substantial

27. At the second restructuring in 2016, the PDO was revised to ‘to increase production of CBM to reduce GHGs associated with coal combustion in the project area’ and the indicators were also revised accordingly. Because the original PDO indicators had achieved more than what was originally intended, the end targets of the revised PDO indicators were set at an ambitious level. As shown in table 3, each indicator did not reach the set target at closing in 2017.


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Table 3. Achievement of the Revised PDO Indicators After the Level 1 Restructuring

Baseline End Target Actual (2016)

Actual (2017)

Forecast (2018)

Forecast (2019)

Date December 01,

2009 December 31,

2017 December

2016 December

2017 December

2018 December

2019

Volume of CBM produced annually (m3)a

0 60 million (2017) 90 million (2018) 100 million (2019)

9.2 million 20 million (33%)

80 million (89%)

145 million (145%)

Volume of LNG produced annually (Metric ton)

0 160,000 41,532 (26%)

119,000 (74%)

120,000 (75%)

160,000 (100%)

Avoided GHGs emission annually (Metric ton)

0

By the original conversion factorb 520,000

134,980 (26%)

386,750 (74%)

390,000 (75%)

585,000 (100%)

By the revised conversion factorc 243,200

63,130 (26%)

180,880 (74%)

182,400 (75%)

243,200 (100%)

Note: a. The planned targets of CBM production are 60, 90, and 100 million m3 in 2017, 2018, and 2019

respectively and will reach full production by 2019. b. 3.25 tons CO2 per ton of LNG. At appraisal, due to lack of track records, it was tentatively assumed that all

the LNG produced would be used for power generation and GHGs from coal‐fired plants would directly reduce.

c. 1.52 tons CO2 per ton of LNG. At closing, statistical data became available. Therefore, the conversion factor is recalculated based on the actual usage portfolio. Details are described in annex 6.

28. Volume of CBM production. However, the volume of CBM production was still increasing at closing. The production volume was expected to keep increasing because it generally takes about nine months for CBM production to become stabilized and reach its peak after the completion of drilling. In order to carefully evaluate how likely the operation is to achieve its objectives, the submission date of the Implementation Completion and Results Report (ICR) was extended by six months so that the future CBM production can be more accurately estimated by confirming evidence and actual production trend. In fact, the total volume of CBM has been increasing and is forecasted to reach its peak in 2019. The achievement rate in 2019 is expected to reach 145 percent of the planned target. The CBM production data (both past and future), which was reviewed and verified by the World Bank team, is provided in annex 5. The implementation agency intends to make continuous efforts for further achievements.

29. Volume of LNG production. As for the outputs from the constructed LNG plants, the available facility capacity had already reached 200,000 ton (100 percent of the planned capacity) at project closing. The LNG plant was supposed to use both the company’s own CBM and purchase gas from Petro China (see annex 4). However, due to the government policy change to accelerate the usage of gas for heating, instead of coal, the district heating sector and residential users were allowed to use natural gas on a priority basis, and the SCBMC could not procure enough gas for LNG production. It was beyond the company’s control. On the other hand, considering that the volume of CBM production under the project is increasing in 2018 and 2019 and that more gas pipelines will be built to improve the gas supply situation, it is expected that the volume of LNG production will reach the planned target in 2019.


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30. Avoided GHG emission. Pursuant to the second restructuring paper, avoided GHG emission is calculated based on the LNG production, which replaces the consumption of carbon‐intensive fuel such as coal and gasoline (see annex 6 for details). Because the volume of avoided GHG emission is proportional to the LNG production and sales, the achievement rate of this third indicator is same as the second indicator (LNG production) and will reach 100 percent of the planned target in 2019. As for GHG counting, various methodologies and conversion factors could be considered. Table 3 shows two simple but clear cases, including (a) figures based on the original conversion factor and (b) figures based on another conversion factor based on the actual LNG off‐takers’ portfolio provided by the SCBMC.

31. Best use of available technology. From another aspect, the evaluation takes into account whether the project used the best available technology and produced CBM as much as the geographical conditions would allow with reasonable cost. To employ the latest technologies and maximize the gas production, a cautious approach toward changes of technical schemes was taken—a first batch of testing wells, including both vertical and horizontal wells was developed to compare the cost effectiveness of different technologies in the region. Based on the observation of the performance of these testing wells, the SCBMC decided on the final technical schemes for the remaining wells. As a result, the test data and technical development indicated the possibility of the combination of vertical and horizontal wells. The choice between horizontal and vertical wells at each location would significantly affect CBM volume and the cost‐effectiveness of the upstream gas drilling. Although it took the SCBMC more than a year to compare the production and cost of both technologies in each well location, the optimal technologies were selected with the consent of the World Bank. The L‐type horizontal well technology was applied mainly in the project and became a good showcase in the country. The project played a catalytic role and made a great contribution not only to this project, but also to the following projects. Peer companies such as Petro China and Blue Flame have successively used the L‐type horizontal well technology for CBM developments in similar geological structures. The detail of technology development is presented in annex 11.

32. Although the achievement rate, at closing, was less than the planned target, considering (a) the high achievement expectation in the near future and (b) utmost efforts that were made to maximize the outcome, the efficacy rating of the revised PDO is Substantial.

Justification of Overall Efficacy Rating PDO1 Rating: Substantial (PDO1‐a: Modest and PDO1‐b: High), and PDO2 Rating: Substantial

33. A split rating is applied due to the second restructuring, in which the PDO was revised. Although the achievement rates of the original PDO indicators were significantly high, the efficacy rating for the original PDO (PDO1‐a and PDO1‐b) is rated Substantial because the originally intended contribution to the outcome at the provincial level was partially but not fully made. Although the revised PDO indicators did not reach the set target at closing in 2017, the efficacy rating for the revised PDO (PDO2) is Substantial because significant increase in CBM production after the closing date was confirmed, and intended outcomes are predicted to be achieved in the near future.

C. EFFICIENCY

Assessment of Efficiency and Rating Rating: Substantial


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34. Economic analysis. At appraisal, the project was found to be economically sound based on a baseline economic internal rate of return (EIRR) of 25 percent before including environmental impacts, which would increase the EIRR. This result was robust to sensitivity analysis of gas production rates, drilling costs, and gas prices within reasonable values. A separate analysis at completion, using the same cost benefit analysis method but the economic value is calculated at market prices of the LNG at ICR (shadow price was calculated at appraisal), shows the EIRR to be 15 percent without considering the avoided carbon emission benefits, or 18 percent when carbon benefits are taken into consideration. While this is lower than what was estimated at appraisal (see table 4) due to the longer construction period (actual eight years versus planned three years in the PAD), higher investment cost, and lower LNG prices in the first several operation years (as discussed in paragraph 55), the EIRR is nonetheless substantial, higher than the World Bank’s benchmark of 12 percent. Further details of the changes in assumptions and methodology, and an updated EIRR estimate with CO2 impacts, are provided in annex 6.

Table 4. EIRR (excluding environmental benefits) at Appraisal and Closing

EIRR at Appraisal EIRR at Closing

25% 15%

35. Financial analysis. At completion, the financial internal rate of return (FIRR) is calculated to be 12 percent. This is based on (A) the actual loan conditions, (B) the actual cost and revenue from 2013 to 2017, and (C) reasonable predictions for 2018 and future years. The FIRR estimated at completion is slightly higher than the original estimation at appraisal of 9 percent (see table 5). This positive improvement is mainly attributable to the higher volume of CBM production and government subsidy for CBM production. The data used to produce these figures can be found in annexes 5, 6, and 7.

Table 5. FIRR at Appraisal and Closing

FIRR at Appraisal FIRR at Closing

9% 12%

36. Sensitivity analysis. Several sensitivity analyses were carried out to determine the financial viability of the project under various scenarios. The results indicate that changes in key parameters such as (a) operation expense, (b) CBM production, and (c) LNG market price, would indeed affect performance. In particular, the LNG market price is one of the most sensitive variables because the profit margin of the company highly depends on it. Nevertheless, the project’s financial strength is expected to remain robust as shown in table 6.

Table 6. Sensitivity Analyses

Pessimistic Scenario FIRR at Closing (%)

20% increase in operation expenses 11

20% reduction in CBM production 10

20% reduction in LNG market price 7

37. Aspects of design and implementation. The closing date of the project was extended twice. However, it was not simply due to the delay in implementation. The implementing agency requested for the extension to prioritize the project outcome rather than to complete the project within the original


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timeframe. There were significant improvements in well drilling technologies during the project period. To maximize the production of gas, it was necessary to obtain the actual operation data of existing wells. Based on the data analysis, the technologies and locations of horizontal wells and vertical wells were properly redesigned. As a result, the implementing agency achieved greater outcomes. Average CBM production volume from a single well in the project is significantly higher than other projects in neighboring area. According to the assessment by a third party (China University of Mining and Technology), the average daily CBM production from a single horizontal well under the project could be 12,000 m3, much higher than the daily production of single horizontal wells operated by other companies in the neighboring areas in the same region, recorded as 2,000–6,000 m3 per day (see annex 11).

38. Although there was a slight cost increase (see annex 6 for details) and the EIRR is lower than the estimation at appraisal, given the sound absolute level of the EIRR and FIRR achieved and the operational efficiency being well‐above industry standards, the rating for project efficiency is Substantial.

D. JUSTIFICATION OF OVERALL OUTCOME RATING

39. Although a split rating is applied, both outcome ratings before and after restructuring are Satisfactory based on the ICR guideline. Therefore, the overall outcome rating is ‘Satisfactory’ as shown in table 8.

Table 8. Overall Outcome Rating

Before Restructuring After Restructuring

Relevance of objective High

Efficacy (PDO) Substantial Substantial

PDO 1‐a Modest PDO2 Substantial

PDO 1‐b High

Efficiency Substantial

Outcome ratings Satisfactory Satisfactory

Overall Outcome Rating Satisfactory

E. OTHER OUTCOMES AND IMPACTS

Gender

40. The project was not gender tagged and, therefore, did not specifically focus on gender. However, the project indirectly provides several positive impacts on the gender aspect as well. For cleaning and landscaping in the project area, 50 local villagers, including 28 women (56 percent) were employed. In addition, from a long‐term perspective, supporting greener growth and managing resource scarcity will result in better quality of air and sufficient energy supply at the household level. This will improve the quality of life for cooking, cleaning, exercising outside, and laundry. Those who benefit most from such improvements are housewives.


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Institutional Strengthening

41. The project strengthened the institutional capacity of the implementing company (SCBMC). The number of staff‐weeks of training for the SCBMC reached 2,150 and it is more than double the original end target (800 staff‐weeks). In the training, the capabilities in project management, corporate management, construction, gas liquefaction, and safety were strengthened. In addition to the training, the experience gained from the project will be useful for future work, including new site development and operations and maintenance (O&M). Furthermore, the project accommodated a tailored simulation system in 2016. The system can provide practical training programs for the LNG plant operators to understand how to control the LNG plant under both normal and emergency situations. Through this realistic training, the SCBMC can effectively enhance and maintain operators’ capability and avoid severe accidents. Because this is a unique and advantageous system in Shanxi Province, it has been used for not only the SCBMC’s employees, but also for other companies’ operators. This training service has yielded an additional income (CNY 400,000 as of March 2018), which can be used for the system maintenance and future upgrade. Photos of the simulation system are shown in annex 12.

Mobilizing Private Sector Financing

42. The project implementing agency was a Special Purpose Company (SPC) created to prepare, finance, construct, and operate the project facilities. The World Bank loan was made to the Government of China (GOC) according to the IBRD’s standard terms and conditions. The GOC loaned the proceeds to the Shanxi provincial Government, who then forwarded the proceeds to the SPC on the same terms and conditions. The project was funded by the World Bank, the government subsidy, public domestic banks, and state‐owned entities. Therefore, no private sector financing was directly injected in to the project. However, the successful production of the project catalyzed and mobilized private sector financing. Successful production and the technology used in the project became a good showcase, drove the following projects, and attracted further private investments of CNY 580 million in the neighboring area. (See annex 4).

Poverty Reduction and Shared Prosperity

43. The project brought considerable social benefits to the village, created more than 400 new job opportunities, and, therefore, contributed to directly reducing local poverty. For example, the construction of wells and gas collection facilities generated CNY 27 million (US$4 million) worth jobs for local villagers, which included civil works, water transport, and temporary employment. According to the social survey, most villagers had experienced a significant increase of income during project construction by working for the company, leasing houses to construction workers, and selling vegetables and farm products to the contractors. In 2016, the average per capita income in the village had reached CNY 13,000, which was 172 percent higher than in 2008 (CNY 4,780 per capita). Furthermore, from a long‐term perspective, the LNG produced in the project has been supporting the affordability and sufficiency of energy supply on a regional level. The scarcity of energy could be a critical issue for the country that encountered rapid economy growth. The stable energy supply from the project exerted a positive impact on the prosperity of the country.


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Other Unintended Outcomes and Impacts

44. Road upgrade. The road infrastructure in the project area before the project was poor and it was inconvenient for local villagers to move in the area especially when it rained or snowed. For the project construction purpose, more than 100 km of local roads were redeveloped. The upgraded roads are now being used by local villagers and are highly appreciated. This improved the efficiency of villagers' economic activities and the quality of life in the area where the project was executed. Photos of local roads are shown in annex 12.

III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME

A. KEY FACTORS DURING PREPARATION

Project Design

45. Analytical studies were conducted by the World Bank to underpin the project design. The aspects that were properly designed included lending instrument, project components, and environmental and social management. On the other hand, ‘institutional and implementation arrangements’ planned during the preparation stage diverged from what was originally expected, and the level 1 restructuring was required. The detail is described in the following subsection.

Institutional and Implementation Arrangements

46. The project implementing company (SCBMC) was to be responsible for both the investment component and the TA component. However, the original PDO and indicators included the improvement of CBM/CMM development in Shanxi Province as a whole. As described earlier, it was not realistic for the SCBMC to motivate the relevant provincial agencies and institutions to implement the provincial‐level activities such as policy studies and the development of data and information systems. To solve this issue, the PDO and indicators were revised in the second restructuring. As a result, the SCBMC was able to focus on the workable project activities.

Technical Aspects

47. The vertical well technology selected during preparation was proven and demonstrated by other completed and ongoing CBM projects in the world. It was considered to match the geological and methane reservoir conditions at the project site. The overall well and surface facility design was standard for this type of operation at that time. However, the advancement of technology and more actual sampling data obtained during the early stage of development provided opportunities to analyze and compare alternative methodologies. In the end, the project adopted horizontal wells in 33 locations, which were not originally planned. Having said that, it is natural that the underground well drilling projects hold a certain degree of uncertainty. The project successfully and flexibly adapted recent technology during the implementation.


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48. In the LNG plant, the liquefaction technology selected during the project preparation was Expansion Refrigeration Cycle and four skid‐mounted trains to be built with the capacity of 50,000 tons for each train (a total of 200,000 tons annually). This technology was mature and was a widely accepted conventional technology that was used in many small LNG production plants. The first train in the LNG plant was built following this design. The evolving LNG market development exerted pressure on the SCBMC to consider more efficient technology, so a comparison of different technologies was conducted again. It concluded that the remaining three trains (total 150,000 tons annually) would be merged as one train and the Mixed Refrigerant Cycle technology would be used. This change of technical design enables the SCBMC to produce better quality LNG with less electricity consumption.

B. KEY FACTORS DURING IMPLEMENTATION

(i) Factors subject to implementing entities control

Human Resources and Organizational Capacity

49. The number of staff‐weeks of training for the SCBMC reached 2,150, which is 269 percent of the target (800 staff‐weeks). The SCBMC repeatedly organized the necessary trainings for all levels of staffs, including relevant technical personnel, middle‐level leaders, and management. It effectively improved the company's technical and organizational capabilities to ensure successful implementation of the project.

Basic Logistics

50. The SCBMC has effectively used the existing pipeline facilities owned by Petro China to transmit the CBM produced in wells to the LNG plant. Even during step‐by‐step construction of gas‐gathering stations, the least‐cost method of gas transportation was realized by using temporary connection of wellheads under the agreement with Petro China. The LNG was transported to Shanxi, Hebei, Henan, and eastern China through low‐temperature tanker trucks. The efficient logistics were well‐structured.

Social and Environmental

51. Through continued learning and efforts by the SCBMC, the environmental issues, which were identified during implementation, were addressed or remedied and did not have a residual impact on the environment. As for the social safeguards, the project involved a certain amount of permanent land acquisition and temporary land occupation. The resettlement actions were handled very well in compliance with the national law, local regulations, and World Bank requirements. The details are presented in annexes 9 and 10.

Safety

52. Throughout the project, the SCBMC maintained a ‘safety first’ policy and took effective measures, including the establishment of a safety management system, three‐level security inspection, and risk assessment. Every year, the investigation of potential safety hazards was carried out. Safety learning and training opportunities, including emergency drills, were organized more than 50 times a year to enhance the safety awareness of all staff and effectively improve the ability to deal with


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incidents. Through a series of effective safety measures, work‐related accidents did not occur. An independent safety panel was established, comprising technical experts from the industry, to guide the SCBMC in improving its safety management. The simulation system established under the TA component has also empowered the operation staff to practice safety measures.

(ii) Factors subject to the World Bank control

Adequacy of Supervision

53. Supervision was efficient and adequate. Although the task team leader (TTL) was changed before the launch of the project, the transition and the task handover were conducted smoothly. The project launch mission was initiated in November 2009 followed by periodic supervision missions. At the end of every mission, a wrap‐up presentation was shown to the stakeholders to clearly share the mission result.

Adequacy of Reporting

54. The reporting by the World Bank through Aide Memoires, implementation status and results reports, and wrap‐up presentations was of high quality, detailed, and candid. The supervision missions included necessary experts in areas including technical, fiduciary, safeguards, and safety. These experts monitored the project and guided the borrower whenever necessary. Such actions taken by experts were properly summarized in the annexes of Aide Memoires.

(iii) Factors outside the control of implementing entities

LNG Market Price Decline

55. At the time of project appraisal, the price of LNG was generally negotiated between producers (mainly Australian suppliers) and consumers (Chinese power generation companies etc.) with the intervention of the governments, and the amount of LNG was limited in China. With the reform and development of the gas market in China, the LNG price is now set by the market. The LNG is traded as a commodity and its price is affected by market conditions. Due to the decline of the domestic energy demand coupled with the sharp fall in international oil prices, the LNG prices in the market declined compared to the assumption at the appraisal stage. The price fluctuated between CNY 5,000 and CNY 7,000 per ton before 2013 and then started a continuous decline from 2014. In 2016, the transaction price dropped to CNY 2,500 per ton. In 2017, prices slightly rebounded and the average price reached around CNY 3,600 per ton. However, it is still considerably low compared to the trend in 2010–2013. The LNG price decline affected the LNG production and the project FIRR negatively.

IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME

A. QUALITY OF MONITORING AND EVALUATION (M&E) Rating: Substantial


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M&E Design

56. The set of the original PDO result indicators and intermediate indicators had several weaknesses to monitor and evaluate the project. These weaknesses include the following: (a) GHG reduction was one of key aspects of the original PDO, but there were no indicators to quantify GHG reduction, (b) the original PDO included the provincial‐level improvement, but it was hard to evaluate how much the project contributed to such provincial improvement with the original indicators, and (c) the debt service coverage ratio (DSCR) was included in the intermediate indicators to monitor financial strength in each year during implementation, but it was not enough to ensure long‐term financial sustainability. These issues were addressed with the second restructuring. The revised PDO and the indicators were appropriate and sufficient to measure the project’s progress.

M&E Implementation

57. The restructured Results Framework properly guided the client and the World Bank to monitor and evaluate the project progress toward the achievement of the PDO. The implementation agency regularly collected, consolidated, and analyzed data in line with the M&E design. The methodology and report were of high quality and acceptable. In addition, when necessary, an external monitoring team was effectively recruited for surveys.

M&E Utilization

58. The implementation agency and the World Bank regularly used the indicators to manage the project progress toward the PDO. At the end of every mission, a wrap‐up meeting was held to conduct consultations for improvement based on the data derived from M&E activities. The results of these consultations were summarized in Aide Memoires and shared with wider concerned parties so that appropriate next actions could be taken on time.

Justification of Overall Rating of Quality of M&E

59. The overall rating of quality of M&E is Substantial. M&E implementation and utilization were conducted properly. Although there were some weaknesses in the original M&E design, corrective action was taken to address them. By the closing date, the data being collected informed the project’s achievements reliably.

B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE Environmental Safeguards

60. The overall rating of environmental safeguards is Moderately Satisfactory. The project involved extractive activity in a mountain area and the construction of the LNG plant, thus the soil erosion, vegetation clearance, and safety issues of primary concern were identified. Given its nature and scale, it was appropriately classified as Category A, with the Environmental Assessment (OP/BP 4.01) being triggered. The safeguard rating at the beginning of the implementation was relatively low. For example, the vegetation restoration was not immediately conducted. However, the final safeguard rating achieved was Satisfactory through continued learning and effort by the SCBMC (photos of vegetation


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restoration in the drilling area of 53,000 m2 are provided in annex 12). The compliance issues, identified during implementation, were addressed or remedied and did not have a residual impact on the environment, implementation progress, or project objectives. The details are presented in annex 9.

Social Safeguards

61. The overall rating of social safeguards is Satisfactory. The project involved a certain amount of permanent land acquisition and temporary land occupation. Involuntary Resettlement (OP 4.12) was appropriately triggered. To address this issue, a Resettlement Action Plan (RAP) was prepared and social safeguard activities were well‐handled in compliance with the national law, local regulations, and World Bank requirements. Through the course of the project implementation, the external monitoring team conducted regular surveys. Based on the survey of affected households and interviews with key stakeholders, compensations and the process under the RAP were satisfactory enough for the affected people. The details are presented in annex 10.

Financial Management

62. The overall project financial management (FM) performance is assessed as Satisfactory. Appropriate FM arrangements were in place to ensure proper use of the World Bank loan and accounting of the project funds. Given that the project was implemented by a wholly state‐owned enterprise (SOE), the project’s FM benefited from the SOE’s sound corporate governance and internal controls. The project audits were carried out by independent auditors and the audit reports were submitted to the World Bank on time in compliance with the loan covenant. Although some audit reports raised certain insignificant finance‐related problems, these problems were addressed by the borrower during implementation with the supervision of the auditors and the World Bank. Most of unaudited interim financial reports were provided to the World Bank on time.

Procurement Management

63. The procurement performance rating has been satisfactory throughout the implementation of the project. The World Bank procurement policies and procedures were followed properly and no major procurement issues were found. The project concluded a total of 144 contracts, of which 57 contracts were funded by the World Bank loan. The largest procurement package was a US$47 million package for the second phase of the LNG plant. To ensure the successful procurement and implementation of this large‐scale plant design and supply contract, the client employed the professional services of a project management consultant (PMC) to provide technical and project management support for the single responsibility engineering, procurement, and construction (EPC) contract that was effectively and successfully implemented. For disbursement rate, there was delay in the early stage of the project. However, it was not caused by the procurement issues, but the client simply took a longer time to determine the optimal process technology for the facilities.

C. BANK PERFORMANCE

Quality at Entry Rating: Moderately Satisfactory


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64. The PDO was highly relevant to both the national agenda and the World Bank’s CPS. The World Bank team worked closely with the client to identify specific needs and design the appropriate project components. The World Bank mobilized a large team with necessary specializations, including energy development, gas production, safeguard, resettlement, procurement, and finance. Lessons learned from global experiences were incorporated in the project design. One drawback was that the authorities in Shanxi Province were not involved as one of implementation agencies or focal points. This resulted in restructuring during the implementation.

Quality of Supervision Rating: Satisfactory

65. The World Bank team employed regular supervision to review the progress and identify issues on time. Aide Memoires, implementation status and results reports, and wrap‐up presentations were produced and always focused on the key issues to achieve the desired development outcomes. The identified problems were properly reported to the World Bank management and necessary actions, including two restructurings, were taken. The supervision task team comprised members with appropriate skills, including safety, which is very important in a project of this scale, to address any problems with the client. The TTL’s presence in China enabled a richer and more frequent dialogue. Support and guidance from the World Bank team were appropriate and sufficient. In addition to fiduciary support, many technical recommendations were offered to ensure efficient implementation and high‐quality trainings. These efforts reflected in high CBM production, efficient LNG plant operation, and an effective training simulator. The dedication of the World Bank team to the project contributed to better outcomes and higher achievement of the objectives.

Justification of Overall Rating of Bank Performance Rating: Satisfactory

66. Although there was a shortcoming in Quality at Entry, it was addressed during implementation without causing any substantial problems. The stakeholders are satisfied with the World Bank’s performance (see annex 7). Given the satisfactory supervision and outcomes, the overall rating of the World Bank performance is Satisfactory.

D. RISK TO DEVELOPMENT OUTCOME

Risk of poor O&M: Low

67. The management and staff of the implementation company were well‐trained in the project and have never caused any serious problems and accidents in the operation. This reliable performance is based on not only the individual skill sets but also on well‐organized institutional strength. The training simulator has also contributed to maintain the practical O&M skills in the company. The risk related to the future O&M is considered Low.

Risk of unsustainable fiscal management: Low

68. The implementation company anticipates stable annual sales of CNY 600 million and profits of CNY 100 million after 2019. Because financial sustainability is one of the indicators, the DSCR, return‐on‐


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assets, and current ratio have been properly monitored. The financial analysis confirmed that the financial status has been kept stable and is expected to be even better (see annex 6). The financial risk of the company is considered Low.

Risk of further decline of LNG market price: Modest

69. The current LNG market price is less than the expectation at appraisal stage. This downward trend was observed not only in China but also in other countries. However, the price cannot be lower than the marginal cost of LNG production. Most of experts, including the International Energy Agency, predict the gas price will increase in the long run. Having said that, the price can still go down to some extent in the short run and can negatively affect the company’s cash flow. As shown in paragraph 36, 20 percent reduction in the LNG price will lower the FIRR (from 12 percent to 7 percent). Considering the potential impact, the risk related to the LNG price is considered Modest.

Risk of natural disasters and climate change: Low

70. The project sites are in a low‐risk earthquake zone. Now, the area is not exposed to extreme climate disasters such as typhoons, droughts, and flooding. Although future climate change may raise the disaster risk triggered by heavy rain or wind gust, the constructed infrastructure was designed to be resilient enough against natural disasters (for example, 70 m/s wind and 100‐year probability rainfall). A good drainage facility is also well‐developed. The critical properties are insured against severe damages. Therefore, the disaster related risk is considered Low.

V. LESSONS AND RECOMMENDATIONS

Lessons Learned from Challenging Experience

71. Alignment of project objectives with the implementation agencies needs to be carefully designed. At appraisal, it was expected for the sole implementation agency to implement the provincial‐level TA components. During implementation of the project, it turned out to be challenging. Although the issue was addressed in the restructuring, this might have been noticed at the appraisal stage if each entity’s role and responsibility were further discussed and scrutinized.

72. It could be more cost effective to (a) bundle small separated works and procurements into a consolidated EPC contract with a single responsibility and (b) outsource a part of construction management tasks. The project concluded a total of 144 contracts. The company encountered a lot of challenges, especially in the first phase of the LNG plant construction, in which many separated contracts were concluded. A management cost for the coordination and adjustment among contractors was required. Each small procurement package was less attractive for potential bidders. It resulted in construction delay and additional cost. In the second phase of the LNG plant procurement, the PMC and EPC approach was applied. Then, the implementation agency was able to avoid delay in construction and cost escalation. The second phase of the LNG plant was efficiently and cost‐effectively implemented.


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Recommendations Based on Successful Experience

73. It is vital to prepare for the deployment of new technologies even during implementation. The project paid attention to new technologies that would work better than the original plan. During project implementation, the technical design was adjusted and the L‐type horizontal well technology was used effectively. Although this change required the extension of the closing date, it was reasonable to prioritize the project outcome (maximizing CBM production in this case) rather than sticking to the original schedule.

74. Initial Investment in capacity building can ensure the project’s sustainability and reduce the life cycle cost. The project established the company’s sustainable training system, including the training simulator. There was a long discussion before the company made the decision to invest in the training simulator because none of the peer companies in the region owned such facilities. After the cost‐and‐benefit analysis, the installation was decided. As a result, the training simulator has greatly contributed to enhancing and maintaining the operators’ skills. Compared to the potential damage caused by lack of capacity, the training cost is nearly negligible (0.6 percent on the total cost in this project). The LNG plant was designed to last more than 25 years. The operators’ skills must be passed on to the succeeding generations. Tangible training facilities support a safe and efficient operation during the whole asset life.

.

The World Bank Shanxi Coal Bed Methane Development and Utilization ( P100968 )

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ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS

A. RESULTS INDICATORS A.1 PDO Indicators

Objective/Outcome: Produce 100 million m3 of CBM in the project area annually when all wells are put into commercial operation

Indicator Name Unit of Measure Baseline Original Target Formally Revised

Target

Actual Achieved at Completion

Volume of CBM Produced Annually

Cubic Meter(m3)

0.00 0.00 60000000.00 20000000.00

20‐Apr‐2009 31‐Dec‐2014 31‐Dec‐2017 31‐Dec‐2017

Comments (achievements against targets): The indicator didn't reach the target at the completion. Actual achievement rate in 2017 was 33% of the target. However, the volume of CBM production was still increasing at closing. The production volume was expected to keep increasing because it generally takes about nine months for CBM production to become stabilized and reach its peak after the completion of drilling. It is predicted to surpass the target in the near future and keep improving to reach 145% of the target (See Paragraph 27‐31 and Annex 5).

Objective/Outcome: Produce 160,000 metric tons of LNG in the project area annually


Target


Volume of LNG Produced Metric ton 0.00 0.00 160000.00 119000.00


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Annually 20‐Apr‐2009 31‐Dec‐2014 31‐Dec‐2017 31‐Dec‐2017

Comments (achievements against targets): The indicator didn't reach the target at the completion. Actual achievement rate in 2017 was 74% of the target due to the government policy change (See Paragraph 29). However, it is predicted to reach 100% of the target in 2019 (See Paragraph 27‐31 and Annex 6).

Objective/Outcome: Avoid 520,000 metric tons of GHGs Emission from the project area annually


Target


Avoided GHGs Emission Annually

Metric ton 0.00 0.00 520000.00 386750.00

01‐Dec‐2009 31‐Dec‐2014 31‐Dec‐2017 31‐Dec‐2017

Comments (achievements against targets): The indicator didn't reach the target at the completion. Actual achievement rate in 2017 was 74% of the target due to the government policy change (See Paragraph 29). However, it is predicted to reach 100% of the target in 2019 (See Paragraph 27‐31 and Annex 6).

A.2 Intermediate Results Indicators

Component: Exploration and development of CBM production wells


Target


Numbers of wells drilled in total

Number 0.00 0.00 126.00 126.00

20‐Apr‐2009 31‐Dec‐2014 31‐Dec‐2017 31‐Dec‐2017

Comments (achievements against targets): The target was fully met. 93 vertical wells and 33 horizontal wells were constructed.


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Component: Program to assist the project entity in developing its capacity (i) to construct and operate the facilities efficiently and safely, and (ii) to achieve long‐term financial sustainability


Target


The number of staff‐week trained for SCBMC

Number 0.00 0.00 800.00 2150.00

20‐Apr‐2009 31‐Dec‐2014 31‐Dec‐2017 31‐Dec‐2017

Comments (achievements against targets): The indicator substantially exceeded the end target.


Target


SCBMC's Financial Sustainability ‐ DSC Ratio

Number 0.00 1.40 1.40 1.00

20‐Apr‐2009 31‐Dec‐2014 31‐Dec‐2017 31‐Dec‐2017

Comments (achievements against targets): The indicator didn't reach the target at the completion due to the reduction in LNG sales. However, it is estimated to continue improving and exceed the target in 2020 (See Annex 6).


Target


SCBMC's Financial Sustainability ‐ Rate of Return on equity

Percentage 0.00 9.00 9.00 11.59

20‐Apr‐2009 31‐Dec‐2014 31‐Dec‐2017 31‐Dec‐2017

Comments (achievements against targets): The indicator exceeded the end target at completion.


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Target


SCBMC's Financial Sustainability ‐ Ratio of current assets to current liabilities

Number 0.00 1.10 1.10 0.70

20‐Apr‐2009 31‐Dec‐2014 31‐Dec‐2017 31‐Dec‐2017

Comments (achievements against targets): The indicator didn't reach the target at the completion due to the reduction in LNG sales. However, it is estimated to continue improving and exceed the target in 2020 (See Annex 6).


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B. KEY OUTPUTS BY COMPONENT

Objective/Outcome 1

Outcome Indicators 1. Volume of CBM Produced Annually 2. Volume of LNG Produced Annually 3. Avoided GHGs Emission Annually

Intermediate Results Indicators

1. Numbers of wells drilled in total 2. The number of staff‐week trained for SCBMC 3. SCBMC's Financial Sustainability ‐ DSC Ratio 4. SCBMC's Financial Sustainability ‐ Rate of Return on equity 5. SCBMC's Financial Sustainability ‐ Ratio of current assets to current liabilities

Key Outputs by Component (linked to the achievement of the Objective/Outcome 1)

(Component 1: Investment) 1. 126 CBM wells (93 vertical wells and 33 horizontal wells) were constructed. 2. Gas collection pipelines and the CBM gathering station were constructed. 3. The (first phase and second phase) LNG plants were constructed. (Component 2: TA) 4. The number of staff‐weeks of training for SCBMC reached 2,150. 5. SCBMC’s financial sustainability was improved.


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ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION

A. TASK TEAM MEMBERS

Name Role

Preparation

Jianping Zhao Task Team Leader

James Monday Senior Enviromental Engineer

Xiaowei Guo Senior Procurement Specialist

Feng Ji Operations Officer

Chaogang Wang Senior Social Scientist

Haixia Li Financial Management Specialist

Peter Meier Economic Analysis Consultant

Alan Carter LNG Consultant

Edwin Moritz Gas Production Consultant

Ivy Cheng Financial Analysis Consultant

Franz Gerner Peer Reviewer

Wolfhart Pohl Peer Reviewer

Youxuan Zhu Resettlement Consultant

Norma Leon Office Manager

Cristina Hernandez Program Assistant

Chunxiang Zhang Program Assistant

Supervision/ICR

Ximing Peng Task Team Leader

Yunlong Liu Procurement Specialist

Haixia Li Financial Management Specialist

Fowzia Hassan Team Member

Tianxiu Kang Team Member

Chaogang Wang Social Safeguards Specialist

Zhuo Yu Team Member

Fang Zhang Team Member

James Orehmie Monday Social Safeguards Specialist

Feng Ji Social Safeguards Specialist

Lijun Zhang Team Member

Wenqiang Gong Safety Consultant

Hua Du Energy Consultant

Shanshan Ye Team Member

Na Han Team Member

Youxuan Zhu Social Safeguards Specialist

Yongli Wang Enviramental Safeguards Specialist

Vilija Kostelnickiene ICR Contributor

Alan David Lee ICR Contributor

Li Peng ICR Contributor

Takayuki Doi ICR Main Contributor


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B. STAFF TIME AND COST

Stage of Project Cycle Staff Time and Cost

No. of staff weeks US$ (including travel and consultant costs)

Preparation

FY06 2.000 22,689.18

FY07 9.725 72,192.67

FY08 24.070 198,792.38

FY09 9.717 68,563.70

Total 45.51 362,237.93 Supervision/ICR

FY09 0 1,539.86

FY10 6.050 64,804.17

FY11 7.650 66,208.18

FY12 5.650 101,497.75

FY13 5.350 93,755.34

FY14 3.300 49,934.54

FY15 6.800 80,390.27

FY16 7.618 78,765.38

FY17 11.405 73,272.86

FY18 6.026 41,627.90

Total 59.85 651,796.25


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ANNEX 3. PROJECT COST BY COMPONENT

Components Amount at Approval

(US$, millions) Actual at Project Closing

(US$, millions) Percentage of Approval

(US$, millions)

Investment Component (CBM and LNG Development)

202.6 214.4 105.8

TA Component (Institutional Strengthening and Capacity Building)

1.7 1.2 70.6

Total 204.3 215.6 105.5


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ANNEX 4. Project Diagram

Facilities

1. The facilities constructed in the project include (a) CBM production wells, (b) a gas‐gathering plant and collection pipelines, and (c) LNG plants. Gas from the individual wells is transported through collection pipelines to gas‐gathering systems. The gas is transported through main gas pipelines to the processing plant, followed by liquefaction in the LNG plants. The electric power for the facilities is supplied through a 35‐kV transformer station in the Zhengzhuang Block. This provides reliable and relatively low‐cost supply for the field operations.

Figure 4.1. Facilities constructed in the project


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Funding Structure

2. The project implementing agency (SCBMC) is a special purpose company (SPC) created to prepare, finance, construct, and operate the project facilities. Shareholders are SOEs. The World Bank loan was made to the Government of China (GOC) following the IBRD’s standard terms and conditions. The GOC loaned the proceeds to the Shanxi provincial government, who then forwarded the proceeds to the SPC on the same terms and conditions. Domestic financial institutions also loaned to the SPC. Therefore, no private sector financing was directly injected to the project

Figure 4.2. Funding Structure

Private sector participation

3. Due to the uncertainty of underground conditions, it was challenging for the private sector to make a decision toward CBM development. As they said, the project might catalyze the private sector’s participation. In fact, as shown in table 4.1, private sector financing was mobilized in neighboring CBM developments after 2013 when the project started its CBM production.

Table 4.1. New Projects in the Neighboring Area after 2013

Project Name Year Investment (CNY, millions) Public/Private

Shun Tianda 2014 180 Private

Huagang 2016 950 Public

Hao Kun 2016 400 Public‐Private Partnership

Government policy to promote gas utilization

4. Development of gas has been included in the government’s energy plan. Shanxi provincial government also launched a provincial gasification program in 2013 to promote the production and utilization of gas in Shanxi province. In 2017, urgent action to promote clean heating was required by the central government in order to address the serious air pollution issues in northern China. The coal‐to‐gas (replacing coal with gas for space heating) program was a key part of this initiative, and it included Beijing, Tianjin, Hebei provinces and their adjacent regions including Shanxi. Government subsidy was provided for the program. LNG produced under the project has been distributed mainly to be used for city gas, industrial gas consumers and gas filling stations for vehicles.


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ANNEX 5. CBM Production

1. Increasing CBM production. The project closed in June 2017. Since then, the volume of CBM production has actually been increasing. It generally takes at least several months for each CBM well to stabilize and reach its peak after the completion of drilling. Most of the wells were constructed in 2017 and will stabilize by the end of 2018. The total CBM production is expected to keep increasing and reach its peak in 2019. Figure 5.1 shows the actual volume of monthly CBM production after the closing date.

Figure 5.1. Monthly CBM Production (Actual)

Source: Borrower’s ICR Report.

2. Long‐term forecast. Based on the track record from 2013 to 2018, it is estimated that (i) ramp rate to the peak at each well is around 85% per year, (ii) peak sustained period is around seven years for vertical wells and around five years for horizontal wells, and (iii) decline rate after peak is around 15% per year. Figure 5.2 shows a cumulative curve of CBM production from all 126 wells. The CBM production volume is forecasted to surpass its end target (60 million m3 per year) in 2018. It will keep increasing to 145 million m3 per year in 2019. Once each well reaches its peak production, it can maintain the same level of production for several years. Then the volume will start gradually decreasing. The economic lifetime of the wells is around 15 years, but the SCBMC can construct additional wells in the area if necessary. This can increase the project’s internal rate of return further.

Figure 5.2. Yearly CBM Production (Actual and Forecast)

Source: Borrower’s ICR Report.


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ANNEX 6. EFFICIENCY ANALYSIS

1. Economic analysis at appraisal. A cost‐benefit analysis was conducted. The economic costs include yearly capital investments and operation expenses, excluding tax, duty, and financial charges. The economic benefits include the incremental LNG sales and associated environmental benefits.

2. At appraisal, the project as a whole (including CBM and LNG production) was estimated to have a baseline EIRR of 25 percent, excluding environmental benefits and 42 percent, including environment benefits (reduction of particulates, SO2, CO2, and methane emissions). Key assumptions included the following. The economic benefit of gas production, and of gas input to produce LNG, was valued at the economic price for pipeline gas. This price was estimated in terms of opportunity cost based on the border price of LNG, with a baseline value of CNY 1.17 per m3, constant for all years (lower and higher values were tested in the sensitivity analysis). This economic price was higher than the prevailing financial gas price in 2009, CNY 0.88 per m3 (excluding tax), which was regulated by the GOC at that time. The economic benefit of LNG production had a baseline value of CNY 0.75 per m3, calculated as the distributor’s willingness to pay for LNG from the plant (CNY 1.92 per m3) less the value of input gas (CNY 1.17 per m3), also constant for all years.10 The economic value of CO2 equivalent emissions was assumed to be fixed at US$15 per ton. At appraisal, it was conservatively assumed that LNG would be used mainly for power generation. The sensitivity analysis found that CBM production would become uneconomic (that is, its EIRR excluding environmental benefits would fall below 10 percent) if the amount of gas produced was 64 percent of the expected best case, while LNG production would become uneconomic if it added less than CNY 0.44 per m3 in value to gas input.

3. Financial analysis at appraisal. The project entity was newly established and therefore did not have a record of financial performance. Most of inputs were based on tentative assumptions. The main financial benefit from the project was revenue from LNG sales. The planned production level of the LNG plant was 200,000 tons per year (fully operational). The financial costs are (a) capital cost of construction, including applicable taxes and duties and (b) O&M costs, including input materials, power, maintenance, depreciation, wages, and administrative expenses. The largest expenditure item is CBM purchase which is needed to keep the LNG plant operating at capacity.

4. Project costs. The total investment of the project from the beginning to the closing was US$216 million, which is 6 percent higher than the originally estimated cost of US$204 million at appraisal. The slight cost increase was mainly due to the first phase of the LNG plant construction, where many separate procurements were concluded and a lot of adjustments and management costs were required. Based on the lessons learned, this aspect was improved in the second phase of the LNG plant construction, for which the PMC and EPC approaches were applied. Because the total cost increase was not significant, the impact on economic and financial sustainability is limited. In fact, additional finance from the World Bank was not required because the implementing agency was able to cover the incremental cost.

10 The PAD text (page 62) says the difference was assumed to be CNY 1 per m3, but PAD table 9.3 shows a difference of CNY 0.75 per m3.


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Changes in Assumptions and Methodology for the ICR

5. Because the GOC deregulated gas prices in 2013, at the time of completion, gas prices are negotiated based on net‐back market price and the LNG price is determined by the market. For the ICR, the actual price of gas (excluding tax), negotiated between the SCBMC and its suppler (Petro China), is taken as CNY 1.74 per m3 in 2018, increasing 3 percent each year to CNY 1.96 in 2022, and constant thereafter. The actual sales price of LNG from the plant (excluding tax) is taken as CNY 4,566 in 2013, decreasing yearly to the lowest at CNY 2,531 in 2016 and recovering to CNY 3,299 in 2017. It is anticipated that the LNG price could increase in the coming years with the recovery of global economy and growth of natural gas demand in China. The LNG price was assumed at CNY 3,800 per ton in 2018, increasing yearly to CNY 4,200 in 2019, CNY 4,500 in 2020, CNY 4,700 in 2021, and CNY 5,000 in 2022.

6. Overall, the EIRR, excluding environment benefits is 15 percent. The lower EIRR than anticipated at appraisal can be attributed to the longer construction period (2011 to 2018) than anticipated at appraisal (2009 to 2011), higher investment cost, and lower LNG price in the first several operation years. This, in turn, is due to the lower‐than‐expected rate of the CBM and LNG production to date, for reasons explained earlier in the ICR. Nonetheless, the EIRR remains higher than the World Bank’s benchmark of 12 percent.

7. The EIRR is higher when environment benefits are included, along similar lines to the analysis at appraisal. For the purposes of the ICR, quantification of environmental benefits focuses on CO2 reductions associated with the use of LNG to displace other, more carbon‐heavy fossil fuels. Specifically, the EIRR, including CO2 benefits is found to increase to 18 percent using an updated methodology. It would be higher still if local pollutants and methane were also included. The methodology to calculate the avoided CO2 emissions is revised in accordance with the actual track record and recent guidance on carbon pricing. In contrast to the appraisal assumption of LNG use for power generation, it has in practice been used mainly for industrial use, city gas, and car fuels. To estimate the avoided GHG emission more accurately, the replacement of LNG in these sectors was analyzed based on the actual information collected by the company. For industrial use, LNG is mainly used in gas‐fired boilers to replace coal‐fired boilers. For city gas use, LNG is assumed to also mainly replace coal. For the car fuel use, LNG is assumed to replace gasoline, which is more carbon‐intensive than LNG. The proportion of different uses of LNG has been analyzed according to the actual sale information in 2016 and 2017 provided by the company. For different uses, the replaced coal and gasoline consumption and the avoided CO2 emissions are calculated. The social value of carbon suggested in the Guidance Note Social Value of Carbon in Project Appraisal September 2014 is adopted in the analysis. Key inputs and results at appraisal and completion are summarized in table 6.1.

Table 6.1. Key Input Values and Results for Economic Analyses at Appraisal and At Completion

Row Parameter Unit Appraisal Completion

Assumptions

1. Exchange rate CNY/US$ 6.83 6.30

2. Electricity tariff (excluding tax) CNY/kWh 0.398; 0.45 0.511

3. Economic value of gas CNY/m3 1.17 1.30 to 1.76

4. Economic value of LNG CNY/m3 1.92 1.65 to 3.27

5. Added value of LNG compared to value of gas (for a given year)

CNY/m3 0.75 0.36 to 1.50


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Row Parameter Unit Appraisal Completion

6. Average CO2 emissions reduced per unit of LNG consumed11

tCO2/ton of LNG

3.25 1.52

7. Economic value of CO2 emissions avoided12 US$/tCO2 15 21 to 56

8. Effective operating lifetime years 18 19 for CBM 25 for LNG

Implementation data

9. Total project investment US$, million 204 216

10. Gas production peak volume 106 m3/year 213 145

11. Gas production peak year year 2012 2019 to 2020

12. LNG production peak volume 106 m3/year 323 180

13. LNG production peak year year 2012 onward 2020 onward

Economic and Financial Analysis Results

14. FIRR (including tax) %/year 9 12

15. EIRR excluding environmental benefits 25 17

16. EIRR including benefits of reduced particulates, SO2, CO2 and CH4

%/year 42 N/A

17. EIRR including benefits of reduced CO2 N/A 19

8. Sensitivity analysis. Whereas it is impossible to precisely predict the future LNG prices, the volatility is considered and tested in sensitivity studies. Even with a 20 percent reduction in the LNG price, the FIRR is estimated to be 7 percent.

9. Economic value of the project. Major economic value added by the project is LNG produced as the energy source as shown in figure 6.2. The LNG plant, with an annual production capacity of 200,000 tons, was built in the project and is already functional. Although the CBM production from the project is anticipated to start decreasing gradually around 2024, the LNG plant’s functionality will last for at least 25 years. Further, the implementation agency plans to develop new wells in the area to keep its CBM production (with additional investment) and maintain at least 160,000 tons of LNG production volume. Other assumptions, including operating costs and environmental benefits are estimated under the reasonable prediction linked to the LNG production.

11 At appraisal, LNG was presumed to replace power generation with an emissions factor of 899 g CO2 per kWh. At completion, LNG is estimated to replace use of other fossil fuels for industry (75 percent), city gas (15 percent), and vehicles (10 percent). 12 World Bank 2015 guidelines recommend US$30 per ton in 2015 rising to US$65 per ton in 2040 as a base case social cost of CO2.


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Figure 6.1. Economic value of the project

Source: Authors.

10. Financial sustainability. Table 6.2 shows two important financial indicators for 5 years from now. In addition to the World Bank loan, the company has borrowed a certain amount of fund from several domestic financial institutions (details are provided in annex 7). The repayment and interest could be a severe burden and a future risk to financial sustainability. However, as the LNG production is operating normally, the financial situation of the company is expected to continue improving.

Table 6.2. Financial sustainability indicators (Forecast)

2019 2020 2021 2022 2023

Current ratio 0.64 1.12 1.74 2.91 4.08

DSCR 1.30 1.79 1.74 5.65 5.62


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ANNEX 7. BORROWER, CO‐FINANCIER, AND OTHER PARTNER/STAKEHOLDER COMMENTS

1. The following is the summary of the stakeholders’ comments.

Project Implementation Agency (SCBMC)

2. The World Bank’s services were very satisfactory. During the implementation of the project, the following were observed:

Timely response. Regarding the issues raised, the World Bank experts gave timely answers and worked with excellent cooperation. As for the payment procedure, the World Bank completed the payment within three working days.

Lending terms and conditions. The lending condition was reasonable, according to the financial agreement signed by our company with the Ministry of Finance of Shanxi Province on March 28, 2011. Compared to other financial institutions, including domestic banks, the World Bank loan allowed a longer repayment period, lower interest rates, and a longer grace period. The repayment was designed to increase when the production capacity becomes fully online, thus being in line with the actual needs of the company.

Technical support. Since the start of the project, the World Bank had provided several trainings on procurement, finance, and project management. With these trainings, the company management personnel were greatly informed. The advanced management experience and lessons learned from the World Bank’s other projects were greatly beneficial. The World Bank also provided strong technical support for the construction of the company's liquefaction plant and upstream gas drilling. The United States experts reviewed the technical specifications and design of the liquefaction plant and the upstream development technology. The in‐depth discussions played a significant role in the project decision making.

Support from the World Bank team. The team provided valuable advice and ensured the smooth progress of the project. The team was patient and careful in their supervision and cared about all aspects of the project. The TTL actively helped the communication between the Ministry of Finance, the National Development and Reform Commission, and the project company. The TTL coordinated the smooth implementation and made great contributions to the project. The safety expert visited the site and established the sophisticated simulation system. The environmental safeguard expert demonstrated outstanding professional skills in solving specific issues. The social safeguard specialist cared about the people's livelihood. He thoroughly understood the situation of land acquisition and conducted meticulous investigation to quickly resolve issues. The procurement specialist had a high level of professionalism and was very responsible. The FM specialist was patient and provided detailed explanations every time.


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3. After years of joint efforts, the project was completed in strict accordance with the requirements of the World Bank and was remarkably successful in construction, quality, and technology, while also producing satisfactory results.

The Largest Shareholder (Shanxi Energy Industries Group Co., Ltd.)

4. The project is evaluated as highly successful.

5. Demonstration of clean energy development. There was a significant technical development in the project. It became a good showcase for the CBM industry.

6. Government support. The Shanxi Province has been known for its great CBM potential. However, due to the uncertainty of geological conditions, it was not easy for a company to promote the upstream well development. The Government considers CBM as one of the strategic industries in Shanxi Province and has provided the company a great deal of administrative support, which ensured smooth implementation.

7. The World Bank assistance. The company is satisfied with the World Bank’s assistance. From the beginning to the end, the World Bank team showed professionalism and dedication. In every implementation support mission, the company had productive discussions and learned a lot from the World Bank’s knowledge and experience. The mission helped the company properly keep track of milestones as well.

8. Social benefit. The project created new job opportunities for the local community. In addition, the road prepared for the construction was used by villagers and has been highly appreciated. The World Bank’s safeguard specialists accurately captured the local needs and kept providing practical instructions.

9. Lessons learned. The procurement was challenging for the company in the early stage of the project. The company encountered a lot of difficulties especially in the first phase of the LNG plant procurement, in which many separate contracts were concluded. It resulted in some delay and additional costs. Upon the World Bank’s advice, the company applied the PMC and EPC approach for the second phase of the LNG plant. It worked successfully. The company recommends the PMC and EPC approach for projects of similar scale and nature.

10. Future projects. The company is satisfied with the project’s result and the World Bank’s performance. The company will continue exploring the opportunities for further green energy developments. If an occasion arises, continuous cooperation with the World Bank will be highly appreciated.

Shanxi Provincial Government Agency (Finance Bureau)

11. The collaboration among the World Bank, the company, and the Government is highly appreciated, especially in the following aspects:

Decision‐making process. When the project was appraised, it was not easy to evaluate the risk in the CBM project. Due diligence conducted by the World Bank’s experts provided a


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good guidance for the Government as well. This experience accelerated clean energy development in Shanxi Province.

Changes in technical design. During the implementation of the project, the well drilling technology was significantly developed. The World Bank continuously provided TA and supported the company to use the best available technology. The World Bank’s involvement helped the other lenders’ internal approval processes.

Lenders’ coordination. In the early phase of the project, equity injection from the shareholding companies was delayed. The World Bank and other lenders collaborated on the issues that resulted from the abovementioned delay with continued efforts. Consequently, it was possible to maintain a sound debt‐and‐equity balance, including the Government subsidy. The details are shown in table 7.1.

Table 7.1. Equity and Debt Balance (CNY, millions)

Fund Composition Entity Amount

Equity

Shanxi Energy Industry Group Co., Ltd. 173.4

Shanmei Investment Group Co., Ltd. 102.0

Shanxi Gas Industry Group Co., Ltd. 64.6

The World Bank IBRD 517.9

Domestic Lending

Industrial and Commercial Bank of China Hi‐tech Development Zone Branch

76.5

43.2

102.0

173.4

93.1

China Clean Energy Development Fund Management Center 60.0

Shanxi SME Venture Capital Fund (Limited Partnership) 20.0

Shanxi Energy Industry Group Co., Ltd. 30.0

Government subsidies (including fiscal discounts and CBM drainage subsidies)

19.4

Total 1,475.5


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ANNEX 8. SUPPORTING DOCUMENTS

1. Country Partnership Strategy FY2006–2010

2. Country Partnership Strategy FY2013–2016

3. China 2030 Building a Modern, Harmonious, and Creative Society (2013)

4. Project Appraisal Document

5. Loan Agreement

6. Resettlement Action Plan

7. Environmental Assessment

8. Aide Memoires

9. Implementation Status and Results Reports

10. Borrower’s ICR Report

11. CBM Development Technology Report (China University of Mining)

12. China boosts CBM output in 2017 (AsiaElec, Asia Power Monitor, February 2018)

13. Europe needs China’s help to clear the LNG market (Goldman Sachs Commodities Research, May 2017)

14. China’s dash for gas runs into supply constraints (Goldman Sachs Commodities Research, December

2017)


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ANNEX 9. ENVIRONMENTAL SAFEGUARDS

1. The project involved extractive activity in a mountain area and construction of an LNG plant, thus the soil erosion, vegetation clearance, and safety issue of primary concern were identified. Given its nature and scale, it was appropriately classified as Category A, with the Environmental Assessment (OP/BP 4.01) being triggered.

2. An Environmental Impact Assessment and an Environmental Management Plan (EMP), including a Safety Management Plan were prepared during project preparation. They addressed the environmental impacts that may arise from the construction and operation of well drilling and the LNG plant. A comprehensive analysis of alternatives was conducted for the site location for the LNG plant, compression station and pipeline route, and for the technology for wastewater treatment. So, the environmental impacts of primary concern were minimized or adequately mitigated. In addition, the mitigation measures were well‐incorporated into the project design and EMP.

3. During implementation, the implementation agency assigned a dedicated environmental officer and engaged an external environmental monitoring consultant to carry out the required monitoring programs. The environmental monitoring reports were regularly submitted to the World Bank for review. Overall, the project EMP implementation is Moderately Satisfactory in that (a) the spoil was not adequately managed at the beginning; (b) the vegetation restoration was not immediately conducted at the beginning; (c) the remedy was conducted with enhancement in training and supervision on‐site by the enterprise; (d) there were no residual impacts; and (e) the project environmental monitoring was conducted properly and well documented.

4. In addition, as a remedy, the enterprise changed its environmental consultant and allocated more resources to improve its environmental management. The most crucial factor that drove the implementation of its EMP in the right direction was the awareness improvement of the enterprise management. The training for the enterprise leaders, and particularly the good result of the on‐site environmental facilities that improved the project’s profile, largely accelerated the learning curve of the enterprise management.

5. The internal system for safety management was established with proper institutional structure and adequate budget support, which will ensure the sustainable management of the safety issue in operation stage. This system is comprehensive and comprises a safety assessment, leadership responsibility, an emergency preparedness plan, specific operation procedures, a training plan, and regular examination. In addition, the strong safety awareness of the management promoted the progress of standardization in the safety operation. The enterprise passed and obtained the certificate of Class III for safety standardization in 2015 and pledged to meet the requirement for Class II safety standardization in one or two years.


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ANNEX 10. SOCIAL SAFEGUARDS AND RESETLEMENT

1. The project includes two physical components. One is the LNG plant component and the other is the gas exploration and collection component. Both involve certain amounts of permanent land acquisition and temporary land occupation. To address such impacts, a RAP was prepared during project preparation, which was approved by the World Bank.

2. The land acquisition was implemented first for the LNG plant site, which involved acquisition of 112 mu (74,667 m2) of land area from Dongshan and Jinfeng villages. The adopted compensations were either the same or higher than that in the RAP. The 13 households who lost their 12.8 mu (8,533 m2) of contracted land were provided with land compensation, green crop compensation, and allocation of replacement of farmland. For the other acquired rural land, except for compensation of green crop and attachments, all compensations were kept in the village as a village development fund. The fund was used to develop new farmland, improve village infrastructure, provide support to vulnerable groups, and set up social security insurance for the elderly.

3. Along with permanent land acquisition, additional land areas were acquired temporarily for construction of related facilities, such as transmission lines, gas pipelines, access roads, and flood control facilities, which amounted to 132 mu (88,000 m2) of land area and CNY 0.75 million of compensations. All the compensations were delivered to the affected households.

4. In addition to the compensations received for the land acquisition, the LNG plant project also brought considerable social benefits to the village. According to the social survey, most villagers had experienced a significant increase of income during the project construction, which was contributed by working for the company, providing labors on construction sites, leasing houses to construction workers, and selling vegetables and farm products to the contractors. By the end of 2016, the average per capita income in the village had reached CNY 13,000 per capita, which was 172 percent higher than that in 2008 when the land acquisition took place (CNY 4,780 per capita).

5. For the gas exploration and collection component, the gas exploration area was changed during project implementation. As a result, a supplement RAP for the gas exploration component was prepared in 2012 and submitted to the World Bank in 2013. According to the supplement RAP, only gas storage stations would involve permanent acquisition of 17 mu (11,333 m2) of unused land area. For construction of other facilities, they would involve temporary land occupation of 1700 mu (1,133,333 m2) land area. About 90 percent of the affected land areas are woodlands, with 10 percent being farmlands or other rural lands. Most of the affected land areas are in three villages and two state‐owned forest farms. In terms of compensation policies, for both permanent land acquisition and temporary land occupation, the proposed compensations were either the same or higher than that in the previous RAP.

6. In the beginning, the implementation of the component moved slowly. To facilitate the implementation, 20 experimental gas wells were developed. The first group of wells temporarily occupied 106 mu (70,667 m2) of land area from two villages. All compensations were paid to the affected villages. Following the experiments, a total of 126 gas wells were developed by the end of 2017, including 33 horizontal gas wells and 93 vertical gas wells. The land acquisitions for all gas wells were


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completed in 2016.

7. According to the statistics by the company, a total of 896 mu (597,333 m2) of land area was acquired, including 621 mu (414,000 m2) of land area temporarily leased by the company, and 275 mu (183,333 m2) of woodland being permanently acquired. In addition, about 28 mu (18,667 m2) of concrete surface rural road have also been occupied. For all these land occupation and land acquisition, following the provision in the RAP, compensations have all been paid to the affected parties.

8. Only the land area of one gas storage site (14 mu or 9,333 m2) has not yet been formally acquired. This is because the originally acquired site was located under the transmission line, which is considered as inappropriate for gas storage construction. As a result, an alternative site was provided by the local government. Because the site is located in the area without a land utilization plan, the land acquisition had to wait for the completion of land use readjustment by Qinshui County. According to the company, such a readjustment was finally completed at the end of 2017. As of March 2018, a land acquisition application is being prepared by the county land resources bureau, which will be submitted to the provincial land resources department for approval. At the same time, under agreement of the local government, civil work construction for gas storage stations is being carried out with a temporary land occupation arrangement. The affected village will be provided with full compensation once the approval of land acquisition is obtained. It is hoped that the formal land acquisition procedure could be completed in 2018 to create conditions conducive to begin operation of the gas storage site.

9. Through the course of project implementation, the external monitoring team has conducted regular monitoring activities for the project and produced a total of eight resettlement monitoring reports. Based on a sample survey of the affected households and interviews with key stakeholders, these monitoring reports provided a comprehensive review of land acquisition performance for the project. According to these reports, the affected people were consulted for various land acquisition impacts, all compensations following the RAP were paid to the affected people, and the process and outcome of resettlement were found to be satisfactory for the affected people.


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ANNEX 11. TECHNICAL DEVELOPMENT (L‐type Horizontal Well Technology)

1. Technical development. The L‐type horizontal well technology played a significant role in the project. Considering the depth of the coal seam in the Qinshui Basin (>800 m), vertical wells were considered the most appropriate for the project site at the appraisal stage. Horizontal wells had shown good production only in areas of shallow depth. On the other hand, the horizontal well technology is still new and has been under rapid development. This includes four generations: the first generation (multi‐branch horizontal wells), the second generation (double‐maintenance or main‐supported horizontal wells), the third generation (U‐shaped segmented horizontal wells), and the fourth generation (L‐type segmented fracturing horizontal wells). The capability of the CBM production has been improving step by step.

2. Improvement in the L‐type horizontal well. The fourth generation (L‐type) horizontal well has achieved significantly good and stable gas production compared to previous generations. The third generation (U‐type) horizontal wells needed to be connected to a vertical well at the far end of the main wellbore of the horizontal well for gas drainage. Due to the complexity of the configuration, a lot of inspection and maintenance works are required. The L‐type horizontal wells have simpler configurations, require less O&M costs, and can offer higher production.

Figure 11.1. The Third Generation (U‐type) Horizontal Well

Source: China University of Mining and Technology.


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Figure 11.2. The Fourth Generation (L‐type) Horizontal Well

Source: China University of Mining and Technology.

3. Output Efficiency. The project is located at the Zhengzhuang‐Libi Cooperation Block in the mid‐deep part of Qinshui Basin. The target layer has a thickness of 5.3–6.1 m at a depth of around 800 m with a methane content of 11–24 m3 per ton. This layer has typical characteristics of high buried depth, high reservoir pressure, high ground stress, and low permeability. The Zhengzhuang‐Libi Cooperation Block covers an area of 50 km2, accounting for 6 percent of the Zhengzhuang Block with an area of 834 km2. At present, the methane output per vertical well is up to 950 m3 per day and the output per horizontal well is up to 12,000 m3 per day, both of which are significantly higher than those of neighboring blocks with similar geological conditions. The difference can be seen in table 11.1.

Table 11.1. Comparative Statistics of Methane Output of Neighboring Blocks

No. Name of Block Developer Type of well Output from Single Well (m³/d)

Difference a

(%)

1 Zhengzhuang‐Libi Cooperation Block (The project)

SCBMC (project implementation agency)

Vertical 950 100

2 Horizontal 12,000 100

3

West of Zhengzhuang Block

Huabei Oilfield

Vertical 450 48

4

Horizontal

1,868 16

5 1,856 16

6 2,673 22

7 South of Mabi Block Asian American Gas, Inc

Vertical 527 56

8 Horizontal 4,219–5,563 35–46

9 West of Shizhuangnan Block

China United Coalbed Methane Corporation, Ltd

Vertical 460 48

Source: Liu Shenggui, Associate Professor, China University of Mining and Technology. Note: a. Take the output of single well of Shanxi Coal Bed Methane as reference to describe the output differences

with neighboring blocks.


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4. Awards. The implementation agency (SCBMC) explored the adaptability of horizontal wells for the project. The analytical studies indicated that the use of the L‐type horizontal wells was the most economical for several locations. The SCBMC decided to use the L‐type horizontal well technology to develop CBM in the depth of 800 m to 1,000 m. After the project, peer companies (Petro China, Blue Flame, and so on) have also successively used the L‐type horizontal well technology. Due to these achievements, the SCBMC obtained the national high‐tech enterprise certification. In addition, the company was awarded the title of Taiyuan Municipal Technical Center.


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ANNEX 12. PHOTOS OF PROJECT SITES

Well Drilling (under implementation)

Vertical Well (after completion) Horizontal Well (after completion)

Zhengzhuang‐Libi Cooperation Block (Upstream gas drilling area)


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Road Constructed for the Project

Gas‐gathering Station

Vegetation Restoration in the Well Drilling Sites

Power Distribution for Well Facilities Antenna for Remote Well Monitoring


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LNG Plant LNG Tanks

SCBMC Office LNG Plant Surveillance Monitors

Training Simulator

Fitness Facilities for LNG Plant Operators


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MAP (CHN43541)

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