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Document of

The World Bank

FOR OFICIAL USE ONLY

Report No. 10727

PROJECT COMPLETION REPORT

GUINEA-BISSAU

SECOND PETROLEUM EXPLORATION PROMOTION PROJECT(CREDIT 1334-GUB)

JUNE 22, 1992

Industry and Energy Operations DivisionCountry Department IVAfrica Regional Office

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

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LIST OF ACRONYMS

MNRI Ministry of Natural Resources and Industry

PETROMINAS Empresa Nacional de Pesquisa e Exploracao Petroiiferase Mineiras

The above was substituted in June 1966 by:PETROGUIN Empresa Nacional de Pesquisa e Exploracao Petrolifera

DICOL Distribuidora de Combusteveis e Lubrificantes

ELF Essence et Lubriflants de France

HAI Hydrocarbon Associates Incorporated

OGCI Oil and Gas Consultants Incorporated

THE WORLD BANK FOR OmCIAL USE ONLYWashington, D.C. 20433

U.S.A.

Office of Direct<v-CenetalOpftatm Evaluatrn

June 22, 1992

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on Guinea-Bissau Second PetroleumExploration Promotion Project (Credit 1334-GUB)

Attached, for information, is a copy of a report entitled "ProjectCompletion Report on Guinea-Bissau Second Petroleum Exploration PromotionProject (Credit 1334-GUB)" prepared by the Africa Regional office with PartII of the report contributed by the Borrower. No audit of this project hasbeen made by the Operations Evalua.tion Department at this time.

Attachment

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may nvt otherwise be disclosed without World Bank authorization.

FOR OMCIAL USE ONLYPROJECT COMPLETION REPORT

GUINEA-BISSAU

SECOND PETROLEUM EXPLORATION PROMOTION PROJECT(CREDIT 1334-CUB)

TABLE OF CONTENTS

Page NO

PREPACE ............................................... i

EVALUATION SUMMARY ............................................ ii- Objectives .............................................. ii- Implementation Experience ................................ ii- Results ........................ ...................... iii- Lessons Learnt .............................................. iv

PART I PROJECT REVIEW FROM BANK PERSPECTINE

A. PROJECT IDENTrY .1

B. BACKGROUND .I

- Policy Context .1- Sectoral Development Objectives .I

C. PROJECT OBJECTIVES AND DESCRIPIION 2

D. PROJECT DESIGN AND ORGANIZATION. 3

E. PROJECT IMPLEMENTATION. 3

- Exploration. 3- Petroleum Products Pricing Study. 5- Training ..... , 6- Office Building. 6

F. PROJECT RESULTS. 6

G. BANK PERFORMANCE. 7

H. BORROWER PERFORMANCE. 8

I. PROJECT RELATIONSHIP. 9

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

TABLE OF CONTENTS (c.ntinued) PageNo

J. CONSULTING SERVICES ........................................... 8

- Exploration ...................................... 8...... - Legal .................. .......................... 8- Audit ................. ........................... 8- Study of Petroleum Products Supply and

Distribution ............................................ 9

K. PROJECT DOCUMENTATION AND DATA .......... ........... 9

PART II PROJECT REVIEW FROM BORROWER'S PERSPECTIVE

A. SUMMARY ............................................ 10

B. ROLE OF PETROGUIN ............................................ 11

C. ROLE OF THE WORLD BANK .............................. 11....... 1

D. RELATIONS BETWEEN THE WORLD BANKAND PETROC'UIN .............. ................... 12

F[ART DI STATISTICAL IFORIW&XXQ

1. Related Bank Credits .................................. .......... 13

2. Project Time-Table ............................ ................ 13

3. Credit Disbursements .................................. .......... 14

4. Project Implementation . ........................................... 14

5. Project Costs ............................................ 15

6. Project Results ................. ........................... 16

A. Direct Benefits ........................................... . 16B. Economic Impact ............................................ 16C. Financial Impact ............................................ 16D. Studies ............................................ 16

7. Status of Covenants ............................ ................ 17

8. Use of Bank Resources ............................................ 18

A. Staff Inputs ............................ ................ 18B. Missions ..................................... 19


GUINEA-BISSAU


PREFACE

This is the Project Completion Report (PCR) for the Second Petroleum ExplorationPromotion Project for which Credit 1334-GUB in the amount of SDR 11.9 million wasapproved on March 15, 1983, signed on March 24, 1983, and became effective on June 14,1983. The Credit was closed on June 30, 1990, four years behind schedule. An undisbursedamount of SDR 436,937 was cancelled on November 29, 1990 and the last disbursement wason December 6, 1990.

The Project Completion Report was prepared by the Industry and Energy OpetationsDivision of the Technical Department (AFTIE), Africa Region, (Preface, EvaluationSummary, Parts I and m), and the Borrower (Part H).

Preparation of this PCR was started during the Bank's final supervision mission of theproject in October 1990 and is based, inter alia, on the Staff Appraisal Report, the CreditAgreement, supervision reports, synthesis documents provided by the Borrower,correspondence between the Borrower and the Bank, and internal Bank memoranda.

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GUINEA-BISSAU


EVALUATION SUMMARY

Objective-s

1. In the early 1980's, Guinea-Bissau's petroleum requirements totalled approximately20,C00 metric tons per year. This small amount notwithstanding, petroleum imports were-and remain-of critical importance as they meet almost all the energy requirements of themodern sector of the economy. Furthermore, petroleum import costs, at an annual average ofUS$10 million, represented about 60% of merchandise export earnings.

2. The Government objective for the sector was to develop economically viable domesticresources in order to reduce petroleum imports. This objective was reflected in the energyinvestment program, wLich included promotion of petroleum exploration as financed by theAssociation under Credit 1095-GtJB, which was approved by the Board on January 13, 1981.This promotional effort focussed on the offshore area between 20 and 200 meter water depth.

3. The Government intended to pursue its policy of attracting private companies toundertake exploration by opening up additional acreage. In 1982, based on its explorationconsultant's recommendations, the Government requested the Bank's assistance to financework needed to include the offshore area located in shallow water (i.e. in water depth of lessthan 20 meters) in the next call for bids to the oil industry.

4. The Second Exploration Promotion Project (aimed at rekindling the oil industry'sinterest in exploration for petroleum in Guinea Bissau) included: (a) acquisition of 4,000 kmof new seismic data in the shallow water area; (b) consulting services to assist the nationalagency PETROMINAS in supervising the acquisition, processing and interpretation of newseismic data, integration of the new data generated with previously existing data, promotion ofthe shallow water area to the oil industry, the negotiation of exploration and productioncontracts, and the monitoring of the activities of oil companies; (c) the preparation of apetroleum products pricing study; (d) provision of institutional support and office equipmentto PETROMINAS; and (e) training of PETROMINAS staff.

Implementation Experience

5. The contract for the seismic survey was awarded to the American seismic companyDIGICON through direct negotiations (see Part I-paragraph 11). This procedure wasaccepted because of the technical superiority of DIGICON systems fbr acquisition of seismicdata in shallow water. The company agreed to finance 50% of the cost of the seismic survey,

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against the right to sell the acquired data to the oil industry, in order to recover itsinvestment. Note that the same company had been selected to carry out the seismic surveyfinanced under the First Petroleum Exploration Pwoject (Cr. 1095-GUB).

6. The shallow seismic survey was carried out and completed ih May/June 1983. Inspite of the difficulties of navigating and operating in shallow water, most of the seismicprogram envisaged at the time of appraisal was carried out. Funds remaining under thecategory were utilized to shoot a 2; * km detailed program around the well PGO3, in deeperwater.

7. Results obtained in shallow water are not encouraging, since they show a Mesozoicmonocline overlaying a deep, fauilted, and ill-defined Paleozoic section. No proposal forexploring the area was presented by the oil industry. However, seismic data acquired aroundthe well PGO3 disclosed an interesting exploration prospect.

8. The Government decided to continue the services of tde same exploration consultingcompany which had assisted PETROMINAS under the first Petroleum Exploration PromotionProject. The firm had performed satisfactorily under the first project.

9. In the petroleum products supply and distribution subsector, inadequate prices hadweakened the financial position of the national company in charge of the supply anddistribution of petroleum products (DICOL). In order to address the issue, the projectincluded a study aimed at establishing an adequate pricing policy (CF. Part I, paragraphs 21to 23). Upon analysis of four proposals for implementing the above study, the Governmentawarded the contract to William Matthews and Associates, of Canada. The consultantdelivered his report in December 1985. He recommended that petroleum prices be broughtup to a level where they would be paying external and internal costs. These price changeswere to be phased in during the two subsequent years in order to minimize economic hardshipwhich might result from an immediate modifications.

Results

10. Following the promotion seminars which were held in October 1985, PECTENInternational Company, of the U.S., entered into an exploration and production contract onJune 20 1986, covering six offshore blocks located on the offshore shelf (cf. Part I,paragraphs 17 to 19 below). PECTEN drilled three exploration wells, which were all dry,but yielded useful information on the geology of the area. The diapiric pattern of thestructural geology makes exploration difficult, and the possible existence of oil in this area isno. precluded by the negative results of PECTEN's wells. Exploration activities in thecountry may be resumed by the oil industry once the latter has understood the meaning of thelack of success of Pecten's wells.

11. Conversely, the shallow water area, where the bulk of seismic data acquired duringthe project had been shot, did not arouse any interest among oil companies, and no onepurchased thee acquired seismic data.

12. As a result of William Matthews and Associates' recommendations, petroleum productprices were increased in April 1987. Subse'piently, pricing based on import parity wasestablished under SAC II. Moreover, compliance with a new pricing formula (designed by

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the Bank's specialists and included as an annex to the President's report for the new energyproject), will be a condition for disbursement under this project.

Lessons Learnt

13. It was mentioned under paragraph 8 above that the Government retained for theproject under review the same exploration consultant- within the framework of a US$1.5million contract-who had prov.ded assistance during the previous similar project. Thisconsultant performed a good technical job. However, since the consultant had made theunusual recommendation to the Government to request a new petroleum exploration projectbefore the end of the second year of the first project, it would have been preferable, in orderto allay suspicions of a conflict of interest, to select the consultant through internationalcompetitive bidding.

14. Petrominas, which later on was transformed into Petroguin, was created upon theBank's suggestion, under the belief that the oil industry felt more comfortable in negotiatingcontracts with a national oil company than with the Government. As a matter of fact, oilcompanies want to deal with people corapetent and in a position to make valid decisions,whatever be the institutional framework. Having such people in a Ministry saves the cost of anational oil company, and results in a more flexible answer to the variations of petroleumexploration activities in the country. For example, during the present period of explorationinactivity which has followed the drilling of three dry wells in Guinea Bissau, Petroguin'sstaff is to a great extent unemployed, and the Government is trying to wind down aninstitution which has become unproductive. As long as a country has not become a significantoil producer the creation of a national oil company is unnecessary and cumbersome.

15. The Government financed a seismic survey in the shallow water area, for an amountof approximately US$9 million dollars, which resulted in confirming the already suspectedlack of interest of the area. Generally speaking, carrying out extensive seismic surveys istargeted to initially delineate the most attractive area within a sedimentary basin, and then todefine drilling locations, which the oil companies rightly see as their role. In order to attractoil companies in the exploration of a given basin, it is only necessary to develop broadlyoutlined exploration targets (called "conceptual plays" in the oil industry language). Workprograms to develop these exploration plays may include light exploration methods such asgeochemical analyses (to demonstrate the existence of source rocks), seismic data reprocessing(to show the structural style of a given area, and/or outline the sedimentological pattern of agiven geological layer), or satellite imagery studies (to detect deep seated tectonical features).

16. The Association granted four one-year extensions to the project, in order to assist theGovernment in monitoring the exploration activities generated by the second petroleumexploration promotion. The chronology of events was as follows: the promotional seminar inTexas was held on October 16, 1985; on May 20, 1986, Pecten sent a contractual proposal tothe Government; the exploration and production contract with Pecten was signed on June 20,1987; on January 25, 1988, Pecten acquired a 37.75% working interest in ELF petroleumrights; Pecten carried out a seismic survey in early 1988, and subsequently drilled three wells,out of which the first one was spudded on November 11, 1989 and the last one completed onMarch 23, 1990. From the promotion as a starting point, the overall cycle of exploration fromcontract negotiating and signing to the completion of the last well took five years. This casehistory illustrates the inadequacy of a three year period for a petroleum exploration promotionproject. A five year period would be more adapted to the actual pace of the oil industry.


GUINEA-BISSAU

SECOND PETROLEUM EXPLCRATION PROMOTION PROJECT(CREDIT 1334-GUB)

PART I: PROJECT REVIEW FROM BANK PERSPECTIVE

A. Project Identity

Project Name Second Petroleum Exploration PromotionProject

Credit No Credit 1334-GUBRVP Unit : Africa Region Country Department IVCountry : Guinea BissauSector : EnergySubsector Petroleum

B. Background

Policy Context

1. The difficult situation of Guinea Bissau in the early 1980's stemmed from policiesfollowed after independence. Substantial international assistance and inadequate aidmanagement led to a mushrooming of projects, many of them ill-conceived and overlapping.This lack of appropriate macroeconomic policy resulted in a difficult external paymentsposition: the overall deficit reached US$8 million in 1980, and the debt service amounted toUS$10.1 million in 1981. The Government was keen to rehabilitate the national economy,and to bring the commercial and financial external payments position back intc balance.

Sectoral Development Objectives

2. To that effect, the Government's energy sector objective was designed to developeconomically viable domestic energy resources in order to reduce petroleum imports and toenhance the efficiency of energy use. This objec*i;-, was illustrated by its energy investmentplan, which amounted to US$16 million in the pe,od 1978-1982 and included promotion ofpetroleum exploration financed by the Association (Credit 1095-GUB for SDR1 1.9 million),and the expansion of generation facilities as well as rural electrificaticn financed by AFDBand various bilateral aid agencies.

3. In accordance with the Government's sectoral objective, Project 1334-GUB aimed atpromoting Guinea-Bissau's sedimentary offshore basin (i.e. attempting to attract oil companiesfor the petroleum exploration of the area), and in particular the shallow offshore area.

C. Project Objectives and Description

4. As a conclusion of the regional geological evaluition of Guinea-Bissau's offshoresedimentary basin carried out under the first exploration promotion project, the Government'sexploration consultant recommended that a shallow water seismic survey be conducted (4,000line km), in order to include this area in the following round of bidding. Sh::e there were noremaining available funds under the first Credit to finance this seismic survey, the consultantsuggested to the Government to request a second petroleum exploration promotion projectfrom the Association.

5. Although Petrominas was of the opinion that more thought should be given to thematter, the Government followed the recommendations of the consultant, which had beenendorsed by the World Bank. The Credit was granted by the Association, for a total amountof US$13.1 million. The effective date was June 14, 1983, approximately 2 year.: and 5months after the effective date of the first petroleum exploration promotion project.

6. The project was conceived as a continuation of the first one, and was aimed at: (a)assisting the Government with its promodional efforts (i.e. its endeavor to convince oilcompanies of the significant hydrocarbon potential of the country's sedimentary basins); and(b) continuing institutional support to Petrominas. It consisted of:

(a) Geophysical work: Some 4,000 km of new seismic data to be collected inGuinea Bissav's shallow offshore in water depths of less than 20 m andprocessed;

(b) Exploration work: Exploration consultants would be retained to:

(i) assist Petrominas in supervising the seismic survey;

(ii) conduct special processing of data collected given the nature ofexploration targets:

(iii) evaluate the new geophysical data generated and integrate itwith existing data;

(iv) prepare a report on the petroleum potentia of the shallowwater area surveyed and the country in general;

(v) promote the area to attract interest of oil companies;

(vi) assist in negotiation of exploration-production contracts; and

(vii) assist PETROMINAS in monitoring the activities of operat3ngcompanies.

(c) Legal and Economic work: consultants would be retained to assist with theeconomic, financial and legal aspects of negotiating with oil companies.

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(d) Pricing study: a consultant would be retained to collect data and prepare apetroleum products pricing study which was intended to serve as a basis forestablishing a more rational pricing structure.

(e) Institutional Support

(i) The project provided for part-time assistance of variouspetroleum specialists; and

(ii) Procurement and installation of office equipment.

D. Project Design and Organization

7. Since the project under review was a continuation of the first petroleum explorationproject, it was very well prepared, which was illustrated by the absence of any importantvariance during the course of the credit. In a similar manner, since the parties involved in theimplementation of the first petroleum exploration project prepared the second project, theyalso understood perfectly the conceptual foundation of the latter. The same public agencywhich had been responsible for the implementation of the first credit was also the executiveagency for the second one.

8. Since the Association granted three one-year extensions to the first Credit, bothprojects progressed alongside one another for three and a half years. It is therefore notalways possible to distinguish between operations carried out under the two projects.

9. An institutional study of the petroleum subsector in Guinea Bissau was carried outunder the first project. The consultant in charge ot the study presented its report in July1984. In accordance with the consultant's recommendations, Petrominas shedded its miningactivities in 1986, and was renamed Petroguin. The latter name will be used in the followingchapters o: this report.

E. Project Implementation

xploratio

10. As was mentioned in the Evaluation Summary (Paragraph 8), the Government, withthe agreement of the Bank, decided to retain the same exploration consulting rirm which hadassisted Petrominas in implementing the work program of the first exploration promotionproject. The local experience of the firm was important, since it had already been selected bydirect negotiation in March 1980 to prepare the first project.

11. The American company DIGICON was selected to carry out the seismic survey,because this company had recently built a ship especially constructed for shallow waters (cf.Evaluation Summary - paragraph 5 above). Its instruments included a digital system thatother companies had yet to develop.

12. Government had initially considered a seismic program including the acquisition of2,000 km of fresh data. It further agreed with DIGICON offer to finance 2,000 km more,

within the framework of a speculative contract. Under this type of agreement the companyfinances the acquisition of seismic data, on condition tha:. it can market the data in order torecover its costs.

13. Some difficulties were encountered by the sei6nic boat near the islands and nearonshore areas, because of reefs or sand bars coming near to the surface of the water. As avariance to the main components of the project, the seismic program was accordinglymodified. 200 km of detailed program were shot in the area of PGO3--a well which hadproduced some oil--to complete the 4,000 km envisaged at the time of appraisal. Thesedetailed seismic lines disclosed an interesting structural feature, which may have contributedin attracting the 11 company Pecten to explore the area.

14. The DIGICON interpretation was complemented by a seirmic-stratigraphic studycarried out by an American company. This study gave good stratigraphic indications but didnot result in the definition of well-supported conceptual plays.

15. It will be recalled that the promotional seminars organized in November 1981 underthe first projcat resulted in the signature of a petroleum exploration and production contractwith a group of international companies led by ELF-Aquitaine, covering two offshoreexploration blocks KANGORENE permit). In 1984, the contractor drilled an exploration wellwhich was reported dry.

16. New data acquired during the second projLvt were presented to the oil industry duringseminars which were held respectively irn Houston (Texas) and London on October 16 and 23,1985. The exploration consultant was assisted in this exercise by an American consultantwhose work was of an excellent standard. As a result of the promotion activities, PectenInternational Company sent a proposal for an exploration contract on May 28, 1986.

17. On June 20, 1987, a petroleum exploration and production agreement was signed withPecten, covering six blocks (ANTIBENE perm.t) located south of the ELF-Aquitaine blocks.On January 25, 1988, Pecten further displayed its interest in the area by acquiring a 37.5%working interest in the ELF-Aquitaine consortium acreage, and becoming the operator for theConsortium (Cf. Evaluation Summary - paragraph 10 above).

18. In early 1988, PECTEN carried out a seismic survey ir.cluding 1,100 km in theANGORENE permit (ELF-Aquitaine blocks) and 4,900 km in its own ANTIBENE permit.Interpretation of seismic data led the company to drill three wells between November 11,1989 and March 23, 1990 (two wells in the ANTIBENE permit and one in the ANGORENEpermit). All three wells were reported dry.

19. The independent well-site consultant who assisted PETROGUIN in monitoring thewells drilled by PECTEN expressed some reservations in his final report with regards to thewell-site operations as carried out by the operator. Although this report did not cause anytrouble in the relationship between the Government and the Contractor, it is recommended tohave an independent evaluation of drilling operations carried out by a highly qualifiedconsultant in well-site and whe-logging operations.

20. Guinea Bissau was subsequenly included in a regional study comprising five WestAfrican countries (Mauritania, Senegal, The Gambia and Guinea Conakry), and known underthe acronym MSGB. The study was completed in 1987. However, due to time and financial

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constraints, and to the involvement in the study of different consultants, with poorcoordination, the study was more a juxtaposition of local studies than an actual regional study.Lessons learnt from this experience were used in designing the work program of otherregional studies executed by the Bank.

Petroleum Products Pricing Study

21. In the petroleum downstream subsector, electricity tariffs which had remained frozensince 1974 resulted in subsidies of gasoil used for electricity generation. Inadequate pricesalso weakened the financial position of public enterprises in the subsector, which was furtheraggravated by managerial weaknesses and non-payment by Government agencies for productsprovided. DICOL sustained losses amounting to US$1.5 million equivalent in 1981. Withinthis context, the Project included a study on options and steps to be taken to establish anadequate petroleum product pricing system.

22. Four proposals to carry out the study were received from qualified consultants. Uponan evaluation of the proposals, and with the agreement of the Bank, the Government selecteda Canadian consultant, of Ottawa (Canada). After having completed his study, the consultantissued a report including the following recommendations:

(a) a standard formula should be established in the price structure for DICOL'sCIF cost, based on op,portunity cost at world levels;

(b) DICOL's terminal and distribution costs should be allocated in the pricestructure to each product at each distribution level based on identifiableaccounting costs;

(c) a price stabilization fund should be established as an element in the officialprice structure, which would serve to cushion consumers from precipitouschanges in final prices while adhering to the principle of full cost recovery.

23. Progress were made towards transparency in petroleum products pricing, and priceswere accordingly readjusted upward in April 1987. Another readjustment was made inOctober 1990, under SAC II, when an import parity system for petroleum pricing wasestablished. Bank's specialists further refined this price structure: total transparency would beestablished, and the stabilization fund proposal was not adopted. Compliance with this newpricing structure will be a condition for disbursement under a new energy project, which waspresented to the Board on May 7, 1991.

Training

24. Three Petroguin staff received training in the US, organized in Tulsa, Oklahoma.Training started with a six-month course in English in the University of Tulsa, followed bytraining program in petroleum geology and geophysics. The results were generally good.Further training needs were covered either by the companies operating in Guinea Bissau (anannual amount of US$50,000 for training was included in the agreement with ELF) or frombilateral aid. As a global result of these different training sources, there is now withinPetroguin a cell of qualified technicians in petroleum exploration.

Office Building

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25. It will be recalled that the first project included the construction of a prefabricatedoffice building and a second building aimed at providing accommodation for the consultantsemployed under the project. As was mentioned in the Project Completion Report for the firstCredit, Petroguin had embarked, with the Association's agreement, on a project forconstructing a permanent building, financed with the revenue from the sale of seismic data(US$1.2 million). However, the Central Bank disposed of the hard currency derived from thesale of promotional documents, and in 1986, when the first Credit was closed, the buildinghad not been erected.

26. The Central Bank of Guinea Bissau eventually transferred US$150,000 to Petroguin'saccount in foreign currency. In addition, the US$500,000 signature bonus paid by Pecten(i.e. the bonus paid by Pecten, according to its contractual commitments, upon the signatureof its exploration contract) was also deposited to the same account. Petroguin decided to usethese funds to finance its building. The Bank agreed to assist Petroguin technically andfinancially in the operation, within an amount of US$400,000. However, since the buildingconstruction project took various turns during 1987-1989 (important building, prefabricatedoffices, smaller construction) the opportunity to amend the second project to finance thePetroguin building was lost.

27. Eventually, during the fourth extension to the project, Petroguin requested theAssociation to finance the purchase and the rehabilitation of an existing building in Bissau (itwas not clear if the request regarded the construction or the rehabilitation of the building). Itwas then clarified that Association guidelines require that IDA/Bank funds can only be used tofinance new assets.

F. Proiect Results

28. Aside from the modification made in the program of the seismic survey (Cf.paragraph 13 above), the main variances between planned and actual implementation of theproject relate to its time frame. As a result of the promotion held in November 1985, Pectenentered into an exploration and production contract in May 1986. Negotiations between theELF-Aquitaine group and Pecten resulted in the latter acquiring a 37.5% working interest inELF-Aquitaine acreage. New seismic data were acquired in early 1988, and the Contractordrilled three exploration wells which were completed in March 1990. In order to assistPetroguin in monitoring these exploration activities, the Credit was extended for four periods.These variances in the implementation schedule of the project show that the three year periodinitially planned for this petroleum exploration project is significantly shorter than an averageexploration cycle in the petroleum industry (Cf. Evaluation Summary, paragraph 16).

29. As mentioned in paragraph 18 above, Pecten drilled three exploration wells in 1990,all of them being reported dry. This result does not preclude a possible later discovery in theregion. As far as geology is concerned, the area is marked by salt domes (diapirs), createdby the weight of overlaying sediments. Upward movement of the salt resulted in uplifting andfaulting surrounding sediments. This mechanism may create petroleum entrapments (asillustrated by the prolific oil and gas fields discovered in the American Gulf Coast in a similargeological environment). The complexity resulting from the salt movement, however,consieerably complicates the exploration for the traps which are believed to be present.

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30. In the short term, however, the negative results of the Pecten wells will have adeterrent effect on the oil industry, which would outweigh any promotional efforts. It isrecommended that the Government does not spend money at this time in attempting torekin.dle the interest of the oil industry in the exploration of the area.

31. During the course of the project, the Association found that the installations of thePublic Company in charge of petroleum products supply and distribution (DICOL), and inparticular the fire fighting facilities, were not in working condition. Most of the equipmentneeded to be either rehabilitz'.-d or replaced. It was also found that the south-eastern part ofthe country was poorly supplied in petroleum products. Upon a request presented by theGovernment, the Association agreed to grant a new Credit aimed at addressing these issues.

32. A consultant was contracted, under the project under review, for a cost underUS$30,000, to cost-estimate the various components of the project. The consultant performedvery satisfactorily and delivered his report in early April 1990, before the pre-appraisalmission of the new Energy Project had left Washington.

33. The new project, which was presented to the Board on May 7, 1991, includes acovenant regarding the petroleum pricing structure as established by the Association anddescribed in Annex 3.3 of the President's report.

34. The new Credit includes consulting services for an amount of US$0.1 million, aimedat integrating the new data obtained from the three exploration wells drilled by Pecten into thepreviously established geological framework, and evaluating the drilling operations as carriedout by Pecten (Cf. paragraph 19 above).

G. Project Sustainabitiy

35. Scientific knowledge acquired under the Credit will be maintained through theintegration of technical information obtained from the drilling of Pecten wells in a synthesisgeological report, under the new Energy Credit. However, in the absence of furtherexploration activities in the country, experience acquired by Petroguin staff may progresivelybecome obsolete.

H. Bank Perfo

36. To the extent that the main component of the project (i.e.seismic data acquisition) isnot questioned, the Bank played a satisfactory role in providing appropriate recommendationsto the Government when unexpected exploration results were obtained (such as the difficultiesencountered by the seismic boat to operate in the near shore area-see Part I paragraph 13).The Bank also assisted the Government in finding a geophysical contractor who agreed tocofinance the acquisition of seismic data. On the other hand, Bank's guidelines for theselection of consultants should have been more closely followed (Cf. Evaluation Summary,paragraphs 8 and 13). Furthermore, as was already the case during the first petroleumexploration promotion project, the Bank did not pay sufficient attention to the explorationconsulting firm's financial behavior and relied too heavily on the same consultants'recommendations .

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37. To its credit, the Bank flagged in good time the issue of the dangerous situationprevailing in DICOL's petroleum products storage facilities, due to the worn-out condition ofmost of the equipment, in particular the fire fighting facilities. The Bank agreed to grant aCredit aimed at renovating these facilities.

I. Borrower Performance

38. rTe Borrower always provided the appropriate support and cooperation to visitingconsultants, as well as to Bank missions. Furthermore, during the course of the project, theBorrower took an active part in the decision making process and in the project'simplementation. It also assisted very efficiently in the preparation of the new Energy Credit.However, the Borrower did not always follow the rules set in the Credit Agreement foi hiringconsultants (such as the contracting of the Portuguese company which provided consultingservices to monitor the exploration activities of oil companies), and did not always provide theAssociation with periodic reports about the implementation of the project or the requiredannual audit reports, within the prescribed time frame.

J. Project Relationship

39. The relationship between the Borrower and the Bank was very good during the greaterpart of the project, which contributed to its success. Relations were sometimes clouded whenthe Bank endorsed the recommendations of consultants without the full agreement ofPetroguin, though connections remained warm during most of the time. Towards the end ofthe project however, the relationship, dampened by Bank's position regarding the Petroguinbuilding, was further degraded by the Association's suggestion to dissolve the Agency.

K. Consulting services

Exploration

40. The exploration consulting performed its technical assigmnent in a very satisfactorymanner, and the regional report which it produced received praise from highly qualifiedinternational geologists. This report, and its presentation to oil companies, contributed to theexploration and production contract signed with the oil companies. However, the financialand accounting behavior of the consultant did not match its technical capability.

Leai

41. The firm specializing in petroleum exploration contractual and fiscal regime assistedthe Government in the negotiations with ELF-Aquitaine and with Pecten in a very satisfactorymanner. Its participation resulted in petroleum exploration and production contractspreserving the Government's interest in the event of hydrocarbon discovery.

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AuOh

42. The audit company emplyed by the Government during the First PetroleumExploration Promotion Credit (CR. 1095-GUB) was retained for the second petroleum projectbecause of the quality of its services during the implementation of the first project. The firmprepared a good audit of Petroguin's accounts, and proceeded with the training of theAgency's accountants which had been commenced with the first project. Furthermore, theconsultant flagged whenever necessary the questionable accounting practice of the explorationconsulting firm.

Study of Petroleum Products Supply and Distribution

43. William Matthews and Associates, who had been selected according to ICB,performed well, producing a very good report and valuable recommendations. Thesecontributed to convincing the Government to increase retail prices of petroleum products inorder to reflect actual procurement and operating costs. Furthermore, the consultant was thefirst to flag the dangerous conditions prevailing in DICOL°S storage facilities.

L. Project Documentation and Data

44. Since the petroleum exploration promotion projects 1095-GUB and 1334-GUBoverlapped, and were of similar nature, it would in retrospect have been advisable to preparea common Project Completion Report for both Credits.

45. Abundant documentation in Bank's files assisted in the drafting of this PCR. TheBorrower corrected a few errors and provided complementary information.

46. The legal documents related with the project under review offered an adequatereference during the project. The Credit Agreement's covenants provided useful benchmarksduring the implementation of the Credit.

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GUINEA-BISSAU


PART Il: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE

A. SUMMARX

1. Pollowing the World Bank's first Credit to the Republic of Guinea-Bissau to financepetroleum exploration activities, which covered only the deep-water zone, the Governmentobtained a second Credit to help finance operations in shallow waters.

2. Ihe Credit, in the amount of SDR 11,900,000, was allocated as follows:

1. Seismic survey ............................ SDR 9,100,0002. Services of consultants and advisors ......... ........... 1,820,0003. Petrleum pricing study ............................ 5 0,0004. Equipment and furniture ............................ 270,0005. Training and scholarships .......................... 100,0006. Unallocated ............................ 560,000

3. The Credit was approved on March 24, 1983 and the closing date was fixed forDecember 31, 1985. However, since the planned program had not been completed by theInitial closing date, the Credit was extended a number of times, the final closing date beingJune 1990.

4. The project was conceived and implemented at a time when the results of the firstCredit were still not known, for which reason the executing agency believed that operationsshould not be initiated unti' these findings were available. This view was not shared by theconsutants, Atlantic Resources, Ltd., and even less by the World Bank representative inGuinea-Bissau.

S. Therefore, a start was made even before the Credit was approved on seismic dataacquisition using DIGICON, within E speculative survey framework.

6. As regards project execution, the planned program was in general terms implementedin full, except for the construction or purchase of a building for PETROGUIN.

7. During project execution PETROGUIN always took pains to satisfy the requirementsof the Credit Agreement, observing the World Bank's guidelines for the procurement of goodsand sices and always consulting with the Bank where necessary.

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8. Under the Credit Agreement a number of contracts were signed with specializedconsulting firms and companies for purposes of project implementation, among which shouldbe mentioned:

DIGICON - Seismic data collection;HAT - Ad\ice on negotiations with companies;Atlantic Resources, Ltd. - Production of booklet for promotion purposes;Arthur Young and Company - Audits, advice on accounting and training;PARTEX - Technical assistance and training;William Matthews - Petroleum pricing study;Petroconsultants - Preparation of the MSGB repor;MAP Engineering Services, Inc. - Technical advice for the promotion campaign;CORELAB - Supervision of wells drilled by Pecten;Edgar Schlabach - Study of premises for fuel storage and visit to

new storage locations;TRANZACORES - Supply of equipment;BEICIP - Geochemical study;Morgal International - Supply or vehicles.

9. All these contracts were satisfactorily executed except that with Atlantic Resources,which gave rise to a series of difficulties attributable to the company; this led to the contractfor preparation of the MSGB report being withdrawn at the insistence of the World Bank.

B. ROLE OF PETROGUIN

10. As laid down in the Credit Agreement, the Borrower made PETROGUIN theexecuting agency for the project. Given the lack of experience of its personnel and the needfor credible st'idies to present to foreign companies, PETROGUIN either continued earliercontracts with consultants or made new ones. Using the experience acquired under theprevious project, efforts were focused on getting more companies interested in exploration inGuinea-Bissau. To this end, a study was made of the subregional sedimentary basin, with theparticipation of the other countries concerned.

11. In this context, PETROGUIN negotiated and signed an exploration contract withPECTEN Guinea-Bissau, with which Walter International and IFC were associated.

12. On the basis of the experience acquired in executing the two projects, PETROGUINsubmitted to the World Bank a request for financing to study the paleozoic section, and at thesame time to carry out an aeromagnetic study on behalf of the mining sector.

13. However, the World Bank refused to finance this project in light of the negativeresults of the paleozoic section study in the Republic of Guinea (Conakry). In our view,however, this reasoning is quite unacceptable for a number of reasons.

C. ROLE OF THE WORLD BANK

14. In its capacity as lender, the World Bank through its staff closely supervised theprogress of the project, whether as regards execution of service contracts, supply ofequipment, or monitoring of project tasks or studies. During the life of the Credit,

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PETROGUIN invariably received support from the World Bank with a view to proper projectImplementation, and the company was visited on a number of occasions by Bank missions.

15. However, the support provided by the World Bank began to weaken during the lastthree months of project execution; we attribute this to the three dry wells drilled in Guinea-Bissau, or to the new energy sector policy defined by the World Bank Board.

D. RELAIO BErWEEN THE WQOL BANK AND PROGUIN

16. 'he relations between the World Bank and PETROGUIN during project executionwere always amicable, being reflected in frank exchanges of views which in generalcontibuted to the almost complete implementation of the planned program.

17. Nevertheless, after PECTEN had drilled three dry wells, the World Bank's attitude tooperations in the sector for which PETROGUIN is responsible changed.

18. This change was reflected in the cut in financing for the third project and the refusalto pay for generating sets for the company, although the Bank is quite familiar with Guinea-Bissau's energy problems.

19. However, the company is convinced that the relationship between the World Bank andPETIROGUIN will be reviewed in depth and hopes that the good working relations built upover the past 10 years will continue, to the benefit of Guinea-Bissau's development and in linewith World Bank aims.

This completes the report.

Bissau, April 12, 1991

The Director General

/s/ Ant6nio Cardoso

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PROJECT COIWLETION REPORT

GUINEA-BISSAU


PART IIIs STATISTICAL IN7ORMATION

1. Related Bank Credits

Credit Year ofn "it Purpose Approval SttsComments

iPAt Project

1095-GUB Petroleum 01/13/81 Closed ReasonablyExploration SuccessfulPromotion

Future uriect

Energy Project 05/07/91 Will be launchedin October 1991

2. Prject Time-Tabl

Date Date Datemtm Planne Revised ActuaI

First Mention inthe Files 03/16/88

Identification 11/10/88

Project Brief 10/08/82

Credit Negotiations 01/83 01/19/83 01/12/83

Board Presentation 03/83 03/15/83

Credit Signature 03/24/83

Effective Date 05/83 06/14/83

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Credit Closing 06/30/86 06/30/87 06/30/90

Completion Date 12/31/85 06/30/87 12/31/90

Comments: Since the project had been discussed in depth during supervision missions ofthe first Petroleum Exploration Promotion Credit, no formal appraisal mission was carriedout, and no appraisal report was prepared.

3. Credit Disbursements

Cumulative Estimated and Actual Disbursements(US$ million)

FY 83 84 85 86 87 88 89 90

AppraisalEstimate 1.5 10,3 12.5 13.1

Actual 10.4 11.2 11.3 11.7 11.9 11.9 12.2 12.2

Actual as %of Estimate 0 100 90 86 89 91 93 93

Comments: At the end of the project, a remaining amount of US$0.48 million wascanceled. The last disbursement was on December 06, 1990.

4. Proiect Implementation

Appraisal Actualindicators Estimate Estimate

Preparation of a petroleumproducts pricing study 06/30/84 12/ 85

Approval of DIGICON contract 03/83 02/83

Completion of the regionalstudy 05/84 06/85

Promotional Seminar first half 85 10/85

5. Project Costs and Financing

Appraisal amounts are those mentioned in the President's Report.

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A. Project Costs(In US$ '000)

Foreign ForeignLocal Exchange Local ExchangeCost Cost Total Cost Cost Total

Seismic Survey 0 20,000 20,000 0 20,029 20,024

Special Processing 0 500 500 0 187 187

Exploration Consultants 50 950 1,000 110 1,798 1,608

Legal/Economic Consultant 20 100 120 30 109 134

Pricing Study 10 40 50 20 79 94

Resident Experts 90 500 590 60 147 202

Equipment 0 150 100 0 79 79

Training 0 100 100 0 147 147

Unallocated 0 760 760 0

Cancelled 437

TOTAL 170 23,100 23,270 220 22,687 22,907

Comments: Note (Ref. Evaluation Summary, paragraph 5, and Part 1, paragraph 12) that thegeophysical company financed the acquisition of 2,000 kn more of seismic lines within theframework of a speculative contract.

B. Proiect Financing(US$'000)

PlannedCreditAgment Final CoMMents

IDA 13,000 12,675 NoneDomestic 200 220 NoneOther Sources 10,000 10,012 None

Total 23,200 22,907

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(b) IDA broken-down costs per category are given paragraph 5 (A) above.

6. Project Results

A. D-itect Beneflts

Appraisal ActualIndicators Estimat Estimate

Attracting foreign many one contractcapital for petroleum contractsexploration offshore

Intensifying hydrocarbon -- Acquisition of 5,000exploration km of seismic lines

and three wells drilled

Petroleum Discovery Possible No discovery

Improved knowledge Expected Obtained

B. EconomicJ Imp_

Not Applicable

C. Financial Im=act

Not Relevant

D. Studies

Purpose asdefined at Impact ofAppraisal St Study

Studies

DIGICON Useful for Completed Objective metseismic preparing thereport regional

study

Regional study Promotion Completed Objective met

Petroleum Macroeconomic Completed Significantproducts Benefitspricing

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study

7. Status of Covenants

CreditCovenant Agreement Slu

Employing exploration, I11-3.02 ietaccounting and legalconsultants

Furnishing reports m1-3.04 (a) Metprepared under theproject to theAssociation

Furnishing quarterly III-3.04 (b) Met, often activityreports with delay

Establishing of III-3.05 Met, with delaya new pricingsystem before06/30/84

Maintaining accounts IV-4.01 (a) Metwith respect to theproject

Having these accounts IV-4.01 (b) Met, withaudited occasional delay

Depositing in a IV-4.03 Met only inprivate account September 1987proceeds from salesof reports

* t

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8. Use of Bak Resoce

A. StaffJIaf

Stage of StaffPMlect C,X& Weks

Through Appraisal 9.9

Appraisal thro.sgh Board Approval 9.9

Board Approval Through Effectiveness 7.4

Supervision 98.2

TOTAL 125.4

B. Missions

Stage of PerformanceProject Month/ Number of Days in Specializaton ratingQE& X= Pesn thefield Rreented SMu

BeforeBoardApproval

Bissau 10/83 1 S ECN 1

Supervision

Bissau 03/84 2 4 ECN-GST 1

Bissau 07/84 2 3 ECN/GST 1

Lisbon 08/84 2 5 ECN/GST 1

Lisbon 12/84 1 3 GST 1

Lisbon 02/85 1 3 GST I

Bissau 02/85 3 3 ECN/IFIN/GST 1

Lisbon 04/85 3 3 ECN/:IN/GST 1

Houston 10/85 2 2 GST/ECN I

London 04/86 1 3 OST 1

B 19

Bissau 11/86 1 3 GST 1


Paris 10/87 2 2 EGR/GST 1



Bissau 08/89 1 5 GST I

Bissau 04/90 1 1 GST/EGR 2 (b)

Bissau 10/90 1 1 GST 2 (b)

Comnr ,is: (a) The last two missions coincided with the preparation and appraisalmissions of the new energy project.

(b) Both missions presented minor problems, since one of the itemdiscussed with PETROGUIN staff was the winding out of thecompany, while maintaining of *he experience gained by its personneland the technical data base acquired during the project.

(c) Key to Specialization:

ECN: EconomistFIN: Financial AnalystEGR: EngineerGST: Geologist/Geophysicist

(d) Key to rating:

I - no problem2 - minor problem

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