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A PROGRAM TO ACCELERATE PETROLEUM PRODUCTIONIN THE DEVELOPING COUNTRIES

Section I: INTRODUCTION: THE ENERGY BALANCE

1. In July 1977 the Executive Directors of the World Bank approveda program calling for an expansion of lending by the Bank Group in the developmentof the fuel and non-fuel mineral resources of member countries.' The Bank hadnot previously financed petroleum production projects, and the decision to doso recognized the urgent need for developing countries to exploit their indigenousenergy resources. 2/

2. Because of the experimental nature of the Bank's expanded programfor fuel minerals, it was agreed that a report would be prepared reviewingthe first year's experience and the lessons learned. The present paper presentsthat report. It concentrates on oil and natural gas, since these are the mainfuels, but an account is also given of the Bank's work in coal and the contri-bution coal can make to solving the energy problem of the developing countries.Traditional, non-commercial fuels, which are important in the rural areas, arealso considered briefly, as are the prospects for solar and other renewablesources of energy. In the July 1977 discussions, the need for an integratedprogram for development of the energy sector was stressed. The changed economicsof energy resulting from the increase in the price of oil logically requiredconservation, exploration of previously high-cost domestic sources of petroleum,and expansion of energy from alternative sources to substitute, where possible,for petroleum-based energy supplies. The Bank has been mindful of the need fora balanced program for energy development, and the importance of planning forthe sector as a whole has been emphasized in its work.

3. In the last year, the international community has become increasinglyaware of the energy needs of the developing countries, and has urged the inter-national agencies to expand their assistance in this sector. In the Declarationfrom the Bonn Summit of July 17, 1978, the participants requested that "theWorld Bank explore ways in which its activities in this field can be madeincreasingly responsive to the needs of the developing countries, and ... examinewhether new approaches, particularly to financing hydrocarbon exploration, wouldbe useful". The Secretary General of the United Nations 3/ endorsed the con-clusions of a group of experts appointed by him early in 1978, which includedthe recommendations that:

/ A synopsis of that program and the rationale behind it may be found onpages 20-22 in the 1978 World Bank Annual Report.

2/ The word "petroleum", as used in this report, refers to both oil and naturalgas.

3/ Multilateral Development Assistance for the Exploration of Natural Resources,Report of the Secretary General, A/33/256, dated October 16, 1978, to whichis annexed the report of the group of experts.

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(a) "Consideration should be given to expansion of the existing

activities of the World Bank and the regional Development

Banks, and in particular to the provision of loans for basic

geological survey and geoscientific data base activities; and

(b) "Urgent consideration should be given to additional financingmechanisms and, in particular, a mechanism for providingfurther finance for petroleum exploration in the oil importing

developing nations - this to be linked to the work currentlyunderway within the World Bank and other forums."

4. To provide the background for an assessment of the Bank's recent

activities in energy development, and of what remains to be done, projections

are given below of the "energy balance" of the Non-OPEC developing countries

(NODCs) in 1980 and 1985, which point to the very different situation of the

oil exporters and importers in this group of countries. Section II reviews

the Bank's lending and technical assistance activities for petroleum, coal and

electric power during the past 15 months. Section III examines the exploratory

and other predevelopment work that has to be done before investment can be

made in fuel production, and shows how far it falls short of desirable levels

in the oil importing developing countries (OIDCs). Section IV suggests ways

in which the Bank might help these countries to extend their knowledge of petro-

leum and coal reserves and outlines a program of further work by the Bank in

the energy sector.

The ,Energy Outlook for the Non-OPEC Developing Countries

5. Preliminary Bank projections of the energy balance of the NODCs in

1975-1985 are shown separately in Table 1 for oil-importing countries and

non-OPEC oil exporters. Energy demand and supply in million barrels per day

of oil equivalent (m bdoe) are divided according to the amounts provided by

oil and other sources (including coal, gas, hydro and nuclear power). Non-

oil sources of energy are largely produced and consumed domestically, and the

bulk of trade in energy fuels is in oil. The projections are revisions of

figures prepared for the World Development Report (WDR) 1/. Key assumptions

are that:

(i) Crude oil prices will remain constant in real terms through

1985; 2/

(ii) NODC economies will grow at a rate of 5.9% per annum during the

decade. 3/

1/ World Development Repo,rt, published by the World Bank, August 1978.

2/ Corresponding to a per barrel price for reference crude of $11.50 in

1975.

3/ GNP growth rates for each group of countries and for five-year periods

are given in footnote 1 to Table 1.

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TABLS I PRELIMINARY PROJECTIONS OF NON-OPEC DEVELOPING COUNTRIES (NOOCs) ENERGY BALANCE 1975-85 '/(million barrels per day of oil equivalent)

Growth Rates (. oer annu)1975 1980 1985 1976-80 198I-85 1976 5OIL-IMPORTING DEvELOPING COUNTRIES (OIDCs)

Consutotion: OIl 4.33 5.35 7.20 4.3 6.2 5.2Non-OIl 3.7 4.95 7.30 5.8 8.1 6.9Total I2j 1 0 3 .0 5.0 7.1 6.0Production: Oil 1.21 1.66 2.85 6.5 11.4 8.9ton-OHl 3.62 4.88 7.35 6.2 8.5 7.3Total 1; l o.io 6.2 9.3 7.8Net Energy ImtPorts I/ 3.3 3.76 L 3.3 2.7 3.0Oil umoorts 3T21 36 .iT35 3.4 3.4 3.4Oil Imoorts as % of Total Imports 14.4 12.6 7.2Value of Oil Imoorts (current $ billion/year) 14.3 24.3 38.3

NON-OPEC OIL-EXPORTING DEVELOPING COUNTRIES 4/

Consumption: 011 1.14 1.36 1.88 3.6 6.7 5.2Non-Oil 0.4 0.85 1.37 11.6 10.0 10.8Total 1.63 2.21 6.3 8.0 7.1Production: oil 2.36 4.09 5.55 11.6 6.3 8.9Non-Oll 0.61 1.14 ±.9! 13.3 10.9 12.1Total 2.97 523 7 12.0 7.4 9.6Not Energy Exoorts !A 3 02 4.7 18.4 6.9 12.5Oil Exoorts T 22 m 3.67 17.5 6.1 11.6Oil Exports as % of Total Exports 22.0 29.6 32.1Value of Ol Exports (current S bililon/year) 4.3 13.8 25.0

OTAL NON-OPEC DEVELOPING COUNTRIES

Consttion: oil 5.47 6.71 9.08 4.2 6.3 5.2Non-Ol 1 4.22 .80 8.67 6.6 8.4 7.5Total 12. 5 17.75 5.2 7.2 6.2Productlon Oil 3.57 5.75 8.40 10.0 7.9 8.9Non-Oil 4 6.02 9.27 7.3 9.0 8.2Total 7.80 11.77 8.6 8.5 8.5NMt Energy Imports 9 07,5 0.08 -17.0 -36.1 -27.2

EI ITEI/

Bunkers (all oil) 0.46 0.57 0.67 4.4 3.3 3.8

IRefers to cr_arcalei enrgy sources only and assUwes that OPEC crude oll prices rmain constent in real terms through1985 (511.50 per barrel In 1975). OIDCs are orojected to grow at 5.3% Per annum In 1976-80; 6.41 In 1981-85; and 5.8%per annue for thn whole of the decade. Corresponding growth rates for non-OPEC oil exporters are 5.5X. 6.6X, and 6.11;and for all NOOCs the growth ratt assumed are 5.4%. 6.4% and s.9%. Totals may not add due to rounding.2/ Non-ol Include coal, gas, end hydrooower, nuclear and ge otheral. The beraktdate for energy f rom these sources forall NDOCs Is:Non-Oil Enerw Consuiotion and Production (Mllion 3BOE)1975 I98

Production Consumpotion Produc Ion ConsumotionCoal 2.17 2.30 3.74 3.75Gas 0.85 0.71 2.53 1.92lydro, Nuclear, and Geothermal 1.20 1.21 3.00 X 00Totai Non-Oil 423 4.22 9.27 8.61 As Indicated, the bulk of energy Imoorts Is in the form of oil; coal and gas cczount for almost all of the rminder.4 Non-OPEC oll exporters Include: Angola, Banrain, BolIvia, Congo, Egypt, MalaysIa, Mexico, Syyrla, man, Trinidad and_ Tobago, Tunisia, and Zaire.

. Deliveries to bunkers (for fuelling vessels) are excluded from net Imoorts and net exports.S urce Bank Staff estImates.

6. For all NODCs, consumption of energy is projected to grow by 6.2%

per annum during the decade to 17.75 m bdoe in 1985 from 9.69 m bdoe in 1975.

However, because of an 8.5% per annum growth in energy production during the

period, the energy imports of the NODCs are expected to decline from 1.9 m

bdoe in 1975 to 0.08 m bdoe in 1985. The reduction of the "energy gap" for

the NODCs as a group is expected to be accomplished by a balanced expansion 6f

energy supplies from both oil and non oil sources. Within the latter, the

share of energy production and consumption provided by gas, hydro and nuclear

power, and other sources, is projected to increase at the expense of coal.

7. The aggregate figures disguise the very different circumstances

of the oil exporting and importing developing countries. The energy exports

of the non-OPEC oil exporters (Angola, Bahrain, Bolivia, Congo, Egypt, Malaysia,

Mexico, Syria, Oman, Trinidad and Tobago, Tunisia, and Zaire) are expected to

increase rapidly (by 12.5% per annum) during the decade, despite a 7.1% per

annum increase in energy consumption. By 1985, their exports of energy are

projected to rise to 4.21 m bdoe (of which 3.67 m bdoe in oil) with a value in

1985 of $25.0 billion, or 32.1% of the estimated total export earnings of

this group of countries in that year. Energy production, growing at 9.6%

per annum, is expected to outpace GNP growth (6.1% per annum) significantly

during the decade. For this group of countries, energy production will be

an important stimulus to economic growth and a major source of foreign exchange

earnings. The development programs of these countries will depend heavily

on the energy sector for finance.

8. The oil importing developing countries will be in a very different

position. The net energy imports of the OIDCs (excluding deliveries to

bunkers) are projected to rise from 3.2 m bdoe in 1975 to 4.3 m bdoe in 1985,

all in oil. Although the share of oil in total imports will fall sharply, the

cost of oil imports will rise from $14.3 billion in 1975 to $38.3 billion

in 1985. The progress in substituting other energy sources for oil is

reflected in that 55% of the projected increase in energy consumption and

70% of the projected increase in energy production will be from non-oil

sources.

9. These projections differ in important respects from those of

July 1977. Consumption of energy by the OIDCs in 1985 is now projected to

be 14.5 m bdoe compared with the 12.5 m bdoe projected earlier. The

difference is a direct result of the higher growth assumed for the OIDCs in

the WDR and the co-efficients used to determine the consumption of energy from

major sources. Moreover, of the 2.0 m bdoe of additional energy required to

support the higher growth rate of OIDCs (5.8% p.a. compared with 4.5% p.a.)

almost all is projected to come from additional consumption of oil. Daily

oil consumption is now projected at 7.2 m barrels compared with the earlier

estimate of 5.4 m barrels.

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10. On the supply side some progress has been made. Production of oilis now projected to reach 2.85 m barrels per day, a figure 24% higher thanthat projected in July 1977 (2.3 m b/d) on the basis of then existing trends.The new estimate remains well short of the 5.4 m bdoe that might be produced

if the maximum practicable effort had been made to locate and develop the oiland gas resources of these countries.

11. As the supply of energy projected from non oil sources is virtuallyunchanged, the oil deficit projected for the OIDCs (excluding bunkers) in1985 is 4.35 m b/d compared with 3.1 m b/d foreseen in July 1977. Thesefigures suggest that, for the OIDCs at least, the incentive to develop domesticoil resources has increased during the past year or so.

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Section II: RECENT BANK GROUP ACTIVITIES IN THE ENERGY SECTOR

12. Following the Executive Directors' decision in July 1977 that theBank Group should expand its assistance for fuel and non-fuel mineral resourcedevelopment, a program of energy sector studies and project lending for oil,natural gas and coal was drawn up. The expanded program of energy sectorstudies was instituted because a careful review of the needs and potentialitiesof individual developing countries for primary energy production is a pre-requisite of an effective investment program.

13. The mandate given was for an expanded effort leading to Bankfinancing of fuel mineral production (in contrast to exploration) in theexpectation that the willingness of the Bank to finance a modest share ofproject costs would attract a much larger flow of investment from privatesources. It was not felt appropriate for the Bank, in view of the risksinvolved and its own lack of experience, to consider providing substantialfunds for petroleum exploration. It was believed that the presence of theBank and its readiness to provide loans for production would give confidenceto both host countries and oil companies that they could secure a faircontract, and increase the willingness of the latter to invest capital inexploration.

14. However, the proposal was accepted that, in a limited number ofcases, the Bank might provide small loans for exploration, to be refinancedby a subsequent production loan, or repaid by the foreign oil company if acommercial field was not found. The Bank would express its willingness toconsider financing the production facilities if the exploratory effort wassuccessful.

Energy Sector Work

15. It is expected on the basis of recent studies that about 60 countriescould benefit from an accelerated program of oil, gas and coal exploration anddevelopment. To provide the basis for Bank involvement in the energy sectorin these countries a 5-year program of sector work has been initiated.It is expected that more than 60 studies will be prepared, and will coverabout 35 countries, in addition to ten small Caribbean countries. In somecountries there will be studies of more than one sub-sector; in others(depending on lending operations) there will be studies which update, elaborateor consolidate those carried out in previous years.

Lending Activities - Oil and Gas

16. During the past 15 months, the main activity has been to identifyand prepare projects for financing in FY79-81. It is expected that, duringthe three-year period FY79 to FY81, there will be 30 oil and natural gasprojects under preparation, of which 22 are expected to be ready to beformally considered for financing. In addition, five loans for coalproduction are expected to be considered.

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17. The focus of the program has been on countries that have goodprospects for producing petroleum and coal but do not have the experience to

do so without assistance. Within this group priority has been assigned to

those that are poor, have large populations, are heavily dependent on importedoil and have the greatest need for technical assistance. Of the 30 oil and

gas projects now under preparation, 16 are located in countries with per

capita incomes in 1976 below $500.

18. More than half of the petroleum projects in the program are forthe development of known but previously unexploited reserves of natural gas.The governments of many developing countries, especially since the oil priceincreases of the mid-seventies, have been concerned that significant amountsof gas are being flared in oil field operations; that discoveries of dry gas

fields are not being developed; and that "gas prone" zones are not beingadequately explored. Natural gas is a very valuable resoiurce, providing

energy for commercial, industrial and residential electri- power, and the

raw material for fertilizer and other chemical industries. The large fixed

investments required to transport and distribute natural gas, and the public

utility characteristics of the industry which make it liable to government

regulation, mean that it is not especially attractive to foreign investors.

For these reasons, there is a strong case for Bank financing.

19. Of the oil projects under preparation, three are for financing

production from reserves that are small but will substantially reduce the

dependence on oil imports of the countries concerned. Two other projects are

in countries where oil production and reserves have been declining and where

difficulties are experienced in attracting foreign investment. Several of the

projects are for the secondary recovery of oil. The economic rates of return

of the projects now under preparation are likely to be high. A preliminary

estimate for 10 petroleum projects indicates a range of over 20% to as muchas 100%, with an average for this group of over 40%.

20. The share of project cost to be financed by the Bank in the case of

production loans is expected to average about 20%, but it varies substantially

from project to project.

Lending for Coal

21. The prospects for coal and lignite production in the developing

countries are examined in the next chapter. In July 1977, it was estimated that

it would be possible to prepare and consider for approval one or two coal/lignite

projects a year starting in FY80. Experience during the past 15 months has

shown that developing count es with major coal reserves welcome Bank assist-

ance in the expansion of existing coal mines or exploitation of new deposits.

A pipeline has been developed for FY79-83 which may allow lending for

2-4 coal/lignite projects a year at an annual lending of $100 - 200 million.Two of the coal projects under preparation will contribute significantly to

export earnings, and the others are expected to satisfy 5 to 20% of domesticenergy needs in the countries concerned.

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Substitution of Coal for Oil as a Power Source

22. The coal projects currently being executed or prepared in developingcountries are mainly designed for new domestic, coal-fired power stations orfor the export of coal to new power stations in Europe, Japan or the U.S.A.The present expansion of coal production in developing countries substitutescoal for oil or gas in new installations and will thus help to slow down thegrowth in oil/gas demand. There has been very little switching from gas/oilto coal in existing installations in developing countries, because (i) time isneeded to build up coal production in line with the increase in demand, and(ii) more importantly, most existing power stations or other potential coalusers lack dual-fired boilers, making the switch impossible without majornew capital expenditures. Coal use will therefore spread only gradually asexisting installations become obsolete and new plants are added. A morerapid switch from oil/gas could only be expected if a further major oil priceincreases were to offset the disadyantages of using coal in existing installa-tions. These include, in addition to incremental capital costs for burnermodifications, coal handling and storage facilities, as well as ecologicalproblems.

Lending for Electric Power

23. During the past five years, the Bank has made 86 power loans andcredits, for about $4.3 billion, for projects costing about $15 billion. Inthe next five years it is expected that about 110 loans and credits, for $7.5billion, will be made (see Table 2 below).

TABLE 2: LENDING FOR POWER GENERATION AND DISTRIBUTION:ACTUAL FY74-78 AND ESTIMATED FY79-83

Fiscal Year No. of Loans Amount

(Current $m.)

1974 16 7701975 11 5041976 20 9491977 17 9521978 19 1146

Actual 1974-78 83 4321

Estimated 1979-83 110 7500

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24. In the non-OPEC developing countries in 1977, about 50% of electri-city was produced from hydro sources, 48% from thermal sources, and 2% nuclear.In the years to 1985 it is expected that total electricity production in thesecountries will grow by about 10% annually, with hydro growing at about thesame rate and nuclear gradually increasing its share (see table 3 below).

TABLE 3: ELECTRIC PRODUCTION BY SOURCE - NON-OPEC DEVELOPING COUNTRIES

5 1977 5 198510 GWH % 10 GWH % Annual Increase %

Hydro 2.6 50 5.6 49 10Thermal 2.5 48 5.0 44 9Nuclear 0.1 2 0.8 7 35

TOTAL 5.2 100 11.4 100 10

Source: World Bank estimates.

Note: GWH = 1 million KWH.

25. Over the next five years it is expected that 25-30% of Bank lendingfor power will be for hydro generation, 15-20% for thermal, 15-20% for ruralelectrification and 30-45% for other power projects including all transmissionand distribution projects. Since a loan to Italy in 1959, the Bank has notfinanced nuclear plants, partly because of the availability of finance frombilateral sources.

Technical Assistance

26. The main purposes of technical assistance in the energy sector areto improve sector planning and to develop coherent programs for energy deve-lopment; to devise and introduce complementary financial policies, especiallyin regard to pricing; and to identify and prepare energy projects that are ofhigh priority. The suddenness of the change in the energy situation left mostcountries, developed and developing alike, unprepared to tackle the newproblems. The problems are complex, and although expert technical advice isreadily available, essential decisions on a national energy program and itsplace in the country's general plans for development must be made by theresponsible authorities. The Bank's experience in the last 15 months suggeststhat in many developing countries progress in exploiting indigenous sources ofenergy is held back by:

(a) The lack of effective energy planning institutions and thecontinuing shortage of adequately trained administrators;

(b) The poor understanding of energy pricing issues due to anabsence of energy price studies and analysis;

(c) The inadequate analysis of data derived from explorationactivities.

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27. To gain an understanding of the current state of knowledge aboutenergy resource in the developing countries, and what obstacles need to beremoved if these resources are to be developed quickly in a coherent way,the Bank commissioned a survey of 70 developing countries by BEICIP, 1/ theconsulting arm of the French Petroleum Institute which had prepared earlier astudy of the developing countries' petroleum needs and potential. Theconclusions of the new survey as regards the availability of essential dataon petroleum reserves are discussed in Section III. The survey also concludedthat in about 50 of the countries surveyed the government or the state oilcompany urgently need help in a variety of training and institution buildingactivities. Most of these countries need advice in framing or amendinglegislation relating to the energy sector, or in adapting policies and pro-cedures that would improve the prospects of cooperation with foreign prospectingand production organizations.

28. The Bank's energy sector work is designed to assist member countriesto resolve these problems. The Bank's country economic work will also takeincreasingly into account the broader questions that affect energy development,such as inter-sectoral relationships, price and rate policies, and the role offoreign investment, and offer appropriate advice to the national authorities.Detailed studies of particular issues, and provision for legal and technicaltraining, will be included in Bank loans and credits wherever appropriate.Except for governments that have experienced national oil companies capableof carrying out projects themselves, most governments will need to bring inforeign private or state-owned organizations to assist them in one or more phasesof their petroleum development efforts. Petroleum agreements are extremelycomplex documents that on the oil companies' side are regularly negotiated byhighly skilled technical and legal specialists. If a reasonable and balancedagreement is to be achieved, governments will need to hire negotiators withskills matching those of the companies' representatives. It is here that theBank may be of assistance by helping to find, and possibly by financing,technical and legal advisers to assist governments in drafting and negotiatingpetroleum development agreements with foreign collaborators or by commentingon drafts of such agreements if invited to do so by the parties. An exampleof the latter is mentioned in paragraph 77.

29. The main emphasis of the Bank's technical assistance has beenon commercial sources of energy, but in countries where the bulk of energyconsumption occurs in rural areas, and where a significant share is providedby non-commercial sources of energy such as fuel wood, the Bank has providedassistance in integrating the commercial and non-commercial sources into abalanced program for the sector as a whole. The contribution of the non-commercial sources to increasing the supply of low-cost energy in ruralsocieties is considered in the next Section.

1/ The study of the Bureau d'Etudes Industrielles et de Cooperation de l'InstitutFrancais du Petrole (BEICIP) covered all OIDCs believed to have prospects forpetroleum development, plus three small oil-exporting countries which couldbenefit from Bank assistance in this sector.

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30. There is ample room for other international and bilateral agenciesto assist the developing countries in this sector. The United Nations, theregional banks and the national oil companies of several countries are al-ready active or have offered to provide support.

Assessment of Progress to Date

31. A good start has been made on the Bank's expanded program for oil,gas and coal. So far as lending is concerned, the estimates made in 1977 arelikely to be met. The oil and gas projects that are coming forward will havehigh economic rates of return. It is clear that developing member countriesattach considerable importance to the development of indigenous energy suppliesand that there is a growing demand for help from the Bank, both financialand technical.

32. It is early to judge how far the Bank's activities are encouragingadditional financial support for oil and gas production in the developingcountries, but indications are favorable. Discussions that have taken placewith potential investors suggest that co-financing of major petroleum projectswith the Bank is attractive, even in low income countries, because of theirhigh economic returns. Greater assistance in preparing projects throughengineering loans and credits, and other support, will increase the numberof opportunities in this sector. In addition, more indirect participation bythe Bank, as in the case of Pakistan and Gulf Oil, (see para. 77) may increasethe flow of investment in petroleum development. There will also be a steadyflow of coal/lignite projects, with substantial co-financing, but the numberof countries concerned is limited.

33. Despite the progress in the past year, much remains to be done.As indicated in Section 1, the energy balance of the oil-importing developingcountries in 1985 appears less favorable in the light of projections madefor the World Development Report, 1978, than in the estimates made in July1977. In addition, the Bank's experience in the past year has demonstrateda larger than expected demand for both technical and financial support.

34. The petroleum projects already identified are largely for thedevelopment of proven reserves of gas and oil which had been discovered overa long period of time but which until 1974 were not commercial. The Bankprogram, and projections of petroleum production, are therefore based largelyon knowledge derived from surveys and exploratory work done in the past.Further increases in oil and gas production, and in Bank financing, willdepend on new exploration leading to new discoveries. However, the amount ofgeological and geophysical work, as well as exploratory drilling, since 1973have not increased in response to the new economics of production but haveremained at a very low level in most of the developing countries. This isa matter of serious concern, since such work is a prerequisite to sustainedincreases in production.

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International Finance Corporation (IFC) Activities in the Energy Field

35. In its work on energy the International Finance Corporation, anaffiliate of the World Bank, has assigned priority to the development ofexisting discoveries which maximize increases of output at relatively modestrisk and uncertainty. The Corporation is likely to be involved in threetypes of operation, none of which poses difficult issues of policy orprogramming.

36. One group of activities involves past discoveries which fora variety of reasons have not yet been ,ieveloped. Some of these will requireappraisal drilling to establish their commercial value. In some cases, dis-coveries made under agreements negotiated earlier have not been followed upbecause of the reluctance of the contracting oil companies: they have spentexploration funds to confirm the discovery but are reluctant to commit devel-opment expenditures before petroleum contract terms are agreed upon. IFC'sinvolvement will serve to strengthen the relationship between the governmentand the company.

37. A second type of activity involves a large number of fields inwhich primary recovery has been completed or is declining but which are nowworth additional expenditures for more costly secondary recovery programs.The Corporation will be called upon to provide financing for such programsas well as to lend technical assistance in the formulation of new contracts,either with the original concessionaires or with new companies. In situationswhere small independent oil companies are involved or where the governmenthas the predominant stake in the venture, IFC will seek ways to mobilize therequired resources through cofinancing or other devices.

38. IFC will continue its work in refining and distribution projects.These will include instances, as in the recent past, where an oil company inthe field is unwilling to build or expand a domestic refinery, because it ownsunutilized refinery capacity elsewhere, or for other reasons. If the govern-ment nevertheless wishes to increase domestic refinery capacity and prefers aprivate foreign investor to undertake the task, IFC will assist in its imple-mentation provided it is economically justified.

39. The Corporation expects also to be able to support explorationactivities in certain instances where the oil company is willing to undertakethe exploration entirely at its own risk in return for an IFC commitment toshare in exploration and development costs in the event of a commercial dis-covery being made. Since there would be no financial loss to IFC should theventure fail or be abandoned, current policies would permit IFC to enter intoa transaction of this kind. However, such opportunities will probably occurinfrequently because they will be offered only where commercial prospectsare very bright and/or where political conditions are extremely uncertain.

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IFC's Present Program

40. The Zaire oil project approved by the Board in October 1978 is the

Corporation's first venture in petroleum extraction. IFC's investment in the

project is just over $4 million out of a total of $33 million to be invested

in secondary recovery in an offshore oil field. The IFC Loan should enhance

the stability of the agreement among the parties to the project by increasingthe confidence of the government and the foreign oil company that it will

continue to be honored.

41. The Corporation is preparing appraisals for a number of

additional fuel sector projects for consideration in-the near future.

Division of Labor Between IFC and the Bank

42. Private sector involvement in various phases of energy development

is frequently necessary if capital and technological know-how are to be made

available. IFC will take the lead in those projects which it is able to

handle effectively with its own resources; where an equity participationis appropriate; or where the Corporation can play a role in mobilizing and

packaging private funds. Projects which require a larger investment than isprudent for IFC to make will be handled by the Bank. Still other situationswill call for joint participation, where for example an equity role isindicated in conjunction with Bank lending. Close cooperation between the

staffs of the Bank and IFC responsible for energy sector activities is clearlyimportant if their respective resources and experience are to be deployed tothe best advantage.

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Section III: PROSPECTS AND PROBLEMS FOR FUELS IN DEVELOPING COUNTRIES

43. Since the oil price increases of 1973 and 1974 the economics ofenergy production have changed radically. The price of oil is now highenough:

(a) to cover the cost of exploiting known reserves of oil and gaswhich previously were uneconomic because of their small size and the high costof enhanced recovery or of transport;

(b) To justify increased expenditures on petroleum exploration in areaswhich did not show promise of containing deposits of oil or natural gas ex-ploitable at the old prices.

44. Developing countries thus have additional incentives to explore forand develop petroleum and other forms of primary energy. Some countries haveopportunities to produce indigenous fuels more cheaply than importing them, andto achieve rates of return that would justify the investment of scarce capital.As mentioned in Sect on II, the petroleum projects now being prepared for Bankfinancing are expected to have average economic rates of return above 40%.

45. Before the price increases of the mid-seventies all but a few ofthe non-OPEC developing countries would have been ill-advised to spend moneyin this sector. Imported oil was cheap, and expenditures on developing localsupplies would have been a particularly uneconomic form of import substitu-tion. This is no longer the case.

Exploring for Petroleum

46. The work that has to be done before production facilities can beconstructed may conveniently be divided into three stages, although in practicethey often overlap; Geological and Geophysical surveys; Exploratory Drilling;and Appraisal Drilling. A vigorous effort to improve the available data on thelocation, scale and commercial exploitability of petroleum reserves is a pre-condition for future increases in production.

(i) Geological and Geophysical Surveys

47. Geological surveys usually are the first stage of exploring forpetroleum. Most of the world's sedimentary basins have already been exploredto some extent by surface geology, but many of these surveys need to be up-dated in the light of more recent geological information or the availabilityof improved techniques. Geological techniques that are used during surveysinclude the interpretation of aerial photographs and the sinking of boreholesto a limited depth to test rock characteristics. Geophysical prospecting istypically carried out by specialized contractors, and includes reconnaissanceusing aeromagnetic and gravimetric techniques and seismic work. Promisinglocations, which are usually small in relation to the total size of the basin,are subjected to more intensive seismic examination to identify areas fordrilling.

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48. This phase of pre-development is extremely important in determining

the prospects for discovering commercial reserves of oil and gas, and minimiz-

ing the amount of drilling that has to be done. The study commissioned by

the Bank found that 54 of the 70 countries were in need of asssistance for

the re-evaluation of existing data, the implementation of new surveys, and/or

stratographic test wells. Accurate geological information is particularly

valuable in negotiations between governments and private investors seeking to

acquire exploration rights. Uncertainty is reduced because both governments

and companies nave a better appreciation of the probable commercial value of

any oil or gas that may be found. If the chances of exploration leading to

an exploitable field are improved, the terms under which exploration and sub-

sequent production may take place can be established more realistically and

the stability of the agreement is enhanced. A host country that can provide

detailed geological information when it opens an area for bids, increases the

competition for exploration rights and the eventual exploration agreement

should provide for more rapid assessment of the petroleum potential of the

area.

49. The cost of the geological and geophysical work required by the

developing countries ranges from about $500,000 to as much as $5 million per

project. More than one project in a country may be necessary to cover all

potential areas. The lower figure refers to countries where an experienced

consulting firm is required to re-evaluate existing data; the higher figure

to countries where most of the essential survey work has yet to be undertaken.

Some assistance for geological and geophysical work is available from the

UN and the bilateral agencies, but the funds that can be provided by these

agencies are limited. A proposal that the Bank should assist this stage of

exploration activities is outlined in Section IV.

(ii) Exploratory Drilling

50. Exploratory drilling is a high-risk activity. The cofts of a major

drilling program can range from $10 to 50 million per 10,000 km , and there

is no assurance that a commercial deposit will be found. About 600 sedimentary

basins with petroleum potential have been identified throughout the world and

of these some 400 have been drilled to date. The 200 basins that have not

been explored are located mainly in high-cost areas: the difficult environ-

ments deep offshore (more than 200 meters of water), the Arctic areas and the

lightly inhabited interior of continents (for example, the mid-upper Amazon,

and central Africa). Many of the lightly explored or unexplored basins lie in

developing countries.

51. The vast bulk of known reserves of oil occurs in "super-giant"fields (accumulations of more than five billion barrels). Few of the basins

that have been explored in recent years contain geological structures where

such large fields might be found, and none of the unexplored basins possesses

geological characteristics that suggest the discovery of another "Middle East"

where 24 super-giant fields have been found. l/ The focus of exploration

activity has therefore shifted to the smaller fields, and improvements in

technology have enhanced the ability of drillers to discover them.

l/ The four remaining known super-giants are in Venezuela, Texas, Alaska

and Mexico. The Mexican field is the only super-giant field discovered

in this decade.

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52. In principle, therefore, the prospects for increased exploration inthe lightly explored basins, situated mainly in developing countries, wouldappear to be good. However, in currently producing basins, the largest andmost attractive structural prospects were explored first and there is a strongincentive to re-evaluate older prospects; more intensive exploration may dis-cover smaller, but now profitable fields in these basins. As the industryturns to "second tier" geological prospects, in many cases prospective areasin developed countries have the advantage that the essential infrastructureis in place and that they are close to the markets. These circumstances prob-ably explain much of the difference in relative drilling intensity betweendeveloped and developing countries. A balance that may appear appropriatefrom a global point of view, or from that of the oil companies interestedin supplying the world market, may be inappropriate from the viewpoint of adeveloping country which attaches high priority to increasing its oil self-sufficiency and would wish to explore its oil potential as quickly as possible.

53. A serious constraint on exploratory drilling is the shortage of riskcapital for investment in developing countries. Some countries with effectivenational oil companies have been able to overcome the lack of risk capitalby offering attractive terms to foreign investors. But in many developingcountries the shortage of risk capital is aggravated by the absence of aknowledgeable negotiating agency, which may lead the government to ask forterms that do not offer a reasonable incentive to the investor; or, on thecontrary, to accept terms that are too favorable to the latter. Countries inthis position require technical assistance to collect and evaluate basic data,to improve the legislative framework in the energy sector, and to negotiatepetroleum agreements which, as indicated in paragraph 28, are typically verycomplex and call for a high degree of sophistication. Simple parameters suchas return per barrel, profit split, production sharing arrangements, etc., donot provide reliable guidelines for different types of agreement. Productioncosts differ widely, and a 25 cents per barrel margin in a low cost area maybe a more attractive deal for the investor than a $1.00 per barrel marginunder other conditions. Without the technical capacity to assess the adequacyand "fairness" of the potential financial rewards offered to prospectiveforeign investors, developing countries will be handicapped in formulatingappropriate exploration strategies.

(iii) Appraisal Drilling

54. Once a find has been made and there is a high probability of a com-mercial field being developed, appraisal drilling, usually backed by detailedgeophysical surveys and engineering studies, is undertaken. This phase ofpre-development activity generally is not very risky. Projects that havereached the stage where appraisal drilling is required are likely to becommercially viable and the Bank would therefore be justified in making anengineering loan or credit, in the expectation that it could later be foldedinto a loan for production. This suggestion is taken up in Section IV.

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Scope for Petroleum Exploration in Developing Countries

55. The survey commissioned by the Bank on the oil and gas situationin 70 developing countries (see paragraph 27) provides the best available

information on the size of prospective petroleum areas, onshore and offshore,

past seismic and exploratory drilling activities, the existing permit and

contract situation, and the outlook for exploration in the near term.Twenty-three countries have prospects of finding "high" or "very high"quantities of petroleum, while a further 15 have prospects of locating"fair" quantities as defined below.

TABLE 4: PETROLEUM PROSPECTS OF SEVENTY DEVELOPING COUNTRIES

No. Size of Potential Resources

Type of Country of countries Very High High Fair Low

Oil producer/net importer 12 6 3 2 1

Non-producer/known reserves 10 4 2 3 1

Non-producer/no discoveries 45 1 4 10 30

Non-OPEC producer/exporter 3 2 1 0 0

TOTAL 70 13 10 15 32

Potential resources are classified into four main categories on the basis ofestimated recoverable quantities: Very high - over 1,500 m. barrels; High -between 750 and 1,500 m.; Fair between 100 and 750 m. Low - less than 100 m.barrels. Measured by the reserves of OPEC countries, even the "Very High"category is modest. But in terms of domestic consumption, the "Low" categorymay be very significant. Most African countries, for example, consume lessthan 5 m. barrels a year. The ultimately recoverable reserves (URR) of thedeveloping countries are not known with any certainty, but a recent estimatesuggests that the OIDCs, whose proven reserves are now about 2% of the worldtotal, could account for about 15% of the world's URR. 1/

56. Over the past ten years, exploratory wells have been drilled in 71non-OPEC developing countries. Another 19 have been explored by seismicsurveys without drilling, and three countries by other means. The drillingdensity - the number of wells drilled per thousand square miles - is farlower than in the OPEC and the industrialized countries, and is lowest of allin the OIDCs. Such exploratory drilling as has taken place in the NODCs has

been sporadic; in 1975-76 it amounted to about 5% of the world total and wasactually lower than in 1972-73 despite a substantial increase of drilling in

the industrialized countries where the intensity was already far higher (about

1/ Report of the Group of Experts on Mineral and Energy Exploration inDeveloping Countries, annexed to the Report of the UN Secretary Generalof October 16, 1978 quoted in paragraph 3.

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90% of the world total). l/ Over the same period there was also a decline in

expenditures on geophysical work in Asia (-31%) and Africa (-12%) and only a

slight increase in Latin America (4%). In the United States the increase was

60%.

57. Exploration statistics must be interpreted with caution, and there

is no consensus among governments or in the oil industry on how much activity

is adequate. What may appear appropriate from a global point of view may be

wholly insufficient from the viewpoint of an oil-importing LDC with reasonable

prospects of finding or enlarging reserves of petroleum. Using the criterion

that an adequate level of exploration is one that is likely to lead to the

early identification of exploitable reserves, the study prepared for the Bank

classified the 70 developing countries as shown in Table 5:

TABLE 5: ADEQUACY OF EXPLORATION IN SEVENTY DEVELOPING COUNTRIES

No. of Exploration Activities

Type of Country Countries Inadequate Moderate Adequate

Oil producer/net importer 12 6 4 2

Non-producer/known reserves 10 3 3 4

Non-producer/no discoveries 45 28 13 4

Non-OPEC producer/exporter 3 1 2 0

TOTAL 70 38 22 10

If the above findings are compared to those on petroleum prospects (Table 4)

it appears that only seven of the 23 countries with high or very high

prospects have been explored adequately; six have been explored moderately

and the rest inadequately. Of the 15 countries with fair prospects, only

one has been explored adequately, and the rest moderately (3) or inadequately

(11). Countries whose prospects warrant an increase in exploration activity

include such comparatively large consumers of petroleum as India and Argentina

(146 m. barrels a year each) Turkey (66 m.) the Philippines (66 m.) Colombia

(44 m.) Peru (44 m.) Pakistan (26 m.) and Vietnam (22 m). 2/

58. The costs of exploration are high and rising. The cost of drillingmay be several times as much in a developing country as in the United States.

At present prices the cost (mostly in foreign exchange) of an exploration

campaign on-shore is in the range $10-30 million, and off-shore $20-50 million.

1/ Source: Oil and Gas Journal and International Petroleum Encyclopedia.Almost all the drilling in the industrialized countries took place in

Canada and the United States.

2/ Figures for petroleum consumption are for the year 1976, taken from UNseries J. No. 21, World Energy Supplies, 1972-76.

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Some 25-40% of the cost is attributable to geological and geophysical surveysand 60-75% to drilling. Estimates made by a UN group of experts in 1977suggest that the additional financing requirements for petroleum explorationin the OIDCs are on the order of $1 billion a year (in 1976 prices) over theperiod 1978-90, nearly half of them in countries that are presently non-producers.

TABLE 6: ANNUAL EXPLORATION EXPENDITURE /a

1976Developing Countries Actual % Desirable (mid-80s) %

($ m.) 1976 $ m. 1985 $ m.

Oil exporters /b 1,150 16 2,000 3,333 17Oil-importers - producers 600 8 1,200 2,000 10

non-producers 300 4 800 1,333 ,7Sub-total 2,050 28 4,000 6,666 33

Industrialized countries 5,250 72 8,000 13,334 67

Total 7,300 100 12,000 20,000 100

/a Excludes centrally planned economies.

/b Includes OPEC and non-OPEC exporters.

Source: Derived from UN Experts' report referred to in paragraph 55.

The desirable shift of global expenditure on exploration towards the OIDCsis not large, from 12 to 17%; nor are the magnitudes themselves very great.But, in the light of recent experience, the shift is unlikely to take placesoon if left to market forces.

Prospects for Coal

59. According to the present estimates, coal reserves (including coking,bituminous and sub-bituminous coal as well as lignite) in developing countriesare less than 6.5% of the world total. The present distribution of world coalproduction directly reflects the reserve situation: centrally planned econ-omies account for 52.5%, developed market economies for 42%, and developingcountries for only 5.5%.

60. Available information indicates that about 30 developing countrieshave known, but only partially explored coal and lignite reserves. Thesecountries include:

(a) oil producing countries such as Algeria, Indonesia,Iran, Nigeria and Venezuela;

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(b) countries with important coal and lignite reserves, someof which are important producers, such as Argentina, Colombia,Egypt, Mexico, Brazil, India, Korea, Vietnam, Turkey andYugoslavia;

(c) countries with medium sized or relatively inaccessiblecoal and lignite reserves such as Afghanistan, Botswana,Burma, Chile, Madagascar, Malawi, Morocco, Mozambique,Namibia, Pakistan, Peru, Philippines, Somalia, Swaziland,Taiwan, Tanzania, Thailand, Zaire and Zambia.

Thus, the problem in many countries is not so much one of identifying newresources, but rather of determining more reliably the extent and qualityof existing resources. Furthermore, there are a number of factors whichrestrict the supply of coal (mining difficulties, poor quality, transport/handling, ecology) which are dissimilar to petroleum, and which in manycountries are more important obstacles to production than the lack ofknowledge of reserves.

61. Necessary exploration work for known coal reserves in LDCs can bedistinguished by different risk and cost factors into two main categories:

(a) in a number of cases, especially in countries witha sizeable existing coal/lignite industry (Colombia,India, Turkey, Vietnam, etc.) exploratory drillingand quality testing are needed to complete feasibilityand preliminary engineering work prior to projectappraisal. The risk at this stage of explorationis minor. Costs range from US$0.5 to $2.0 millionfor the exploration/quality testing component. Inaddition, some projects may require transport engi-neering.

(b) in the majority of developing countries, although someexploratory drilling has been undertaken, the size,quality and mining characteristics of the coal fieldhave not been sufficiently delineated to allow ameaningful economic evaluation of the reserve. Addi-tional exploration is needed in these cases but theexpenditures and risks involved are far smaller than inpetroleum exploration or in non-ferrous metals. It isestimated that from US$1.0 to $2.5 million would needto be spent to establish with a 90% probability theeconomic value of a given deposit.

The Bank's existing lending mechanisms (Engineering Loans, Project PreparationFacility) 1/ are available to finance final exploration required to complete thefeasibility work outlined under (a) above. The more extensive exploration

1/ This facility makes temporary advances of up to $1 million for studiesand other forms of technical support. The borrower repays the advancesby refinancing them through a Bank loan or IDA credit for the projectconcerned as soon as it becomes effective.

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outlined under (b) has not been financed in the past but will be consideredin the future. As in the case of petroleum, many developing countries,especially the small ones, have devoted either no or only minimal resourcesto coal exploration. A few, for example, Indonesia and Colombia, have reliedprincipally on multinational mining companies.

Traditional Fuels

62. Energy planning in most developing countries has not taken suffi-cient account of the energy needs of rural areas, which depend mostly onnon-commercial sources of energy. The examination of the energy require-ments of the rural population, for domestic consumption as well as produc-tion, is an important part of the task of increasing the productivity andraising the incomes of the world's poorest forty percent.

63. Until recently the pattern of energy use in rural areas was a con-tinuing substitution of locally available fuels such as firewood, charcoal,animal dung and crop wastes by oil products, either directly as in kerosenefor domestic use, and diesel oil and gasoline for transport and pumping, orindirectly through the generation of electricity for light, refrigerationand mechanical power. The relative economics of these sources changeddramatically in 1973-74, reducing the advantages of petroleum derivatives.

64. The Bank has re-examined the role of rural electrification bothgenerally and in specific countries with a view to determining (a) the usesfor which it is economically and socially justified, and (b) the comparativepower costs of decentralized (mostly diesel) and centralized systems.

65. At the same time the Bank, in company with other institutions andgroups, has begun to consider the traditional, non-commercial fuels whichstill supply about half of the total energy in LDCs and more than 85% ofthat used by the rural sector in these countries. A large potential existsfor maintaining or even increasing the contribution of these fuels with con-siderable economic, social and environmental gains. To realize the potential,actions are required to increase production, improve recovery and processingso as to facilitate transport to nearby towns and villages, and improvethe design and efficiency of cookers, furnaces, etc. which burn wood andother combustible material. The techniques are simple and straightforward,and for the most part are well known in the LDCs themselves. Fuel wood com-ponents are included in 14 out of 34 forestry projects and 11 out of 22 ruraldevelopment projects approved or planned for the period 1976-1980. Some ofthese projects include provisions for technical improvements in charcoalproduction and wood-burning stoves.

Solar and Other Renewable Sources of Energy

66. There are many other energy devices available today, some new andsome conventional, that are potentially economic in some areas under currentor near term conditions. They include: solar water heating, solar dryers forcrops and fish; windmills for grain grinding, water pumping and householdelectricity supply; and small hydro plants. In addition there are underdevelopment other technologies that might become economic within a decade orlonger depending on new advances in design and production. These includesolar pumps, solar electric power, biogas plants and solar cookers.

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67. There are serious financial, institutional and social constraintsthat need to be overcome if these energy alternatives are to play a rolein the developing world. The Bank is encouraging countries to focus onthese problems. It has participated in planning a pilot exercise in ruralenergy planning in Colombia with the objective of preparing regional projectscomprising an optimal mix of conventional, traditionai and non-conventionalenergy sources. These might be complemented with suitable industrial programsto design and produce the required equipment. A rural development project inBolivia includes funds for the development and adaptation of solar energydevices. In another technology development and demonstration effort, the Bankis acting as executing agency for a UNDP solar pump project for small-scaleirrigation in India, Mali, Sudan and the Philippines.

68. On the whole, the technology of solar energy and other devicesmehtioned above is not sufficiently advanced for these sources to make aquantitatively significant contribution to energy supplies for some time.Nonetheless, continued research in these areas and the adaptation of tech-nology developed elsewhere remain of great importance.

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Section IV: PROPOSALS FOR EXPANDED ASSISTANCE IN ENERGY DEVELOPMENT

69. The recent experience of the Bank in energy development, particu-larly in the new fields of oil and gas production, points to a clear needfor more assistance to the developing countries, especially those that arenet importers of oil, the main energy fuel.

70. Forty-eight of the 74 developing countries which import oil dependon it for at least 90% of their commercial energy requirements; only four(India, Korea, Pakistan and Zambia) are less than 50% dependent on oil owingto the extensive use of coal, natural gas or hydro-electric power. The oildeficit of these countries as a group is now thought to be larger than wasestimated in 1977. Although oil production has increased, consumption isincreasing more rapidly owing to a faster rate of growth than was foreseen atthat time. Many developing countries are passing into the energy intensivephase which the developed countries experienced during their rapid industri-,alization and urban growth. However, unless their energy deficit can benarrowed by exploiting indigenous sources of energy more fully, scarce foreignexchange will have to be diverted to imports, which would reduce the growthrate of which the countries are capable.

71. This concluding Section reviews the areas of activity that can leadto greater energy production, and proposes an expanded program of assistanceby the Bank.

National Energy Planning

72. Under the new conditions of the supply and price of energy, develop-ing as well as developed countries need coherent policies to address nationalenergy needs and an appropriate strategy to implement them. The importanceof helping the oil importing developing countries at this general level hasbeen stressed throughout the paper. The various elements of an energy pro-gram have to be pulled together and fitted into the totality of the govern-ment's economic and financial plans. Assistance is needed in many cases tocreate, or reorganize and strengthen, an energy planning authority and totrain the necessary administrative and technical staff. Assistance is alsorequired in some countries to revise petroleum and minerals legislation, aswell as official regulations and fiscal measures which affect the energysector.

73. The elements of an energy policy include a strategy that willmaximize the use of the most efficient energy sources, make more effectiveuse of existing resources, promote conservation, increase knowledge of thecountry's resource potential and its development, and develop or adapt tech-niques for using traditional fuels more effectively. The Bank would beprepared to expand technical assistance in energy planning and lending forresearch and development in the more efficient use of traditional fuels. Suchsupport would aim at improving present technology, adapting it to villageconditions, reducing unit cost and expanding marketing systems. There

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is very large scope for disseminating existing or adapted technology moreeffectively. Usually such activities would be financed as components ofother projects but, in larger countries, a small separate project may bewarranted. As noted in para 67, the Bank is already supporting the appli-cation of solar energy technology. This too can be expanded but the focusof Bank country activities will remain on the adaptation, application andmarketing of non-hydrocarbon technologies rather than on the basic research.

74. The Bank's sector and sub-sector work, which will be geared to theexpanded program for energy, is intended to help member countries draw upnational plans and policies that will ensure as rapid and efficient exploita-tion of their energy resources as possible. The present program covers only35 of the 60 countries which stand in need of help. The work will be expandedas rapidly as possible to the others, and additional work will be undertakenin countries where only some of the sub-sectors have been covered. Assistancewill be given in resolving particular legal and administrative problems, andin the training of local personnel. Provision for these activities will bemade in the technical assistance, engineering and production loan and creditsreferred to below. Where a loan or credit is not immediately in prospect,every effort will be made to find a suitable expert and a source of finance.

75. Assistance in all the areas mentioned above is available from avariety of agencies. The U.N. system, for example, offers assistance throughthe UNDP, the regional Economic Commissions, UNIDO, the Centre for NaturalResources, Energy and Transport, The Centre on Trans-National Corporations,and through such specialized agencies as FAO, IAEA, UNEP and WMO. Bilateralagencies, including the national oil companies of some industrialized coun-tries, are also in a position to help and several have done so. The Bankwill work with these agencies in order to draw on their experience and spe-cialized knowledge and to avoid duplication of effort.

Pre-Development Activities

(i) Survey Work

76. The discussion in Section III emphasized the need of the Non-OPECdeveloping countries, particularly the oil importers, for help in exploringfor petroleum. Some 54 developing countries are believed to need assistancefor the survey phase (paragraph 48). Not all of them will require financialhelp from the Bank; some should be able to fit such activities, short of ex-ploratory drilling, into their UNDP programs or obtain funds from other sources.Nor will a large number be ready to commission surveys and evaluations at anyone time. This is particularly true of the non-producing countries, many ofwhich do not yet have the experience or institutions to define the work thathas to be done. There is nevertheless a large scope for Bank assistance.For geological and geophysical survey work, it is proposed that the Bank beprepared to make technical assistance loans and credits. As indicated inparagraph 49, the funds required are likely to range between $500,000and $5 million per project. Starting with the countries that have the bestprospects, and taking account of the Bank's own staff capacity, some 8 to 10

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technical assistance loans a year could be made during the early 1980s. Giventhe wide range of costs involved, it is not possible to estimate precisely thefunds required, but as a rough approximation Bank/IDA Energy Technical Assis-tance lending might be in the range $20 to 25 million a year from FY81 onwards.

(ii) Exploratory Drilling

7 7). The important and difficult phase of exploratory drilling, asexplained in paragraphs 50-53, comes between the completion of survey work andthe delineation of a petroleum deposit by appraisal drilling to the stagewhere it is ready for exploitation. It was suggested in July 1977that the Bank could help member countries and foreign collaboratorsto negotiate an acceptable agreement for exploration and production,if invited to do so, and confirm its willingness to consider making a loan forthe eventual production facilities or related infrastructure. The firstexample of such an arrangement is the joint venture for potential crude oiland natural gas development established under agreements signed on November14, 1978 between the Government of Pakistan, the Pakistan Oil and Gas Develop-nent Corporation and Gulf Oil Corporation, after extensive negotiationsduring which the Bank was asked to review and comment on the various draftagreements. The Bank has since written to the Government of Pakistan notingthe latter's intention to request Bank assistance in financing the cost ofFroduction facilities if and when a commercial discovery is made, and inarranging additional financing from other sources; and expressing out willing-ress to consider doing so provided the project met the usual Bank criteria.Ihe possibility of Bank participation in other arrangements of this kind isunder discussion in a number of countries.

8. The Bank's presence at this critical stage, and its agreement toconsider making a loan for production facilities if an exploitable deposit isfound, should contribute to a greater willingness of host countries, on thecne hand, and foreign collaborators on the other to reach agreement on the terms of acontract for exploratory drilling. However, the possibility of eventual BankFarticipation is likely to attract foreign organizations to invest risk capitalin exploration only in a relatively few countries which are deemed to haveparticularly good prospects for producing an exportable surplus of petroleum.In the majority of OIDCs it seems necessary for the host country itself totake all or part of the risk of exploration, and it is proposed thereforethat the Bank help such countries to do so.

79. While investing in petroleum exploration is inherently riskierthan in conventional Bank projects, the enhanced prospects for the economicaldevelopment of petroleum resources in developing countries, together withm easures that can be taken to minimize the technical risks, should make itPrudent for OIDCs to borrow from the Bank for exploratory drilling in appro-Friate cases. Measures to reduce the technical risks would include ensuringthat high quality geological and geophysical surveys had been undertaken in.11 cases, including a probability analysis, in financial and technical terms,

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of the risks and benefits, and had revealed favorable prospects for the

discovery of petroleum in commercial quantities. Exploratory drilling would

be carried out in stages and in limited areas, with a careful review of the

findings at each stage before proceeding to the next or, if the results are

clearly unpromising, terminating the exploration program (and cancelling the

balance of the Bank loan or credit). The best available technical expertise

would be provided to the borrowers to assess the results of the surveys and

exploratory drilling.

80. The relationship between the borrowing country, its national oil

company (if any), foreign organizations in particular cases and the Bank could

take a variety of forms. Some countries with a well-established national oil

company may be able to carry out an exploratory program on their own, under a

Bank loan. Countries which lack the experience to do exploratory work themselves

would be encouraged to enter into a contract with an interested foreign private

or state-owned company and assisted in obtaining fair terms under an appropriatetype of petroleum exploration and production agreement. The Bank would make a

loan or credit to the government to cover its share of the costs of exploration.

In countries that have an experienced national oil company, the Bank would

make a loan or credit to the company for exploration which the latter

could carry out either by itself or in association with a foreign

partner.

81. Such an arrangement, under which the risk would be shared with thehost country, assisted by a Bank loan or credit, is likely to attract foreign

investors to invest capital for exploration in a wider range of countries.

However, there may well be countries in which even this arrangement would be

an insufficient inducement to foreign investors because of the small size

of the petroleum reserves or for other reasons. In these cases exploratory

work would have to be carried out by exploration companies under service

contract arrangements which the Bank would finance through a loan or credit

to the government.

82. A number of member governments have indicated informally that theywould be interested in taking Bank loans for petroleum exploration under the

fype of arrangements described above. Bank loans and credits for exploration

would be made on the same terms as engineering loans and credits, namely

10 years of repayment with a suitable grace period, and like them wouldbe re-financed from a subsequent loan or credit for production facilities.

However, although exploration loans and credits would be made only in caseswhere survey work indicated that there are reasonable chances of success,there would be less assurance than in other sectors that a projectloan would follow. To reduce the annual repayment burden, provision would

be made in the loan agreement to extend the term of the loan to the normallimit for the country in the event that the exploratory drilling did not lead

to a project suitable for Bank financing before the expiry of the grace period.A similar arrangement would be made in IDA credits for exploration.

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83. In para 50 it was noted that the costs of a major drilling programare in the ranRe $10 to 50 million; and there may be more than one program ina country. In the case of loans (credits) to national oil companies, or wherethe loan financed the costs of a service contract, the Bank loan would coveran appropriate share of the entire cost, depending on the circumstances of thecountry. In countries that entered into an agreement with a foreign collaboratorunder which the latter shared in the financing, the Bank loan (credit) wouldcover no more than half the foreign exchange cost. It is very difficult atthis stage to forecast the demand for Bank financing of exploratory drillingand therefore to estimate the amount of lending for this purpose. In theearly 1980's the program might contain 8 to 10 such loans and credits ayear.

Project Preparation

84. Full use would be made of engineering loans and credits, and theProject Preparation Facility, to ensure that borrowers are given adequatehelp in preparing production projects for financing. Engineering loans(credits) would be used to finance appraisal drilling for oil and naturalgas and activities required to establish the economic value of coal and lignitedeposits. For oil and gas, appraisal drilling can cost up to $25 millionper program, and engineering loans (credits) for projects of that sizemay be needed in some cases. For coal and lignite, the requirement is muchlower, about $2-3 million unless transportation engineering is also needed.The terms of engineering loans and credits would be standard, namely 10 yearsof repayment with an appropriate period of grace, and would be refinancedfrom the eventual loan (credit) for production facilities. Most such projectsare likely to require the financing of appraisal drilling by the Bank, sothat the number of engineering loans and credits would be about as largeas the number of production projects in the program, which could reach12 to 15 a year by FY83.

Production Investment

85. Estimates were made in July 1977 of the investment requirements ofthe OIDCs for exploration, production and downstream activities in oil, gasand coal. Revised calculations for oil and gas have been made which areshown in Table 7. The new estimates are that the annual investment require-ments of the non-OPEC developing countries for petroleum and gas are about$6.8 billion (in 1977 dollars) of which a little less than 20% is for naturalgas and the rest for oil. The annual investment requirements of the OIDCsare nearly $4 billion.

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Table 7: INVESTMENT IN OIL AND GAS BY NON-OPEC DEVELOPING COUNTRIES- Estimated Annual Requirements 1976-85

Annual AverageDeveloping Countries with per capita Oil /a Gas /bIncomes in 1976 of: 7T 977 US$-m)

$1051 and AboveNet Oil Exporters 1,000 450Net Oil Importers 1,575 225

2,575 675

$626 - 1050Net Oil Exporters 200 152Net Oil Importers 750 100

950 252

$251 - 625Net Oil Exporters 930 50Net Oil Importers 420 100

1,350 150

Below $250Net Oil Exporters 100 10Net Oil Importers 650 138

750 148

Sub-Total: Net Oil Exporters 2,230 662Sub-Total: Net Oil Importers 3,395 563

GRAND TOTAL 5,625 1,225

Source: World Bank Staff Working Paper 289, April 1978(Per capita income limits are expressed in 1976 $).

/a Includes investment requirements in oil and gas exploration, develop-ment of oil, production of oil and associated gas, and crude oil pipe-lines in all non-OPEC developing countries. The exploration stage isassumed to account for 25 to 30% of total investment requirements inthe upstream phase. The relative costs of the various explorationactivities are approximately 5 to 10% for geological surveys, 15 to30% for geophysical prospecting and 60 to 75% for drilling.

/b Refers only to investment in development of non-associated gas and gaspipelines: excludes investment in liquified natural gas (LNG) projectsexcept in Malaysia.

Note: Investment Requirements for oil relate to the projected output in thenon-OPEC developing countries of 8.40m-bdoe (of which 2.85m bdoe inOIDCs) by 1985 (see Table 1 and paragraph 10). They are not comparablewith the estimates made in July 1977 because: (a) they are expressed in1977 rather than 1975 dollars; (b) they cover only upstream investment(including crude oil pipelines); (c) the real costs of petroleum develop-ment are now estimated to be significantly higher; and (d) the earlierestimates were related to a level of output that was considered feasibleif maximum efforts were made.

- 29 -

86. It is proposed to step up the work of preparing oil and gas projects

so as to increase the number of loans for petroleum projects to 10 to 12 per

year. Work on coal/lignite projects will permit 2 to 4 loans to be considered

by the Board annually during the years FY80 to 83. Thus the total program

for fuel mineral production by the early 1980s would include 12 to 16 projects.

To this must be added the proposed lending for pre-production activities,

including survey work, exploratory and appraisal drilling, and preliminary

engineering. The lending amounts can be estimated only approximately at this

stage, since the size of the projects may vary considerably. Allowing

for price increases, the program could reach about $1,500 million (current

dollars) by FY83. As a proportion of Bank/IDA lending, lending for

fuel mineral development would increase from about 5-6% (present program) to

10-11% in FY83.

87. For the period FY79-83, IFC is planning investments of about $130

million in energy. This represents about 5% of the total IFC program for the

period. The cost of the projects so financed would be in the range $650 - 750

million, or $130 - 150 million a year. IFC's program is in addition to the

expanded Bank/IDA program described above.

Contribution of Bank Financing to Oil and Gas Development

88. The proposed Bank lending program, rising to $1,500 m. (current

dollars) five years from now would include $1,230 m. for oil and gas projects.

About 60% of the lending would be for production facilities and would cover

up to 20% of the total cost. The balance would be for pre-production activi-

ties, contributing a larger share of the costs, perhaps two-thirds on average.

The total cost of the projects assisted by the Bank in FY83 would be in excess

of $4 billion. Bank financed projects for oil and gas development would thus

represent a substantial share of the up-stream investment requirements of the

Non-OPEC developing countries in the sector. 1/

Summary of Expanded Program

89. The Bank Group can help the OIDCs to find and exploit their indi-

genous energy resources more effectively by expanding its program of

operations and technical assistance. The following is a summary of the

proposals for increased Bank Group activities in the energy sector:

1/ See Table 7. The total investment requirement of $6,850 m. a year in

1977 prices would be equal to $9,660 m. in 1983 prices using the Bank's

commitment deflator. A tentative estimate of the total cost of Bank

financed activities in FY83 is $4,200 million or 43% of the latter figure.

However, total investment should rise considerably as a result of the

Bank's assistance.

- 30 -

(i) National Energy Planning.

Some 60 OIDCs need help in devising national plansand policies for the sector, and in creating or strengtheninga national energy authority. The Bank's present program of sectorand sub-sector work for 35 of these countries will be extendedduring the next five years to cover the remainder. Help willalso be given to'resolve particular legal, technical and adminis-trative problems and in training local personnel. Financing ofexperts will be provided in technical assistance, engineering andproduction loans and credits and if necessary in the Bank's adminis-trative budget.

(ii) Pre-development

(a) Survey Work. Fifty-four countries need assistancein evaluating and updating data from earlier surveys or in commis-sioning new surveys. Where assistance is not available from anothersource, the Bank would finance such surveys with technical assistanceloans or credits. Costs would range between $0.5 and 5 million percase, and the total is tentatively put at $20 to 25 million a year,from FY81, covering 8 to 10 operations. The terms of energytechnical assistance loans/credits would be standard, namely 10 years,including an appropriate period of grace.

(b) Exploratory Drilling. The Bank is willing to help andadvise member governments and foreign collaborators in concludingagreements for petroleum exploration and production; and to confirmits willingness to finance the eventual production facilities, pro-vided the project meets its usual criteria. One such arrangementhas already been concluded and others are under consideration. TheBank would consider making loans (credits) to OIDC member governmentsto cover the latter's share of exploration costs undertaken in associationwith a foreign private or state-owned company. In countries where foreigninvestors are unwilling to invest capital in petroleum exploration,the Bank would make a loan or credit to cover the costs of explorationdone by an exploration company under a service contract. Explorationloans would be for 10 years, with a suitable grace period, and wouldbe re-financed from a subsequent loan for production. If a productionloan was not made within the grace period, the exploration loan wouldbe extended to the normal limit for the country. A similar arrangementwould be made for exploration credits.

(c) Project Preparation. Engineering loans and credits wouldbe made to finance pre-appraisal drilling for fuel mineral projects;and the PPF would also be used to finance preparatory work within thenormal limits. The terms of engineering loans would be standard andwould be subject to re-financing from any eventual loan for production.

- 31 -

(iii) Lending For Fuel Mineral Production

An expanded program of lending is proposed, rising to

12 to 16 operations in FY83, of which 10 to 12 would be for oil and

gas, and 2 to 4 for coal and lignite. Depending on the extent to

which Bank assistance increases up-stream investment in the oil

and gas sector of the NODCs above the level assumed in Table

7. Bank financed activities in FY83 would represent one-third

to two-fifths of such investment.

The program outlined above would be revised annually, based on the Bank's

evolving experience in the sector.

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World BankHeadquarters:1818 H Street, N.W.Washington, D.C. 20433, U.S.A.Telephone: (202) 477-1234Cable Address: INTBAFRAD

WASHINGTON DC

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