Avt~C 6s7 / - C Document of The World Bank FOR OFFICIAL USEONLY ; -;H 'I 141 ,- r At;t t ,-.i' , i'',/','lt},¢' '! , s gT. Report No. 11701-KO R -. :,:t !- :f r.' ':^ '- .. : IA A ' t1 STAFF APPRAISALREPORT KOREA ETROLIEM DISTRIBUTION ANDSECTOR MiANAGEiENT IMPROVEMENT PRCJECT WAY 12, 1993 Industry and Energy Operations Division Country Department I East Asia and Pacific Region This document has a restricted distributon and may be used by recipients only in the performance of their officlhdduties. Its contents may no otherwise be dislosed without World Bank authrzation. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Avt~C 6s7 / - CDocument of
The World Bank
FOR OFFICIAL USE ONLY
; -;H 'I 141 ,- r
At;t t ,-.i' , i'',/','lt},¢' '! , s gT. Report No. 11701-KOR -. :,:t !- :f r.' ':^ '- .. : IA A ' t1
STAFF APPRAISAL REPORT
KOREA
ETROLIEM DISTRIBUTION AND SECTOR MiANAGEiENT IMPROVEMENT PRCJECT
WAY 12, 1993
Industry and Energy Operations DivisionCountry Department IEast Asia and Pacific Region
This document has a restricted distributon and may be used by recipients only in the performance oftheir officlhd duties. Its contents may no otherwise be dislosed without World Bank authrzation.
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CURRENCY EOUIVALENTS(as of December 1992)
Currency Unit Won (W)US$1.0 = W780
Wiooo US$1.282
WEIGHTS AND MEASURES
bbl barrelbcf billion cubic feetbpd barrels per daybtu British thermal unitGWh gigawatt hourskcal kilocalorieKWh kilowatt-hourkoe kilogram oil equivalentkm kilometerlb poundmcf thousand cubic feetmmbtu million British thermal unitmmcfd million standard cubic feet per dayMW megawattppm parts per milliontcf trillion cubic feettoe tons of oil equivalenttonne metric ton (= 2,205 lb)
ABBREVIATIONS AND ACRONYMS
DHCC Dai Han Coal CorporationDHOPCO Dae Han Oil Pipeline CorporationEPB Economic Planning BoardEUA Energy Utilization ActKDHC Korea District Heating CorporationKEEI Korea Energy Economic InstituteKEMCO Korea Energy Management CorporationKEPCO Korea Electric Power CompanyKESC Korea Electric Safety CorporationKGSC Korea Gas Safety CorporationKIER Korea Institute of Energy ResearchKMPC Korea Mining Promotion CorporationLNG Liquified Natural GasLPG Liquified Petroleum GasMOE Ministry of EnvironmentMOER Ministry of Energy and ResourcesMOST Ministry of Science and TechnologyPEDCO Petroleum Development CorporationTSP Total Suspended Particulate
DHOPCO's FISCAL YEARJamnary I to December 31
Fox omcUL USE ONLY
KOREA
PEROLEUM DJISIFRUTJON AND SECTOR MANAGEME4T IMPROVEMENT PROJECT
Loan and Project Summary
The Republic of Korea
y :Lddan Dae Han Oil Pipeine Coiporation (DHOPCO)
hA,mt: US$ 120 million equivale
Teng- 15 years, inclu five years of grace, at the Bank's stndard variable itrerate
0 &hgtg Te: lTe Government would re-lend the proceeds of the Bank loan to DHOPCO on the sameweras and conxitions as the Bank loan. DHOPCO would bear the foreign exchange andinteres. rate risks.
Mhe objecdve of the project is to improve the efficiency or Korea's energy sector andenhance the reliability of petroleum supply. This will include: (a) establishig a moreefficent and rliable petroleum supply and disbution system ftrough the costuaionof a pipeline network; (b) improving environmental quality and safety standards byreducing air and water pollution and by reducing rail and road hazards; (c) developingan appropriate energy consevaton progran (with a stgy to ustain t); and (d)
proving sector insdtutions by thehei ff financial, operadinal and managacapabilities of DHOPCO.
The project consists of tbree parts. The first is an approximatdy 1000 km pipelinesysmm to transport petroleum products. The network will include an east-northundine conecting two eastern refnries (Yukong and Ssangyong) near Pusan toTacion; a west-north truline connectng the Honam riney at Yeocbon to Taejon;and two parall ppelines from Taejon to Seoul. The proposed system also includestwo short segmen, as wll as storage anks, pumping stations and loadig andunloadig facdites. The sysoMm is designed to initially transport about S00,000 bpd ofclean products or about 55% of the total oil consumed domestically. The second partis a major study on energy conservadon, including prpration of an action plan forsubsequent implementation by the Govement The third includes tchnical assistancetu DHOPCO, which involves training DHOPCO staff in the cridical aeals of operaadons,fine an management and helping to design and implement DHOPCO's managementinformation system.
The project will yield significant economic and environmental benefts, as well asunquantified benefis resuldng from enancement in reliability of supply and greauerefficiency in the secor, and indirect benefits to other sectors. The project's economicbefits are derived from saving assoated with traportig petroleum products viathe proposed pipeline versus existng mode (coast vessels, rai tankers and trucks).The environmenta benefits include reductions in (a) aw pollution from the tuk; (b)marine pollution, from oil leaks of vessels and from the loading facilities; and (c) r
This documeat has a restricted distribution and may be used by recipients only in the performanceof their offcia duties. Its contents may not otherwise be disclosed without World Bank authodzation.
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nd ril hazards, fron acceis involving tucks. The Indirect benefits include reducwear and tar in the highway system and less congesdon of the port faciltes.
The project-specific risks are minimal. The risk of cost overruns and impleandelays have been tk into -ount in the project sensitivity analyses which show thaits economic vily is robust The land and rights-of-way have lready beenacquirod. The envonmental risks have been fully evaluated and mitigation plans tbatare consistent with the Bank guideines have been developed.
sPriect Cos8t:Local Po¢vi« Total
-- US$ milion Land & Pight of Way 111.0 - 111.0Linepipe & Fitting 79.0 41.0 120.0Pipeline Constuction 185.7 - 185.7Tenninal Equipment 2.7 11.0 13.7Terminad Constuction 59.5 12.5 72.0Pumps & Ancilaries 3.2 35.0 38.2Pump Station Const. 14.0 - 14.0SCADA System - 17.0 17.0Stat Up 2.2 - 2.2Engineering 41.7 - 41.7Inchon - Seoul Segment 81.0 - 81.0Stus& & TA - 3.5 3.5Base Co 50.0 1= QQUPhysica Cont 20.0 9.0 29.0Price Cont 19.4 5.8 _5.2Totd Project Cost 619.4 134.8 754.2Interest D. Const 53.0 2.5 55.5Total Finacing Req. 672.4 137.3 809.7
PolFKHRX Dam=]BNO AM SECMOR-MANNOAUEM BTI20HXAM X zRC
9StfARROW Repw
Pae No.
I TM nW
A. Resourcs and Production ...................................... 1B. Cosumptmo and Demand ...................................... 2C. Prkes . 3D. Ins ts .............. 4E. Issu, Str and the Role of the Poposedr t ..................... SF. Outlook ....................................... 11
IL PTLEM SUPPL AND DSTRIB UTION
A. Prset and Past Consumption of Petroleum Products .................... 12B. EistigSystm........................................... 12C. Future Demand for Petroleum Products ............................. 15D. Need for an Efficien Distbutin System ........................... 15E. Lessons from Previowu Bank Involvement ........................... 17F. Raionaefor Bank Involvement ................................. 17
I. n r
A. PoetBckround .............................. 19B. Projet Objeci .............................. 19C. PrFoecDescripton .............................. 19D. SWs of Prect Preparadon ............................... 0E. Contactud Aex andT s .............................. 20P. Environmen and Safety Aspec .............................. 210. Project ationa Schedule .............................. 21H. ProjectCost .............................. 22I. P ect FinacingPlan ....................... ....... 23J. Promrement and Disbursement .............................. 24K. Montoring, RqKt and S rvision ............................. 6.
IV.
A. Bacound .............................. 27B. Or i atonda Staffi .............................. 27C. Operations and Managemn .............................. 28
This report was prepared foliowing a mision to Kora in July 1992, consing of Messrs./Mme. M. Farbandi(Task Mager), S. Pad (Fkiandal Analysis), R. de Silva (Institut ), Y. Ziv (E nvo ment Specialist), H.Schober (Projec Engineer) and I. Budiaja (Pipline Speciit). Per rvwers were Memr. H. Razavi(IENOG) and A. Heron (EM2DR). The project was cleared by Messrs. Vineet Nayyar, Chief, EAlIE andCallisto E. Madavo, Diector, EA1DR.
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V. ANCIAL.ANAL
A. PastPerformanc ....................................... 32B. Investmnt Program and Finaning Plan ............................ 33C. Findd Oudook ....................................... 34
VI. PRQJECT BE AND RISKS
A. Benfits ................................................ 37B. Ris ....................................... 38
VI. AGROMMENTh ANDRECOMMENDATION
A. Ageemen ....................................... 39B. Romen. ...................................... 40
1. Terms of Ref e for Energy Coservation Study.....................41.... 42. Edxstipg Tnspomaion Modes for Ffloleum Products ........................ 453. Schenme c Diagrm of Pipeline ................................Facilites. 464. ProjecD Design and Tecnical Fea................................... 475. Project m onOrgaion ..................................... 496. Project SplnonSchedules ...................................... 507. Amal Capital Eendi ........................................ 518. Esimated Sdule ofD sement ....................................Disur n 529. Proje superision ph n ........................................... 5310. Description of MIS DevelopmenPln ..................................P. 5511. Tentaive Trag Program ......................................... 5712. Pat Financl Performance ......................................... 5913. Fiacial Projection and Underlying Assumptions ............................ 6214. Economic Analysis and Underlying Assumptions ............................ 7115. Slected Domes and Data Avaie in the Project File ...................... 81
1. DHOPCO'S Orgniadon2. Energy Sector Organizaon
mmd : IBRD No. 24104
Chapter I
The Etergy Sector
A. Resources and Producton
1.1 Korea is almost totally devoid of indigenous commercial energy resources. Its energyendowments consist essentially of limited hydroelectric power (2300 mw) and high-cost anthraite coal (750million tons of recoverab' reserves). Thus, all the energy needs of this rap .Ny growing economy are metthrough import.
1.2 In 1991, the total domestic energy supply requirements of Korea were 103.6 million tons oilequivalent (toe), as is shown in Table 1.1. The country produces about 28% of the solid fuel it uses, mostlyin form of low quality coal (anthracite). However, its anthracite reserves are rapidly becoming depleted.Furter, becaw production costs are high, the Government is now encouraging tbat uneconomic mines beabandoned, which in turn, is contributing to a progressive decline in anthracite production. For the balanceof its coal needs, Korea imports bitumimnous coal (56% coking coal and 46% steam coal), making thecountry the second lrgest importer in the world after Japan.
Table 11: Korea - Supply of Prmary Ene In 1991v 000 toe)
1L Woodac.k/ includes 3150 toe international Bunker Fuel.Source: KEE/Bank mission.
1.3 Io 1991, the imported petroleum consisted of 59.2 million toe of crude oil, which wereprocessed in the country's five refineries, and 14.5 million toe of finished petroleum products. Petroleumexports compnsed fuel oil, diesel oil and some jet fuel ( see Chapter II for a discussion of petroleumsupply).
1.4 The entire gas consumed in Korea is imported in the form of liquified natural gas (LNG).The Govnment decided to import LNG in 1981 to diversify fuei supplies and to address environmentalconcerns arisg from the use of more polluting fut-- such as fuel oil and coal. Thus, a contract forimpong LNG from Indonesia was signed in 1983 and once the Pyongtaek terminal was completed, LNGbegan to be imported (in early 1987). The Pyongtk terminal is currenty being expanded through a Bankloan (Loan No.3413-KO) to increase its capacity ftom 3 to 5 million tons of LNG per year; the contuctionshould be completed by 1994. The engineering work for constructig a new LNG receiving terminal inInchan has begun, and after this terminal commens operatons in 2000, the total import capacity of LNGwil reach 10 million tons per year.
1.5 At the end of 1992, the total installed power-generating-capacity was about 24,000 mw, ofwhich nuclear plants accounted for 32%, thermal station for 58% and hydropower 10%. Gross electricitygeneaion during the year was 118.6 trawatt-hours (Twh), about half of which originated from nuclearplan. Since LNG was imported in 1987, it has accountd for 10.6 % of total electric power generation.
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B. Consunmtion and Demand
1.6 The gross consumption of energy was 103.6 million toe in 1991. Table 1.2 gives the patternof past ad pest consumption by type of fuel.
Table 1.2: Koma - Energy Consumption(Averae Annual Growth - Pretge)
1991 gross cootwmpdon(1000 _ tol 1,263 24,490 59,650 3,502 14,078 jI 103,60
1991 Sha (%) 1.2 23.6 .576 3.4 13.6 100
a' Indudes 617 toe of other en products such as woodfuel.Source: KEEl/Bank mision.
1.7 Growth in coal consumption has been declining primarily because the residental andcommercial sectors have been substuting cleaner and more convenently-handled fuels sucn as LNG,Ilquified Petoleum Gas (LPG) and electricity for anth coad. The coal consumption in these twosectors has been decreasing at an average of 9.8% per year since 1986. Nevertheless, domestic anthracite,used mostly in fabrication of briquettes for domestic space heating, is the mam source of energy for mostlow-income housholds. The use of coal in the power sector has essenally remained constant since 1986,despite the surge in power demand, which was met by the swpply of LNG. This trend, however, is notexpected to continue since the supply of LNG will be inffcient to meet the rapidly growing demand forpower generation fuel; therefore, the couny needs to import a subsntal amount of coal. Cuffendy, ofthe tota coal consumed, 52% is in the industri sector, 29% in the resideial and ommrci s rs and19% in the power sector.
1.8 The rapid growth in petroleum consumpion (16% per year since 1986) stems from highgsoiine conumption in the trasport sector as well as high kerosene consumption in the resent andcommercial sectors, where kerosene is subsdtuting for coal (see Chapter II for a discussion of petroleumConsumption).
1.9 The growth in LNG consumption has been limited by the availability of supply: currentconsumption is 3 million tons per year and is expected to reach 5 million by 1994, representing 5.5% of thecountry's total enery requreme. With the construction of the new LNG terminal at Inchon, supplycapacity will reach 10 million tons per year, rnep tig about 8% of the couy's total energrequreme by 2000. About 62% of LNG will be used in the power sector and 38% in the industrial andcommercial sectors by that year.1'
1.10 The growth of nuclear-based power generation has slowed, as the avaiability of appropriatesies for plants are becommg ineasigly scarce due to enviromental and safety concems.
1.11 Energy consumption by end-use sectors is shown in Table 1.3. In 1991, the industrialsector had the highest consumption (42.9 milion toe), followed by residental and commeal sectrs (21.8milion toe), power sector (19.5 million toe), transport sector (16.1 million toe) and public sector (2.8million toe). About 1.4 million toe were lost in tnsformation.
1v no oveuieas plan i to posresvely nres the share of LNG consmVtion in reideia and commrci secto and todeca Its consumption in th power seco.
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Table: 13Korea - Energy Cosmptond by Sector(1000 toe)
1.12 More dhan any other sector, transport has been responsible for the zrdth m enerconsumption since 1986, having both the highest average annual growth (16%) and z'me highest ncrease inthe share of total energy consumption (from 8% in 1981 to 16% in 1991). This is followed by the industrialsector, with growth averaging 14.5% per year since 1986, although its share has not changed significantlysince 1981 (reasing from 38% to 41%). The share in the commercial and residal sectors has declinedsubstantially due to the use of higber efficiency fuels such as LNG, LPG and electricity.
C.PEd=
1.13 Energy products are priced on a full cost-recovery basis and, are in line with internationalprices. Domestic coal (anhacite) prices are set by the Government and are approximately at parity withined coal prices on an energy-equivalent basis. The average retail price of anthracite coal (gade 5 withcalorific value of 4,400-4,600 kcal/k) was about US$54 per ton in 1991, whie tat of imported bituminouscoal is detmined by the international market place. Since domestic coal production is declining and thecountry's future coal needs must be met through iLports, the price of aU coal in Korea wil be based oninteational prices.
1.14 The price of electricity is based on long-run marginal cos which the Korea Electric PowerCompany (KEPCO) intrduced in 1977, including a tme-of-use rates for the larger consumers. In 1989,KEPCO carried out a comprehenive tarff study as part of the agreemen under SAL II. The study,reconciling efficiency objectives with financial and income-distribution considerations, resulted in imprithe tariff stucture by eliminating subsidies for the agriclte sector, mnimizing cross-subsidies, redefiningconsumer groups and allowing KEPCO to earn a reasonable rate of return on its capitl investmeut. Theaverage retail price of electricity in Korea during 19.'I was US$0.07/Kwh. However, electricity rates areexpected to rise again in the near future in order to meet KEPCO's significani capital investmentrequirements.
1.15 Given the recent development of gas industry in Korea and the Government's plan topromote the use of gas, the Government continues to set the price of LNG - both the wholesale pricecharged by the Korea Gas Corporation (KGC) to KEPCO and the City Gas Companis (CGCs), and theretail price charged by the CGCs to individual consumers. The wholesale price is based or, the import (CIP)priceof LNG and an agreed margin designed to cover K5C costs. The retail price is set Lo as to providesufficient return to the CGCs, while taking into account the competitive position of gas vis-a-vis alternaivefuels. The average retail price of LNG in 1991 was US$5.85 per mmbtu to industry, US$6.51 per mmbtuto the commrial sector and US$8.77 per mmbtu to the residential sector. Gas imports are sublect to a 1%customs tarff and a value added tax of 10%.
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1.16 The dereguation of petroleum products prices began in February 1983, when theGovernment lifted the price control on jet fuels and solvents. Deregulation of other prices has since beenprogresively implemented: asphalt in November 1988; premium gasoline and napbtha in March 1989 andremaining gasoline grades and kerosene in September 1991. The only three products still subject to pricecontrols are diesel oil, heavy fuel oil and LPG. Price controls on all petroleum products ae expected to belifted by the end of 1993 in order to stimulate competition in the oil refining indusfty.
1.17 Prices of products that have not yet been liberlized are set by tIIhe Government at threestages: for refiners, agents (wholesalers) and retailers (including the service stations). Price setting takesinto account all cost factors. The basic customs tariff is 5% of the CIF price of imported crude oil as wellas of imported petroleum products. Excise taxes are levied either on the price of imported products or onthe ex-factory prices of domestic production as the case may be. They include: 8% for LPG, 9% fordiesel, 109% for unleaded gasoline and 130% for regular gasolineY Also, a value-added tax of 10% isapplied to all oil products at the refiners' level, as well as to the margins of the wholesale and retail dealers.In addition, the Korea Foreign Trade Association charges a 0.15% tax on the C&F prices of al importedpetroleum products. A surchage tax for the Petroleum Business Fund is levied on imports of crude oil andpetroleum products; and while the amount varies, it should be equal to the diffeene between the actual oilimport cost and the cost set by the Government. The Fund is used mainly for a petro:eum stockpile and forfinancial assistance in construction of petroleum transportation facilities, such as the proposed pipeline.Table 1.4 provides a more detailed breakdown of the energy prices in Korea.
Table 1.4: Korea - Energ Products Prices(Units as noted)
pl Ranging in sulfur content from 4% in Bunker C to low sulfur (1.6%) fuel oil.Source: KEEL/Bank mnission.
D. Institutions
1.18 Various entities are involved in the sector. The main policy- making body responsible forplanning and guiding most energy related activies (except for the nuclear power safety program which
2 About 90% of the reveme from the gasoline excise tax is spent on road construcion.
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remain the responsibiliy of the Ministry of Science and Technology-MOST), is the Ministry of Energyand Resources (MOER). KEPCO and Korea Electric Safety Corporadon (KESC) dominate the electricitysector. Te Petroleum Development Corporation (PEDCO) deals with oil exploration and development.KGC and the Korea Gas Safety Corporation (KGSC) are responsible for gas supply and safety aspects of thegas industry. Dai Han Coal Corporation (DHCC) and Korea Mining Promodon Corporation (KMPC) dealwith coal and minesal resources. The Korea Energy Managemenu Corporation (KEMCO) is involved in andprovides most of te fends for energy conservation activities. The Korea Energy Economic Institute (KEEI)and Korea Inste for Energy Research (KER) are concerned with energy econonucs, foestig andR&D. (Organiional chart of Korea's energy sectr, showing various affilated entifes and their reltiolnsto the MOER is attached). The proposed project will he implemented by D)ae Han Oil Pipeline Corporation(DHOPCO), an entity which is 50.88% owned by the MOER and is reponsible for sporting oil productsin Korea. The President of DHOPCO reports to the Director of the Resource and Policy Office of theMOER, who in turn reports to the Minister (see para. 4.5).
1.19 There are no major institutional issues in Korea's energy sector. While the Board ofDirectors, and in some cases the top management of these entities, are appointed by the Government, theenites operate on a commercial basis without impeding the functioning of a free energy market; they arelargely independent of Government interventon and fully autonomous in day-to-day operations. A commonpractice in Korea with regard to major investments is that the Government frequenty establishes a company,with itself as the major shareholder, and then privatizes it once it is operating and earning revenues. Thecriteria for establishing such companies is for the proposed investment to atin at least a 12% rate of return.
B. Issm. Straterv and the Role of the Pronosed Proect
1.20 While Korea has addressed many of the sectoral issues in the past, some issues still remain;and, some which had been dealt with have resurfaced. The phenomenal growth in the county's economy-hence, the need for energy to fuel suL. growth--together with the lack of indigenous energy resources andpast global oil cnses have created a pivotal role for energy m the country's economy and in theGovernment's decision-making process.
1.21 Approximately 91 % of Korea's energy requirements were inported in 1991. The importbil was US$12.5 billion, represendng over 15% of the country's total imports and about 18% of its exportearnings. The sheer magnitude of the unount involved and the country's total dependence on importedenerg creates a central preoccuton for the Government: How to develop an effective and sustainableenergy strategy which would support the county's rapid economic growth. After the two oil crises and withincreasing concerns over the environmenal im4pacts of energy use, the Government, in early 1980s,developed a strategy that aimed to bring about greater efficiency in the use of energy and enhance thereliability of its supply, while minimizing the environmental impacts. The strategy targeted five key areas:(a) fostering energy conservation; (b) deregulat the energy sector; (c) assessing, in a comprehensivemanner, the environmental impacts of energy production and use and developing and implementingenvironmental protection and safety policies; (d) diversifying both the type of the energy utilized as well asthe sources of import; and, (e) optimizing, through expansion, rehabilitation and new construction, thedevelopment of the physical infrastuctur needed to manufacture and transport energy products.
1.22 The Government's attempts to implement the above strategy have met with mixed results.Diversification has been a success, carried out in an economic and efficient manner. A phased-deregulationof the sector is also being executed successfully, albeit at a slow pace. Environmental issues associated withthe energy sector are being addressed seriously, as the Government is making gemine attempts at the localand national levels to assess their long-term implications, and develop appropriate mitigation plans to protectthe environment. However, efforts to sustain energy conservation have not been very successful. Finally,the construcdon of energy-related infrastucture is being carried out in a rational manner.
1.23 To the extent the above issues have not been addressed, or have been addressed but theexpected reuts have been less than satisfactory (such as the energy conservation issue), Korea's enewrsector connes to function inefficiently. The rsolving of the rema_ ing issues leading to improvement insector efficiency and management is a top Government priority. It was in this cont that the Bank agreedto work with the Govenment to alleviate the remaiing sectoral issues before Korea's graduation from Banklending in 1995. The Bank pardcation in the proposed project helps address as many of these issues as isfeasible under one operation, thus providig significant value-added benefits to the project Y. The followingparagrphs disuss the Government's past success in coping with thte above issues, as well as its handing ofremaining issues and the exte to which the proposed project intends to address them.
1.24 M Conservation. Energy intensity was very high in Korea durig the 1960s and197Qs when heavy, enegy-inteasive industries such as steel, chemical and petrochemical were expanding.It decined in the early 1980s when some industrial activities shifted to hr-techlology ma tring thatwas less energy-itesive (see Figure 1). In addition to this stctural change, it declined due to certinGovernment measures designed to effectively control energy demand and foster conservation: Theseincluded passing the Energy Utilizaton Act (EUA) in 1979 and simultaneously creatng the Korea EaryManagement Coiporation (KEMCO) in order to improve the eficiency of energy use through regulations,fianci assistance and incentives, national campaigns and education, research and development (R&D) inconservation technology, the use of energy-efficient equipment and development of high-efficiency forms ofnergy ulaadon schemes such as co-generation and distict-heating. However, after 1987, energy intensity
rose agin, reflecting the erosion of energy conservation measres (see Figure 1).
FM 1.: Korea - Energr Intensity(toe/Constant 1985 GDP)
a of Enstgy Consnmption
n.7
91 92 93 64 85 85 87 SS S9 SC 91Years
1.25 While the concept of energy intensity is a relatively crude measurement of energy efficiency-- because it does not take into account the industay mix -- it does provide a general indication of efficiencyin energ use. Based on this measurement, Karea's economy is significany more energy-intensive than thatof the OECD countries (see Figure 2). Measuring the growth in erergy consumption relative to growth inthe country's GDP (energy/GDP elastcity), also shows significant increase since 1987, with 1990 elastictybeng well above one. The elasticity is expected to remain above one, at least until 1993-1994, although theGoverment target for energy elasticity is 0.75 by 1996 ( which is dsigly below the long-term average,which appears to be an optmistic expectaton). Recognizing the large differences between energy intensitiesof Korea and OECD countries, the Government attaches considerable importance to increasing energyconservation and improving efficiency. Further, given the heavy burden of energy on the economy, theGovernment's policy for energy conservation is aimed not only at developing easues leading to more
3/ Value-added bnef*ts are a crheria for Bank involvement during Korea's graduation phase (pare. 2.13).
Y Er intensity is defined as the mio of total primary energy supply (rPES) to gross domesdc products (GDP).
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efficiem ena use, but for those which can reduce consumption - even in areas which may aready beenerg efficalen
aui Korea- Retve Enr Intensty (1961-1990)
Q.9
0.D __OECD____
OEC Totol
0.5 % j j-[..1...I. _ In
59 63 n it Y75 79 83 87
Soure: EA
Fjgm :3 Korea- Energy/GDP Elastict (1963-"1990)
1963-1990 Average
1996 Targe
e8 67 7t 75 73 33 97Year
source: KE.
1.26 The incase in energy intey since 1987 (Figure 1), has become a major source ofconcern beause despite Govent effor in tbis area, the continuing rapid growt of the economy has puta great deal of pressure on the nation's ability to cost-efectively meet its energy needs. The Goveme'sresponse to this latest rise in energy intensity was to amend the Enery Ulizaion Act of 1979, prepaing amuch stron sact for the next five-year Enery Consraton Plan and Program (1992-1997).
1.27 In Bank discussions with the Govemen it was undetood that a stronger act orregulation withut te necessay market elements may not reduce energy consunption: Conservation canmotbe a sepa or idepndent objective, but should be analyAed in the context of ener polcies in genera.Martet pries ae far more effective dm regulatry itervention in giving the correct signal to consmersregl energy conservati However, when market prices do not provide the right signal, innovave
sanm d sometmes implied subsidies should be used. Approtey-designed regatory invionsshould be intrpduced only to supplement ftese measures. In fact, one reason that conseion efforseroed in Korea could be the xistence of myriad reglations wihout the right market signals.
./ Bxcppodblyin reiddentand commrasacor wre duationon enmw consanplsys a domnarole.
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1.28 Although the structural changes towards les energy-intensive industry are lioely to be moreimportant in reducing total energy-intensity tban technical efficiency gains, a substantial amount of energycould be conserved through technical efficiency gains -- if measures are designed and implementedappropriately. One important element in this route is technology transfer. The Government should foster,including through import, the introduction of additicnal end-use technologies into the Korean market,particularly small-scale, bigh-efficiency technologies such as small *-generation units for commercl useand high-efficiency gas boilers for residential space. The Government should also provide mechanisms forassisting end-users to adopt these technologies. The altermative end-use technologies, energy consumption,economic development, and social preferences should then be integrated to provide a framework forestimating and comparing the potential costs and benefits of alternative conservation measures.
1.29 The Govenment now intends to implement the amended EUA talkng into account the abovefactors, in order to develop a sustinable energy conservation program that will not disrupt the economy.However, the proper evahation of the above factors is a complex task. Thus, Govermment asked for Bankassistance to study ways to improve energy conservation measures and to help manage energy demandgrowdh in Korea. To this end, the Goverment accepted the Bank's recommendation to set up an energyconservation steering committee of three MOER representatives and one represeave each from theEconomic Planning Board (EPB), KEPCO, KEMCO, KEEI, KGC, and DHOPCO. The steering committeehas initiated, with the help of the Bank, a major study, the objective of which is to develop a plan settingforth policies and actions that will promote the most efficient use of energy in Korea given the country'seconomic development needs and evo'ving consumer demands. The scope of the study is divided into twophases. Phase I provides (a) an estimate of potential energy savings through conservation efforts, whileconsidering the interavtions among energy, economic and technology factors in Korea; (b) a "road map" inthe form of a pioritized conservation program developed through a systematic cost-benefit analysis ofvaanous options; and (c) an agreed plan of actions for Phase II, covering the implementon, monitringand, if needed, further evaluation of specific conservation programs. The Phase I study was carried out bya reputable intemational consulting firm (Stanford Research Instiute-SRI- Intnational), and the contract forthe study was awarded in accordance with Bank guidelines. The Phase I report dated April 26, 1993 hasbeen subnitted and subsequenty agreed with the Govermnent during negotiations. The major conclusionsinclude seven specific actions: (i) strengthening the planning and coordination functions; (ii) establishingsystematic measrement and evaluation processes for Energy Conservation Programs; (iii) activelyevaluating the feasibility of implemenfting Market-based Energy Pricing Policies; (iv) promoting IntegratedResource Planniag to KEPCO and KGC; (v) developing methodology and technology required for efficientmanagement and operation of oil and gas pipelines; (vi) deepeing and broadning the Energy ConservationSupport base; and (vii) further developing studies and plans for Integrated Transportation SystemDevelopment and Management. Phase II wfll focus on the development of detailed conservation programdesigps, im ion podures and schedules, the appropriate mechanism for monitoring and evatingthe specific energy conservation measures, and recommendations for appropriate institutions for programimplementtion. Duing the negotiations, agreement was reached with DHOPCO that it would engagequalified consultants, under terms of reference and conditions satisfactory to the Bank, to carry out Phase Itof the Energy Conservation Study. Annex 1 gives the terms of reference (TOR) for Phase I, describing inmore detail the objecdves and scope of the study.
1.30 D uon. In its attempt to induce greater efficiency in the sector, the Governmentpromulgated a phased-in deregulation plan for petroleum in 1987. The plan called for libealizing the non-pricing regations, as well as those that related to price which were still in effect in 1987 (liberalization ofpetroleum prices began in 1983). Although the implementation of the plan initially faced some obstacles-mostly from Govemment's own intervention to protect other industies-the first phase of deregulation wassuccessfuly completed in 1989. By the end of 1992, many elements of phase two were also in place,leaving only a few regulations stiU intact.
1.31 Indeed, deregulaton has been applied to every stage in the supply and distribution ofpetroleum products in the cotry, such as the refmiing process, imports, tansport, and distrbution. Therefining industry consists of five private companies (pan. 2.4), two of which include foreign capital (the
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Goverment now alows non-Koreans to hold up to 50 percent of the shares of the refiing companies). Ingeneral, the companies only need to obtain Government approval for major modifications of facilities, suchas those involving the disdllation plants and would affect the refining capacity. With regard to imports,although the imports of crude oil and petroleum products are still subject to a licensing system, it does notrestrict competition. Rather, the system is only used for oil emergency purposes: All licenses are authorizedas long as importers fulfil their obligations with respect to maintaining emergency stocks. The importersinclude the five refineries, LPG companies, KEPCO and a number of trading companies. Deregulation inpetroleum transport sector will be increased significantly because the proposed pipeline will be operatedsimilarly to a common carrier available for use by all interest d parties (para. 3.5). Adoption of thisprinciple would be an important step toward greater private sector participation in Korea's petroleum supplyand distribution market. Finally, the procedures for settng up service stations have been liberalized so thatany compay, including non-Korean frms, can now establish service stations: At present, the retaildistnrbution of petroleum products is done by 4,700 service stations which are idependent from the refiningcompanies. The only existing reglaion involves the minimum distance between stations, which has beenrelaxed recently and it will be completely lifted on November 15, 1993. Further, the service stations arenow alowed to display any trademarks, including those of a refner (indicating that the station sells productsfrom that refiner) or independent signs (indicating that it sells products from any refiner); or it need not statethe origin of the products.
1.32 Until now, deregulation has been progressing smoothly and has achieved most of itsobjecives, particularly in the area of price decontrol. There are, however, several issues that need to beaddressed expeditiously in order to safeguard the susanablity of the deregulation. First, some type of anti-trust legisation is needed to ensure that markeing agents do not aRocate the market among themselves.Second, operators of import termimls must be required to give fair access, at a reasonable fee, to thirdparties. Third, ownershp of the petroleum truck fleet must be divorced from the marketers. Further, thereis a need for an adequate regulatory framework to deal with the liralized stuation. The Bank hasdassed these with the Government and is satified it will address these remaining issues in the near futureand that it intends to achieve full dereguation of the country's petroleum industry.
1.33 Given that the objective of Energy Conservation Study is to develop a plan to promote themost efficient use of energy, this may include identiyng any existng egulations that hinder thedevelopment of an effective energy conservation program. During negotiations, agreement was reachedwith the Govemment that any regulations that hinder the implmentation of an effective energy conservationprogram will be removed or revised, in a manner and time frame satisfactory to the Bank, to promote themost efficient use of energy in Korea.
1.34 Diversification. The Government's new strategy called for reducing dependence onpetroleum by diversifying into alternative energy sources including imported coal, liquifled natural gas(LNG) and nuclear energy, as well as selecting a wide spectrum of energy suppliers for oil and other energyimports. Korea has pursed t"is policy with much success. In the supply side, heavy investments weremade in nuclear energy: As of July 1992, total installed nuclear capacity was 7,615 mw, providing about14% of the country's total energy requirements. Also, import of LNG is another important facet of thisdiversifation strategy: Import of LNG, which began in 1987, now represents 3.5% of the countly's totalenergy requirements and will rise to 4%-5% by 1994 after the Bank-financed LNG terminal at Pyongtaek iscompleted, and again to about 8% by 2000, after the new Inchon LNG terminal is constrcted. Korea alsodiversified its source of oil supply, as it gradually shifted from long-term conats to spot-market purchases.
1.35 Phsical Infrstructure. The Government has also taken measures to ensure that publicinvestment conforms to least-cost development principles. The energy utilities are allowed to earn areasonable rate of return on their invested funds, and in some cases these funds are used to help fnanee thecotucton of addi infrastructur. At preset the country's five private refineries are expanding andupgrdig their facilites so as to produce products which are more compatible with the country'sconsumptin paen. However, even considering the lower energy demand forecasts in the seventh five-year plan (7% per year), considerable investment in still needed in energy-related infr ture to satisfy the
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growing demand. Becuse italy-generated funds are unlikely to be sufficient to cover all the costs ofthe planned additions, the Govermment is allowing private sector shareholdings in energy corporations suchas KEPCO.
1.36 The proposed project is another significant undertaking (see Chapter VI for projectbenefits). The deleterious effects of traporig petroleum products under present modes-vessels, railtankers and trucks-with regards to the environment, safety, economics and reliability, are discssed inChapter II.
1.37 Environmena Policy. In 1980, the Government recognized that the side-effect of itseconomic development policy was potential deterioration in the country's environment conditions. Thus,the sixth five-year plan, and, even more so, the seventh five-year plan had as their main objective, theharmony between economic prosperity and the preservation of the enviromnent. In Jamnaty 1990, theGovernment elevated the Office of Envmironment Administion to Cabinet level and established the Ministlyof Enviromnent (MOE). In the same year, the National Assembly proposed a comprehensive EnvironmeaPrevention Act, enhancing all aspects of enviromental protection including air, water, hazardous chemicals,noise and vibration, and solid waste management. In partcular, the Consttuton was amended toincorporate a clean and healthy evironment as a basic human right.
1.38 The MOE has identified the main energy-related environmental concerns to be the level ofthe emissions of total suspended paulaes (TSP), nitrogen oxides (NOx) and sulphur oxides (SOx). Thebulk of air pollution in Korea comes from the combustions of coal and oil, and emissions from motorvehicles. Also, electricit geneaion is a significant contributor and measures have been recendy itmoducedto reduce emissions from thermal power plants. To meet the emission standards set by MOE for 1995 and1999, KEPCO is planing to invest US$3.6 billion betwee 1992 and 2000. In addition, MOE hasmandated the use of natual gas for power plants in the metropolitan areas and in the commerci and publcsectors of 14 designated large cities. The Government has also required oil refineries to instal productdelphurization facilities. With respect to NO, emissions, the Government has introdrieed standards whichrequire new gasoline vehicles to be fied with catalytic converters. Furher, it is combating the problem ofhigh-level TSP by replacing coal and bunker-C fuels with cleaner fuels such as natural gas, and relocaingthe poluig inusries such as anthracite bnquette factories outside of cities.
1.39 In the seventh five-year Plan, the Government set a target of incasing the share of cleanenergy from 26.5% in 1991 to 49% in 1996. The clean energy share is defined as the number of housesusing gas (as opposed to coal), the mber of LNG-fired power plants, desulphurization capacity, and theshare of unleaded gasoline in the markL Table 1.5 presents the components targeted by the Governmentfor increasing the share of clear energy.
Table 1.5: Korea - Planned Increase in Share of Clean Energy(Units as noted)
___________________] 1991 1996
No. of Houses Using Gas 1.625 million 3.135 millionShare of Total (%) 20 34
LNG-fired power plants (mw) 2,550 5,967Share of Total (%) 12 17
Desulfurization capacity (bpd) - 135,000
Unleaded gasoline share (%) 63 100
Total clean energy share (%) 26.5 49
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1.40 In the contex of th Government's high priority to enviromental considetalons, any newprojects must satis its objectives. In this rspect, the proposed proiect fits the Goverment'senvironmeital and saety citera. Not only the project contibutes significandy in improving theenvironmental quality and safety standards, it helps estaish, for the first time, an environmental and safetyframwork for implemenig this type project in the country in accord with internationally recognizedguielines and stadards prescribed by " Bank (pam. 3.7).
F. Outlook
1.41 Table 1.6 shows the forecasts for Korea's energy demand. These are based on aggregatingsectoral (industry, residental and commercial, power, and public) energy demand, which is determned by
kng into account the energy price, share of the sector and GDP and popuaion growth.
Table 1.6: Korea - Fores of Energ Demand(1000 toe)
1.42 The Govemnment projects that the implied energy/GDP elaAtici y will decline from itscurrent level of 1.27 to 0.75 by 1996. This may be an optimistic projection in view of the sharp growth inenergy demand. Based on Bank projections of GNP growth (7.5% p.a. between 1992-1996) and eneryconsumption growth (7% p.a. for the same period), the implied energy/GDP elasticity is expected to be 0.93for the period. Petroleum dendence is expected to remam at the current level of 57%-60%, but totalenergy dependence wil increase to about 95% by 1996, reflecfing the increase in imports of LNG andbituminous coal.
Chapter II
Petrleum Suppy and Dtrobun
A. Present and Past Cousum#tlon of Petroleum Products
2.1 Since Korea has no indigenous hydrocarbon resources, the country imports all its petroleumproducts, either in form of crude oil (which is processed in five local refineries), or finished petroleum products:In 1991, this amounted to about 408 million barrels of crude oil and 110 million barrels of finished petroleumproducts. Korea also exported about 70 million barrels of products in that year. The country's net consumptionof petroleum products was 448 million barrels, or 1.23 million barrels per day (bpd). Petroleum consumptionper capita in Korea is 10.4 barrels per year. Table 2.1 provides the breakdown of petroleum consumptin bytype of products in 1991, and Table 2.2 shows the pattern of consumption.
2.2 Altogether, consumption has risen dramatically in recent years. The use of LPG has grown ata rapid pace due to both the improved living standards and stringent environmental regulations. This wasparticularly marked in the urban residendal and commercial sectors where LPG substituted for kerosene andcoal. However, kerosene consumption also increased because it is substituting for coal in resident sector inremote areas. Further, gasoline consumption surged due to increased demand in the tranport sector: In 1981,there was one car for every 67 Koreasm, but by 1986, there was one car for every 31 and by 1991, there wasone car for every 10 Koreans. In addition, diesel consumption in the industrial, resiental and commercialsectors gew at an average rate of 8%-9% between 1981-1991, but growth in transport was 16% over the sameperiod. Fuel oil demand, which declined from 1981-1986 mainly because of decreased consumption in thepower sector due to environmental concerns, rose agan as the result of increased power generation requirementsand the unavailability of sufficient LNG (as a clean fuel). Consumption of naphtha also grew, due to themncreased need for petrochemical products. Table 2.3 provides the sectoral share of petroleum consumpton in1986 and 1991.
B. Ex%istii System
2.3 In 1991, Korea purchased about 40)0 milon barrels of crude at an average C&F price ofUS$19.59 per barrel: 74% was purchased from the Middle East, 21% from Southeast Asia, 4% from LatinAmerica and 1% from Africa. In addition, it imported about 110 million barrels of finished petroleum products,mainly from the Asia region.
2.4 Five refineries process the imported cmde and are also the major importers of the petroleumproducts. Although the first refinery was Government owned, all are now privately owned and two have jointventures vith foreign oil companies. All five refineries which are located on the coastal region to faciLitate theocean tankers, supply the imported crude. About 75% the supply comes from the three refineries in southernregion (Yukong, Honam and Ssangyong). The volume of cmde and products imported by the refineries isdetermined by their non-regulated market share.
Table 2.1: Korea - Petroleum Produs Cosmption In 1991(1000 Barrels per day)
2.5 The pattern of petroleum consumption has changed, as the countly requies increasigly moredesuphurized light oil products and LPG. To cope with changng demand, refineries first imported lightpetroleum products; however, they soon recognied that major investment in heavy oil cracking anddesuphurization facilities were needed to respond to strcter environmental regulaons. Thus, a total of 144,000bpd of crackdng capacity and 60,000 bpd of desulfrzation capacity will be insaled by the end of 1993. By theend of 1995, the cracking facilities will reach to a capacity of 204,000 bpd and desulphurization 135,000 bpd(para. 1.39). Table 2.4 presents the refinery capacity.
Table 2.4: Korea - Petrolem Ref_ig Facflties(1000 barrels per day)
i 1 Existing Bxpansion Total Capacity Market ShareRefiery Location Capacity Capity (Yr. of Compl.) %
2.6 After refining, distribution of petroleum products (both refined and imported) is handled througha multi-stage network:
(a) About 47% of total sup,.ly is transported by the refineries to the "direct sales n depots, to besold to the large consumers such as KEPCO. Depending on the location of the largeconsumers, it is ansported either in coastal vessels, rail tankers or trucks.
(b) The remaiing 53% is transported by the refineries to the "sales agents" who, in turn, sell theproducts to a "direct sales store" for medium size consmers (15.2%), to service stations(29.2%), and to sub-dealers (8.6%) for retail sales to consumers. This supply is alsotansported by coastal vessels, rail tankers and trucks, while the sales agents distrbute theproducts mostly by road trucks.
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2.7 At present 240 coasal vessels, 1600 fail takers and 5400 tucks tursport about 90% of thecounuty's petroleum. Only about 10% is carred by a pipeline system (IBRD map 24104). Annex 2 provides abreakdown of the existg transpot modes by type of tansport and by refnries and dealers.
C. Future Demand For Peroleum
2.8 Growth in consumption of varous fuels is expected to slow, but at differing rates. LPGconsumption is not expected to slow significandy until 1996; however, growth in kosene consumption isexpectd to drop from an average of 26% over 1986-1991 to 6.2% from 1991-1996, and will probably level offto about 2%-3% per year after 1996. Gasoline consumption is expected to slow to 15% between 1991-1996,and to 12% between 1996-2001. Demand for petroleum products is projected by KEEI, based on a model usingthe same paameters that project the country's energy demand. Table 2.5 shows the forecast of future demandfor petoleum .
D. Need for an Efficient Distributon System
2.9 At present, the e ng tansport system creates senous problems. First, it is uneconomicbecause most of the rdining capacity is located in the south and over 40% of the market is in the north, in theSeoul Metropolian area, thus, petroleum products must be trsported by trck, rail tankers and coastal vessels.The system is also uneliable becuse it does not have the flexibility it needs during peiods of high demand.Over long distances, pipeline would be the most economic mode for transportig petroleum products. Inaddition, trucks and rail tankers create severe atmospheric pollution and the vessels have inceased marinepolution drough ofl leaks and around the loading facilities: It is estimated the annual contribution to airpolution is about 990,000 tons of CO2., 11,000 tons of NOx and 6,000 tons of SO2. The Kean coastalauthorities also estimate that oil leaks from vessels amounted to about 2.42 million liters m 1990. Further, theexisng modes create safety hazards: While no reliable stistics exist for truck accidents, they are frequentlyreported. With respect to shippmg accidents, data from coastal authorities indicate that out of 240 total accidentsin 1991, 35 (14.6%) involved petroleum vessels.
2.10 The present modes also have created considerable congestion in the country's tan oninfra ure. Due to rapid economic growth, road, rail and port capacity has been stretched to the limit. TheKyungin highway (the main road for asportg oil products to the Seoul metropoltan area), was designed for42,000 cars per day, a limit reched in 1986. At present, it carries 82,000 cars per day. Similarly, the Inchonport facilities were designed for 35 million tons of cargo a year, a limit that was reacbed in 1988. Already, thecargo througt of this port is 60 million tons per year. But, given the projected demand for petroleumproducts, by year 2000, Korea will need to distribute 2 million barrels of oil products per day. Such an increasecan only exacerbate the congestion problem.
Table 2.5: Korw - Forecast of Pebleum Product Consumption and Growth(1000 Br_b)
Gasne Keromne Diesed Oi let oi St Light LPG Fuel O ,hYears Prod K%- r-. O|. % cms . % Cons. - . % cons. -C % Cons. % cons.
2.11 The proposed project should resolve many of these problems. With regard to congestion, themimber of coastal vessels will decrease by 44%, and the rail tankers by 88%. While the number of trucks wilonly be reduced by 25%, those that remain will cover short distances in limited areas. In terms of safety, thepipei should reduce the road traffic in Kyungin highway alone by 2,700 trucks per day by year 2000Y1' Theeconomic benefits as well as the nironmental and safety benefits reswlting from the reduced number of vessels,rail tankers and trucks, are discussed in Chapter VI.
E. Leons from Previous Bank Ibnvolvemen
2.12 The Bank has played a major role in Korea's development through a diversified lending programthat has involved over 100 operations, several of which were for power projects. Of these only one loan was forthe petroleum sub-sector, for a Gas System Expansion Project that became effective in March 1992. Althoughit is too early to derive any lessons from this last operation, Bank experience in Korea with power projects hasbeen exemplaty vwth regard to the efficiency with which they were implemented.
F. Ratinae for Bank Involvement
2.13 The rationale for Bank involvement in the project needs to be discussed in relaton to Korea'sgaduation. In August 1991, when the Bank and Government developed plans to phase out Bank lending by1995, they agreed on an aggregate level of lending during this period, as well as on a range of amual lending.It was also agreed that Bank lending must have significant value-added benefits and a major impact on sectoralpolicies, in order to justify Bank participation. Namely, priority areas for Bank operations would be those inwhich the Bank could provide value apart from ansferng fiani resources. At the same time, as incomesand urbanizaton have increased, the Govermment has been pressed to address social and environmental concernswhile contRing to upgrade inauctu and manufacturing technologies to enable industry to develop moresophisticated products for export. Therefore, Bank operational work is now focused on: (a) supportng specificareas of high-priority infrasuucttre investment with technology transfer and institutional development; (b) furtherlberizng the financial sector; and (c) addressing social and envnmetal issues.
2.14 After several rounds of discssions in which the county's priority needs (including an efficientpetroleum distribution system) were assessed in the context of Bank's criteria, an energy project was proposedthat contais substantial policy objectives, including an increase in the sector's efficiency, improvedenvironm al quality and safety standards, and greater reliability of petroleum supply. The proposed projectfits well with Bank criteria. While its economic befits (lower transortation costs) and enviromnental andsafety benefits (redced air and marine pollution and decreased road and rail accidents), and supply benefits (themore reliable pipeline vers existing modes of tranwsport) could be achieved regardless of Bank involvement,other critical benefits-such as inreaiDng the sector's efficiency, raising the level of environmental and safetystandards in the country's oil industry during thne construction and operation of the new infrtuct (andsimilar inrastuctr in future), and strengting the capabilities of the sector's institutions-would probaily notmateialize.
2.15 With respect to improwvng sector efficncy, the Bank encouraged the Government to develop aplan that sets forth policies and actions to promote efficient use of energy through appropriate conservationmeasures. To this end, the Bank, MOER, and DHOPCO prepared joint terms of reference for the proposedEnergy Conservation study, and the resulting action plan will be implementd by the Government (para. 1.29).The Goverment and DHOPCO have earmarked US$1.5 mitlion of the proposed loan to carry out phase I and II(of the study). With respect to the environment and safety, through its involvement, the Bank has already
1/ Assuming tank capact of 100 bbl.
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significandy contibuted to strengtening DHOPCO's capabilities and hence raised the level of safety andenvironmental standards in the county's oil industry. Some examples include the followmng: (a) it requiredDHOPCO to develop well-designed spll-contol plans that include trained teams and clean-up equipment that canrespond immediaty n the event accidents occur near rivers and lakes along the pipeline routes; (b) it alenedDHOPCO to the potential for high-risk accide;ts in the terminals and along the pipeline routes, which ledDHOPCO to develop disaster contingency plans that incude emergency teams, routing-drill praces,coordination with public emergency response services, and acquisition and installation of stationay and mobilefire fighting, fire detection and rescue equipment; and (c) it helped DHOPCO identify the high traffic loadsaround the Seoul termial. As a result of this last concern, DHOPCO changed the project design to cope withthe large nmber of tmcks and people (changes involved access roads and facilities for drivers). These concemshave been incorporated in a high- quality envroental and hazard assessment report which will be used by allparticipaws, including new enras (para. 3.8). Furdter, as the result of Bank involvement, DHOPCO hasagreed that the proposed pipeline will continue to be available to all interested parties, hence pavmg the way forgreater private sector participation and increased competition. Finally, deregulation measures related to energyconservation progras will also contribute to greater sector efficiency (para. 1.33).
2.16 The Government's agreement to carry out a major sudy on energy conservation and finance itscosts, and moreover, to submit an action plan for energy conservation as a condition of Bank loan approval,clearly demonstates its desire for Bank assistance in sector analysis and policy formulation, particularly in thoseareas where the Bank is able to bring the benefits of broader experience. Fuhermore, the borrower'swillingness to make significant changes to the EA report and comply wt!h Bank-prescribed envomentalmitigation plans and safety standards, is another indication of Korea's interest in the Baks non-monetaryassistace.
2.17 Inde, Bank involvement will help the Government address these critical areas (conservation,dergulton, environment and safety) which might otherwise not receive proper attention until after Korea'sgrduation, paruarly as the Bank is now the only offrcial source of exteral assistance and advice (since ADBand OECF are no longer active in the country). Not only will Bank involvement ensure that energy conservationprograms, envirormental mitigation plans, guarantees for the open use of the pipeline and institutional buildingwithin the project entity be implemented, but the internalization of these actions will also have significant value-added benefits. Without these value-added benefits resulting from Bank involvement, Korea would simplyconstrct a pipeline.
Chapter m
The Project
A. P ,d
3. X The pre-feasibility study for the proposed project (in the form of a route survey) was conductedin April 1980. This was foUowed by feasibility and basic engineng studies, carried out in 1983 and 1984respectively. In Decmber 1989, the National Assembly enactd the Oil Pipeline Law and which took effect in1990; this law provided that the project be icluded in the sixth and seventh five-year plans. Subsequently, amore detailed design was carried out by a joint venture of internationa and Koran consults, which led to theconstuction of 30 kilometer segment, in Kyungin section.
B. Project Obiective
3.2 The objective of the project is to improve the efficieney of Korea's energ sector and enhaethe reliabilit of petroleum supply. This will include: (a) establishing a more effic and reliable petroleumsuply and distrbution system through the construction of a pipeline network; (b) improving envionmentalquality and saety standards by reducing air and water pollution and by reducing rail and road hazards; (c)developing an appropiate energy conservation progm (with a strategy to sustain it); and (d) improvig sectorinstitudons by stengthening the financial, operational and managerial capaies of DHOPCO.
C. Project Desitl
3.3 The project consists of three parts:
(a) An approximately 1,000 km pipeine system to transport petroleum products. The network willinclude an east-north tunkline connecfting two eastern refinries (Yukong and Ssangyong) nearPusan to Taejon (300 kIlometers); a west-north trunkline connecting the Honam refinery atYeochon to Taejon (275 kilometers); and two paralel pipelines from Taejon to Seoul (141kilometers each). The proposed network also includes two short segments, one comecting theKyung-in refinery at Inchon to Seoul and Kimpo, and another linking Kwangju to Kolsung. Inaddition, the system includes storage tanks, pumping stations and loading and unloadingfacilities. The system is designed to initally transport about 500,000 bpd of light (clean)products or about 55% of total oil consumed domestically. (Other petroleum products, such asfuel oil, will continue to be shipped through the existng system). Annex 3 gives a moredetailed description of this part of the project, including a diagram of the project facilities.Map IBRD 24104 shows the pipeline route and location of ancillary installations.
(b) A major study on energy conservation that will include an action plan that can be subsequentlyimplemented by the Govemment. This is discussed in para. 1.29 and detailed terms ofreference for the Study are given in Annex 1.
(c) Technical assistance to DHOPCO, which involves helping design and implement a managementinformation system (para. 4,10) and trainig DHOPCO staff in the critical areas of operations,fmance and management (para. 4.20).
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D. 8tatus of Project Premsratlon
3.4 The project is in an advaned stage of prepaon. A small section (30 km) of the network atKyungin is now complete and cperting; about 90% of the land and right-of-ways needed have been purd ed;and, some of the engieerng specificaions (for equipment, termals, pump stations and ancillaries) and somepreliminary construction have been completed. The Bank has reewed the project design and found itsatisfatory. Annex 4 provides a more detailed discussion of the project's technical and design features.
E. Contratual Asectand Plule Tadru
3.5 DHOPCO was established under the Article of Incorpoation of January 20, 1990. Based onthis Article and a subseque Joint Investment Agreement, the Government's equity participation in the proposedproject is 50.8%, while seven other private entities hold 49.2% of the shares (para. 4.3). The country's fivelocal refineries are among the seven private shareholders, collectively holding 41% of the shares (each 8.2%).The Article of Incorporation states that the purpose of DHOPCO is to consttuct, operate and manage oilpipelines; transport and store oil products; and lease or rent oil products' tasporaton facilities andequipment. Furthermore, Article 20 of the Oil Pipeline Law (law no.4215) states that the pipeline operatorshall not reject the request for oil transport from any user except when there are no operational facflities totransport oil, or in case of natura disaster or inevitable accidents. Hence, the proposed pipeline could be usedby any entity. During negoiations, agreemen was reached with DHOPCO that it will continue to make thepipeline available for use by any third party, subject to limitations provided in Law no. 4215 and the Regulatonfor Oil Transportation.
3.6 In August 1992, a "Reguation for Oil Transportation" was established and subsequenlyapproved by the MOER in January 1993. Its purpose is "to regulate requirements for oil storage, handling andtrnsporttion by DHOPCO in accordance with the provisions of Oil Pipeline Law." The regulation requires the"user' of the pipeline to enter into a ype of "take-or-pay" contract with DHOPCO. The contct wouldguarantee DHOPCO a minimum annual quantty of oil for ranportation (by each user of the system). If theactu quantity taported is less than 90% of the contracual quat, DHOPCO will be reimbursed for thedifference. The regulation also provides for a "charge rate" for transportation as well the storage of oil. Thecharge rate (tariff) for the Kyungin section (Inc:hon-Seoul) has already been approved by MOER, because theconstruction of this segment is completedY The charge rate for the south-north section has not yet beenfinaliznd because the construction is still in progress and some ,osts are beig revisd. The pipeline tarff willbe set so as to be competitive with other modes of tranwsport yet yield a rate of reurn of at least 12% eDHOPCO's investment. It will be based on a model 1 which takes into account projected future demand, ti arefineries' optimiation of the different tansport modes, the projected quantity of oil htanported and stored, andDHOPCO's long run marginal cost. According to the model, the estimated minimum tariff for the entirenetwork in 1995, when the project is complete, will be W1.80 per barrel-km for oil transportation, and W268per barrel for oil storage. The current transportation costs for vessels. rail tankers and road trucks is W2.37,W3.53 and W5.96 per barrel-km, respecdvely. Applying the above pipeline tariff (W1.80 and W268), the rateof return on DHOPCO's investment will be 12.5%.
[i The approved rate for this segment of the network is 3.20 Won per barrel-km, for oil tansporation, and 272.6 and 76.8 Won perbarrel for oil storage in North Tenninal and Khnpwco Termnal, respectively.
2/ The model, Optima Pipeline Tariff Determination, was prepared for DHOPCO by KEEI, and k has been reviewed by the Bank.
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F. Enumeal and Saety Asnet
3.7 DHOPCO prepred a comprehensive enviromental assessment (EA) report which was reviewedby the Bank over an eight-month period. The major environmental inpacts of the project, both duringconstuction and aftwards (such as on the ecosystem, land use, air and water quality, noise and vibrationlevels), have been fully evaluated and appropnate mitgation plans have been developed consistent with Bankprocedures and guidelines. Alternatives for terminal locations, pipeline routes and pump station sites, as well asfor waste water treatmen technology, have also been analyzed in detil, and optimum designs have been selectedaccordingly. In addition, impacts from accidental fires have been studied and the project design provides for asafe distance (for tank farms) to minimize the fire hazard. DHOPCO has also emphasized safety concerns,including setting appropriate procedures in case of oil leaks. A more detailed discussion of potentialenvironmental impacts of the proposed project and the recommended mitigation plans, as well as the requiredactions for evaluations and monitoring activities, are provided in the EA summary report and elaborated in thefull text of the EA report.
3.8 The potential adverse environmentl impacts of the proposed project are relatively minimal. Asmentioned in para. 6.4, the project significandy improves the environment and raises safety standards. Inadditon, a comprehensive EA report has been produced for the project consistent with intnational guidelinesas well as Bank guidelines. This report is the first for a pipeline project in the country, and thus provides theframework for environmental and safety standards for subsequent projects of this type. In particular, the reportwas substntialy enhanced through the Bank's requiremes to improve safety standards and produce anenvironmental mitigation plan. (Examples of these improvements are presented in para. 2.15). Duringnegotiations agreement was reached with DHOPCO that it will implement the requirements of EA and that theevromenta and safety guidelines resulting from the EA report will be adhered to by the entire industryassociated with the use of the proposed pipeline, including new entrants.
G. Project Imlemet and Schedule
3.9 DHOPCO is fully responsible for implementing the project and is able to carry it outsuccessfully. It has recrited a qualified and experienced cadre and has access to a large number of localengineering and construction firms with extensive inational experience in executing similar projecs. (Annex5 provides the organizational chart for project implementation).
3.10 The project design is based on a feasibility study by a foreign fimn worldng in conjunction witha local engineering finm. The two also collaborated in preparing the basic design. The project was divided intofour regions: Metropolitan area, the Middle area, Youngnam area and Honam area. Four engieering firms(Byucksan, Daelim, Dongah and Hyundai), one for each area, were selected through a two-step procedure basedon qualifications and bid prices, to undeake the detailed engineering. (The selection procedures weresatisfactory to the Bank). The work has been completed and the firms have been retained to finish theconstruction supervision and other implementation tasks needed to complete the project in their respective areas.DHOPCO will also hire assistants in specialty fields by direct appointment. All local engiering costs will befinanced by DHOPCO.
3.11 DHOPCO has scheduled the project for completion by the end of 1994. Despite the advancedproject preparation and ongoing construction, this objective may not be achieved. The major constraint is thatmost of the long lead-time delivery equipment is to be financed from the proposed Bank loan and Boardpresentation is scheduled for the end of May 1993. Therefore, the Bank has estimated the project completiondate at June 30, 1995 which should be feasible barring unforeseen obstacles. Annex 6 shows the projectimplementation schedule.
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H. ProQkcot
3.12 The prject is esdmated to cost the equivalent of US$754.2 million excluing US$55.4 millionfor intrest during construction. About 18% of this cost is foreign exchange. Table 3.1 summarizes the projectcost etmates. Amnex 7 presents the annual capital exendiu.
Db_3.1: Korea - Project Cost Estmates(US$ milion - 1991)
won Bsilion A/ US$ Million Foreign as
CXunpOmone I Local I Foreign Tol LOAWl Foreign |Tot % of ToWa
Land & Right of Way 86.6 - 86.6 111.00 - 111.00 0.0
Tot Financing Req. 524.35 1 07.18 631.53 672.38 137.29 809.67
L I/ cuding taxes and dutes equivalent US$13.8 million.Source: DHOPCO and Bank mission.
3.13 The cost esfimate is based on end-1991 prices which were derived from actual equipment,material and labor costs and conacts' cost data adjusted for inflation. The physical contigency has beenesmated at 7.5% of the base cost for the part of the project which has not been constuced yet. The 7.5% isamved at by using different physical contnencies for different components of the project, rnging from 3% forengineering to 10% for consucton. The price contingency for the foreign cost compoen of the project isbased on Bank-projected intational price increases; local cost components are based on Bank-projectedinflation rates in Korea. The average price contngency derived on this basis is 3.45%, and it assumes that 6%-7% of capital coss will be disbursed in 1995. The interest during construction is calculated on DHOPCO'sfinancing plan, which applies appropriate interest rates and the grace period of each lender (para. 5.9), andassumes that interest will be accrued only after funds are disbursed.
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I. Project cNabd Pi=
3.14 Table 3.2 provides the project fiancing plan. As shown, approximately 95% of the equitycapital has already been paid by the shareholders. The remaning 5% is scheduled to be paid in the third quarterof 1993. Except for the proposed Bank loan of US$120 million, approximately 20% of the project's borrowing
iremen have already been received and the baance has been secured. The proposed Bank loan would bemade to the Goverment of Korea, which will on-lend its proceeds to DHOPCO under a Subsidiary LoanAgreement satisfactory to the Bank. The signing of the Subsidiary Loan Agreement is a condition of loaneffectiveness. The Bank loan proceeds would be on-lent to DHOPCO on the same terms and condtions as theBank loan to the Government. Considenng that DHOPCO is bearing the foreign exchange and intrest raterisks, and given that it is paying for the Government's energy conservation study (US$1.5 million), the effectivecosts of Bank funding to DHOPCO would be close to market rates. The Bank loan would be for a period of 15years, including 5 years of grace at the Bank's standard variable interest rate. The loan would finance 90% ofthe estimated foreign exchange expendirs, or 16% of total required fiancing.
Table 3.2: Korea - Project Fnacing Plan(US$ million)
1990- 91 1992 1993 TOTrAL
Government 84.21 26.47 5.47 116.15
Private Sector 59.04 I /16.78 hI 31.38 5.30 112.50
Yukong 13.59 4.27 - 0.88 18.75
Honam 13.59 4.27 - 0.88 18.75
Equiy Ssangyong 13.59 4.27 - 0.88 18.75
Kyungln 4.96 1.83 11.08 0.88 18.75
Kukdong 3.30 - 14.57 0.88 18.75
KAL 6.80 2.14 0.45 9.375
____ Kwangju 3.21 - 5.73 0.45 9.375
Total Bquty 143.25 74.63 10.77 228.65
Petroleum Business 10.64 39.62 25.64 128.2 204.10Fund _ __ __
TreMrUyLoan - 2.6 2.60 5.20
rPns I/ KDB Industry , 6.41 - 38.46 44.87
Korean Ebch. Bank 2.69 - - 2.69
Commecial Borrow 8.43 195.73 204.16
IBFUD _ __ _ 120.00 120.00
Tota LOan 10.64 85.39 484.99 581.02
TOTAL 153.89 160.02 495.76 809.67
FiMm 3 quartas of 1992.hi Lasn quarter of 1992.£/ US$1 = W780.Souwce: DHOPCOIBank minion.
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J. Procrement and Disbursement
3.15 Procurement arrangements for the project are summaized in Table 3.3. The cost of each iteminludes its pro rata share of the project's physical and price contingencies.
3.16 The porion of the project not financed by the Bank loan (N.B.F.) would follow DHOPCO'sprocurement procedures which are sadsfactory to the Bank. At the Government's request, works and servicestotdllg US$412.4 million equivalent, will be awarded to local suppliers or contractors following procurementprocedures which witl not affect the satisfactory execution of the project in terms of costs, quality or completiontime. An amount of US$119.6 million equivalent, to purchase land and rights-of-way, will be paid out of theGovernment's own resources.
Table 3.3: Korea - Summary of Proposed Procurement As(US$ million)
Procurem Method TotalProject lement ICB | LCB Other N.B.F. cost
Land& RightofWay 119.6 119.6
WorkcsTerminal Consuction 15.0 62.6 77.6
(12.5) (12.5)Pipeline, Pump Station & Civil Works - 215.2 215.2
Goods, ine Pipe and Pipeline Materils 127.3 - 2 - 129.3
TOTAL 198.6 15.0 8.8 532.0 754.4(99) (12.5) (8.5) (00) (120)
Note: Figures in parete are the amon fnamced by the Bank.N.B.P.: Not-Bank-Pinanced.Other: nludes local and hiternationalshopping and consultntservices.
3.17 Except for those items that can be obtained through loca and intaonal shopping (para3.18), all goods financed by the Bank would be procured th international competitive bidding (ICB)according to the Bank's prom en guelines and using the Bank's standard bidding documents.Approximately 15 bidding packages totalling US$198.6 million would constitute the procurement rquirig ICBprocedues. A margin of preference of 15% of the CIP price (or the percentag of customs duty and otherimport taxes if lower than 15%) will be granted in bid evaluation to goods mamnfacatred in Korea with adomestic value-added equal to at least 20% of the ex-factory bid price.
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3.18 Off-thewshelf, readily available goods (e.g. pipeline valves and constuction materials) having aper item value of no more than US$200,000 would be eligible for procurement through local and internationalshopping in an aggregate amount not to exceed US$5.0 million. A minimum of three price quotadons for eachitem would be required.
3.19 The proposed loan would include one civil works contract in the amount of approximatelyUS$15 millic,. to be procured through local competitive bidding following procedures acceptable to the Bank.It is unlikely that foreign contractors would be interested in a contract of this size in Korea; nevertheless, foreigncontactors will not be restricted from bidding.
3.20 Consultants for te al assistance, training and studies totalling about US$3.8 million wouldbe selected and appointed according to the Bank's Guidelines for the Use of Conwultants.
3.21 All procrement packages estimated to cost more than US$1.5 million will be subject to priorreview by the Bank. The prior review process wil cover about 90% of the total value of Bank-financed goodsand services.
3.22 The esimated disbursement of the Bank loan is shown in detail in Annex 8 and summarized inTable 3.4:
Table 3.4: Korea - Esdimated Loan Disbursement(US$ million)
BaSnk Fiscal Year 1994 1995 1996
II Annual 64.3 43.2 12.5Cumulative 64.3 107.5 120.0
3.23 Disbursement of the loan is based on the assumption it will become effective on July 1, 1993.t is planned that the proposed loan would be fuRy disbursed by December 31, 1995. A loan closing date of
June 30, 1996 is established to allow for late payments (such as retention money). The scheduled loandisbusement is much faster than it would be if it were following the standard profile of the Bank's overallpipeline subsector; this reflects the advanced stage of project implementtion. Retroactive financing equivalentto 10% of the proposed loan is recommended for expenses incurred after July 14, 1992, mosdy for partialpayments of long lead- time delivery equpment and materials (such as high pressure pumps) purchased throughadvanced contract approved by the Bank, as well as for the cost of the energy conservation study.
3.24 The proposed Bank loan would be disbursed against the categories outlied in Table 3.5, below:
Table 3.5. Korea - Allocadon of the Proposed Bank Loan
Category US$ milion Perentage of Exenditr Ffinced
Goods 93.0 100% of foreign expenditures; 100% of localexpendiures (ex-factory costs); and 65% of local
_________________________ __________ expendihtu for other items procured locally.
Works 12.5 90%
Consultant Services 2.5 100%
Unallocated 12.0TOTAL 120.0
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3.25 To facilitate disbursement, a special account in a fully converible currency would be establishedwith an authorized allocation of US$10.0 million, which is equivalent to about two months of averagedisbursements. Replenishment of the specia' account would be made quarterly or whenever the account is drawndown by about 50% of the initial deposits. Reimbursement for goods valued at less than US$1.0 million wouldbe made on the basis of statements of expenditure (SOEs). Documentation of SOEs would be retained byDHOPCO and made available for review by Bank supervision missions. All other disbursements would be madeagainst ful doumentation.
K. MonLtodrng. Reortlg and Supervion
3.26 The Bank would monitor the physical progress of the proposed project as well as the borrower'sfinancial and other performances, to ensure that al conditions of the proposed loan are satisfied. For thispurpose, the Bank would field an average of two supervision missions per year, durng the active project phase,to review project implementation, inspect job-site activities and discuss issues with Government and DHOPCOofflcials. In addition, DHOPCO would be required to forward periodic progress reports. During negotiations,agreement was reacbed with DHOPCO regarding the format, content and frequency of these reports. The basicrequpment is the submission of quarterly progress reports for each project component and DHOPCO's anwalfinanci and auditors reports as defined in para. 4.16.
3.27 Project supervision by the Bank would be coordinated through a supevision plan presented inAnnex 9. The plan will be confirmed with DHOPCO during loan negotiations. Bank supervision would requirea total of about 44 staff-weeks during the life of the project, of which about 12 would be at headquartes (toreview progress reports, procurement actions, correspondence, etc.) and 32 would be in the field. Supervisionwould be carried out mainly by Bank technical and financial staff, which would include one energy conservationand one environmental specialist. The borrower's contribution to project supervision would entail providiginputs to the Energy Conservation Study and to training and MIS components, as well as providing informationand reports on the staus of project implementation, which would include updates on the progress in physicalworks and on other aspects of the loan.
Chapter IV
The Bonrower
4.1 Daehan Songyugwan Kongsa, or Dachan Oil Pipeline Corporation (DHOPCO), was establishedon Jamuay 20, 1990 following the enactment of the Oil Pipeline Project Law (Law No. 4215, January 13, 1990)by the National Assembly. This law in turn conctized a Government policy decision of December 1989 tocreate a naionwide oil pipeline, to be constructed and operated by a single company in which the Goernmentwould hold over 50% of the shares. The objective of the pipeline was to establish an economical and efficientoil transportation system, ease traffic congestion on existing transportation means, and furher enhance the safetyand secmrity of the distribution and supply of petroleum products. The pipeline invesMent decision was theresult of ten years of Government planning and of three separate feasibility stxdies (including by Korea Kaiserand Dongah Engieeing).
4.2 In order to undertake the construction and subsequent operation of a trans-national oil pipeline,a joint investment agreement between DHOPCO's shareholders wa sipged on January 15, 1990, establishing ajoint stock company as provided for in Korea's Commercial Code. According to its Articles of Incorporation,DHOPCO's mission is to constuct, operate and manage the oil piptline; transport oil products and provide fortheir storage; lease and/or rent petroleum products transportation faciWes and equipment; and engage in otherrelated busiess as required to conduct the above activiies.
4.3 Authorized capital stock consists of 17 million shares, par value W10,000, of which 16,995,000shares have been issued as of December 31, 1992. The company's paid-in share capital as of that date wasW169.9 billion, with an ownership structure as shown in Table 1 below.
Table 4.1: Korea - DHOPCO Owneship Strume (as of Dec. 31, 1992)
Petroleum Business Fund (MOER) 50.8%Yukong Limited 8.2%Honam Oil Refinery Company, Ltd. 8;2%Ssangyong Oil Refining Company, Ltd. 8.2%Kyungin Energy Company, Ltd. 8.2%Kukdong Oil Refining Company, Ltd 8.2%Korean Air Company, Ltd. 4.1%Kwangju Express Company #i 4.1%
TOTAL 100.0%
1 This consuction and ransport company is pan of the same business group as Asian Airlines, Ltd.
B. Oralon and 8ta
4.4 DHOPCO management is vested in its Board of Directors, which decides on all importamaters related to business operations. The Board consists of not less than 3 and up to 15 directors, includingthe representative director and President and one auditor. The MOER can recommend 8 standing or non-standing directors, including the representave director and Presnt, and the auditor. Each of the sevencompanies involved can recommend a non-standing director.
4.5 The President of DHOPCO is appointed and subject to dismissal by the President of Korea atthe reco n of the MOER. As chief executive officer, the President of DHOPCO represents DHOPCO
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on the Board and manages day-to-day business affais. Board meeigs are also attended by DHOPCO'sStanding Auditor, who is appointed by the President of Korea at the recommendation of the MOER, afterconsultation with the Minister of Finance. The Standing Auditor is not a member of the Board, but may, at hisiniiative, express his opinions at any Board meeting. Under the President are 2 Senior Managing Directors, oneresponsible for planning and administaton and the otber for the project and operations. An audiingdepartment, separate from the rest of the organzation, reports to the President. The Senior Managing Directorsin tun oversee 3 Managing Diectors in total, responsible for adnision, the project and operations. Fivefield offices, presenly responsible for overseeing pipeline constuction, cover the Kyungin, South Seoul,Cental, Youngnam and Honam regions.
4.6 As of December 1992, total staff numbered 213 individuals; at full operation, total staff areexpected to number around 500 individuals. In 1992, 34 staff were engaged in planning and administrativeactivities; 18 staff in accounting and finance; 21 staff were employed in constnction and project activities; ad124 in operations, including the 5 field offices. The central controls department consisted of 8 staff, while 6were employed in auditing. At full operation, the expected composition is around 140 individuals at assistantmanager rank and above, and around 360 staff. DHOPCO's future organizaional chart, at full operation (seeDHOPCO's organizational chart) reflects the shift from constucti to operations that will take place. Themajor change occurs in the costuction area: the two departments currenty under the Construction ManagingDirector (Land Affairs and Engineering), are slated to disappear once pipeline operations commence and will bereplaced by departments responsible for the Project and for Constuction; the Managing Director will then beresponsible for the Project. The field offices, currently responsible for construction and reporting to theConstruction Managing Director, will be trnsformed into regional offices for operations and witl report to theOperations Managing Director.
4.7 The company's present organization appears to be suited to the constrction activity it isunderaing. Staff are competent, as evidenced by the level of preparedness for project implementation. Manystaff are drawn from other public enterprises. The President was formerly the vice-president of PEDCO and thepresident of KOPCO (Korea Petoleum Company). Both the executive and non-executive directors are alsodrawn from pubhc and private companies active in the petroleum and construction business. In addition, somestaff have been drawn from the Hankuk Oil Pipeline Corporation, which is the other oil pipeline operatingcompany in the county. At that company, staff had developed, implemented and operated a similar pipelineproject, and DHOPCO has benefitted from being able to hire this group of staff. With this relevant previousexperience, DHOPCO staff possess the skills required in both the construction and the operation of a pipeline.The projected organzional chart also appears to be well sutd to the operation of the pipeline, once it iscons;tucted.
C. Operatins and Mngaement
4.8 Anual Budgetmg Procedures. Each DHOPCO department submits a draft budget for thefollowing year in October of the current year to the Planning Departmnt, which assembles the final budget andmakes allocations among the various departments. The resulting draft budget is then approved by the Presidentof DHOPCO and sent to the MOER's Petoleum Supply and Demand Division for approval. This ncmallytakes place in mid-November. MOER approval usually takes two weeks, and the approved budget is subiittedto the company's Board of Directors in early December for final approval and acceptance.
4.9 Financial Planninr. DHOPCO does not, as yet, undertake systematic financial planning. To alarge extent, this stems from the fact that the company has a limited mandate, and a mission that is, at present,confined to the construction and operation of an oil pipeline. While it does operate in a competitive environment(refineries have various transportation altrnatives available to them for their petroleum products), its assignedrole is more that of a regulated public utility than that of an idependet, commercial endty. Its financialplanning and budgetary procedures are correspondingly designed. Nonetheless, staff involved in the plamningand financial (including internal auditing and conrrol) funcdons would benefit from short training programs
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tailored to their specific needs. A core of well tained staff in these key areas would also enable the comn " tobetter access and exploit other business opporumides in the fture (para. A.20).
4.10 Mana&ement Information Systems (MIS). In accordance with DHOPCO's general needs andstrategy, a computerized information system which would provide management with operating and financialinformation without a time-lag would be required. To address the management informaton needs which willsurface when the oil pipeline is operational, a modem, computer-based MIS should be installed, starting with areal-me core which would contain those elements which relate direcdy to planning, control and monitoring ofoperaions through an Operations Information System (OIS). The primary objectives of the OIS would be: (a) todevelop, monitor and execute the oil pipeline network opeting plans and system maintenamne activities; (b)plan, control and evaluate commercial operating strategies; and (c) monitor and control operating financialperformance and accounting systems.
4.11 The OIS should be an integral part of the comprehensive MIS, specially with respect tohardware compatibiLty and file access/data interchange. In this regard, DHOPCO should expect to use the OISdesign structre and format as a basis for the development of the additional MIS components. The QIS shouldbe based on a modular concept for both hardware and software to allow for the efficient phasing of the overalldevelopment from the standpoint of financial as well as technical resources. DHOPCO's general accountingsystem should be included in the comprehensive MIS development.
4.12 DHOPCO plans to set up its MIS in three phases. The first phase, planned to be implementedby 1995, covers operational control and processing of transactions. In this phase, the basic MIS plan will bedefied, followed by applications development in finance, payroll, personnel management and pipelineinformation management. In the second phase, planned for the 1996-1997 period, the MIS will be integrated byfunctional groups, and the OIS system will be expanded. In addition, the information base for petroleumdistribution will be fnalized. In the third phase, the focus will be on strategic planning, and on the fullintegration of the various databases created in the preceding phasus.
4.13 The nucleus of a staff capability to organize the MIS was established at DHOPCO in early1992, and presently consists of 6 individuals. By 1995, DHOPCO estimates that a total of 20 staff will berequired to implement and operate the planned MIS. DHOPCO's planned strategy for developing its MIScapabilities is saiisfactory to the Bank. The proposed project will support the first phase of MIS development asdescribed above. A more detailed description is given in Annex 10. For this purpose, a sum of US$500,000has been allocated for the basic design of the MIS. Agreements was reached with DHOPCO during negotiaionson the basic terms of reference and timing for carrying out of the first phase MIS development
4.14 Accoumfnn System. DHOPCO keeps its accounts in accordance with financial accountigstandards, approved by the Minister of Finance and promulgated by the Securities and Exchange Commission ofKorea (first promulgated on December 23, 1981; subsequently revised on three occasions, the last of which wasMarch 29, 1990). These standards, which are in general similar to internationally accepted accountingstandards, establish accounting and audifting principles and reporting standards for companies subject to theExternal Audit of Joint Stock Companies Act. DHOPCO has hired a competent accounting staff and is able todeal with accounting matters in a timely manner.
4.15 Internal Auditin. DHOPCO's intemal auditing department consists of 6 individuals. Aninternal audit of each DHOPCO department is conducted at least once a year. This audit covers admmistrative(defined as accountig and financial matters) as well as technical (defined as matters relating to the pipelineconstruction at this stage and to be extended to pipeline operation in the future) aspects. In addition to theseregular audits, DHOPCO's auditing department is expected to carry out special audits as and when required bymanagement. An example of such an audit, carried out recendy by the auditing department, concerns thewelding procedures used in the pipeline construction in the Kyungin area (Seotl-Incheon leg of the pipeline).This audit was ordered by the president of DHOPCO. DHOPCO's internal auditing staff appears well-motivatedand aware of its responsibilities. In keeping wi; the construction phase of the pipeline to date, the bulk of thesestaff have eng_imring backgrounds. Once DHOPCO commences full-scale pipeline operations, the internal
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auditing functon could be suntheined by recrndting conventionly trained and exrieced aiditors toreiforce the coverage of financial issues.
4.16 Ex Amd=. Under Korean law, a stock compay whose assets in the previous businessyear exoeed Won 400 million is required to undergo an exta audit by a private, idependen Charte PublicAccountant. DHOPCO's accounts are audied by the Tong Lin Accounting Compan, a reputable Korean firm.The audit is generally carried out in February of a given year for the accounts closed on December 31 of thepreceding year. The audit examines DHOPCO's accounts for their conformity with Korean generally acceptedaccounting principles, which are in general similar to internationally accepted audiing standards. DHOPCO'sexenal audits for the years ended December 31, 1990 and 1991 were fully satisfactory. During negodaionsagreements was reached with DHOPCO that it will contnue to employ idependen auditors acceptable to theBank and sbmit to the Bank certified copies of its audited financial stements togedter with the auditor's reportnot later than six monts after the end of each fiscal year.
4.17 In addition to the idependent audit, corpoaions that are affiliated to Government ministries areaudited by the auditing department of the parent mity. Such an audit was caried out in Septmber 1991 forthe 1990 accounts and in May 1992 for the 1991 accounts by the MOER's auditing department. Finally, theBoard for Audit and Inspection, attached to the President's office, is authorized to carry out audits of anycorporation that is over 50% owned by the State as and when required. In any given year, however, only oneof these two foms of Govermnent audit is carried out.
4.18 aes. Every corporation which is headquarered in Korea is assessed a corporation tax.DHOPCO's corporate income tax rate is 36.55%, assessed on anmnu income. However, losses in any givenyear can be can ed forward for tax purposes for the following three yeas. Customs duties and tariffs areassessed on all imported items according to the prevailing tariff schedule. In DHOPCO's case, the importeditem consist mainly of machinery, for which the 1993 duty rae is 9% on the CIP price of the item in questioA value-added tax is applied to goods, services and all imported items. The VAT rate applicable to importeditems is 10%, assessed on the duty-paid price. In addition, a special tax is assessed on con ners (in effect sinceJamnuy 1, 1992).1'
4.19 Insurance. DHOPCO carries the following insurance policies: (a) central control buildinginsurance policy (over US$4 milion); (b) fire insurance policy, covering facilities (US$37 million at present,projected to rise to around US$353 million once the North-South section is completed) and ofi iventory(US$24.5 million, projected to rise to over US$168 million once the pipeline is fully operational); (c) machineryinsurance policy, covering storage tanks, electric and computerized machiney (US$19.5 million at present,projected to rise to close to US$181 million once the North-South section is completed); and (d) commalgeneral liabiliy policy, covermg legal liability to third parties arising out of ownership, maienan and/or useof the insured pipeline facilities, including loading/unloading facilities (US$10 million per occurree at presentfor the Kyugin section, and rising to US$60 million once tie North-South section is operational). However, toensure the adequacy of the liability insurance coverage, agreement was reacied with DHOPCO that it shall: (i)employ, not later than January 1, 1995, insurance consultants, under terms and condition sadsfactory to theBank, in order to assess the project risks; (ii) furnish to the Bank for its review and comment, the report by suchconsultant containing their findings and recommendations; and (iii) not later than June 30, 1995, take almeasures necessary to ensure adequate insurance coverage against such risks.
4.20 Tran Needs. Very few of DHOPCO's staff have received training overseas in their specidarea of responsibiLity. In 1990, 3 electrical and mechanical engmeers were trained in the US on the SCADAsystem and current plans include training 2 enginers in oil m uing systems and 2 in oil pumping technology.Training needs can be classified in three categories: operational, financial and managerial. On the operationalside, DHOPCO staff are technicaly competent and would benefit primarily from short-term, non-degree coursesin areas such as pipeline technology, dispatching and interface, and quality control for petroleum products. In
1/ Ihis tax is Won 20,000 for a 20 foot container, and Won 40,000 for a 40 foot conainer.
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addition, short seminas on specific topics such as work control usig the computer, pipelie coating technology,pipeline hydruics, etc. would be useful. On the financial and managerial side, short-tem courses in taxation,personnel and financial manalgement, including billing and internal auditing procedures, would be useful. Inaddition, DHOPCO management has expressed an interest in training around 10 staff in long-erm degreecouses in the US and Europe. This traing would cover business administration, economics, internationalcontract law, and engineern.
4.21 The program of overseas traiing will lay the foundation for DHOPCO to secure a fully trainedand competent staff to manage the extensive oil pipeline network. However, DHOPCO will have some 500 staffwhen it is fully operational, not all of whom can be sent on an overseas training course. DHOPCO would needto er iblish in-house training progms to provide or-going traning for its technical, finacial and managerialpersomel. Such a program would also be useful for periodically updating staff lnowledge on new technologiesand systems. Trainiag could be provided by both local and foreign experts. Training materials prepared inKorea would maximize dissemination of management concepts, techniques and procedures. In this regard, itmay be useful to associate foreign pipeline companies in the training programs, partcularly in the technicalfields.
4.22 The Bank and DHOPCO discssed the latter's traing needs, and agreement on a tentativeining program has been reached. Annex 11 provides the description of the tentative program. However,
DHOPCO's training needs will be better defied by the end of 1993, when recruitment for operions isscheduled to be completed. A sum of US$1.5 million in the proposed loan has been allocated for traini tostenghe DHOPCO's operational, financial and managerial capabiLities. During negotaions, agreement wasreached with DHOPCO regarding the timing for preparaton and implemenion of a detailed training programsatisfactory to the Bank.
Chapter V
FTdanclal Analyds
A. Pt Po
5.1 The pipeline is being constucted in two phases: the first phase concerns the Kyungin section(Seoul-Inchon/Kimpo area), whereas the second phase concems the north-south section (Seoul-Taejon-Ulsan-Onsan leg and the Seoul-Taejon-Yeocheon leg). Given the vety recent establishment of the company, a fmnancialanalysis of past performance is not meaningful. The first year of operation was 1992, when the Kyungi sectionbecame partially opeatioA. The first fll year of operation, with both sections fully operational, is exectd tobe 1995.
5.2 The company's audited statements for 1990 and 1991, and preliminary statements for 1992, areshown in Annex 12, and in Table 5.1 in US dollars. As of December 31, 1992, its total assets amounted toW255 billion (US$327 million equivalent). Annual sales in 1992 were only W6.7 billion (US$8.7 million),reflecting the start-up of operations on the Kyungin section.
Table 5.1: Korea - Income Statemnts (1990-1992)(US$ million)
Actual P191m . ~~~~ ~ ~~~~ ~ ~~1990 1991 1992
Revenues 8.7Opeating Expeses 0.2
Labor 1.1O&M 0.8
dmstration 0.8Operating Icome 5.9Other Income 1.9 9.8Less:
Other Exenses 0.4 0.4Interest 0.6IAcome Tax _0.5 2.7 1.8
Net Income 1.1 6.7 3.5
Average Exchange Rate (W/$) 700 757 770
Now: totals may not add up due to rounding.
5.3 As can be seen in the above table, DHOPCO had no revenues from operations in the first twoyears of its exitenc. In 1992, partl pipeline operations commenced on the Kyungin section. In that year,DHOPCO earned a rate of return of 5% on average net fixed assets. DHOPCO does not take tide to the oil ittrnspor, as a resut of which its operatig expenses are limited to the provion of transport, while revenesconcern transport and storage fees.
5.4 DHOPCO's balace sheets for the 1990-1992 period are shown in Annex 12, and summarized in Table5.2 in US dollars.
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Table S.2: Korea - DHOPCO's Balance Sheets (1990-1992)(US$ million)
5.5 DHOPCO's assets to date have largely been financed by equity, which explains the very lowdebt:debt & equity ratio. The long-term debt contracted consists primarfly of a loan from the PetroleumBusiness Fund (76% of total long-term debt), which is payable over a 10-year period. Other loans outndingas of December 31, 1992 include W2 billion from Treasury Lo and Investments Special Accounting (10years); W5 bilion from Korea Development Bank Industry Facilit (10 years); and W2.1 billion equivalentforeign cumrrency loan from Korea Exchange Bank (7 years).
5.6 DHOPCO's liquidity position is vety high, although the current ratio has declined from 1990.Even so, it was in excess of 13 in 1992. This situation is projected to normalize, however, oce DHOPCOcommes full-scale pipeline operations. The company's debt semvice coverage ratio was 1.8 in 1992,explained by the relatively low debt service burden in that year.
B. Invemnt Proeam and F*inau Plan
5.7 DHOPCO's investment program during 1990 to 1995 consists of the proposed project describedin Chapter 3. Total expendures for the pipeline are estimated at W632 billion (approximately US$810 million).This program includes the Kyungin section of the pipeline (US$81 million), most of which has already beencompleted, as well as the north-south section of the pipeline (US$729 million). While at present the enieinvestment program is the proposed project, the Bank will require that it review any addional investment toensure that DHOPCO maintains a strong capital stnzture. During negotations, agreement was reached withDHOPCO to cany out a joint annual review of its investment program with the Bank no later than December31 of each fiscal year until the project is completed.
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5.8 DHOPCO's fnacing plan for the proposed project for the 1993 - 1995 period is shown inTable 5.3.
Ta S.3: Korea - DHOPCO's naucing Plan (1993.1995)
Wbillion [ US$mllion Percent
Investment Program 388.0 497.5 90Increase in Working Capital .A 52.6 A
5.9 As of end-1992, DHOPCO's capital of W169.9 bilion (US$218 million) was subscribed by theGovement (50.8%), the five refineries (8.2% each), Korean Airlines (4.1%) and Kwang Ju Express, aconsuction and tansport company (4.1%). The balance of the authorized capitl will be paid in 1993, and isexpected to be disributed among the same sharholders in a way as to maintain the present share-holdingscture. Equity accounts for 30% of the capital investment program. Internal cash generation is expected toimprove after 1995, when the pipeline becomes filly operational. Unti then, internal cash generaon isexpected to basically cover the increase in working capit required, while capital expendir will be financedthrough the equity contibutions and borrowing. Projected borrowing, shown in Annex 13, include lans fromdomestic and foreign banks with mautides of 7 years, a loan from the Petroleum Business Fund with a maturityof 10 years, Treasury loans with a maturty of 10 years, a loan from the Korea Development Bank IndustryFacility Fund, with a maturity of 10 years, and the proposed IBRD loan with a maturity of 1S years.
C. FiWal Oulloo9k
5.10 Projections of DHOPCO's financial performance for the period 1993-2002 and the assumptionsunderlying these projections are presented in Annex 13. Key financial indicators are presented in Table 5.4below. In interping the ratios shown, it should be borne in mind that DHOPCO will become fully operationalonly in 1995; the years 1993 and 1994 should therefore be considered the start-up period, for which aconventional ratio analysis is of limited value.
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Table S.4: Korea - DI1OPCO's Projected Key Finanial Indicators, 1993-2002
5.11 DHOPCO's policy is to set pipeline tariffs that are competitive with alternatiVe modes oftransport, on the one hand, and that yield a minimum rate of return on DHOPCO's investment of around 12%when fully operational, on the other. This tariff structure is embodied in a contractual relationship thatDHOPCO will enter into with oil refineries (see Chapter 111, para. 3.6). Revenues are generated both throughoil transport and oil storage in DHOPCO facilities. The projections of quandties transported and stored arebased on the results of a model which takes into account the expected future demand for oil products in thecountry, the refineries' opdmization of the different transport modes available (pipeline, ship, rail or truck), andDHOPCO's long-run marginal cost. Tariffs are assumed to be adjusted annually to keep up with inflationYDHOPCO's revenues for the fist year of full operation would be WIl 1 billion, and are projected to increase toW217 billion in 2002. DHOPCO earns increasing rates of return on average current net value of fixed assets,as can eseen in Table S.4Y
5.12 The major recurrent expenditure in the income statement is electricity for pipeline operations,followed by O&M, as can be seen from the projected statements shown in Annex 13. Depreciation accounts forclose to 50% of total operating expenses. Interest on borrowing is also a significant expense, reaching a peak in1996 and declining thereafter as DHOPCO begins repayment of principal.
5.13 Since DHOPCO does not take title to the oil that is being transported, this reduces DHOPCO'sneed for working capital, since its inventories and stocks are limited to certain spare parts and equipment forpipeline operations. DHOPCO's receivables and payables have similar terms; however, current assets areconsistently in excess of current liabilities, with the result that the current ratio is at least 1.9 throughout theprojected period.
5.14 The financial projections show that DHOPCO starts generating significant surplus cash once fullpipeline operations commence. Since DHOPCO does not, at present, envisage further investments beyond theproposed pipeline, this surplus cash could be used to pay off DHOPCO's high cost debt (commercialborrowing), provided that sufficient cash balances are maintained to keep the current ratio at 1.5. Alternatively,
I/ Current Bank projectionsare 6% for 1993 5.5% for 1994 and S% per annum for 1995 and beyond.
(/ The rate of return shown in Table 5.4 is calculated by dividing DHOPCO's projected net operating income by the average current netvalue of fixed assets for the year in question. Net operating income is total operating revenues less operating expenses, includingdepreciation but excluding interest and other charges on debt. The average current net value of assets is obtained by deducting accumulateddepreciaton from the avetage gross value of fixed assets. The average gtoss value of assets is taken to be one half of the sum of gmssassets in operation at the beginning and at the end of the year, as revalued annually.
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DHOPCO would be in a strong position to pay dividnds to its shareholders beginning as early as 1995,depnding on its debt repayment policy. DHOPCO would also be in a strong position to undertake futurepipeline expsions or other related investments.
5.15 The total investment program for full pipeline implementation amounts to US$809.7 million, ofwhich some US$312 milion have already been committed. In light of the substantial investment that remains tobe undertaken, and given that the company will not be fully operational till 1995, a high level of self-financingcannot be achieved until that time. DHOPCO's main challenge will be to maintain a strong balance sheet as itcarries out the remaining investment program over the 1993-95 period. However, its equity position is strong,and even with the increased borrowing that will be required to finance the investment, DHOPCO'sdebt:debt&equity ratio is projected to remain below 70:30.
5.16 To ensure that measures are taken to mamtain a strong capital structure and sauisfactoryliquidity, during negotiations agreements was reached with DHOPCO that it would not incur any further debt ifsuch additional debt would raise its total indebtedness to more than 70% of its total capitalization, and that it willmaintin a current ratio of at least 1.2.
5.17 As can be expected in the start-up phase, DHOPCO's debt service coverage ratio is erratic inthe inidal years of pipeline operation, as additional debt is contracted to pay for the investment program, anduntil pipeline operations start generatng revenues. Once full pipeline operations start, DHOPCO should nothave major difficulty in mainining a debt service coverage ratio in excess of 1.2. With a view to ma _iainingthe debt service coverage ratio at acceptable levels, dunng negotiations agreement was reached with DHOPCOthat it would nr. incur any additional debt unless a reasonable forecast shows that its estmated net revemnes afterexpenditu for each year during the term of the debt to be inurred shall be at least 1.2 times its total estmateddebt service requirements from 1995 onwards.
Chapter VI
Project Benefits and Risks
A. Beneits
6.1 The project will yield signficant economic and envirnenl benefits, as well as unquantifiedbeefits resulting from enhancing the reliability of supply and indirect benefits to other sectors. Omce the projectis completed, Korea's entire supply of light petroleum products (gasoline, jet fuel, kurosene and diesel).represeting over 50% of country's total petroleum consumption, will be transported though this pipelinesystem. The pipeline will replace all coastl vessels, rail tankers and road trucks now used by the refimeries foransporn light products to the 'direct sales" depots and the "sales agents" (para. 2.7). Only fuel oil and LPG
will condnue to be shipped through existing modes.
6.2 Economic Benefits The project's economic benefits are derived from saving associated withtransportn petroleum products via the proposed pipeline versus existng modes. Based on projected demand,cost analyses were conducted on "with pipeline" and "without pipeline" scenarios. "Without pipeline" costswere calculated considering total costs connected with expanding the existing system (vessels, rafl, road andsmall Pipeline nework) in order to tranwsport the forecasted volume of light products which will be moved by theproposed pipeline. The "with pipeline" scenaio includes project investnt and operatimg costs incluingphysical coningeni but excluding price congencies. Under both scenaios, internal costs such as taxes andduties have been excluded. With respect to an alternative use of the land required by the pipeline, it is assumedthe price paid for it reflects its economic value. These cost savings are estimated for both segments of thepipeline (Kyung and North-South).
6.3 The economic rate of return calculated on this basis is about 14.5%. Annex 14 provides adiled analysis of the econmic rate of return including the assumptions underlying the calculation. Thesensivity of this rate of return was tested with respect to changes in key assumptions. The table 6.1 shows theresults of the analysis.
Table 6.1: Senstiviy Analysis
ER (%)
Base Case 14.50
(a) pipeline operating costs up 10% 14.2(b) pipeline capital costs up 10% 13.3(c) (a) and (b) 13.0
6.4 Fial Rate of Retnrn The prqect's fincial (intal) rate of return (FRR) is 12.5%. (SeeAnnex 14 for a detailed analysis). The project revenue is derived based on the proposed minimm tariff, namely1.80 Won per barrel-km to transport product and 268 Won per barrel to store them. The investme andoperadtng cost used to clcte the FRR are those for the economic analysis of the project, but include pricecontingencies as well as taxes and duties. The resulting FRR, 12.5%, simply confirms that in order forDHOPCO to attain at least a 12% rate of retr the minimum tariff needs to be set at 1.80 Won per barrel-kmand 268 Won per barrd, respectvely, for transportation and storage of products, as is currendy proposed.
6.5 Environmental Bmefus. There are also direct enviment and safety beneits that have notbeen quantiied. These include a reduction in (a) air polution, mainly from the trucks, but also from the railtankers; (b) marine pollution, from oil leaks of the vessels and firom the loading and unloading port facilities;and (c) road and rai hazrds, from accidents involving truc and rail tabkers. It is estiad that S02emissions from the present modes of transport are about 6,000 tons per year, and the proposed project willreduce these to 2,000 ton per year. With respec to NO, emissions are now about 11,000 tons; and will drop to
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3,000 tons. Regarding CO2 levels, the proposed project will reduce emissions from 991,000 tons per year in thepresent system, to 291,000 ton per year. It is important to note that while these reductions represent 2%-3% ofthe pollution emissions nationwide, in the Seoul metropolitan area, where the air pollution problem is mostacute, the improvements will be much greater, because 40% of the country's consumption occurs in that areaand trucks are the predominant mode of transporting petroleum products.
6.6 In addition to its environmental benefits, the proposed project significantly reduces road and railaccidents. Whie it is difficult to confirm the number of accidents involving petroleum trucks and rail tankers,the US National Transportation Safety Board (NTSB) estmates that if the accident index for trucks is 1.00, it is0.347 for rail tankers and 0.0006 for pipeline. Thus, the pipeline will dramatically reduce the number ofaccidents. Further, the construction of the pipeline will have a significant influence on reducing the shippingaccidents of tankers and oil leaks (paras. 2.9 and 2.1).
6.7 Finally, there are substantial indirect benefits which have also not been quantified. Theseinclude (a) a more timely and reliable petroleum sup,ply to other sectors; (b) reduced wear and tear, andtherefore, capital investment, in the highway system; c) less congestion of port facilities (para. 2.11), whichreduces both demurrage charges and investment costs; and (d) greater efficiency in the sector due toimplementing energy conservation measures, allowing the pipeline to be used by all companies, andstengtming the project entity.
B. Risks
6.8 The project-specific risks are minimal. The risk of cost overruns and implementation delays hasbeen taken into account in the project sensitivity analyses and the result shows that the project economic viabiLityis robust. The land and rights-of-way have already been acquired. The environmental risks such as adverseimpacts on the ecosystem, land use, water and air qualty, have been fully evaluated and appropriate mitigationplans have been developed consistent with Bank guidelines. The environmental risks and the corespondinmiidgation plans are discussed in detail in the EA report.
Chapter VII
Ageements and Recommdaion
A. gr
7.1 During negotiations, agreements were reached with the Government that it will:
(a) As a condition of loan effectiveness, enter into a Subsidiary Loan Agreement with DHOPCOfor on-lending the proceeds of the loan to DHOPCO on terms and conditions satisfactory to theBank (para. 3.14);
(b) Implement the conservation measu recommended in the action plan of Phase I of the EnergyConsvaion Study, including those related to eliminatg or adjusting any existng regulaonsthe Study finds hinder an effective energy conservation program (paras. 1.29 and 1.33).
7.2 During the negotiations, agreemeats were reached with DHOPCO that it will:
(a) Engage qualified consultants, under terms of reference and conditions satisfactory to the Bank,to (1) carry out Phase I of the Energy Conservation Study not later than November 1, 1993(par. 1.29) and complete the study not later than March 31, 1995; and (2) commence a studyfor improving DHOPCO's Management Information System not later than November 1, 1993,and complete the study not later than March 31, 1995 (pam. 4.13);
(b) Make the pipeine available to any party, subject to said party adherng to the provisions of Lawno. 4215 and the Regulaion for Oil Transportation (pam. 3.5);
(c) Implement the qiments of the environmental assessment (EA) report prepared for theproject, ard require that the environmental mitigation plans and safety sndards contined inthe EA be adhered to by all parties who use the pipeline, including new entrats (para. 3.8);
(d) Prepare, not later than August 31, 1993, an action plan satisfactory to Bank, that inchldes adetailed training program that contains the measures DHOPCO intends to take over the next twoyears to stregthen the Corporation's fincial and manageral capabiies and raise the level ofstaff expertse (para. 4.22);
(e) Meet a current ratio of at least 1.2, a debt-service coverage ratio of at least 1.2, and a debt-equity ratio that does not exceed 70/30 (paras. 5.16, 5.17 and 5.15);
(f) Carry out a joint annual review of its investment program with the Bank not later thanDecember 31 of each fiscal year untl the project is competed, and pay due tegard to theBank's commens and o edons (pam. 5.7);
(g) Be audied by an idependent extmeral auditor acceptable to the Bank, and submit to the Bankaudited anmual ficial statemets within six month of the close of each fiscal year (para.4.16);
(h) Furnish to the Bank during each fiscal year until the project is completed a quartney report onthe physical progress of the project ( para. 3.26).
(i) Employ, not later than Jamuary 1, 1995, insurance consultants, under terms and condiionssatsfactory to the Bank, in order to assess project risb, and funish to the Bank for its reviewand comment, the report by such consultas containing their fidigs and m tons,and, furthrmore, not later than June 30, 1995, take all meures necessary to ensure adequateinsurance coverage against such risks (para. 4.19).
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B. Recommendation
7.3 Subject to the above agreemen and conditions, the proposed project is sutable for a Bank loanof US$120 million. The loan will be extended to the Republic of Korea for 15 years, including five years ofgrace on repayment of principal at the Bank's sandard variable interest rate.
ANNEXES
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Annex 1Page 1 of 4
KOREA
PETROLEUM DISTRIBUTION AND SECTOR MANAGEMENT EMPROVEMIENT PROJECT
Ene~ Con seva tio n
Tems of Referedne for Pbse I
Backd ud
1. The consumption of commercl energy in Korea was about 100 million tons oil equivalent(toe) in 1991, including petroleum products (57%), coal (23%), mnclear (13%), and LNG (4%). Theconsumption has grown at an average rate of 11% per year over 1986-1992. The 1983 oil crsis, and thesevere implication this had for Korea's balace et payments, prompted the Goverment to revise itsapproah to energy imports and reduce Korea's hit' arto almost exclusive reliance on imported oil. A newstraegy was developed in 1980 caing for, inter- ia, diversifying into alteative energy sources includingimorted coa, LNG and mnclear energy, and fostei energy conservation.
2. The energy intensily of the economy was reduced, partly through efficiency gains and energyconsraion, and pardy though a reduction in the relative share of energy-intmsive industries to theadvantge of light manufag. While the energy elasticity of GDP growth was above one during 1960sand 1970s, the ratio dropped below one in early 1980s when the bulk of the industi activity was shifted tohigher tmchnology manufactring.
3. Despite these efforts, the continuing rapid growth of the Korean economy has put michpressure on the nation's ability to cost-effectively meet its energy needs. The rate of energy consumptionduring the last 5 years exceeded the economic growth rate, resulting in an increase in the energy elastcity toGDP, to 1.55 in 1990. It is expected that the energy demand wil condmie to increase at a high rate, as theeconomy grows and as the level of income and qualiy of life improve in the futue.
4. Government's general goal in the sector is to bring about greater efficiency in the use ofenergy while minimizing its impact on the environment. To this end, the government amended theRationalization of Energy Utilization Act, preparing a much stronger Act for the next five-year EnergyConservation Plan and Programs (1992-1997). The program includes, among other things, promoting thedevelopment of high-efficiency forms of energy utilization such as co-generation and odher cost effectiveenergy alternatives. In parallel, the government has asked Bank assistnce in studying ways to improveenergy conservation measures and to help manage energy demand growth in Korea.
Objective
5. The objective of this initiative is to develop a plan setiDng forth policies and actions that willpromote the most efficient use of energy in Korea given the country's economic development needs andevolving consumer demands.
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Page 2 of 4
Scope of Work
6. The scope of work is divided in two phases. Phase I will provide (i) an estimate of thepotential energy savings through conservation efforts; (ii) a "road map" in the form of a prioridzedconservation programs (plan of action) to be carried out mn Phase II; and (fii) terms of reference (TOR) forwork under Phase I. The submission of an agreed-upon Phase I report is a condition for Board presentationof the proposed World Bank loan. Phase I will focus on a comprehensive analysis of the prioritizedprograms, icuding deveopme of dealed program designs, the identfication of implemenaionprocedures and timetables, the appropriate mechanisms for monitoing and evaluatg the specific energyconservation measmes, and recommendations for the insutions to be designated for programtmplementation. A better definition of Phase II will be obtained at the end of Phase I.
Phase I
7. The scope of work under Phase I would cover four main areas: (i) chancterzig energy usem Korea; (ii) reviewig the exisdng conservation efforts and analyzing the reasons for the slowdown ofexisting efforts; (iii) broadly identifying areas which would lead to reduction in energy demand with estimateof the potenti energy savmgs for each; and (iv) based on (i), (Hi) and (iii), developing a porintiedconsevation programs, including the TORs, for Phase II. These are discussed in more detail below.
8. Cbng energy use in Korea includes an analysis of Korea's historic energy use patternsand a forecast of country's future energy demand through year 2010, by sector and type of fuel. The mainsectors to be covered are the industrial, power, commercial, residential and transport sectrs. The type offuel will be the major fuels used in each main sector. The likely future trends in fuel use and energyintensity in each sector will be evalua tang into account the existig sector-specific energy intsites,the current and future (based on several agreed scenaios) energy pricing policy, possible technology-basedchanges in industia energy intensities, cuto conservation efforts in Korea, private investment trends,govemment plans for industial development, the socio-demographic changes in Korea that wil affectenergy-usmg equipment ownmeship and usage pattrns, and the growth in personal income per capita thatwill affect residential energy use and demnd for trasport services (i.e., private auto and public transit).
9. The review of the eme enersv conservation efforts in Korea should be carried out with aview to assess the effectiveness of the Government's currnt energy conservation policies and to identify thereasons for the apparent lack of effectiveness of the previously-enacted energy conservation measures. Thiswill require identifying national, regional, and local government policies directy and indirecly influencingenergy use and energy efficiency, and detmin their effectiveness; the interaction of the energy policieswith other govemment policies; and how these interactions affect the intended results of the policies (e.g.,are the costs and benefits of energy policy consistent with Government's industrial, environmental and tradepolicies). The reasons for slowdown in energy conservation efforts in the private sector and governmentpolicies that have reduced the effectiveness of both public and private energy conservation efforts need to beidentified. This will also include identfication of non-policy elements that have reduced the effectiveness ofconservation efforts, such as breakdowns in measurement, evaluation and enforcement of energy efficiencyefforts. To provide an external perspective, it wil be necessary to identify government policies/approachesused in other countries to promote energy efficiency, and the effectiveness of such policies. This externalanalysis would require examing what market forces broke down which required government intervention;what are the measurable efficiency improvements from these policies; and what are the public and privatecosts associted with these policies. The applicability and adaptability of other counties' energy efficiemny
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Annex.1
Page 3 of 4
poLicies in Komea needs to be assessed, taking into account national economic prionties and policies andjurisdictional sictures widhin Korea.
10. Ident areas which wold lead to reducing enerm v demand - including suggesting currendyavailable technological opportu s that could be employed to reduce demand- and MoantgJlthes_imaed otenial energy savings tbrough conservation efforts and efficiency gains.
11. Based on the fidings in above, the end-product of Phase I should provide a direction, or aroad map, for energy conservation policy development in Korea, in the form of a prioritized conservationprograms to be fully evaluated in Phase I. The Phase I work will therefore include the development ofbroad energy conservation staegies for various sectors, focussng on the need for and mechanisms forincreasing incentives for energy conservation measures. The broad strategy should be based on developinga sound pricing policy in order to provide appropriate signals for the consumers and producers; increasingconsumer resporse by creating more competitive markets and developing more efficient technologies;strengthening imiaon through energy conservation agencies in order to provide information serviceson technology and financial options and to offer technica assisunce; and developing appropriate codes andstaudards. In the industrial sector, the strategy should address issues such as the restrcturing of industrytowards less energy-intensive industry, special supervision of energy-itensive industries, and rationalizationof management and operation. In the residenti and commercial sectors, the strategy should considerstrengtheng the building standards for new buildings, establishing incentives to encourage -,onsumers topnuase energy efficient equipment, and monitoring energy- intensive buildings. In the tasport sector-which requires greater emphasis becae the sector stll remams in an early stage with respect to energyconservation acvities-the role of taxation on vehicles, energy-efficient tansportaton system, and supply ofenergy saving devices should be taken into account. Furthermo, district heating and co-geneton systemsshould be also analyzed, and the findings should be taken into account when designing the energyconservation schemes. Phase I will also include preparing TORs and an estimate of the resources requiredto carry out the work to be performed in Phase II.
Phase II
12. Phase II would provide a detl analysis of prioritzed conservation programs prepared inPhase I, includig developing a sustainabl implementation strategy and time table for the recommendedenergy conservation programs and the rie montorng and evaluation mechanisms. As indicated, abetter definition for the scope of work under Phase H wil be developed at the end of Phase I. However, agood example illustratng the division of work between Phase I and II is the development of an energy auditprogram. While the need for detailed energy audits of industrial facilities as means to recommend efficiencyimprovements will be identified in Phase I, Phase II efforts would further clarify the specific attributes of aneffecive auditing "program", elaboraig how the program would be designed and implemented, andproviding detaied montoring and evaluation requiements to ensure the program's continued effectiveness.An example in the Residential and Commercial Sectors is the institution of building and equipment standardsthat require the use of energy efficient technologies. Phase II would evaluate the cost effectiveness ofvarious standards based on an assessment of their costs and benefits, develop appropriate program designs,itify appropriate implem aonmechm and schedules, and descrbe monitoring and evaluationreqhuiments
13. It is expected that the answers to the following questions will be obtained in Phase II, buildingupon the work in Phase I:
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Annex 1Page 4 of 4
i) &deMOfiagA: What pricing actions could be employed to reduce the energy demand;what are the most critcal finacial and economic factors to include in ranking energyconservation policy options; how should environmental factors be incorporated intoselection of energy options for Korea.
ii) Implementation: What policy actions are necessary to realize energy demandreductions from technology options; how should tade policies be altered in order topromote the use of the most efficient technologies; what institution should beresponsible for defining conservation-specific energy efficiency policies and whatshould be the role of Ministry of Energy and Resources (MOER); and what are theappropriate mechanisms for implementing conservation policies.
iii) MofronJk: What monitoring and evaluation mechanims are required to maintain theefficacy of energy conservation efforts and who should be responsible for monitorngand evaluating conservation implementation efforts, and imposing sanctions for non-compliae with regulations
Resources and Schedule
14. The cost of Phase I is esfimated to be US$300400,000. However, the consultants arerequired to comment on the adequacy of the cost estimate. The consultants are also required to specify thelevel of staffing and expertise to adequately carry out the study. The consulau are expected to fidd amisson to Korea immedately after receving a telex of inte, and at any event not later tan February 1,1993. The work, including the final report, for Phase I is expected to be completed by April 1, 1993.
mPame
-45-Annex 2
KOREAPETROLEUM DISIUTION AND SECTOR MANAGEMENT IPROVEMENT PROJECT
Korea- Existing Tsnortaton Modes for Petroleum Proicts(1991)
Refey & Type of Coasal Vessel Rail Tankers Road TrucksSales Agents Products
| 8rEEAREA |4,06Zm" s| | AREA |935MM2 srr | AREA 3 ,9sm m
PUP OMIL 7 | PUMPS Q NITIA:3) PUP NM 4
EKN52182
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Annex 4Page 1 of 2
KOREA
PETROLEUM DISTRIBUTION AND SECTOR MANAGEMENT IMPROVEMENT PROJECT
PIPELINE DESIGN AND TECHNICAL FEATURES
1. The project comprises the _sttion of approximately 1000km pipg in diameters rangingfrom 10 to 24 inches. The system is designed to transport four types of petroleum products (gasoline, jetfuel, kerosene and diesel oil) from the country's five refineries located along the coast of Korea to terminals,also part of the project, at Taejon and South Seoul. The terminals are equipped for providing the requiredoperating and also the storage and off loading facilities needed to supply products for distribution at therespective terminals.
2. System optimization and basic engineering were provided by qualified reuable internationaland domestic engin finns. Bank technical staff reviewed the system design and found it satisfactory.The operating controls and monitoring equipment are sophisticated and highly computerized, however, theBorrower's staff is experienced and should be able to master the system's intricacies without excessiveproblems. Vaiances from the optimization studies were mostly due to the need to alter pipe routing becuseof civic objections and environmental restrictions.
3. The refinery distillation products are low sulfur diesel oil, kerosene, JP4 jet fuel andunleaded gasoline. These four products will be shipped in batches from the refineries to the delivery terminalsover a common pipeline system consisting of two separate pipelines. When the batches are pumped throughthe pipeline, interfaces will form at each of the product joints. The amount of product contamination (ordegraded) at the interfaces geneally increases as the number of batches shipped to the delivery termialincreases. Thus, the interface costs can be reduced by increasing the batch cycles which, however, requireslarger batch sizes. Optimum batch sizes were dermined by balancing the reduction in interface costs withthe required storage tankage costs. The maximum allowable mixing of two products is smmaized in thefollowing table.
Maximum Mixing Amount (Perent)
Gasoline JP4 Kerosene Diesel
Gasoline into 0.645 0.056 0.022
JP into 0.733 0.146 0.058
wKerosene inio 0.763 3.000 3.000
Diesel into 0.733 3.000 1.000
The batching sequence is: D iesel/Kerosene/JP-4/Gasoline. Because of the small size of the JP-4 batch, itwiU be omitted from every alternate batch cycle.
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An,ex t4Page 2 of 2
4. The main requirement for operating a pipeline with minimum bath contamination iscontinuous operation with no abrupt changes il pressure or flow rate. 'This is the reason that the pipelinesystem consists of two pipeliles. Continuous operationt is not possible when two pipelines are fed itito one.
S. Between Taejon and South Seoul 'I'erminials the two pipelines will be laid side by side in acommoin trench. This design tcature will substantially decrease trentching costs, and it will reduce th right-up-way cost by about a halt compared to separate pipe nrutes.
KOREAPE IRDLEUM DI~IUINAND
SECTOR MANAGEMENTIMPROVEMENT PROJECT
PROJECT IMPLEMENTAPiON ORGANIZATION
EXECUTW DIRCOTR
OPERArDN ~~~~~~CONSTRUCTONMANAGING DIRECTOR MANAGING DIRECTOR
BUSIESSENIERNADOPERATION DEPT. AMNSTRATIONf LANDAFFAIRS DEPT. | 0NGSTRINE DEPTOINTRCTID DPT I I
Planning Sect BUSIflSS8 Of"vsec
_ ~ Sect Wlh Sc3 _
coDssaqoon Sea sea
ICtilNGlN OPOLITAN ~CENTRAL I YOUNGINA I HONAN IKYUNGNOFFICE CONSTRUCTION OFFICE CONSTRUCTION OFFICE CONSTRUCTION OFFICE [CONSTUTIONOFFICE RCOtSRUONOFFICE
.mInIs&atlan Sect Adlsratlon Set Adaban Sect A*stMl Sect.
PETROLEUM DE;TRIBUTION AND SECTOR MANAGEMENT IMPROVEMENT PROJECT
Projet Supernio Pl=
Bank SR pen Inputs Into Key Actes
1. The staff inputs indicated in the table below is in addition to the regula supervision needs at theheadquartes for the review of progress reports, procement actions, corrspondence, etc. (see para. 3.27 of thetext). Accordinely, the total Bank evision inputs is estimated at 44 staff weeks, of which 12 staff weekswould be at the headquarts and 32 staff weeks in the field.
2. Table 9.1 provides a entaive program of supervision activities to be carried out duing project
Work progress, envirolnent aspects Project EngineerEney Conservation Sdy, Enegy Conservation Speciais 8MIS, and raning. Instiion Specist
Environent Specia
May 1994 visio Mission
Work progress, review of Phase II Project Engineer 4of Energy Conservation Study. Energy Conservation Specialist
OCL 1994 Su Jaion Mission
Work progress, finanes, Project EngineerMIS, training, and environmental Finncial Analyst 6aspects. Enironmental Specis
1995 91D missiong (WO)
Work progress, finances, Project EngineerEry Conrvadon Study Financial Analyst 10(near completion), and Envirnmen Speciaistenviron mental aspects. Energy Conservation Specialist
1996 SA n r isdion
Overall perfonmnce eiew, Projed Engineer 4finamces and PCR. Finanial Analyst
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Annex 9Page 2 of 2
Borwows' C4O"t_bul= to Supervison
3. The coordinon of the project would be the responsibility of DHOPCO. This would includeproviding inPuts to the Energy Conservation Study, and for training and MIS needs, as well as providinginformation and zeports on status of project implementaton, including progress in physical works and otherconditions agreed in the proposed loan.
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Ae 10Page 1 of 2
KOREA
PETROLEUM DISTRIBUTION AND SECTOR MANAGEMENT IMPROVEMNT PROJECT
MIS Deeopment Plan
1. DHOPCO plans to set up its MIS in three phases. The first phase will cover operationalcontrol and tansaction proceing, and is expected to be implemented by 1995. The second phase will covermanagement control and tactical plann, and will be implemented by 1997. The final phase will focus onstrategic planning, and will be implemented by 1999.
F-s Phas=
2. The basic MIS plan will be defied m this phase. In addition to providing the blueprint forMIS development, this phase will set up the basic MIS organ on, develop and implement applications inthe area of operationd control and transuction prmcessing.
3. Equipment tat will be instled is a mainframe computer (expected in 1993), followed bya local area network linking D)HOPCO work-stations. In terms of software, the first set of applications tobe developed are in finance and accoung, and payroll. These are expected to be undertken in 1993. In1994, applicaions for prso management and pipeline informaton magement will be developed andimplemented. Finally, in 1995, applications for prent managemen and equipment mangment willbe implemented. Underlying these applications development is the setting up of a database manaementsystem.
4. The proposed project will assist in the design and implementation of the first phase of MISdevelopment Detailed terms of reference for this phase will be agreed upon at negotiatdons. A sum ofUS$500,000 has been allocated for this purpose in the loan.
Second Phase
5. In this phase, the objectives are to expand the MIS to the various DHOPCO fiuctionalgroups; expand the operations analysis system; and set up an informaton system related to petroleumdistribution. Specific tass include developing an appropriate mapping system for the MIS; expandig themainrame; settig up an electronic mail system; and building up the database on petroleum distnbution. Atthe end of this phase, DHOPCO will have a well-integrated operations information system and wfll havedeveloped several daxbases.
Third Phase
6. The focus of this phase wil be to integrate the various functional databases that will havebeen created in the preceding phases in order to develop an intgrated MIS that can be used for stategicplanning. This phase will involve unifying the various systems, setting up the network for global informationexchange, and ingratig the opeonal, accountig, financial and personnel databases. In additon, the
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Annex 10Page 2 of 2
perolem distribution information system will be exaded and integrated into tie DHOPCO MIS. Thisdatse could be a potential source of revenue for DHOPCO, since DHOPCO could provide, for a fee,information on petroleum distibution and consumptio trends in the various parts of the county. Suchinformation would have commercial value to efias, disruos as well as to the marketing depment ofrelatd industies.
7. In order to enre that DHOPCO staff and managemet are fully conversant with dtecapabilities of the MIS, orientions and trainig courses will be provided at each significant step in thedevelopment and implementaton process. Senior management involvement in the dedgn stage will also berequired, to ensure that the system responds to specifi management needs.
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Ane 11Page 1 of 2
KOREA
PETROLEUM DISTRBTON AND SECTOR MANAGENENT IMPROVEMNET PROJECT
Tentve Trainn Program
1. An amount of US$1.5 milLion has been allocated for the purposes of providing trainig toDHOPCO staff The basic priciples underlying the proposed training program are: (i) that it be flexible andadapted to DHOPCO's evolving needs; (ii) that it provide a core of well-trained staff in the critical areas ofopaons, fiance and management; and (iii) that the reach of the program be as exensive as possible.Consequently, the program combines shott-tem, specific interest courses with long-term, degree courses; italso provides for a mix of trainn in-house, witn Korea and overseas.
Long-Tom Traning
2. D e . Over the 1993-96 period, DHOPCO plans to send 9 staff to universitiesi North Ameaica and Europe. The courses include MBA in intemational busness (2 persons); DBA infinacial management (1 pson); MA in economics (2 persons); MS in chemical engineering (2 persons); MSin mechanil egineing (1 pe). The cost of this traiing is estimated at US$720,000.
3. N.e C DHOPCO plans to send 3 persons to the United Stats for a year-longcourse in pipeline technology. In addition, 6 month courses in pipeline systems, quality control for petroleumproducts, taxation, finanl management and ponnel management are planned for 8 persons. These courseswould be primaily delivered in the United States. One or two persons may be sent to Japan to diversify theknowledge base. The cost of this traing is eamated at US$200,000. The Bank and DHOPCO have agreedto review the long-term jtrani progams (both degree and nondegree courses) during the projectimplementation, on a case-by-case basis.
Short-Term Training
4. Qpons. Several short-term courses in the area of measuring flux, work control using thecomputer, pipeline coating technology, securt facites for pipeline operadons, and pipeline hydrauLics wouldbe followed by DHOPCO staff in the projec time frame. These courses would generally be of 2-3 weekduration, and will cover a total of 21 staff, who will be sent to the appr instuions in the United States.On-thejob training, and in-house training programs are also planned in the operations area in order to expandthe reach of training to DHOPCO staff. These programs are intended to update staff knowledge on newtechnologies and systems, and will be delivered by local and foreign experts.
5. Finance. The emphasis here will be on proviing basic traning in finance and planning,which is one of the gaps in DHOPCO's current staff profile. The topics to be covered include internalauditig and control, financial planning, billing procedures and taxaion. These courses woultd be bestprovided in-house or within the country (as, for example, through the Korean account and auditingprofession). Courses in project evaluation, and financial analysis would be called for to enable DHOPCO toposition itself for undertking further pipeline expansions or reated investments.
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Amx 11-Page 2 of 2
6. mu m. In this area, dhe emphasis wil be on saegic planming. Rather than a fomalcourse, a setior magement workshop, conducted by experieed management trainers, would be desirable.Related topics for senior management traing nclude poel management and MIS (see Annex 10).
7. The actual topics and modalities will be detened based on DHOPCO's pipeline operatingexperiemne, and the gaps in knowledge that it is able to identify. An asessment of such training needs wlform an integral part of Bak supervision efforts, particularly in the initial year of operation. In all areas,one of the key objectives will be to develop training materials in Korean, to ensure their wide disseminaon.The cost of the short-tenn training is es d at US$580,000.
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Annex 12
Pagp 1 of 3
KOREA
PETROLEUM DWSRIBUTION AND SECTOR MANAGEENTIMPROVEMENT PROJECT
PEI ROLEUM DISTRIBUTION AND SECTOR MANAGEMENT IMPROVEMENT PROJECT
Assumptions for DHOPCO's Fi c Prjectioons
income Stateme
1. Revenues are calcuated for the oil tawsport volume and the oil storage volume. The transportdistace and projctons of the quantities tansported and stored are based on a study entited 'OptimalPieli Tariff Detmination" undertaken by the Korea Energy Economics Institute for DHOPCO. Thedemand for pipeline usage is projected based on energy demand in the country, the refines' optmationof the differe transportation modes available, and DHOPCO's expected long-run marginal cost(approximated by the average inremeal cost). The tranwort and storage tariffs would be proposed byDHOPCO based on the price of competing camers, DHOPCO profitability targets, and the tariffs applied bythe other oil pipeline operator in the country; the final tariff decision would be taken ty MOER. DHOPCOcould instigate tariff adjustmens as and when required, but tariffs would usually be adjusted annually. Forthe purposes of the projections, tariffs are assumed to increase at Bank's projected rate of inflaon for Korea(6% for 1993, 5.5% for 1994 and 5% for 1995 and beyond).
2. Mg_tri costs are calculated based on the volumes pumped as well as other electricityconumption. Electricity taiffs are assumed to increase at the rate of inflation.
3. ILbag costs are calculated for operations staff and technicians, and are based on DHOPCO'sforecast of employment. The basic amnual cost for operations staff is W12 million, and that for techniciansis W9 million per person. The weighted average staff cost is W9.75 million per person (1992 pnces).These costs are assumed to increase at the annual inflation rate.
4. gmaLo ad M an include: m n , which is taken to be 1% of net constctioncosts per anmum for the terminals and pumpstations, and 0.5% of net construction costs per annum for thepipeline, adjusted for annual inflation; insn,ce which is esfimated at 1% of net construction costs perannum, and is adjusted for annual inflation; wadinit service, which consists of guards and supervisingforeman at the teminals and pumpstaions on a 24-hourbasis. 3 foremen and 31x3 guard shifts are requiredfor the termins, while 9 foremen and 9x3 guard shifts are required for the pumpstations, at an averageannual salary of W5.7 million (1992 prices); and gfhgT costs, which are those associated with miscellaneousconmables and supplies and are estimated by DHOPCO at 0.5% of net construction costs, adjusted foramnual inflation.
S. G a Admin* includes salary as well as health and other social costs for headquartersand terminallpumpstation personnel. The average salary per staff at beadquarters is W16 million, and at theteminas and pumpstations is W19 million (1992 prices). Health and social costs are calculated at 40% ofthe totl salary.
6. is taken over a 20-year period on the value of gross fixed assets and applies toeuipmt, terminals and pipeline installations. A 10% salvage value is assumed for equipment.
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Annex 13Page 8 of 9
7. I is calculated based on acual and anticipated loan terms. See Debt Schedule (ProjecdFinanciai Statements, Section IV).
8. Income, Ta are calculated at 36.55% of income before taxes. Note that a loss in any givenyear can be offset against profits for three subsequent years.
Balaee Sheet
9. Cash is derived from te Sources and Uses of Funds Statement (Secdon I of the ProjectedFinanial Statements).
10. Accounts Receivable are equivalent to one mont's sales revenue, reflecting a 30-day billingcycle.
I1. Inventories and Stocks are related to assets in operation and are taken to be 0.4% of net fixedassets. Oil inventories are nil, given that DHOPCO trsports the product without actually taking possessionOf it.
12. Other Current Assets are advance payments, prepaid expenses and refundable value-added tax,taken to be 0.25% of sales.
13. Gross Fixed Assets are derived from DHOPCO's investment program. From 1996 onwards(once the invesuent program is implemented), assets are iated at the projected inflation rate of 5% perannum. This real asset revaluation is reflected in the revaluation reserve.
:4. Work nm rojz is transferred to Gross Fixed Assets on completion of each projectcomponent. Th project is assumed to remain under work in progress through 1994, when the pipelineconsuction is expected to be completed.
15. Oter Aswu include sundry items such as leasehold deposits, telephone and telex rights,guarnee deposits on leases, and long-term loans to employees.
16. Accnts concern udlity bils, which are taken to be paid in the month followingreceit.
17. Other Current Liabilities include accrued expenses and income taxes as well as wifthokungs.
18. a-m Debt is derived from the Debt Schede.
19. Other Liablits are assumed to remain constant in real terms from their 1992 levels.
20. Adjustent for Asset Revaluation was undertaken to obtain consistcy between project costsfrom an engineering and tenical point of view relative to the book value of assets in 1992. Thisadutment was required for the purposes of the projections on acowut of the exchange rate used in valuingasset acquired up to 1992.
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Annex 13Page 9 of 9
21. Reained Eais are derived from the projected Income Statement. No dividends areexpected to be distributed during the forecast period.
22. Revaluation Reserve represents changes in asset value based on projected inflation (see para.13).
Sources and Uses of Funds
23. Principal Reavments on existing and proposed loans are based on the actual and anticipatedterms of these loans. The IBRD loan has a maturity of 15 years, including a grace period of five years.The Petroleum Business Fund and Treasury loans have a maturity of 15 years, including a five year graceperiod. The Koren Exchange Bank and other commercial loans have a matrity of 10 years, including atree year grace period. The Korean Development Bank Industry Facility Fund loan has a matunty of 25years, with a five year grace period.
24. Investm Proram expenditures are projected to be funded in accordance with DHOPCO'sfumd-raising progam. Note that no furdier investment beyond the nationwide pipeLine is presenly planned.
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KOREA
PETROLEUM DISIBUTION AND SECTOR MANAGEMENT IMPROVEMENT PROJECT
Ecoic Analysis and Underlying Assumptions
1. The basis for economic analysis of the project is the forct of demand for light petroleumproducts (gasoline, jet fuel, kerosene, and diesel oil) for 1993-2013. As discussed in chapter II, the forecastis based on a model prepared by KEEI, taking into account key economic indicators and sectoral growthparameters The Bank has reviewed the model and the basis for KEEI's forecast, and is satisfied withKEEI's assumptions and approach.
2. The project's economic benefits are derived from cost savings associated with ansportinpetroleum products via the proposed pipeline versus existng modes. Cost analyses were conducted on "withpiine" and "without pipeline" scenarios. "Without pipeline" costs were calculated considering total costconnected with expanding the existng system (vessels, rail, road and small pipeline network) in order totransport the forecasted demand of light products which will be transported by the proposed pipeline. It wasassumed that the present share of transport modes would ramain unchanged through the forecast period.Since the transport cosu by vessels, rails and trucks are based on unit costs expressed as "charterage","tariff" and "rate' per barrel per kilometer, they include the capital investment costs associated with eachmode. With respect to costs for the pipeline under this scenario, it was assumed that the existing pipelinewould accommodate its inreased share of transport without additional capital investment, and that it willhave the same operaing costs as the new pipeline. Thus, the costs of four transport modes were used tocalculate the total costs under "without pipeline " scenario, had the existing system been expanded to meetthe projected demand, which is now planned to be tansported by the proposed pipeline.
3. The costs of the "with pipeline" scenario include project investment and operating costs withthe fornmer including physical contingencies but excluding price contingencies. The pipeline operating costsinclude the cost of electricity, labor, mantance, insurance, and general administration cost. The pipelineoperating costs correspond to those currendy being incurred by DHOPCO, in operation of its existingpipeline facilities in Kyungin section. Under both scenarios, internal costs such as taxes and duties havebeen excluded. With respect to an alternative use of the land required by the pipeline, it is aumed theprice paid for it reflects its economic value. These cost savings are estimated for both segments of thepipeline (Kyungin and North-South).
4. The economic rate of return calculated on this basis is about 14.50%. The sensitivity of thisrate of return was tested with respect to changes in ey assumptions. Table 6.1 of the text shows the resultsof the sensitivity analysis.
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Annex 14Page 2 of 10
KOREA
PETROLEUM DISIBUTION AND SECTORMANAGEMENT IMPROVEMENT PROJECT
Table 1: Projected Traousport Volume of Light Oil Products
by by byYean Total VoluMs Castal Vessns RaI Road Taukos Road Trucks
*Cetpoadn on * * * RSMCd~w~aUkwftft covomean comm4f~~~~~~~todn£ rwai
COW~~ ~ ~ ,mw
I 1- I I~~ Lepased IinliVm eeni&shh unaI~ fi
Ev_f ad elp 1,1tOB" ftdm P48atD*oo KCd & Iro _ n Camilli^ *, P PeemaIowco4P8 ed 1& del _ b1 tiz@@ oteswwes ca*almhd b l& dUIB &pdphtr * psrmsehuddLNG b_g& *& mis*d S"_and qds s p b dq_tb e&bsb
