Document of -- The World Bank FOR OFFICIAL USE ONLY Report No. 9589 PROJECT PERFORMANCE AUDIT REPORT COTE D'IVOIRE PETROLEUM EXPLORATION AND DEVELOPMENT PROJECT (LOAN 2189-IVC) MAI 22, 1991 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of --
The World Bank
FOR OFFICIAL USE ONLY
Report No. 9589
PROJECT PERFORMANCE AUDIT REPORT
COTE D'IVOIRE
PETROLEUM EXPLORATION AND DEVELOPMENT PROJECT(LOAN 2189-IVC)
MAI 22, 1991
Operations Evaluation Department
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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COUNTRY EXCHANGE RATES
CFA Franc (CFAF)/US$
Appraisal Estimate (1981) US$1.00 = 271.73Actual: Average 1982 = 328.61
Average 1983 = 381.06Average 1984 = 436.96Average 1985
ACRONYMS AND ABBREVIATIONS
BD - Barrels per dayBEICIP - Bureau d'Etudes Industrielles et de Coop6ration de l'Institut
Frangais du P6troleDE - Debt to Equity RatioDH - Direction of Hydrocarbons, Ministry of MinesDS - Debt Service RatioEDPP - Early Development and Production ProgramFRR - Financial Rate of ReturnGovernment - Government of the Republic of C8te d'IvoireMM - Ministry of MinesMF - Ministry of FinanceMP - Ministry of Public WorksMTOE - Million tons of oil equivalentNOC - National Oil CompanyOROIP - Original Recoverable Oil in PlacePETROCI - Soci4t6 Nationale P4troli6re de la C8t- d'IvoirePPF - Project Preparation FacilitySIR - Soci4t6 Ivoirienne de RaffinageSMB - Soci4t6 Multinationale de Bitumes
FOR OFFICIAL USE ONLYTHE WORLD BANK
Washington. D.C. 20433U.S.A.
OWic e goector-CeneralOpertens omintuan
May 22, 1991
MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT
SUBJECTt Project Performance Audit Report on Cote d'IvoirePetroleum Exploration and Development Project(Loan 2189-IVC)
Attached, for information, is a copy of a report entitled "ProjectPerformance Audit Report on Cote d'Ivoire - Petroleum Exploration and DevelopmentProject (Loan 2189-IVC)" prepared by the Operations Evaluation Department.
Attachment
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.
FOR OFFICIAL USE ONLY
PROJECT PERFORMANCE AUDIT REPORT
COTE D'IVOIREPETROLEUM EXPLORATION AND DEVELOPMENT PROJECT
(LCAN 2189-IVC)
TABLE OF CONTENTS
Page No.
Preface .......................................................... iBasic Data Sheet .................................................... iiEvaluation Summary .............................................. iv
I. BACKGROUND .................................................. I
II. PROJECT IMPLEMENTATION ....................................... 4
A. The 60% Option ............................................ 6B. The Financing Plan ........................................ 7C. The EDPP .................................................. 8D. The Exploration Program .................................... 8E. Technical Assistance to PETROCI ........................... 9F. Maturity, Grace Period and Exchange Risk .................. 9G. Audit .................................................... 11H. Institutional Development ................................ 11I. Financial Performance ..................................... 12J. Procurement ............ ............................... 14K. Environmental Issue........................................ 14
III. CONCLUSIONS AND LESSONS ........ ........................ 14
CHART. Crude Oil Prices 1973-2000 Actuals and Forecast ............. 20
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.
PROJECT PERFORMANCE AUDIT REPORT
COTE DIVOIREPETROLEUM EXPLORATION AND DEVELOPMENT PROJECT
(LOAN 2189-IVC)
PREFACE
This is a Project Performance Audit Report (PPAR) on the PetroleumExploration and Development Project (PED project), involving a IBRD loan inthe amount of US$101.5 million to the National Oil CompRny of C8te d'Ivoire,PETROCI. with the dual objective of developing a field discovered shortlyprior to the project and exploring further in the area. The loan wasapproved on June 29, 1982. US$58.5 million of the loan were cancelled inMarch 1986 at the request of the Borrower. The closing date was extended byone year to June 30, 1986.
The PPAR is based on the Project Completion Report (PCR) prepared bythe Africa Regional Office and issued on November 20, 1989, the President'sReport, the loan documents, on a study of project files, and on discussi-nswith Bank staff. An OED mission visited C6te d'Ivoire in April 1990. Thekind cooperation and valuable assistance provided by the Minister of Minesand his staff, PETROCI and SIR in the preparation of this report isgratefully acknowledged.
The PCR provides a good account of the project experience. The PPARelaborates on selected aspects of project implementation, in particular theinstitutional and financial features of the project and of the loan, and theperformance of the Bank.
The draft PPAR was sent to the Borrower for comments but none werereceived.
ii
PROJECT PERFORMANCE AUDIT REPORT
COTE D'IVOIREPETROLEUM EXPLORATION AND DEVELOPMENT PROJECT
(LOAN 218c-IVC)
BASIC DATA SHEET
KEY PROJECT DATA
Appraisal Actual Actual as 2Item Expectations Estimates of Apr. Est.
Completed 12/31/85 6/30/87Economic Rate of Retur.. (Z) n.a. n.a.
CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS(US$ million)
FY ended June 30, 1983 1984 1985 1986
(1) Appraisal Estimate 46.0 79.5 101.5(2) Actual 30.7 37.0 41.0 41.8(3) (2) as Z of (1) 67 47 40 40
Date of Final Disbursement: 1/13/1985
PROJECT DATES
Original Plan Revised Actual
First Mention in Files 12/01/78Negotiations 4/13/82Board Approval 4/29/82Loan Agreement Date 6/30/82Effectiveness Date 9/22/82Closing Date 06/30/85 06/30/86 6/30/86
Fiscal Year of Borrower: October 1 - September 30Follow-up Projects: Energy Sector Adjustment Program (3150-IVC)
iv
PROJECT PERFORMANCE AUDIT REPORT
COTE D'IVOIREPETROLEUM EXPLORATION AND DEVELOPMENT PROJECT
(LOAN 2189-IVC
EVALUATION SUMMARY
Introduction
1. The Petroleum Exploration further exploration activities (toand Development Project' in C8te be carried out by the samed'Ivoire was one of the first Bank consortium in three blocks), andoperation in the petrolt,= sector (iii) a comprehensive program ofand it was designed to cover two technical assistance to PETROCI.critical phases of the crude oil The project was justified from theactivity: exploration and produc- Bank's viewpoint by thetion. C8te d'Ivoire was a country preliminary estimates of substan-endowed with only one producing tial hydrocarbon reserves discov-ol' field (B6lier) and one ered at Espoir by the Consortiumpromising discovery at the time led by Phillips Petroleum which,the Bank project was considered. in turn, was to require largeThe Government's strategy was then funding by PETROCI as one of itsto achieve a greater self- members. Total project cost wassufficiency in energy. The estimated initially at US$1.2discovery in June 1980 of the billion (see attached Cost Tableoffshore field, named Espoir from the President's Report). The("hope" in English), raised again project was processed in a shortthe expectations about the coun- time to help PETROCI line up atry's potential as an oil producer strong financing plan of its shareat a time when oil prices were in the Consortium. The Bankreaching their highest levels. loan's main feature was theThe Espoir field started available funding for an increaseproduction in 1982, but it became of PETROCI's share in thesoon clear that the reservoir was Consortium from 102 to 60% ("thenot as large as expected. 60% option"). The financing plan
of the project was highlyThe Proiect and Its Obiectives leveraged, with all financing
mobilized being loans from the2. The objective of the Bank, the Euro-dollar market andproject was primarily to enable suppliers. These financing plansPETROCI (Soci4t6 Nationale were viable only insofar as thePetroli4re de la C8te d'Ivoire) to project had good prospects ofhold its own in the joint-venture generating enough cash flows toset up to exploit the Espoir repay the debts. Financialfield. Toward this goal, the Bank projections were positive untilprovided, in a typical manner, 1985, but showed a tighteningboth financing and technical thereafter, especially with theassistance. The project had three 60% option (PPAR, para. 2.07). Tocomponents: (i) the Early maintain a reasonable debt-equityDevelopment and Production Program ratio, safeguards for increase of(EDPP) of the Espoir field. (ii) PETROCI's capital by the
V
Governmen)- were introduced in the (PPAR. pariis. 2.04-2.06). As aGuarantee Agreement. result, only the suppliers'
credits were eventually mobilizedsImplewentation about US$60 million from the US
EXIM Bank and about US$11 million3. Two issues drew attention from the French COFACE (PPAR,to the difficulties of a project para. 2.09).of this nature. The negativepledge issue arose from the 5. The commerciality of theconflict between the Bank Espoir field was declared on Junerequirement to obtain the highest 13, 1981, one year after thecollaterals made available to initial discovery. The transitionlenders and the desire to grant a from explcration to developmentloan directly to PETROCI in order was delayid by a dispute over theto boost its credit-worthiness scope of the development permitimage within the Consortium. The which the Government limited toBank insisted on keeping first the relevant third (250 km2) ofranking on any collateral pledged the initial block. The Bank wasby PETROCI as a matter of first to draw PETROCI's attentionprinciple, but for practical on the possibility of a smallerreasons it accepted the field (about 70 million barrels ofalternative guarantee of the oil) and its need to drawCaisse Autonome (PPAR. paras. 1.08 independent conclusions fromand 3.05). The secrecy issue Phillips in that regard. Theraised by Phillips was justified resulting quid pro quo was thatby the need to anticipate possible C8te d'Ivoire did neither exerciseSecurities and Exchange Commission nor abandoned the 60% option whileactions if insider's information Phillips eluded its commitment towould benefit some but not all change the field's temporaryshareholders. Eventually the Bank facilities into permanent onesaccepted responsibility for damage although serious consideration wassuffered by the Consortium in case given to them for a long timeof a breech of confidentiality by (PPAR, para. 2.10). Despite theits staff in a new policy lesser prospects, the Consortiumdeparture (PPAR, paras. 1.09 and completed more production wells3.06). than planned to draw as much of
the reserves as possible. No4. Project implementation secondary recovery program couldstarted in earnest as retroactive be initiated, however, becausefinancing was de facto allowed for Phillips insisted on obtaining taxabout US$13 million (PPAR. para. concessions in favor of the12). Later, the loan disbursement Consortium which were rat grantedperformance was affected by the by the Government. This lack ofdecision of not exercising the 60% investments during EDPP will makeoption because production never future recovery of the remainingreached the levels anticipated at 40 million barrels more costly.appraisal (PPAR, para. 2.02). Thecorresponding US$58.2 million (or 6. Fifteen exploration wells57%) were cancelled in 1986 were drilled, but. only one (calledalthough it was three full years "Foxtrot") resultcd in aafter the Government had decided potentially commercial gas(although not formally) not to discovery. After an encouragingincrease its equity in the project evaluation well was drilled, no
vWi
agreement could be reached with development program if the "earlythe Government on the financial development" phase wa successful.conditions for developing the The norm with Bank financing is tofield despite the incentive of a fund the sure component, notBank gas development project which probable expenditures. Thewas prepared for a time but was exception is with the contin-eventually shelved (PPAR, para. gencies which, however, are2.11). Phillips withdrew from directly linked with plannedexploration in January 1989, but investments. This vas, thus, athe exploration program was useful significant departure from thein defining the geology of the accepted strategy to finance thecomplex reservoir. The Government hybrid combination of (i) ais also intent on purs,jing the standard exploration andcommercialization of the gas development phase (i.e.. the 10%disnovery. option) and (ii) a conditional
refinancing of a second phase7. Except for the US$1 (i.e., the 60% option). Thismillion PPF advance granted in Audit is of the opinion that thisanticipation of the Bank loan to broader approach is valid andallow PETROCI to hire petroleum enhances considerably the leverageexperts urgently, the technical of the Bank as a financier.assistance component has beenunderdisbursed. This is due in 9. For the borrower, PETROCI,part to the free training offered this was a favorable deal becauseby contract by Phillips. About 50 it obtained guaranteed financingIvorians were trained in the U.S. at a nominal cost (equal to thein this manner. This project commitment fee: .752 p.a.). Thedemonstrated that its outcome understanding was that funding forrelied, in good part, on the the option would be cancelled ifbuilding up of a strong technical it was not exercised within abase to enable the NOC to make its given time period. Although,own assessment and if necessary to eventually, no tangible benefitschallenge its foreign partners' were derived from this option, itproposals or lack of. had a bargaining value in the on-
going negotiation process betweenFindings and Lessons the members of the Consortium.
The chronology of events confirms8. This project epitomizes the importance of this "stand-by"the banker role that the Bank can credit in tailoring favorableplay (PPAR, para. 3.02). Several outcomes for C8te d'Ivoire and itsfeatures incorporated in the national oil company. By beingdesign or allowed during able to mobilize this largepreparation and implementation of financing - both at the time andthe project were unique and for a new borrower - PETROCI'sinnovative. The most important clout in the discussions on futurefeature -if this operation was the developments was increased. Whendecision to make available more the plan of the other companies infinancing than what was imme- the Consortium to borrow on thediately necessary. The project Euro-dollar market did notconsisted of a parallel materialize, the Bank loanexploration and development remained one of the three majorprogram and of an optional sources of funding for the scaled-
vii
down project together wita export order to arrive at a weightedcredits and the Consortium's average return (PPAR, para. 3.01).advances.
12. PETROCI's complaint about10. The confidentiality the exchange Lisk burden is validagreement required by Phillips although it is not specific to.affected the normal disclosure this project. The fact thacprocedures of the Bank. The ban foreign currency borrowing carrieson sensitive information prevented an exchange risk is not fullystaff and management from drafting realized by the borrower stems inthe usual Staff Appraisal Report. part from insufficient disclosureThe less technical President's to the borrower. PETROCI'sReport was, however, prepared. repayments of principal until mid'esides some annoying delays, the 1990 have been 43.6% greater thanconfidentially agreement was not a the nominal amounts, thus addingmajor constraint during 10.9 percentage points (on aimplementation. Actually, given compounded basis) to the annualthe crucial importance of interest rate or effectivelyinterpretation in the exploration almost doubling the nominal rate.phase, the Bank petroleum experts The fact that PETROCT got one ofwere not significantly dis- the last Bank loans at a fixe'advantaged compared to those of interest rate was also a recurrentthe Consortium. Indeed, the complaint. After 1982, PETROCIformer are credited for being the could have borrowed on the Euro-first to flag that the 1981 dollar market at less than thediscoery was not as large as total cost of 13% for the Bankinitially thought. loan. At the time it needed
financing, however, PETROCI ex-11. Compared to expecta- changed the benefit of antions, the project was not i uncertain future downturn insuccess as oil production, interest rates for a sure fixedexploration and reserves were rate loan at a premium.disappointing. Conversely, it wasnot a failure either to the extent 13. No financial rate ofthat design was not at fault, but return was disclosed in theits timing was unfavorable. President's Report on the groundWhether the decline of oil prices that there was too manywas totally unforeset ale deserves uncertainties in the Espoirto be asked as the linear recoveraile reserves, but otherextrapolation of the then rapidly documents mentioned a "prudently"increasing trends (fig. 1) did not estimated return of 25% (PPAR,qualify as sufficient evidence to para. 17). There was noanchor the financing of a recomputed FRR in the PCR althoughinherently risky project. It con- there was no more uncertaintyfirms once more the importance of about production and reserve byintegrating risk analyses and then. Despite requests, the Auditforecasts to obtain realistic was unable to obtain standardprojec-tions. Sensitivity financial statements; hencen,analysis is the more mechanical recevt financial ratios wereway of quantifying the impact of estimated from partial andundesirable outcomes. A better unaudited data. Overall, the
approach would be to spell out paucity of financial informationprobabilities of occurrence in is not justified in a project of
vii
this size. If this is due in partto the disappcinting financialoutcome of the project fromPETROCI's viewpoint, a rate ofreturn for the country could havebeen calculated (PPAR, para.3.09).
14. T'he lesson from thisproject :.a that failure todiscover more crude oil does notimply that the project failed.Petroleum exploration is byessence a gamble based on limitedknowledge and uncertain inter-pretations. Acquiring the knowl-edge about the real potentiald ofan exploration block, a field or areservoir has a cost which, inthis case, was somewhat lowered bythe production derived from anearlier discovery (Espoir). Thereservoir knowledge obtained hasput PETROCI in a better bargainingposition once exploration resumesas a result of higher world oilprices.
1. PED Project, or Petroleum Project, or Project.
PROJECT PERFORMANCE AUDIT REPORT
COTE D'IVOIREPETROLEUM EXPLORATION AND DEVELOPMENT PROJECT
(LOAN 2189-IVC)
I. BACKGROUND
1.01 The economy of C8te d'Ivoire experienced two decades of rapid growthduring the 1960s and 1970s and they resulted in a rising demand for energy. Inturn the trend led to the search for alternative sources for the more costlyimported energy sources. The country had no oil production when the project wasconsidered. The discovery in 1974 of the offshore field, named B6lier ("ram" inFrench), raised the expectations about the country's potential as 4.n oilproducer. The BWlier field started production in 1980. but it was recognizedthat it would satisfy only 5% of the needs projected by the end of the decade.The Petroleum Exploration and Development Project (PED) of the Espoir field("hope") was thus a timely contribution to the Government's strategy which wasthen to attain self-sufficiency in energy resources. This project was also amongthe first Bank operations in the petroleum sector and, thus, an additionalrationale for this evaluation.
1.02 After two decades of sustained economic growth at 7% p.a., C8ted'Ivoire was suffering from a growing imbalance between domestic production andconsumption of energy. By 1972 40% of the 1 million tons oil equivalent (MTOE)consumed was in the forms of firewood and charcoal. The First Oil Shock of 1973led to the tapping of the vast hydro-electric potential. Hydro climbed from 30Zof electricity production in 1973 to 90% in 1981. The Second Oil Shock focusedattention on oil imports. Until 1980 petroleum accounted for half of totalenergy consumption and was entirely imported; crude oil imports were equal to11.6% of export receipts in 1979, 14.1% in 1980 and 16.7% in 1981. Productionfrom the B6lier field was scheduled to grow over 1 MTOE in 1982 and to over 2MTOE in 1985; $80 million of investments in secondary recovery would help sustainproduction, but it was expected to decline to 0.13 MTOE by 1988. Explorationwas, therefore, a priority activity and the discovery of the field named Espoirin June 1980 confirmed the importance of offshore exploration. It alsoillustrated the need to strengthen the national oil company, PETROCI, to becomea viable partner in oil joint-ventures with foreign companies. This was the mainjustification for the Bank intervention.
1.03 Three institutions played a role in the sector: the Ministry of Mines(MM) has overall responsibility for implementing the hydrocarbon policy set atthe Cabinet level on recommendations from a Petroleum Committee. The petroleumactivity is carried out by Soci6t6 Nationale d'Op6rations P6troli4res de la C8ted'Ivoire (PETROCI), the Government-owned company established in 1975 after theBWlier discovery to participate in joint ventures with foreign oil companies.PETROCI is the major shareholder with 42% of Soci6t6 Zvoirienne de Raffinage(SIR) which operates the refinery whose capacity was to be doubled by 1982 at acost of $500 million to meet petroleum refining requirement of both C8te
2
d'Ivoire, Mali and Upper Volta through the 1980s. The domestic distribution ofpetroleum products is done by the local affiliates of eight foreign oilcompanies, of which two of them (BP and Shell) are owned 50% by PETROCI.
Proiect Objectives, Description and Processing
1.04 The project's objectives were straightforward. With the aim toenable PETROCI to hold its own in the joint-venture set up to exploit the Espoirfield, the Bank provided in a typical manner both financing and technicalassistance. Support to the project was three-pronged, allowing in parallel: (1)to provide the direct financing necessary to fund PETROCI's initial share as wellas the option to increase it sixfold, (2) to assist PETROCI in mobilizing fundingon behalf of the Consortium, and (3) to strengthen PETROCI's technicalcapability.
1.05 The structure of the project was correspondingly simple. There werethree components: (1) the Early Development and Production Program (EDPP) of theEspoir field, (2) further exploration activities to be carried out by the sameconsortium in three blocks (A-B, C1 and BI). and (3) a comprehensive program oftechnical assistance to PETROCI.
1.06 The project was justified by the preliminary estimates of hydrocarbonreserves discovered at Espoir by the Consortium lead by Phillips Petroleum(Phillips) with 57.5%, AGIP with 22.5%, SEDCO and PETROCI with 10% each.Initially, Espoir was believed to be a large field with production of up to 20million tons by 1988 (about five times more than B6lier at its peak).Consequently the financing requirements were expected to be considerable even fora consortium as broad-based as Phillips'. Total project cost was estimated atUS$1.2 billion in the President's report (see Table 2 for a breakdown ofestimated costs) and this amount was beyond the self-financing capabilities ofthe Consortium's members.
1.07 The project was processed in a short time. The first Bank approachtook place about four months before the first discovery well was successfully
drilled by Phillips (June 25, 1980). The MOM was originally skeptical of the
Bank lending for exploration activities which required quick decisions. Only
after a nine-month hiatus did the Government made an official request for Bank
financing (January 1981).2 As C6te d'Ivoire expected Bank funds to be availablewhen the field development program was to start (September 1981), the loanprocessing had to be accelerated. The negative pledge issue with the Governmentand the secrecy issue raised by Phillips interfered with a smooth processing whentime was of the essence (see PPAR, paras. 1.08 and 1.09). The proposed loan
amount, initially US$ 42 million (1979), was increased to US$80 million (1981).then to US$130 million when a project slipped out of the program, then was scaled
The initial project was to finance oil storage and pipelinedistribution, with an exploration component. The project scope waschanged after learning that the pipeline was abandoned and thestorage was underway.
2 Memorandum from Resident Representative (January 22, 1981).
3
back to US$100 million based on PETROCI's decision to increase its share in blockCI (PPAR, para. 2.06). The Board approved the loan in April 1982 and it becameeffective in September 1982, one year later than expected which requiredretroactive financing (see PPAR, para. 2.03).
1.08 The negative pledge issue arose from the conflict between the Bankrequirement to obtain the highest collaterals made available to lenders and thedesire to grant a loan directly to PETROCI in order to boost its creditworthinessimage within the Consortium. In August 1981 a draft legislation planned to offercommercial lenders better collaterals in the case of an oil find. BecausePETROCI is not a public company, the Bank argued, its standard negative pledgeclause in the Guarantee Agreement would not give it any security in case wherea lien was created over PETROCI's assets. As a matter of principle, the Bankinsisted that, if PETROCI placed a lien on any of its assets in favor of otherlenders, it must either ensure that such lien secures equally and ratably alsothe Bank loan, or offer to the Bank an alternative equivalent guarantee to securethe repayment in principal and interest of its loan. The issue was reopenedduring the loan negotiations, but closed momentarily when the Bank offeredinstead to make the loan to the Government. After negotiations, PETROCIattempted to offer a second-rank floating charge to the Bank, intending to keepthe first one available to potential commercial lenders. The Government, whorejected a Bank lien on the Espoir oil, proposed as "alternative guarantee" thatprovided by a financial institution. The determination of a financialinstitution acceptable to the Bank was a compromise. The Government preferredthe Caisse Autonome, a State-owned financial institution, or one of the foreignbanks partly owned by the State. The former was accepted by the Bank after apost-negotiation mission in June 1982. Additionally there was a guaranteeprovided by C8te d'Ivoire (see PPAR, para. 2.16).
1.09 Resolving the secrecy issue was as time consuming although a positiveoutcome came earlier. Phillips raised the issue in March 1981 and it lifted itsdata black-out in January 1982 when the project was already in Yellow Cover. Theprerequisite of confidentiality required by Phillips was justified by the needto anticipate possible Securities and Exchange Commission actions if insider'sinformation would benefit some but not all shareholders. Phillips wanted toreceive indemnities for losses incurred if there was an information leakoriginating in the Bank and it was not satisfied with the standard Bankconfidentiality procedures. Eventually the Bank accepted liability not only fordirect damage but also responsibility for damage suffered by the Consortium asa result of the application of securities laws as well as for legal fees.3 Theassumption of mistrust which underscored Phill.ps' sine qua non request isdisturbing. The Project File is replete with examples of biased insistence overBank staff, and later consultants, signing secrecy agreements. No traditionalSAR could be produced because data about the Espoir field could not be madepublic; instead a stand-alone President's report was issued for Loan Committeeand Board consideration. This exception to the normal Bank policy was the bestpractical choice at the time and it was well justified by the need to proceedwith the loan to PETROCI. Yet, the fact that the discussion of project issues
Memorandum from the Legal Department (September 18, 1982).
4
was omitted at Phillips's request in order not to affect reactions of commercialbanks being approached for financing contradicted the Bank's own fiduciaryresponsibility vis-A-vis its shareholders.
II. PROJECT IMPLEMENTATION
2.01 Implementation of the project had started before the loan becameeffective as the Consortium led by Phillips engaged expenditures both for thedevelopment of Espoir and for new exploration on a continuous basis duringproject processing. The Bank's disbursement policy was interpreted favorably forPETROCI as retroactive financing was de facto allowed. Given the risky natureof the expenditures for exploration and the fact that they were decided byPhillips over which the Bank had no enforcing capability, retroactive financingrepresented a significant alteration of standard practices. Furthetmore,allowing "cash calls" as eligible items for reimbursement by the Bank was equallya constructive demonstration of flexibility in its policies.
2.02 The disbursement performance was affected by the decision about the60% option (PPAR, para. 2.06). First, lack of resolution of the issue delayedinitial disbursements except for about US$13 million which were retroactivefinancings (PPAR, para. 2.03). Eligible reimbursements started in January 1983,but never rose to the expected level because PETROCI eventually waived the 60%option. The first supervision report (issued in March 1983 but based on amission in December 1982) acknowledged this possibility by revising theDisbursement Schedule on the 10% assumption. The disbursable loan was thusreduced to US$51 million (including the US$1.5 million of front-end fee). Duringthe first two fiscal years, actual disbursements were slightly faster than therevised estimates, then they lagged them enough to justify cancellation of thebalance despite postponing the closing date by one year. 5 Overall thedisbursement profile was good when compared to the revised schedule which is morerelevant.
FY1983 FY1984 FY1985 FY1986
Revised 26.0 34.6 51.0Actual 30.7 37.0 41.0 41.8Actual as % of Revised 118 107 80 82
2.03 Safeguards were designed to ensure that, except for the initialperiod when retroactive financing was disbursed and while commercial financingwas sought, Bank funds would be complementary, not substituting to commercialsources.6 Actually neither the Euro-dollar loan nor the commercial banks' loansmaterialized, thus leaving the Bank as a major financier. Given that the Bankcontribution to the project was presented as to play a key role in arranging a
Memorandum from staff to Vice-President (March 26, 1982).
The PCR gives two dates for the last disbursement: December 13,1985 (para. 31) and, incorrectly, January 13, 1985 (p. 18).
complex cofinancing package not only for PETROCI, but also for the threemultinational oil companies in the consortium, this outcome was disappointing.There was come confusion about retroactive financing. Shortly beforeeffectiveness, a request for funding US$12.7 million out of the Bank loan wasnoted with surprise "although no retroactive financing is permitted"; then it wassuggested not to consider it retroactive financing. 8 This amount representedthe 10% share of costs advanced by Phillips between June 1981 and May 1982 andbilled to PETROCI contrary to information provided by both the President's Reportand the PCR. The correspondence file shows that the Bank tried to influence theoutcome on the issue of retroactivity through a disbursement condition whichbarred disbursements until the contractual dispute about production acreage andconditions had been resolved. It had been introduced to pressure both C6ted'Ivoire and the Consortium into resolving their dispute about the developmentcontract of block Cl (PPAR, para. 2.10). Although the loan was effective onSeptember 22, 1982, the Bank confirmed on November 15, 1982 that it could stillnot disburse, especially reflecting "doubts" about PETROCI's liability overexpenditures incurred since June 1981. The first supervision mission recommendedto lift the disbursement condition, but not to change the stance on theineligibility of exploration expenditures before June 1982.' The correspondencefile does not document, however, the nature of the US$15.6 million ofreimbursement made during the first 101 days of effectiveness in 1982 whendisbursements were effectively frozen by Operations staff. The PCR shows onlytotal disbursements for the entire fiscal year 1982 and does not provide details.It seems, therefore, that the US$15.6 million figure correspond to theretroactive financing of the above US$12.7 million plus US$1.5 million of front-end fee plus US$1 million of PP" consolidated back into the loan.
2.04 Suspension of disbursements was considered once in 1983 because thecommitment charge on the loan was overdue, but the matter was resolved withoutthe need for action. Three years later, 57% of the loan amount was cancelled.While the Government had decided as early as 1983 not to exercise the 60%-option,the corresponding loan amount was not cancelled then. Other investmentopportunities were studied, including the gas project in the B6lier field (PPAR,para. 2.11). All projects to reallocate surplus fund were shelved when oilprices plunged in 1986 (see Figure 1). Whether it was justified to wait threeyears to cancel such a large amount (US$58.2 million) is opened to question giventhat a new investment of the gas project's magnitude would have required such anamendment to the 1982 Loan Agreement that a new operation would have beenprobably better suited.
2.05 Part I of the PCR does not mention the cancellation date although itoccurred three years after the latest deadline for exercising the 60% option hadexpired and five months after the last disbursement. Operations staff took one
Memorandum from staff to Vice-President (March 26, 1982).
Memorandum on recent developments (July 1, 1982 and September 1,1982).
Telex of January 13, 1983.
6
month to react to the cancellation request from PETROCI " and justified theprolongation of the entire loan amount for such a long period on the ground thatalternative investments (first the often-postponed replacement of the temporaryEDPP installations with permanent ones, then the development of a gas discovery)although the latest would have required a new project to be eligible for Bankfinancing. PETROCI was more straightforward in wanting to reduce its exposureto a rising exchange risk (PCR, part II, para. 5). Given the clear stance of theGovernment about the 60% option as early as 1983, relationship with PETROCI wouldhave gained with the Bank initiating the cancellation procedure earlier.
A. The 60% Option
2.06 The 60% option was abandoned in principle relatively rapidly despitethe opposite impression given by the frequent postponement of the deadline forits exercise and the late cancellation of the undisbursed loan. The initialoption was valid six months and was to expire in December 1981. The Governmentasked for a 3-month extension and was granted two. Later, the Yellow CoverPresident's Report recommended to make the Bank loan before PETROCI and theGovernment had decided about block Cl." A disbursement condition was usedafter effectiveness was declared to expedite a decision, but it had to be waivedin order to meet disbursement requests. PETROCI was granted another six-monthdelay in January 1983 when the negotiations about the contract for thedevelopment of block 01 were concluded. On the financing side, the option wasfavorable because PETROCI's interest in the project would have increased more(from 10 to 60%) than its share in the Consortium's borrowings or liabilities(US$185 million out of 1,131.5 or only 16.4%). Furthermore, for PETROCI, the
minimum incremental return expected under the worst scenario still supported theoption exercise with 10% due to the expected profits from production of alreadyknown reserves (Issues Paper, para. 11). For C8te d'Ivoire, on the other hand,the gain was less attractive as the country's share of net cash flows wasestimated to increase by only 10 points from 75-80% without the option to 85-90%by putting up a larger equity. Last, the option would not give PETROCIunilateral control over development activities undertaken by Phillips. Giventhat the initial 10% participation entailed no payment for the share ofexploration costs' while the 60% option would have obliged PETROCI to payretroactively 50% of these costs, the Option was as reasonable as it could be exante without being an exceptional deal. The direct financial cost of keeping the
Telex from April 2, 1986; recommendation in favor in memorandum of
May 2, 1986.
1" Memorandum attached to the Yellow Cover President's Report (February11, 1982).
12 President's Report, p. 21, footnote. The same information appearedin the PCR, para. 8, item ii (November 20, 1989). The firstsupervision report also outline the same compromise (March 2, 1983,para. 14).
7
option alive was US$1.42 million of commitment fee (0.75%) paid on thecorresponding portion of the Bank loan from signing until cancellation effectiveon March 31, 1986.
B. The Financing Plan
2.07 The financing plan of the project was highly leveraged.understandably from the foreign oil companies' viewpoint, for whom all financialexpenses were tax deductible. The President's Report disclosed a financing planwhich was leveraged to the extreme with no self-financing required in theUS$1,233 million investment and technical assistance program through 1985(President's report, p. iv). The core project, that is, the 10% share ofPETROCI, was to be financed entirely by the Bank loan (including the front-endfee). The 60% option involved additionally US$209.5 million was to be financedby a share of export credits ($13 million), a share of the Euro-dollar loan ($172million), and a $24.5 million loan over 10 years from PETROCI's foreign partnersin the consortium. 14 These financing plans were viable only insofar as theproject had good prospects of generating enough cash flows to repay the debt.Financial projections were positive until 1985, but showed a tighteningthereafter, especially with the 60% option. To maintain a reasonable debt-equityratio, safeguards for the increase of PETROCI's capital by the Government wereintroduced in the Guarantee Agreement (President's Report, paras. 84-85).
2.08 More important as an indicator for safe indebtedness was the returnexpected from the project. None were disclosed in Board documents: "given theuncertainties surrounding the EDPP after 1986, calculation would be highlyspeculative". 1 3 The Issues Paper had been optimistic, however. The globalfinancial rate of return was estimated "to range upward of 30% even under themost pessimistic assumptions" (Issues Paper, August 10, 1981). The incrementalrate of return of the 60% option was "prudently estimated at 252" (ibid.). Thesehigh anticipated returns justified the large borrowings abroad which would carrysubstantial exchange risk. Still, requiring no self-financing from theConsortium was not prudent financial policy and reflected the thinking of thetime which contributed to the debt problem plaguing less-developed countries.
2.09 Only the suppliers' creditswere eventually mobilized. They were notin place as scheduled on time (initially January 1983). By the time the Bankloan was US$32.2 million disbursed, these export credits were in final form butnot yet signed. There were about US$60 million from the US Exim Bank (at 12.5%over 10 years) and about US$11 million equivalent in French France from COFACE(at 10% over 5 years). PETROCI's share in this financing was to be 10%." TheEuro-dollar borrowing was scheduled to be launched in July 1982. By the end of
13 US$ at 0.75% p.a.
14 This amount represents the exploration expenditures incurred inblock C1 until the development permit was granted in June 1981.
is Minutes of Loan Committee (April 7, 1982).
16 First supervision report (March 2, 1983, para. 9).
8
1982, the disappointing result in another exploration well in block C1 reducedthe likelihood of PETROCI increasing its share. The Consortium then decided notto undertake joint commercial financing beyond the already offered exportcredits. In the light of this important change the Bank loan became moreimportant and it was at that time that the disbursement conditionality was lifted(PPAR, para. 2.03).
C. The EDPP
2.10 The commerciality of the Espoir field was declared on June 13, 1981,one year after the initial discovery. The transition from exploration activitiesto development was delayed by a dispuce over the scope of the development permitwhich the foreign partners wanted for the original 750 km2 of block C1 and theGovernment wanted to limit to a more relevant area of 250 km2. The EDPPproduction started, nonetheless, according to the appraisal schedule in August1982 while the agreement on the contract changes for block Cl was obtained inJanuary 1983. Six months later, no decision on the 60% option had been takenyet. Eventually the quid pro quo was that C8te d'Ivoire did neither exercise norabandoned the 60% option while Phillips eluded its commitment to change thefield's temporary facilities into permanent ones although serious considerationwas given to them for a long time." A more important factor was thesignificant reduction of the field's OROIP. Initially Phillips believed thatEspoir was a large field. The first production tests in July 1982 disappointedthis belief and Phillips acknowledged it publicly a few months later. By thenproduction was estimated to be about 8,000 BD below the figures used duringappraisal. The Bank was first to draw PETROCI's attention on the possibility ofa smaller field (about 90 million barrels of oil) and its need to drawindependent conclusions from Phillips. Despite the lesser prospects theConsortium completed more wells than planned to draw as much of the reserves aspossible. Eight wells were drilled instead of five, 4 in block C1 and 4 in blockA. Eventually the reservoir was estimated to contain approximately 70 millionbarrels of which about 50% was recovered. No secondary recovery program couldbe initiated because Phillips insisted on obtaining conressions in favor of theConsortium (i.e.. cancelling fiscal burden on the field and increasing the shareof production covering development costs). Since no agreement was reached withthe Government, neither permanent facilities nor secondary recovery were carriedout. This lack of investments during EDPP will make future recovery more costly.The Espoir field was shut down on December 31, 1988. MM representativescomplained about the operator's production practices during the last two yearsof production. In the absence of a reservoir model, it was not possible for thisAudit to elucidate this issue.
D. The Exploration Program
2.11 The poor results of the Consortium's exploration program explains whyHM disputed that the Bank project be called an "exploration" project. This doesnot seem to be a serious objection given that the Bank loan had a clearallocation (Category 1) for financing PETROCI's share of the exploration program.More wells (15) were drilled th-an required by contract (9 in C1 and 6 in A).
Only one (called "Foxtrot") returned a potentially commercial gas discovery inblock B1. An evaluation well was drilled and more were needed but again noagreement could be reached with the Government on the financial conditions fordeveloping the field. The Bank provided the incentive of preparing a gasdevelopment project but this did not help to reconcile the differences. Phillipswithdrew from exploration in C8te d'Ivoire in January 1989. The explorationprogram was useful in defining the geology of the Espoir reservoirl in particularit led to conclude that was initially believed to be one reservoir was actuallytwo completely different structures, hence the initial over-estimation of Espoirand the disappointing exploration result.
2.12 The comparison between the original cost estimated at appraisal andthe actual cost of the project has a limited meaning because the major option ofthe pro.gram was not exercised. Cost estimates in the President's Report wereUS$92 million for a 10% share from 1980 to 1985 (para. 73). Despite that theConsortium drilled more production and exploration wells than required bycontract, PETROCI's share of these expenditures was less than US$40 million andcould not use the whole loan amount. The original exploration allocation wasused at 43% and the development allocation at 65%.
E. Technical Assistance to PETROCI
2.13 As loan processing took longer than planned, a Project PreparationFacility (PPF) of US$ 1 million was granted in September 1981, at about the timethe loan had been expected. It financed the cost of experts that the Bankinsisted be hired urgently by PETROCI to assist in preparing the NOC's positionabout the Consortium proposals for exploration and development. The loan hadUS$8 million allocated for training and technical assistance, which resulted ina high percentage (16%) of the loan if PETROCI stayed with its 10% share. US$6.5million were earmarked for technical assistance, but only 28% was used despitehigh consulting fees (US$20,000 per man-month). Of the training component(US$1.5 million) even less was used (41), but per contract several Ivoriana (5high level staffs and about 30 technicians) were trained with Phillips in theU.S. The need for technical strengthening of PETROCI was a recurrent item in thecorrespondence file during project preparation.'$ This was also closely tiedwith the organizational improvement made in PETROCI (PPAR, para. 28).
F. Maturity, Grace Period and Exchange Risk
2.14 The Bank loan was granted directly to PETROCI. The necessaryGovernment's guarantee on its debt servicing was provided at a cost of 1.2% p.a.to PETROCI. Terms were a maturity of 17 years, the same as for C8te d'Ivoire,including 4 years of grace. Repayments to the Bank started one year beforeproduction in Espoir was stopped and they will continue until 1999, eleven yearsafter revenues from the project ceased. The front-end fee was capitalized,adding US$1.5 million to the loan amount for a total of US$101.5 million. Giventhat rapid disbursements were anticipated at appraisal (45% at end of first year;78% after two years; 100% after three years), these terms would have allowed
18 For example, terms of reference for the appraisal (May 15, 1981),telex to Resident Representative (August 18, 1981).
10
PETROCI a generous float for two years (from 1985 to 1987) until the start of therepayment period. Both slower and lower than expected disbursements preventedthis benefit to accrue to PETROCI.
2.15 The availability over time of funds can be measured by an indicatorcalled Average Loan Life. It is defined as the ratio of (a) the sum, untilmaturity, of the loan balances (in dollare) outstanding at the end of each yearover (b) the loan amount net of cancellations. This indicator measures thenumber of years during which the entire loan proceeds stay effectively at theborrower's disposal. The faster the disbursements and the slower the repayments,the longer the availability of loan funds. In the case of Loan 2189-IVC, it hadan expected average loan life of 8.7 years at the time of appraisal. The non-exercise of the 60% option cut this availability initially, but the largecancellation offset it later (through a lower denominator), increasing theaverage loan life to 10.2 years. The exchange risk due to the currency-poolinAsystem both realized on past repayments and accumulated until January 31, 1990cut it back to 8.7 years. This indicates .hat the actual terms of the Bank loanwere appropriately matching the production life of the Espoir field which was themain source of cash flows for PETROCI to enable it, inter alia, to service theBank loan. In terms of CFA France, the Bank loan had an average life of 11.3years which is greater than any of the three averages mentioned above. Thissuggests that, on one hand, PETROCI was correct in pointing toward the currencypooling system as the origin of its exchange risk problem, but, on the otherhand, it was not justified in claiming that it had no protection. Due largelyto the French policy regarding the CFA Franc parity, tied to the French Francitself linked to the German Deutschemark, PETROCI's foreign currency debt has notbeen revalued as much as it would have been without this arrangement (PPAR, para.2.17).
2.16 The interest rate on the Bank loan was set at 11.6% and is fixeduntil maturity in 1999. With hindsight. PETROCI is justified in considering thatthis feature proved to be costly compared to a variable-rate loan, a format whichwas not available then. However, as much as it was an unfortunate timing, it wasa positive feature at a time when dollar-denominated interest rates were thehighest observed during the previous decade. During negotiations, both theGovernment and PETROCI objected to the high yearly fee to be paid by the borrowerto the guarantor. Set at Bank request at 1.2% p.a., it was to cover the Stateguarantee provided to PETROCI. The national oil company argued that it was toohigh compared to the one-time 0.5% front-end fee charged by the Government forState guarantee given to private corporations. Recently, this fee has becomeless justified given that C6te d'Ivoire's official debt has been rescheduledunder Paris Club agreements while PETROCI has continued servicing its debt.
2.17 The exchange risk on the Bank loan is borne entirely by PETROCI andthis has been the major complaint against the Bank (PCR, Annex 2). The currencypooling system contributed an exchange risk equal to US$19.76 million between1981 and January .31, 1990, of which 26% on debt already serviced and 74% accruedon the outstanding principal. PETROCI's outstanding exchange risk due to Loan2189-IVC was US$15 million as of end 1989. This represented a 452 increase over
19 Deadline for data collection for this PPAR.
11
the outstanding debt converted at disbursement rates; at the end of 1988 thesituation had been worse with a 50% cost overrun. This was close to twice theaccumulated risk on all disbursed pool loans made to C8te d'Ivoire. PETROCI'sexposure has increased recently. PETROCI does not export anymore sinceproduction from the Espoir field ceased in 1988 and production from the olderB6lier field is sold to SIR in CFA Francs instead of in US dollars as was theprevious practice. Yet, PETROCI's complaint is less valid when its situation iscompared with other cases. The rate between the US dollar (the accounting unitfor the loan) and the CFA Franc has been holding thus far more than relativeinflation rates would suggest. Most disbursements were made in 1982 and 1983 atrates (US$1 = 329 CFA and 381 CFA, respectively) which were greater than theinitial reimbursement rates (about 300 CFA in 1987. 298 in 1988 and 319 in 1989).
G. Audit
2.18 Overall, the external audit was not an effective tool because theaccounts of the Consortium could never be audited despite it was a legalcovenant. The private members of the Consortium did not allow an external auditbeyond verifying PETROCI's account balance in the Consortium. To this extentneither the spirit nor the letter of the covenant were met as the "projectaccounts" were never audited. Insisting on external audit should have been asmuch a priority for the Bank as accepting Phillips' confidentialityrequirements. One wonders if this outcome would have been also acceptable inthe case where PETROCI would have increased its share in the consortium to 60%.The external audits of PETROCI were often late (by a year or more in 1983 and1984, for example) to be useful in managing its finances. This was all the moreunfortunate because these delays coincided with the problems created by SIR'sarrears (PPAR. para. 2.22).
H. Institutional Development
2.19 The project hinged on important institution building efforts whichwere crucial for the sustainability of C8te d'Ivoire's energy policy. The reviewof the project-related correspondence and progress reports shows thatinstitutional problems were apparent before the loan was declared effective. Anew organization chart was introduced early 1982 which called "suitable" by Bankstaff while recommending the urgent hiring of five technical experts.n PETROCIcontracted with BEICIP for the secondment of five staffs from the Summer 1982,but they were rapidly overextended. During 1983 PETROCI management resisted Bankrecommendation to hire two additional foreign experts (geophysicist ad reservoirengineer) on the ground that exploration was slowing down. A supervision missionin June 1983 noted "the deteriorating effectiveness of PETROCI's top management"(Supervision report. July 25, 1983) but recommended only a closer monitoring.The same diagnostic and recommendation were repeated verbatim in the followingtwo supervision reports more than a year later with no action having taken place
20 A letter to PETROCI (May 8, 1985) stressed the need to have externalauditors look at the consortium's accounts, but no action followed.
21 Letter to Minister of Mines (February 1, 1982).
12
besides the return of Ivorian staff in training with Phillips.n TheExploration and Production Department was reorganized early 1985 to promote twoIvorians as co-head in replacement of one expatriate. Overstaffing was noted forthe first time with little -emedy because it was imposed by the Government toalleviate unemployment of young graduates. In the context of the Third SAL astudy for the restructuration of PETROCI was engaged in 1987.2 PETROCImanagement complained of not having been consulted enough by Bank missions whichrelied excessively on M's viewpoint. While PETROCI is the implementing arm ofthe Government for --ts petroleum policy, it has operated mostly as a competitiveconcern governed by commercial considerations. Its ability to preserve itscreditworthiness in difficult times should have justified a direct dialogue onthe key issue of its own organization.
I. Financial Performance
2.20 As neither the PCR nor PETROCI providee financial data, they havebeen reproduced from various supervision reports.2 4 Over the period 1982-86,PETROCI was able to comply with the financial covenants most of the time.Capital adequacy was a target of PETROCI's financial policy supported by the Bankthrough a covenant requiring a capital increase whenever the debt-equity ratio(DE) fell below 65/35 or 1.85:1 and the debt service ratio fell below 1.5 times.The first test came after appraisal. To be practical the Bank recommended agradual capital increase tied to the accruing share of the Government in theEspoir production. Symmetrically the DE definition was relaxed by consideringas quasi-equity "a prudent estimate of the net present value of PETROCI's shareof the same production" (Issues Paper, August 10, 1981). As this had the effectof raising the DE ceiling, the DE covenant was set lower at 1.5:1. In July 1982the capital was increased by US$46.5 million by incorporating various reservesand while the Government disbursed US$1.6 of unpaid subscribed capital it did notchange the DE level.
2.21 Even with oil prices forecasted to rise 3% p.a. faster thaninflation, the debt service ratio was anticipated to fall below 1.0 from 1985 to1987 (the end of the projection period).2" The first supervision mission raisedthe issue of the "national needs" ("besoins nationaux") which was one of the twocontributions accruing to the Government from a producing field (the other beingthe "oil profits"). It was assumed at appraisal that the former would be leftir. PETROCI to assist in building its equity reserves and eventually help assuret'te debt servicing. This commitment was not honored, which had the expectedimpact on PETROCI's finances. In FY1982 (ending September 30, 1982), which wasthe first year where the production from Espoir had an impact, profits were down.A net lose was reported in FY1984 because of arrangements favoring SIR, of the
22 Supervision Reports dated September 10, 1984 on a mission completedin February 1984, and of November 30, 1984.
23 No mention is made in the correspondence file either.
24 PETROCI failed to provide updated financial data for this Audit.
23 Telex to PETROCI (December 30, 1981).
13
small share of Espoir production actually accruing to PETROCI, of the beginningfor the writing off of Espoir's devalopment expenditures, and of the Governmentstill cashing in on its 50% production share rather than leaving it withPETROCI." As PETROCI could not break even with its 10% share of Espoir or withits 15% in BWlier, it posted further losses although e sh flows remained positivedue to large depreciations taken against earlier .velopment expenditure. 2 7If the gaine from W4lier and Espoir going directly to the Government budget areconsolidated with those going to POTROCI, either operation was profitable. Forthe Espoir field alone, the Governoent share is estimated at !3S$279 million (PCR,para. 27) and PETROCI's at about US$40 million. This total must be lowered bythe cost of the Bank loan which in principal alone was US$63 million (of whichUS$5.1 million of realized exchange losses and US$14.6 of revaluation due tochanges in exchange rates). The policy of locating all these losses in PETROCIwas too extreme. Indeed, now that both fields have ended production, PETROCI isleft with limited cash flowe to support its debt-servicing on the Bank loan whichmatures in 1999.
2.22 The main drain on PETROCI's finances had been identified early on asthe payment arrears accumulated by SIR, the public sector refinery of whichPETROCI is a 42% shareholder. The SIR arrears vis-&-via PETROCI was an issueraised by the Bank as early as April 1982 when they amounted to US$176 millionsthe issue was, however, not covered in the President's report and aconditionality was removed from the draft loan agreement when assurances werereceived from the Government on reducing these arrears. To protect PETROCI,however, a ratio between accounts receivable (mainly from SIR) and accountspayable was introduced as a financial covenant with a 1.2:1 floor. Except forFY1982 when SIR's arrears were in the process of being reduced, this requirementof creditworthiness was met during project implementation. The main result wasto allow PETROCI, in turn, to reduce its short-term debt incurred to offset thearrears. As SIR was in financial distress due to cost overruns on investmentsand debt servicing calls, receivables from SIR could not be maintained under 90days as required by the Loan Agreement. Payments by SIR were partly offset byfreezing at about US$32 per barrel in late 1982 the price at which PETROCI wasselling the B6lier crude oil to the refinery. Given the assumption of marketprices continuing to climb, losses on B6lier sales were forecasted. With thesame effects on PETROCI's revenues and profits, the Government also decided tolet SIR manage its oil imports instead of relying on PETROCI against a fee. Inorder to eliminate SIR's deficit, the IM suggested in late 1983 to furtherchange the transfer prices between PETROCI and SIR. A Bank mission drew the sameconclusion but made recammendations for continued operations of the refineryafter structural changes to restore a permanent financial equilibrium. Actionwas delayed until after completion of a detailed study
26 The Government decided in September 1984 to leave with PETROCI the"national needs" share of the Espoir production estimated at US$8million (Supervision Report, September 10, 1984, Annex VIII).
27 Depreciating investments over five years results in net incomeswhich are comparatively lower than industrial concerns which aredepreciating over 20 years or longer.
14
J. Procurement
2.23 The procurement process was not traditional because PETROCI did notprocure capital goods directly. Phillips as lead manager for the consortium wasin charge of managing the exploration and development program. All procurementissues were decided on a 65% majority of the consortium and PEIROCI could stopprocurement in case of malpractice, but could not impose on Phillips theobservance of a specific form of procurement. The Bank recognized that theprocurement procedures used in the petroleum industry (limited internationaltendering) were adequate and it waived the ICB re4uirement. PETROCI like theother non-managing partners in the consortium was billed for its share ofexpenditures. The procedure called "advance against Operator's Cash Calls" wasalso accepted by the Bank as adequate in the absence of any other alternative.Safeguards against over-disbursements were, however, built into the disbursementprocedure. Since the external auditors did not have access to the consortium'saccounts (PPAR, para. 2.18), there is no way to be entirely sure that theaccounting presentation chosen was the best. As far as Bank operations areconcerned this is a drawback of this project format where the operator is neitherthe borrower nor under the full control of the guarantor.
K. Environmental Issue
2.24 At one point of its processing, the project was put on hold onenvironmental and worker safety grounds; these issues were later clarified."During implementation, however, the environment was not a major concern of eitherparty. When closing the underwater wells of the Espoir field, however, the MMwas anxious to choose a solution which would avoid oil spill hazards such ascaused by well heads caught in fishing nets.
III. CONCLUSIONS AND LESSONS
3.01 Compared to expectations, the project was not a success asexploration, production and reserves proved disappointing. Conversely, theproject was not a failure either to the extent that design was not at fault, butits timing was unfavorable. Whether the decline of oil prices was totallyunforeseeable deserves to be asked. The linear extrapolation of then upwardtrends does not qualify as state-of-the-art forecasts especially when the recenttime- aries was affected by a "structural change" such as the Second Oil Shock.Figure 1 illustrates pointedly this argument. More importantly, it confirms oncemore the importance of integrating risk analysis and forecasts to obtainrealistic projections. Sensitivity analysis is the more mechanical way ofquantifying the impact of undesirable outcomes. It is not sufficient, however,as a reliable risk assessment proxy because one critical component is usuallymissing: no probability is allocated to these possible outcomes. Given that manyprojects depend on combinations of events to yield their suggested return, thelevel of expectation should be disclosed in the form of probability ofoccurrence. If even a minor probability for oil prices to decline had beenacknowledged ex ante, ex post disappointments would have been mitigated andcorrective decisions facilitated.
28 Memorandum from Project Advisory Staff (March 25, 1982).
15
3.02 The performance of the Bank was exemplary as a banker. It madeavailable to PETROCI directly, a first-time borrower with limited past oilproduction, and indirectly to a consortium of foreign oil companies, over whichthe Bank had no enforcing power, more funds than the immediate and certainexpenditures program required. This approach was justified by the need todemonstrate PETROCI's ability to meet its share of financing in its first majorexploration and development joint venture. The desired enhancement of PETROCI'sstatue was achieved and in itself justified the approach. What has not beenreconciled, however, is the difficulty to service a large debt if it has financedan exploration program which has failed.
3.03 Intrinsically. PETROCI's complaint about the exchange risk burden isvalid although it is not specific to this project. The fact that foreigncurrency borrowing carries an exchange risk is not fully realized by the borrowerstems in part from insufficient disclosure to the borrower. The Project Briefprepared in 1979 assumed no exchange risk until 1988 with US$1 equal to CFA220(PB, Annex 3). Thereafter, Bank documents were displaying only dollarinvestments and financing, thus bypassing the issue. The repayments of principaluntil mid 1990 have been 43.6% greater than the nominal amounts, thus adding 10.9percentage points (on a compounded basis) to the annual interest rate oreffectively almost doubling the nominal rate.
3.04 At negotiations, PETROCI argued that 11.6% p.a. of interest plus 1.2%p.a. of guarantee fee plus 1.5% of front-end fee (itself capitalized and repaidat the previous 12.8%) plus the commitment charges made the Bank loan verycostly. The total cost was greater than the level represented at the time toPETROCI which implied a saving of 230 basis points over a Euro-dollar
29borrowing. Between aopraisal and Board presentation the LIBOR declined byover 3 percentage poits to 13.6%. Since 1982 the LIBOR has declined while theBank rate stayed fixed. This unfavorable turn of event was not foreseen when theBank loan was prepare, rad when it compared well with prime lending rates offeredin many industrialicel countries. In effect, PETROCI exchanged the benefit ofan uncertain future dow.turn in interest rates for a sure fixed rate loan at apremium which was initi 1l small but has grown over time. Given the interestsituation which prevaile: in 1981, PETROCI got favorable lending terms. Still,the total nominal cost w&s greater than the 10% incremental rate of return in theworst-case scenario which .,mplied that under conservative risk analysis the Bankloan was not suitable to i..aance the 60% option.
3.05 The negative pledge policy of the Bank may have been applied withunjustified zeal. The Government was "adamantly" against a World Bank lien onthe Espoir oil.30 There may have been a case of over-protection between thenormal State guarantee given to the Bank, the negative pledge, the bank guaranteefrom the Caisse Autonome and the guarantee from the State to PETROCI. The factthat PETROCI was required to pay a high fee to the Government for the latterguarantee also contributed to the impression of overcrowding of securities.Although this comment does not purport to challenge the negative pledge policy
29 Memorandum to Disbursement Department (November 12, 1981).
so Telex from lawyer (May 25. 1982).
16
whereby the Bank never takes second-ranking security, the point is also that, ina project calling for up to US$1.2 billion of fundings, not all collaterals canbe vested into the lender financing only US$100 million. This issue has takenincreased importance at a time when commercial bank lending needs to be offeredtangible guarantees to be forthcoming.
3.06 The prerequisite of confidentiality imposed by Phillips was justifiedby the need to anticipate possible Securities and Exchange Commission actions ifinsider's information would benefit some but not all shareholders. One wonderswhy regulations - not even a law - of one nation had to prevail over a foreignactivity governed by a foreign law and financed by an international organizationwhose loan agreements have the character of international law. More disturbingis the assumption of mistrust of the World Bank which Phillips' stance reflectedas well as its insistence over Bank staff signing secrecy agreements. Mostdecisions are context-specific, that is, it was the best practical choice at thetime. To this extent, this Audit is satisfied the Bank's acceptance of thiscondition was perceived as a general condition of doing business with the oilcompanies and specifically was warranted by the need to implement the financingagreement with PETROCI.
3.07 The Bank took the appropriate stance in its dealing with the SIRissue. At one point, the IMF put pressure for the closing of the only refineryin the country. While IMF's argument was valid, it was purely justified onmacro-economic grounds. i.e. the extent to which scarce budget resources weresunk into a dubious public sector venture. Initially the Bank was balancedenough to recommend a profound restructuring together with recapitalization.Yet the presentation made at the highest level in C8te d'Ivoire after conclusionof a long study recommended to close the refinery as being uneconomical. Giventhe clear intent of the Government to keep operating one of the two refinerieson the Atlantic Coast of Africa, a more pragmatic approach should have beenmaintained by the Bank over time.
3.08 The Bank was influential in resolving the dispute between Phillips
and the authorities about the scope of the development permit of the Espoirfield. It recommended a smaller perimeter and used the lever of loaneffectiveness to expedite the solution. Bank staff were also the first to drawthe attention of MOM and of PETROCI on the possibility of the Espoir reservesbeing lower than assumed.
3.09 No financial rate of return was disclosed in the President's Report
on the ground that there was too much uncertainties in Espoir recoverablereserves and with the 60% option. There was no recomputed FRR in the PCRalthough the above questions had been answered by then. The absence of anyfinancial data annex as well as a final project costs table in the PCR did not
allow this Audit to calculate an ex post FRR (see footnote 24). Based on recentresults and the closing of Espoir, the FRR for PETROCI is negative. Overall, thepaucity of financial information is not justified in a project of this size. Ifthis is due in part to the disappointing financial outcome of the project from
PETROCI's viewpoint, a rate of return for the country could have calculated.Assuming no further exchange risk until maturity of the Bank loan, the FRR is
estimated to be positive for the country.
17
3.10 This project demonstrated that its outcome relied in good part on astrong technical base to enable the NOC to make its own assessment and ifnecessary to challenge its foreign partners'. The Bank closely and adequatelymonitored both the technical and the finincial situations of PETROCI, reflectingthe concern of developiig a viable institution able to deal competently withforeign oil companies. PETROCI was slow building up an in-house and Ivoriantechnical capability as it allowed itself to be distracted by either the successof its current exploration venture or the evolution of oil prices worldwide. Theinstitution was also entangled in the broader issue of public sector streamliningpursued at a macro-economic level by the IMF and the Bank through its structuraladjustment operations. The resolution of this issue was decided outside PETROCIand this stance may have not been entirely appropriate given the effortdemonstrated by the NOC's management to maintain a balanced operation.
3.11 PETROCI's complaint about the exchange risk is legitimate to theextent that the risk impact was not disclosed up front. PETROCI was also unableto hedge effectively against a risk known only 30 days in advance because thecurrencies of repayment are identified by the Bank one month prior to maturity.This limits the usefulness of hedging techniques applied to debt-servicing whichwork better if future obligations can be covered months or years ahead. Thisliabilities management by borrowers has been facilitated with the currencypooling revision introduced in 1989. Still, borrower's perception would be morepositive if information on the implications of borrowing in foreign currencieswas provided. This could include an estimate of the foreseeable exchange riskgiven a set of assumptions (e.g., projected inflation rates in the borrowingcountry and in the three countries whose currency will be disbursed). Theprojected parity depreciation (or appreciation) could (with all the warning aboutthe nature of forecasts), then, be incorporated in the threshold for computingthe project's financial rate of return.
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IVORY COAST
PETROLEUM EXPLORATION AND DEVELOPMENT PROJECT(LOAN 2189-IVC)
Petroci
Summary Income Statements(CFAF Billions)
FY1982 FY1983 FY1984 FY1985
SalesDomestic Crude /1 38.9 34.7 30.5
66.3Imported Crude and Product 107.7 53.6 68.9Due from Caisse de Perequation 2.2 6.1 2.8 6.2
TOTAL SALES 148.2 93.8 101.8 6.2
Cost of PurchasesDomestic Crude 28.4 24.0 n.a. n.a.Imported Crude and Product 105.8 54.7 n.a. n.a.
