Document of The World Bank FOR OFICAL USE ONLY Report No. 13694 PERFORMANCE AUDIT REPORT CHINA DAQING OILFIELD-GAOTAIZI RESERVOIR DEVELOPMENT PROJECT (LOAN 2231-CHA) ZHONGYUAN-WENLIU PETROLEUMPROJECT (LOAN 2252-CHA) AND KARAMAY PETROLEUM PROJECT (LOAN 2426-CHA) NOVEMBER 14, 1994 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of
The World Bank
FOR OFICAL USE ONLY
Report No. 13694
PERFORMANCE AUDIT REPORT
CHINA
DAQING OILFIELD-GAOTAIZI RESERVOIR DEVELOPMENT PROJECT(LOAN 2231-CHA)
ZHONGYUAN-WENLIU PETROLEUM PROJECT(LOAN 2252-CHA)
AND
KARAMAY PETROLEUM PROJECT(LOAN 2426-CHA)
NOVEMBER 14, 1994
Operations Evaluation Department
This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
CURRENCY EQUIVALENTS(annual averages)
Currencv UJnit = Yuan (Y)US$1.00 = Y5.8
ABBREVIATIONS AND ACRONYMS
CNOOC - China National Offshore Oil CorporationCNPC - China National Petroleum CorporationCNTIC - China National Technical Import CorporationDPAB - Daqing Petroleum Administration BureauERR - Economic Rate of ReturnKOC - Karamay Oil CompanyGOC - Government of ChinaMIS - The Management Information SystemMOPI - The Ministry of Petroleum IndustriesOECD - Organization for Economic Cooperation and DevelopmentPCR - The Project Completion ReportSPCMI - State Planning Commission Machiniery and Inspectioni WingTOR - Terms of ReferenceZPEB - Zhongyuan Petroleum Exploration Bureau
FISCAL YEAR
January 1, - December 31
FOR OFFICIAL USE ONLY
THE WORLD BANKWashington, D.C. 20433
U.S.A.
Office of Director-GeneralOperations Evaluation
November 14, 1994
MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT
SUBJECT: Performance Audit Report on ChinaDaqing Oilfield-Gaotaizi Reservoir Development Project
Attached is the Performance Audit Report on China - Daqing Oilfield-Gaotaizi ReservoirDevelopment Project (Loan 2231-CHA), Zhongyuan-Wenliu Petroleum Project (Loan 2252-CHA) andKaramay Petroleum Project (Loan 2426-CHA) prepared by the Operations Evaluation Department.
The objectives of these projects were to enhance exploration success and petroleumproduction levels, through the introduction of modern oilfield technology and through training in the useof these advanced technologies.
Although there were significant delays in implementation, due primarily to the complexinstitutional arrangements required for foreign procurement in China at that time, the projects all mettheir major objectives. In particular, sophisticated technologies were effectively transferred. Bothproduction levels and reserves increased substantially under all projects. Safety practices studies, drillingand completion studies and modern technical training facilities for oilfield workers and technicians werealso introduced.
The outcome of all three projects is rated as highly satisfactory, their sustainability aslikely, and their institutional impact as substantial.
This document has a restricted distribution and may be used by recipients onLy in the performance ofI their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
FOR OFFICIAL USE ONLY
PERFORMANCE AUDIT REPORT
CHINA
DAQING OILFIELD-GAOTAIZI RESERVOIR DEVELOPMENT PROJECT(LOAN 2231-CHA)
ZHONGYUAN-WENLIU PETROLEUM PROJECT(LOAN 2252-CHA)
ANDKARAMAY PETROLEUM PROJECT
(LOAN 2426-CHA)
TABLE OF CONTENTS
Page No.
PREFACE ................................................. iBASIC DATA SHEETS .iiEVALUATION SUMMARY .xi
The Daqing Project .xiThe Zhongyuan Project .xiiThe Karamay Project .xiiiCommon Findings and Lessons .xvConclusions .xviii
DAQING OILFIELD-GAOTAIZI RESERVOIR DEVELOPMENT PROJECT I
1. BACKGROUND .I
2. PROJECT OBJECTIVES . 2
3. PROJECT IMPLEMENTATION AND RESULTS. 2
Exploration. 3The Prototype Production Station. 3Studies. 3Training .5
This report was prepared by Richard L. Bemey, Principal Evaluation Officer, with inputs fromFernando Zuniga-Rivero, Petroleum Engineering Consultant and secretarial services by LomaSibblies.
This document has a esicted distribution and may be used by recipients only in the peormanc of therofficial duties. Its contents may not otherwise be disclosed without World Bank authrzton.
Delays in Project Implementation . ............................. 5The Prototype Petroleum Production Station ...................... 6Choice of Technology ...................................... 6
5. PROJECT OUTCOME AND SUSTAINABILUTY. .................. 8
Findings and Lessons Learned from PCR ......................... 11Delay in Project Implementation ............................... 11The Reservoir Study ........................................ 14The Management Information System (MIS) Study .................. 16
5. PROJECT OUTCOME AND SUSTAINABILITY . .................. 16
Findings and Lessons of PCR Report ............................ 20Procurement ............................................. 21The Shift to Heavy Oil Development ............................ 21Training ................................................ 22Technical Studies .................... . ...................... 23Lessons Learned from Implementation of Studies ................... 24
5. PROJECT OUTCOME AND SUSTAINABELITY . .................. 25
CONCLUSIONS FOR ALL THREE DEVELOPMENT PROJECTS. ...... 26
Bank Lending for Oil Development in China ...................... 27
Annex 1: Comments from China National Petroleum Corporation .... ........ 28
PERFORMANCE AUDIT REPORT
CHINA
DAQING OILFIELD-GAOTAIZI RESERVOIR DEVELOPMENT PROJECT(LOAN 2231-CHA)
ZHONGYUAN-WENLIU PETROLEUM PROJECT(LOAN 2252-CHA)
ANDKARAMAY PETROLEUM PROJECT
(LOAN 2426-CHA)
PREFACE
This is a Performance Audit Report (PAR) for the Daqing Oilfield-Gaotaizi ReservoirDevelopment Project involving a Bank Loan of US$162.4 million, US$161.9 of which was disbursed;the Zhongyuan-Wenliu Petroleum Project, involving a loan of US$100.8 million, US$96.8 of which wasdisbursed; and the Karamay Petroleum Project, involving a loan of US$100.3 million, US$89.5 of whichwas disbursed. The main objective of the three projects was to transfer modem oilfield technology toChina and to increase petroleum production at the three fields. Project Completion Reports were issuedon May 21, 1991, December 10, 1992, and June 29, 1992, respectively.
The PAR was written in the Operations Evaluation Department (OED). To prepare it, OEDreviewed the Presidents' Reports, Staff Appraisal Reports, legal documents, transcript of the BoardProceedings, Bank files, and held discussions with Bank staff associated with the project. An OEDmission visited China in October 1993, where it held discussions with Govemment officials, officialsof the China National Petroleum Company (CNPC), China National Offshore Oil Corporation(CNOOC), and the management of the Daqing Petroleum Administration Bureau (DPAB), ZhongyuanPetroleum Exploration Bureau (ZPEB), and the Karamay Oil Company (KOC). The effective andpleasant cooperation and assistance of these Chinese authorities, and particularly of CNPC, is gratefullyacknowledged.
The PCRs, which were of acceptable quality, concluded that the implementation of all threeprojects was successful and that the results were all satisfactory. This audit report supplements thePCRs. It makes recommendations on ways that similar projects could be implemented with less delaysin the future, and highlights the practices used for the successful transfer of technology and recommendsthat these practices be used in similar circumstances elsewhere.
Following standard OED procedures, this draft PAR was sent to the Borrower for comment.Comments received are attached as an annex to the PAR.
i.
PERFORMANCE AUDIT REPORT
CHINADAQING OILF[EDI-GAOTAIZI RESERVOIR DEVELOPMENT PROJECT
(LOAN 2231-CHA)
BASIC DATA SHEET
KEY PROJECT DATA
Apraisal Expectation Actual
Total Project Cost (US$ million) 674.3 332.0Loan Amount (US$ million) 162.4 161.9Economic Rate of Return 91 %
*As the net cash flow was positive from the first year of project implementation, the ERR (on an annualizedbasis) was an infinite rate of return. See p. 19 of PCR.
CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS(USS million)
* Procurement supervision in combination with other projects./A: E: Economist L: 1: No significant problem
PE: Petroleum Engineer 2: Moderate ProblemFA: Financial Analyst 3: Major ProblemPS: Procurement Specialist 4: Major problem not adequately addressedG: Geologist
heavy oil Actual: 3/31/91recovery, TAand training.
Weiyuan Gas Field Gas field 1985 Satisfactory Completion date:Technical Assistance rehabilitation Original: 6/30/90Project (Ln: 2580-CHA) TA and training. Actual: 6/30/92
Liaodong Bay Petroleum Gas field 1986 Completed Completion date:Project (Ln: 2708-CHA) appraisal, TA Satisfactorily Original 12/31/89
and training Actual: 12131/89
Sichuan Gas Development Support of 1994 Completion date:and Conservation Project sector restruc- Original: 2001.(Ln: 3716-CHA) turing, pricing, Loan approved: 3/94
Original ActualIdentification Mission 9/81Preappraisal Mission 9/82Loan Negotiations 2/83Board Approval 3/29/83Loan Signature 4/15/83Loan Effectiveness 8/9/83Closing Date 12/31/86 12/31/90Date of Final Disbursement 5/3/91
vi
STAFF INPUTS(Staff Weeks)
ActualThrough Appraisal 116.5Appraisal Through Board Approval 16.9Supervision 183.1
Total 317.5
MISSION DATA
Stage of Date Number of SW in Specialties PerformanceProiect (mo/vr) persons field reRresented /a Status /b
Through Appraisal 09/81 5 20 PE, PS, FA, G, EIdentificationAppraisal 02/82 6 24 PE, G, FA, E, two C
Appraisal throughBoard Approval 05/82 3 9 E, FA, PE
Post Approval 09/83 3 9 E, FA, PESupervision
1 09/83 2 5 PA, PE 12 03/84 4 24 G, GP, FA, PE 23 09/84 3 6 G, FA, PE 24 05/85 4 8 G, FA, PE, PS 25 12/85 3 6 G, FA, PE 26 09/86 3 10 G, GP, PE 27 02/87 3 3 G, PS, PE 28 10/87 3 6 PS, FA, PE 29 03/89 3 3 PS, PE, G 210 05/91 4 3 PS, PE, FA, C
/a: PE: Petroleum Engineer /bL 1: No significant problemG: Geologist 2: Moderate ProblemC: consultants 3: Major ProblemGP: Geophysicist 4: Major problem not adequately addressedPS: Procurement SpecialistFA: Financial Analyst
vii
RELATED BANK PROJECTS
Year of Sau CommentsPu=pse A=royal
Daqing Oilfield-Gaotaizi Reservoir 1983 Satisfactory Completion date:Resorvoir Development Development Original:6/30/86Project (La: 2231-CHA) TA and trining. Actual: 6/30/90
Weiyuan Gas Field Gas field 1985 Satisfactory Completion date:Technical Assistance rehabilitation Original: 6/30/90Project (La: 2580-CHA) TA and training. Actual: 6/30/92
Libaong Bay Petroleum Gas field 1986 Completed Completion date:Prject (La: 2708-CHA) appraisal, TA Satisfactorily Original: 12131/89
and training. Acual: 12131/89
Sickxun Gas Developmet Support of 1994 Completion dae:n Conevation Projct sector restruc- Original: 2001.
Original ActualIdentification Mission 5/2/83Appraisal Mission 9/15/83Negotiations 4/16/84Board Approval 5/29/84Loan Signature 6/25/84Loan Effectiveness 9/25/84Closing Date 3/31/89 3/31/91Date of Final Disbursement 7/25/91
ix
STAFF NPITTS(Staff Weeks)
Through Appraisal 43Through Board Approval 64Supervision 154
Total 261
MISSION DATA
Stage of Date Number of SW in SpecialtiesProject (mo/yr) persons field reRresentedThrough Appraisal
Identification 5/83 7 4 E, PE, G, FAAppraisal 9/83 6 3 PE, G, FA
* Procurement supervision in combination with other projects, but only SW which were spent for supervisionof Karamay Petroleum Project have been counted.
Daqing Oilfield-Gaotaizi Reservoir 1983 Satisfactorv Completion date:Reservoir Development Development. Original: 6/30/86Project (Ln: 2231-CHA) TA and training. Actual: 6/30/90
Weiyuan Gas Field Gas field 1985 Satisfactory Completion date:Technical Assistance rehabilitation Original: 6/30/90Project (Ln: 2580-CHA) TA and training. Actual: 6/30/92
Liaodong Bay Petroleum Gas field 1986 Completed Completion date:Project (Ln: 2708-CHA) appraisal, TA Satisfactorily Original: 12/31/89
and training. Actual: 12/31/89
Sichuan Gas Development Support of sector 1994 Completion date:and Conservation Project restructuring, pricing Original: 2001.(Ln: 3716-CHA) rationalization, Loan approved
increasing gas 3/94production andconservation.
xi
PERFORMANCE AUDIT REPORT
CHINA
DAQING OILFIELD-GAOTAIZI RESERVOIR DEVELOPMENT PROJECT(LOAN 2231-CHA)
ZHONGYUAN-WENLIU PETROLEUM PROJECT(LOAN 2252-CHA)
ANDKARAMAY PETROLEUM PROJECT
(LOAN 2426-CHA)
EVALUATION SUMMARY
INTRODUCTION
1. China's petroleum production increased off-setting the anticipated decline in domesticfrom 10 million tons per year in 1960 to nearly oil production; second, to provide a vehicle for110 million tons in 1980, but declined during the introduction of modem technology through1981-1982. There had been no new major the financing of modem equipment and thediscoveries in the 1970's and there was little technical assistance in optimum utilization oflikelihood that future large discoveries could this equipment; and third, to upgrade theaugment production during the 1980s. Offshore operating, technical, and managerial skills ofexploration, with its high risks and specialized China's oil industry personnel. Three regionsrequirements, had been contracted out to were identified as being of prime importance tomultinational oil companies. The Ministry of MOPI: Daqing, Zhongyuan and Karamay. OverPetroleum Industries (MOPI) came to the the three-year period, 1981-1984, the Bankconclusion that in the short and medium term, identified, and subsequently financed, a projectincreased output would have to be achieved in each of these areas.primarily through expanded production in andaround existing oilfields, and this could only be THE DAQING PROJECTaccomplished through the introduction ofmodem production and exploration technology. 3. The Daqing Oilfield project was theIt was within this framework that the first Bank operation in the petroleum sector inGovernment of China (GOC) approached the China. Daqing was the largest petroleum fieldBank for assistance in rehabilitating and in China, where a successful rehabilitationmodernizing China's petroleum sector. program would have an important impact on
China's aggregate petroleum output.2. The Bank's petroleum sector lending inChina had three basic objectives: First, to 4. The broad objectives of the Daqingimprove the development of the known Oilfield Project were: (i) to increase oilhydrocarbon-bearing structures, thereby partially production through the introduction of modem
xii
equipment and technology; (ii) to establish a the oilfield region for skilled workers and fortraining center for skilled workers and another engineers. The program has been extremelyfor engineers and technical staff; (iii) to successful, with more than 10,000 engineersincrease reserves through the support of an and skilled workers already having completedexploration program using modem seismic data various three-month to one-year courses.gathering and processing equipment.
Outcome and SustainabilityImplementation and Results
9. The Audit finds that the Daqing project5. The project was executed by the outcome was highly satisfactory, as all its majorDaqing Petroleum Administration Bureau objectives were met. Its institutional(DPAB). Implementation started slowly, but development impact was substantial. Thecompletion of most of the physical components transfer of technology that took place during thewas delayed by only one year. Studies project, appears to be fully sustainable. Theencountered delays from two to seven years, Audit is in full agreement with the PCR that theand training over four years. potential economic benefits from continuing the
field development of the Gaotaizi reservoir is6. The project was highly successful in sustainable. Output from the field is expectedintroducing modem production and exploration to be greatly increased as a result of thetechnology, and resulted in substantially enormously positive results of the Enhanced Oilincreased oil production and oil reserves. Both Recovery Study. All covenants were compliedmodem equipment and technology assistance with.were important in this process. As a result ofthe recommendations made in the reservoir THE ZHONGYUAN PROJECTengineering, well drilling and well completionstudies implemented under the project, 10. The Zhongyuan project was the secondcumulative production in 1989 was 40% higher Bank project in support of the Modernization ofthan appraisal estimates. Improved exploration the Chinese petroleum sector. Modemtechniques resulted in an increase in proven technology was critical in the Zhongyuanreserves. The expanded size of the oilfield oilfields because the reservoirs were quite deep,resulted in a 50% increase in proven reserves with high pressure gas zones, which madeand a greatly expanded development program. drilling very difficult. Its geology was quiteDPAB also extended its exploration efforts into complex, and the primitive seismic equipmentareas where its old equipment could not have being used made the identification of optimumbeen used, and increased its ratio of successful drilling locations problematic.wells from 32% to 48%.
11. The broad project objectives of the7. Five studies related to the transfer of Zhongyuan project were: (i) to increase oil andoilfield technology were implemented under the gas production and reserves in the project area;project. The Reservoir Engineering Study, (ii) to enhance operational efficiency andDrilling and Completion Practices Study and strengthen ZPEB's institutional capabilities; andSafety Study formed the core of the program (iii) to extract LPG from the associated naturalfor transfer of technology outside the gas which was being flared.technology embodied in equipment purchases.
Implementation and Results8. A large part of the training wasaccomplished through the creation, for the first 12. The project met with substantial delaystime, of formal technical training centers within in all components, with the exception of the
xi,ii
drilling of explorati'on wells. In spite of the it in Chinese characters was not available atdelays, all the major project objectives were that t-ime.successfully achieved: ZPEB was able toimplement the full development of the South 17. The Reservoir Study of the SouthWenliu oilfield; one hundred and twenty million Wenliu oilfield was to establish an optimizedtons of additional proven reserves were long-term field development plan. ZPEBconfirmed in the East Wenliu structure and are continually requested further work from thenow under development; and the gas processing consultant, and the study never did come toplant for the recovery and treatment of LPG closure. Nevertheless, ZPEB reported that theproducts from the associated natural gas was process of sending their technical staff to theinstalled and is fully functional. consultant's headquarters to assist in
implementing technical studies proved to be an13. Action was taken on environmental effective method for technology transfer. Theproblems that were identified. During an early experience gained has enabled ZPEB to designsupervision mission, Bank staff noted that its own reservoir model with independentlycorrosion from untreated water had caused purchased software.serious production and environmental problems.T'he Bank recommended, and ZPEB agreed, to Outcome and Sustainabilityamend the scope of the project to include thedesign and construction of a water treating 18. Despite the long delays, the projectfac ilIity. In addition, the study's outcome was highly satisfactory, in meeting itsrecommendations for upgrading water handling major goal to transfer exploration andtechniques have been disseminated to, and production technology to ZPEB, and assistapplied in, oilfields throughout the country. ZPEB increase its oil and gas production. It
had an important environmental impact. It14. Four consultancy-assisted studies enabled ZPEB to stop the wasteful flaring ofintroduced modem oilfield practices and natural gas, and it found solutions duringtechnology. The Safety Practices Study implementation for eliminating environmentallyrecommended actions needed to bring the field unsound water processing practices. Itsoperations safety practices in line with Western successes in improving ZPEB operatingsafety standard. These recommendations were capacity are likely to be sustainable. It wasimplemented. less successful in helping ZPEB to improve its
institutional management capabilities. Its15. The Drilling And Well Completion institutional development impact was thereforePractices Study and demonstration program judged negligible. All covenants wereanalyzed problems that had been encountered in complied with.the past and proposed ways to overcome them.These recommendations were also acted upon, THE KARAMAY PROJECTwith excellent results in ter-ms of faster, moreefficient drilling and greatly improved 19. The Karamay Project, in Xinjiangcompletion rates. Province, was the third and last Bank project to
focus on increasing oil production. As in the16. The Management Information System preceding two projects, the project objectiveStudy, which was to assist with the introduction was the provision of technical assistance toof modern oilfield management techniques, enhance the region's long-term productivity.including modem cost accounting was canceled, Karamay's major problem was that it hadprimarily because the technology to implement massive reserves of heavy oil that it had not
been able to develop with its existing
xlv
technology. The project was therefore tailored studies and with contractor on the use of newto the requirements for developing and equipment. Both proved to be quite effective.enhancing its heavy oil recovery program, in However, the overseas technical trainingaddition to updating light oil exploration and program for engineers and managers was ableproduction technology. The project also to train only one quarter of people expected.included a Gas Utilization Study for gas that Inadequate early attention to development ofhad been recently discovered offshore in language skills was a major contributifg factor.Southern China and an EOR study for heavy oilfrom the Liaohe oilfield in Liaoning Province. 25. Studies: The geological and reservoir
studies were successfully implemented,Implementation and Results although with many delays, with the assistance
of foreign consultants. The costing study was20. Procurement started slowly, with successfully implemented by a group of localproblems of coordination among the three consultants from other oil enterprises. The Gasconcered entities, KOC, CNTIC and MOPI. Utilization study was implemented by CNOOC,
the executing agency for this project21. Light Oil: The exploration program for component. It was only partially successful, inlight oil was less successful than expected that it did not fully analyze issues related toduring appraisal. The resultant increase in optimum utilization of the gas.production of light oil was about half thatexpected at appraisal. Project Restructuring
22. Heavy Oil at Karamai : Support for the 26. The Bank worked closely with KOC inheavy oil program was greatly expanded. restructuring the project to take advantage ofInstead of supporting experimental pilots, the new opportunities in the rapidly changingproject was restructured to support a program conditions in the oilfield. Funds were shiftedfor full development of KOC's heavy oil from the light oil project component to supportresources, including the drilling of over 1100 a greatly expanded program to drill delineationwells. The development program has been and development wells - an increase from thehighly successful. Production, which was original 160 to a final 1,126 - and aoriginally projected to remain at below 50,000 concomitant growth in surface facilities,tons per ylear, rose to 1.4 million tons in 1990 particularly steam generators. It was anand is expected to increase to more than 2.7 extremely successful endeavor; however, themillion tons per year by 2000. project resulted in a significant change in the
project scope, and the changes were made2 3. HeavY Oil at Liaohe: The studies for without formnal agreement by Bank Managementthe Liaohie heavy' oil pilot development program or the Board.showNed that while the program was feasible, thedevelopment would not be economically viable Outcome and Sustainabilityfor Liaohe heavy' oil unless the internationalprice wxas over $30 per barrel. The large scale 27. The Audit finds that the outcome of thepilot wvas abandoned. Karamay project was highly satisfactory, as it
met its objectives of introducing modem oilfield24. Training: A training center for oilfield technology, including management, financialworkers was built after some delay. The center costing and control, and of assisting KOC tois operating effectively. The other major increase its oil production levels. Institutionalsource of training in the use of new technology development, particularly that related towas on-the-job training with consultants on financial management and controls also appears
xv
to have been significant. The benefits are likely 3 1. Internal Procedures: The Chineseto be sustainable in the future. All covenants internal procurement approval process requiredwere complied with. coordination of approvals by five separate
Chinese agencies. Even after the Bank raisedCOMMON FINDINGS AND LESSONS the issue, it was unable to convince the GOC to
make the changes needed to establish effectiveDelays in Project Implementation inter-agency working groups to facilitate the
process, although commitments to do so were28. Delays of up to two years were made numerous times.encountered in the procurement of goods andservices for all three project. There were, of 32. Lesson: The Bank should have insistedcourse, many causes for these delays, including: that these problems be resolved as a condition(i) the Borrower's inexperience in working with of moving forward with the Karamay project.Bank procurement procedures; (ii) cumbersome Both the Bank and the GOC have learned frominternal clearance procedures, combined with a their experiences with these projects. In thefragmentation of responsibilities among various recent Sichuan Gas Project, the Government hasGovernment agencies; and (iii) protracted organized a Coordination Committee to ensurecontract negotiations after the contractor had that procurement processing remains on track.been selected, particularly on revised terms ofreference for the studies and related revised fee 33. Protracted Negotiations: Substantialstructures, but also for some specialized delays also took place after the winningequipment. There are, however, actions that the contractor had been decided. Negotiations onBank can take to lesson the impact of these the final terms and conditions of contracts oftencauses of delay. took up to 10 months, an exceptionally long
time by Bank standards. For consultant studies,29. Inexperience: The Bank had some negotiations took up to 18 months.anticipated the need for a new Borrower tolearn Bank procedures and established a 34. Recommendation. The Bank shouldprocurement training program early in the consider intervening in contract negotiationsproject cycle. This training program was when they extend beyond what would appear toestablished many years later, after the problems be normal and appropriate, and the work to bebecame pervasive in all Bank lending done is on the critical path, or when a patternoperations. of extended negotiations begins to develop. In
such cases the Bank could request a30. Recommendation: Training programs participatory role as a neutral facilitator, to keepfor Bank procurement and loan disbursement the negotiations in line with the scope of thepractices should be part of any project with a original bidding documents. Such interventionnew borrower or new executing agency, could be particularly important when the resultsparticularly important when the country itself of the consultant study are considered criticalhas only recently joined the Bank Group, and is for proper implementation of other projectstill unfamiliar with international bidding and elements.Bank procedures. Where inter-agencycoordination is necessary, a procurement Choice of Technologyseminar should be given exclusively for all thestaff who will have to Nvork together on the new 35. All three projects purchased drillingproject. In this way the seminar could initiate simulators for their training institutions.the process of teamwork that is needed for Technology was changing rapidly in the area.efficient project implementation. The winning bidder in the Daqing and Karamay
xvi
projects committed himself to technology implementation. These delays were caused byupgrades that were not yet in production. The differences in opinion about what the terms ofequipment arrived without the computer reference required and changes in the studyhardware and software needed operate it. scope during the course of implementation.Before the problem could be resolved, the Bank staff should have carefully monitoredcontractor went bankrupt. No replacement changes in study scope and should have workedequipment has been bought, and, as a result, all with both parties to ensure that unrealisticthree centers have been unable to provide this expectations did not push the consultant toimportant training. promise more than could be delivered. When
Borrowers have had little or no experience in36. Lesson: Bank borrowers should working with foreign consultants, Bankpurchase only proven technology. Bidding technical staff should join interim projectdocuments and equipment specifications should reviews.reflect this requirement before they areapproved. 41. Safety studies are an important part of
the modernization of any oilfield operation,37. Lesson: Borrowers who have had little particularly when the operation has had little orexperience with commercial law, may need no contact with modem western safetyadvice from the Bank on the limitations of legal standards. The direct involvement of oilfieldremedies for resolving commercial disputes, operating staff greatly improved the likelihoodincluding, when appropriate, advice to accept of effectively implementing the studythe loss and start over again, so that the project recommendations.objectives can be met.
42. Cost accounting and studies can beTurnkey Contracts successfully implemented by local groups, if
these groups have access to the techniques used38. The failure of the prototype monitoring in more advanced countries. There are manystation in the Daqing project once again advantages to implementing such studies withdemonstrates that the coordination and quality local groups, the most important of which maycontrol function is probably the most difficult be that it establishes the internal "ownership" ofpart of the construction of any plant. the results which makes dissemination and
adoption much more likely.39. Recommendation: This complexmanagement function should not be performed 43. The Gas Utilization Study wasby a Borrower with only limited experience in intended as a vehicle for improving theworking with foreign suppliers on complex coordination between gas producing and usingprojects. In such cases, turnkey contract should agencies. It did not achieve this goal. Such abe used to ensure the completion of study is unlikely to be successful if only one ofcomplicated facilities that require efficient the concerned agencies is involved in itsinterfacing of many different pieces of execution. If Bank staff are unavailable forequipment, such as the Daqing prototype detailed supervision of studies undertaken bysurface facility. local groups, arrangements should be made to
have an international expert review the study atImplementation of Studies critical junctures, since there may be no internal
critical review process.40. Study Delays: In addition to the delaysin initiating consultant studies, there werefrequent delays and extensions during
xvii
Transfer of Technology. program should include training of managementand business staff, in addition to technical staff,
44. The transfer of advanced oilfield even if these staff are not expected to take other
operating technology and know-how was the foreign courses, since technical stal'l'rarely have
most important achievement of the three time to translate materials when thcy return.
projects. The transfer took place through manychannels, the most important of which were: CONCLUSIONS
i) The training, both in China and abroad, 47. The three projects of this Audit reflect
provided by the suppliers of modern the first stage of the development of Bank
and sophisticated equipment purchased assistance to China's Petroleum Sector. They
under the project. focused primarily on introducing moderntechnology, the training of staff at all levels in
ii) The involvement of the implementing the use of this technology, and utilizing this
agency's staff in working with the technology to improve the productivity and
consultants, both in China and at the safety of oilfield operations and to increase the
consultant's headquarters, on the volume of oil that could be produced from
various consultant studies, particularly these fields. In these endeavors they were
those related to reservoir analysis, highly successful. New technology was
oilfield practices and safety. successfully introduced, training ccnters wereestablished to train staff in all aspects of
iii) Consultant assistance, at the oilfields, modern oilfield operations, productivity was
with the initial implementation of the increased, and a great deal more oil was
recommendations emanating from their produced than would have been possible using
studies, particularly in the areas of the older, outdated technology previously
drilling and oilfield practices and safety available.standards.
48. The results of the technical assistance
iv) The establishment of permanent and staff training must be ranked as the most
training institutions for skilled workers important of achievements of these projects, in
and the training of teachers, both in spite of the delay caused in the actual trainingChina and overseas, in the specialized programs. The capabilities of all three
curricula and teaching methodology operating companies and their contribution
most effective for learning advanced towards the petroleum industry in China have
oilfield techniques and practices. been significantly enhanced by theimplementation of these projects.
45. Recommendation. The Bank shouldconsider replicating in other countries the same 49. The Audits highlight the issues of the
approach to transfer of technology that it has effectiveness of transfer of technology in this
utilized so successfully with the China project because it believes that the techniques
petroleum loans. used here could be and should be replicated inother countries, particularly those with large but
46. Training Abroad. When foreign technically behind the times petroleum
language training is needed for the effective industries. It also highlights the difficulties
transfer of technology, it should be included as encountered when the Bank starts project
a specific project component. It must be lending operations in a new country, and
implemented early, since it is always a time- proposes ways in which these difficulties could
consuming process. This language training be overcome in other countries that have
xviii
limited experience working with foreign with the petroleum authorities. If the Banksuppliers and are unfamiliar with the Bank's intends to continue to be active in the Energyprocurement procedures. sector, it will need a broader understanding of
sector priorities.Sector Review and Policy Dialogue
Bank Lending for Oil Development in China50. The projects were appraised withoutany significant sector review or sector policy 53. The Bank stopped virtually all oil sectordialogue. By sidestepping sector policy issues, work in China after the introduction of OMSthe Bank was able to assist in speeding up the 3.82 in 1984. The next two petroleum projectsrate of technical progress in the petroleum were for technical assistance.sector at a critical juncture in China's petroleumdevelopment efforts. The Audit believes that 54. OMS 3.82 takes the position that Bankthis flexible approach greatly enhanced the loans should not support wildcat explorationBank's effectiveness in making an important efforts. The high risk nature of suchimpact on the sector. undertakings make them unsuitable for the use
of borrowed funds, and international oil51. There were, however, many sector companies have a clear comparative advantageissues where a policy dialogue might have in technology know-how. It also takes ahelped sector performance, such as lack of reasonable position on countries with limitedautonomy at the enterprise level, price controls petroleum activities. However applying theand quantitative target setting instead of same approach to resource development toefficiency oriented profit criteria. In the early countries with a very large, established sector,1980s, China was not ready to make policy with a massive petroleum production needs tochanges in these areas. China is now moving be reconsidered. In these limited number ofrapidly towards a market oriented, decentralized cases, a substantial part of the proven reserveseconomy. The Bank has been working with the should, and will, continue to be developed byGovernment on evaluating alternative ways of national enterprises, since it is unlikely thatrestructuring the petroleum sector to increase these operations can be transferred to foreigncompetition among foreign operating entities, joint ventures on reasonable terms. It makesand to introduce competition. An expanded little sense in these cases to refuse to assist insector policy dialogue is needed, particularly in the transfer of modern technology to thesethe areas of pricing and investment priorities. national operators.
52. The Bank has done little in the way ofbasic sector work. The original choice ofprojects was left to the Chinese authorities(MOPI), both with no independent effort madeto prioritize the sector's investment program.Given the time constraints, the size of thecountry, and the significance of the first threeprojects, this approach was a reasonable way toinitiate a sector lending program. A sectorpolicy review was implemented in 1990, but itlooked mostly at the institutional issues. Therehas yet to be a review of the country's majoroil and gas operations. The Bank is, therefore,unable to discuss sector investment priorities
PERFORMANCE AUDIT REPORT
CHINA
DAQING OILFIELD-GAOTAIZI RESERVOIR DEVELOPMENT PROJECT(LOAN 2231-CHA)
1. BACKGROUND
1.1 China's petroleum production increased from 10 million tons per year in 1960 to nearly 110million tons in 1980, but declined during 1981-1982. There had been no new major discoveries in the1970's and there was little likelihood that future large discoveries could augment production during the1980s. Offshore exploration, with its high risks and specialized requirements, had been contracted outto multinational oil companies. The Ministry of Petroleum Industries (MOPI) came to the conclusionthat China was unlikely to increase petroleum production, or even maintain it at its current level, as longas the industry continued to use outdated technology. In the short and medium term, increased outputwould have to be achieved primarily through expanded production in and around existing oilfields, andthis could only be accomplished through the introduction of modem production and explorationtechnology. It was within this framework that the Government of China (GOC) approached the Bankfor assistance in rehabilitating and modernizing China's petroleum sector.
1.2 The Bank's petroleum sector lending in China had three basic objectives: first, to improve thedevelopment of the known hydrocarbon-bearing structures, thereby partially off-setting the anticipateddecline in domestic oil production; second, to provide a vehicle for the introduction of moderntechnology through the financing of modem equipment and the technical assistance in optimumutilization of this equipment; and third, to upgrade the operating, technical, and managerial skills ofChina's oil industry personnel.
1.3 The Daqing project was identified by MOPI as among the highest priority projects formodernizing the operations of petroleum industry, primarily because Daqing was the largest petroleumfield in China, where a successful rehabilitation program would have an important impact on China'saggregate petroleum output. The introduction of modern technology would be a critical element in thesuccess of Daqing's long-term operations, because the company's largest oilfield had been fullydeveloped, and in spite of an extensive secondary recovery effort through water flooding, productionwas beginning to decline. Oil was no longer free flowing but had to be pumped, and the limits ofsecondary recovery efforts through water flooding were becoming apparent. Furthermore, oil had beendiscovered in a much deeper horizon, but Daqing lacked the technology needed to efficiently drill andcomplete production wells at this depth.
2
2. PROJECT OBJECTIVES
2.1 The broad objectives of the Daqing Oilfield Project were:
(a) To augment oil production through the development of the Gaotaizi reservoir;
(b) To establish a training center for skilled workers and another for engineers andtechnical staff,
(c) To increase reserves through the support of an exploration program using modemseismic data gathering and processing equipment; and
(d) To implement this program in addition to the imported equipment, DPAB wouldreceive technical services in the form of six studies covering all aspects of oilfieldoperation practices;
2.2 One of the most innovative features of this project - and the following two petroleumdevelopment projects - was the effort made to maximize the impact of the transfer of modemtechnology, which was the central project goal. First, it was agreed that Bank funds would be used onlyfor the import of equipment that embodied modem technology, such as drilling, cementing, anddown-hole testing equipment, and a seismic data processing center, instead of standard oilfield materialssuch as tubing and drill bits. Second, it was agreed that, since the transfer of technology required anextended learning process, all equipment purchase contracts would include a requirement that theequipment supplier provide on-the-job training in the use of the equipment, both in China and in foreigncountries where the equipment was in operation.
2.3 The project was appraised in February 1982, approved by the Board in January 1983, andcompleted in October 1990, four years after originally planned. Project implementation and results wereessentially as described in the PCR, and are summarized in the following section. There were no sectorpolicy conditionalities associated with the loan.
3. PROJECT IMPLEMENTATION AND RESULTS
3.1 The Gaotaizi reservoir was successfully developed. It proved to be substantially larger andmore productive than originally anticipated. On the basis of the exploration data generated duringproject implementation, the estimated areal extent (size) of the oilfield has increased substantially, ashave the reserve estimates. Reserves, which had originally been estimated by the Bank consultants at32 million tons, and by DPAB at 51 million tons, are currently estimated at 76 million tons. Theextended size of the field resulted in an expanded development program with the first phase, coveredunder the project, implemented between 1982 and 1985, and a second phase, which was outside theproject scope, implemented between 1986 and 1989.
3.2 As a result of the recommendations made in the reservoir engineering, well drilling and wellcompletion studies implemented under the project, production has also increased significantly aboveappraisal estimates, both on a per well and a total basis. Average daily production peaked at 26 tons
3
per well in 1985, compared with the appraisal estimates of 19 tons, and total field output peaked at 5.0million tons in 1987 and 1988 compared with the appraisal estimate of 3.8 million. Accumulatedproduction in 1989 was 24.8 million tons, compared with the projected 17.7 million tons.
Exploration
3.3 The introduction of state-of-the-art seismic data acquisition, processing and interpretationequipment and technology and the training associated with its introduction contributed to a markedimprovement in DPAB's success in identifying prospective locations for its exploration drilling program.As a result, the success ratio increased from 32% to 48%, under much more difficult terrain than couldhave been worked on with the older equipment.
The Prototype Production Station
3.4 The facility was completed three years behind schedule, primarily as a result of delays in thecompletion of the consultancy study. The first design was for a facility more expensive than estimatedat appraisal, primarily because the optimal size suggested by DPAB was to handle 100 wells, far largerthan expected at appraisal. The cost for this first design was almost four times the amount allocatedunder the project -- US$22 million versus US$6 million. Since the foreign exchange was not availableunder the project and MOPI was unable to allocate the additional funds required for the prototype, thedesign was changed to a much smaller, 20 well plant. Since this was a prototype plant, the smallerfacility was considered appropriate.
3.5 DPAB engineers leamed how to use up-to-date standards and specifications for the design ofoilfield collection and gathering stations, and are now able to design all their own facilities. However,because some of the contractors delivered faulty equipment, the monitoring aspects of the facility neverworked. As a result, the prototype facility was unable to meet its target of improving the standards formonitoring individual well operating conditions and production levels on a continuous basis.
Studies
3.6 Five studies related to the transfer of oilfield technology were implemented under the project.The Reservoir Engineering Study, Drilling and Completion Practices Study and Safety Study formedthe core of the program for transfer of technology outside the technology embodied in equipmentpurchases. While all the studies were successfully implemented and were highly successful intransferring modem oilfield technology to DPAB, they all suffered from delays ranging from two to sixyears.
3.7 The Reservoir Engineering Study was completed two years late. Its objectives were, first,to design a master plan for development of the Gaotaizi reservoir and, second, to provide training inadvanced methods for designing and implementing reservoir modeling, so that they could continue toplan future reservoir development programs. Some of the study results were of considerable importancefor improving the way DPAB implemented its field development program. The study identified oilbearing sands that had previously been omitted from production plans. Completion of wells in thesesands has been an important element in allowing Daqing to maintain its planned production levels. Thestudy also identified additional reservoirs that had not been previously identified by DPAB, therebyproviding additional suitable locations for drilling new production wells.
4
3.8 The study also proved highly successful as a vehicle for the transfer of technological know-how.DPAB staff engineers were able to use the methodology they had learned to create their own reservoirmodel, using software they had obtained with the purchase of their computer. With this new softwarethey were eventually able to update the development plan for the Gaotaizi reservoir, and to model otherreservoirs in the area.
3.9 However, the study failed to meet the expectations of DPAB, in that it did not establish amasterplan for the development of the Gaotaizi oilfield. By the time the final report was delivered toDPAB, its broad recommendations had already been incorporated into DPAB's thinking, but itsmasterplan was already obsolete. Because the contract had failed to include the purchase of theunderlying modeling software and hardware needed to rerun the model, DPAB was unable to updatethe model results to take into account new drilling and production data that had accumulated since theoriginal field data had been transmitted to the consultant. The report on the model and theaccompanying proposed development masterplan was, therefore, useful only as a historical document.
3.10 Lesson. It is imperative that the operating company should acquire the hardware and softwareneeded to continue to carry out their own reservoir modeling requirements, even if this equipment isincompatible with the modeling equipment used in their training.
3.11 The objective of the Drilling and Completion Study was to identify the ways DPAB couldimprove their oilfield development technology. It was started two years behind schedule and wascompleted almost four years behind schedule. One of the main delays was caused by an inaccuratedescription in the Terms of Reference for the study of DPAB's drilling needs. The problem appearsto have been that the terms of reference were completed by a consultant who had only visited theDaqing oilfield briefly, and had only a limited knowledge of the geological conditions encounteredthere. As a result many changes had to be made, both before and after the bidding took place, to ensurethat the study would be one that would fit more appropriately DPAB's requirements. For instance, oneof the components was an evaluation of water jet injection drilling, which could not be used in Daqing'sgeological conditions, because it would damage the reservoir. Nevertheless, even with the long delays,the final results were impressive. Using the recommendations of the study, DPAB was able to reduceits drilling and well completion time by 30%. Perhaps even more importantly, its deep drillingproblems were satisfactorily resolved, enabling it to drill and complete successfully 122 new deep wells,where the previous five attempts before the study was undertaken had all been abandoned beforecompletion.
3.12 Lesson: Studies designed to evaluate and recommend improvements for oilfield andmanagement practices need to be designed jointly with the executing agency's management. Suchstudies can be implemented far quicker when they are designed in a way that establishes ownershipon the part of the agency to be studied. This process should be accomplished during appraisal, or, atthe latest, before project effectiveness, if they are to be implemented on schedule. If Terms ofReference are being revised during contract negotiations with the successful bidder, close supervisionis also advisable.
3.13 The Safety Study was delayed by four and a half years. Much of the delay was due to thelengthy intemal procedures needed to establish an acceptable Terms of Reference, and the longnegotiations required to reach agreement with the contractor on an acceptable study program. The studywas further delayed by the need to change contractors, (and renegotiate the study program) after theoriginal winning bidder went bankrupt. Eventually this study proved to be a highly effective tool for
5
improving safety standards at Daqing. Comparable statistics for before and after the study show adecline in serious accidents after the study recommendations were implemented to less than one-thirdtheir pre-study level.
3.14 The study was particularly innovative because it involved the operations personnel at everylevel. It was organized as a joint activity between the consultants and numerous operational levelcommittees. Eight foreign experts held 34 separate group forums to identify and discuss over 500 safetyissues. The final documentation was fully translated into Chinese to facilitate its dissemination tooperating personnel. Study results were instrumental in the modification of the design of the Daqingmulti-purpose oil tank storage facility, in the design of fire fighting facilities, and in the use of saferdrilling techniques.
3.15 Lessons. Safety studies are an important part of the modernization of any oilfield operation,particularly when the operation has had little or no contact with modem western safety standards. Thedirect involvement of oilfield operating staff greatly improved the likelihood of effectively implementingthe study recommendations.
Training
3.16 Training of both engineers and skilled workers was an important part of the project's objectivefor the transfer of technology. A large part of the training was accomplished through the creation, forthe first time, of formal technical training centers within the oilfield region for skilled workers and forengineers. The training centers have been staffed by personnel sent abroad under a program financedby the project to learn the most up-to-date technical standards and teaching methods, and by foreignexperts who were invited to Daqing to design courses and specifically train local staff. The programhas been extremely successful, with more than 10,000 engineers and skilled workers already havingcompleted various three-month to one-year courses.
4. PROJECT ISSUES
Delays In Project Implementation
4.1 Delays of up to two years were encountered in the procurement of goods and services for theproject. There were, of course, many causes for these delays, including: (i) the late start in preparingand issuing the draft bidding documents by outside consultants; (ii) the borrowers inexperience inworking with Bank procurement procedures; (iii) cumbersome internal clearance procedures combinedwith a fragmentation of responsibilities among various Government agencies; (iv) protracted contractnegotiations after the contractor had been selected, particularly on revised terms of reference for thestudies and related revised fee structures;
4.2 In addition, there were frequent delays and extensions in the implementation of consultantstudies, due to differences in opinion about what the terms of reference required and sometimes due tothe desire on the part of the Borrower to expand the scope of the original terms of reference.
4.3 This was the first Bank loan to the petroleum sector, and one of the first Bank loans to China.One should therefore not be surprised that implementation went less smoothly than planned, as both the
6
Bank and the Borrower learned about the operating practices, procedures, and policies of the other. ThePRC concluded that the problems of lack of experience were exacerbated by inadequate interagencycoordination and cumbersome internal clearance procedures.
4.4 The PCR suggested that the Bank could have helped reduce the delays in consultancy studiesby assisting the project entity in drafting a better focused scope of work in terms of reference forconsultant studies, and that these draft terms of reference should have been prepared before the fieldappraisal rather than during project supervision. The Audit is in full agreement with these observations.However, it found that there are a number of additional operational lessons that can be learned fromthe experience with these three first petroleum projects in China. These lessons may help to minimizeprocurement delays in the future, both in China and in other countries new to the Bank's procedures.
The Prototype Petroleum Production Station
4.5 The objective of this prototype facility was to introduce design technology and equipment whichwould optimize the processing of crude oil, water and natural gas from the reservoirs (to minimize theenergy requirements to heat and transport them). It was also supposed to introduce an accurate methodfor continuous metering of individual production and injection wells so that reservoir performance couldbe monitored and optimized. As discussed below, this project component met with several difficultiesand was never made operational.
4.6 Although DPAB had never worked with foreign contractors, it decided, with the Bank'sconcurrence, to act as its own prime contractor for this project component, coordinating all procurementand construction activities. Based on the advice of the consultants, the project was subdivided into ninebidding packages, with DPAB taking responsibility for interfacing the nine contractors. Thisimplementation structure could have worked if all contractors had performed to the letter of theircontracts. Unfortunately, the key contractor, who was to provide the central computer monitoring unit,failed to provide the necessary computer software. Other less critical pieces of equipment also failedto work as required. As a result, DPAB was unable to make the facility function.
4.7 Lesson. For complicated facilities that require efficient interfacing of many different pieces ofequipment it is important to have a turnkey contract with a prime contractor who will have sufficientfinancial commitment in the project to ensure that all the equipment works together properly.Furthermore, when things do go wrong, it is much easier to initiate corrective action, with litigation ifnecessary, for one large contract where there are clearly defined responsibilities, than it is on a numberof small contracts where contractors can invariably blame the problem on the interface with the othercontractor's equipment.
4.8 Recommendation: The coordination and quality control function is probably the most difficultpart of the construction of any plant, and should not be left to an implementing agency who has hadonly limited experience in working on such projects with foreign suppliers.
Choice of Technology
4.9 The Daqing and Karamay projects together purchased five drilling simulators for their traininginstitutions, all from the same supplier. Unfortunately, the equipment arrived without the electronicsthat were necessary to allow them to function. The experts who were supposed to arrive to put themtogether never showed up, and sometime shortly thereafter the supplying company went bankrupt. No
7
replacement equipment has been bought, and all these centers have been operating without this centraltraining activity. When it was discovered that the supplier had declared bankruptcy, the Borrowers triedto find other ways to make the equipment function, even at a limited level. Unfortunately, this couldnot be done, since the time and cost needed to make it work is much greater than the cost of new digitalequipment. A number of lessons and recommendations can be drawn from this unfortunate experience.
4.10 Lessons: The choice of appropriate technology may require specialized technical knowledge.The technologies employed by the two suppliers who bid for these contracts were very different. Onewas an analogue technology and the other was a digital technology. The digital technology, which wasmuch newer, was claimed to be able to accomplish more than the older analogue technology, but wassomewhat more expensive. A comparison of the effectiveness of the two technologies was particularlyimportant in this case because the bids were relatively close, and the question of which was the lowestevaluated bidder hang from the evaluation of the various claims and counter-claims about what eachpiece of equipment could do. However, in reviewing the bids, Bank staff appears to have made noeffort to ensure that an adequate evaluation and comparison was made of the effectiveness andusefulness of the two technologies.
4.11 Recommendation: For the procurement of highly complex technical equipment, where Bankstaff have no expertise, a special effort should be made to ensure that the appropriate technology isused. When radically different technologies are being proposed for accomplishing the same goal, Bankshould insist that a knowledgeable, independent consultant is hired to compare the advantages and thedisadvantages of each.
4.12 Lesson: Bank borrowers should not be used as experimental subjects for new and untestedequipment when there are alternative, tested equipment available in the market. The lowest evaluatedbidder offered an "advanced" model that was not yet on the market. As a result, it was difficult for theexecuting agency to judge the validity of claims about how the machine would function. In the end,the machine offered by the successful bidder failed to function at all, most probably because thecompany, under extreme financial pressure, rushed it into production before all the bugs had beenworked out.
4.13 Recommendation: Bidding documents should require verification that equipment with similarcharacteristics and capabilities should be in operation. Preferably, similar equipment should havealready been sold and installed so that claims about its effectiveness can be assessed. If the equipmentis a new model, especially one with expanded capabilities, then the contract should stipulate thecondition that it be tested and approved by the borrower, or an independent agency representing theborrower, as a condition of acceptance of the export letter of credit.
4.14 Lesson: The Borrowers have been unable to resolve the problem, and still are without thisimportant piece of training equipment. After finding that the company was bankrupt and could not meetit's obligations, the Borrowers spent most of their efforts on attempting to salvage the uselessequipment, and have yet to consider purchasing substitute equipment. Essentially, those involved appearto have lost sight of the project goal, which was to provide a complete training facility for skilledworkers. To ensure that this goal was accomplished, the Bank should have advised the Borrowers torecognize the loss, and to purchase similar equipment from another producer. If loan funds were nolonger available under the project, the Borrower should have replaced the equipment with its ownresources, to fulfill its obligations to complete the project.
8
4.15 Recommendation. Borrowers in non-market oriented countries, who have had little experiencewith commercial law in their own country or in developed countries, may need guidance on what theycan and cannot expect in the resolution of commercial disputes. When major problems arise, the Bankshould provide assistance in suggesting the most likely successful strategy to follow, including, whenappropriate, to accept the loss and start over again, so that the project objectives can be met.
5. PROJECT OUTCOME AND SUSTAINABILITY
5.1 The Audit finds that the project results were highly satisfactory and successful in meeting allits major objectives. Its institutional development impact was substantial. The transfer of technologythat took place during the project, through the program of studies, the introduction of modem oilfieldequipment and the training related to its operation and maintenance, and the technical training for skilledworkers and engineers all appear to be fully sustainable. The Audit is in full agreement with the PCRthat the potential economic benefits from continuing the field development of the Gaotaizi reservoir issustainable. Output from the field is expected to be greatly increased as a result of the enormouslypositive results of the Enhanced Oil Recovery (EOR) study undertaken under the project. It is expectedthat one of the methods tested under this study (the polymer flooding) will increase the recoverablereserves from Gaotaizi (from 30% of oil in place to 44%). DPAB has sufficient confidence in this newtechnology to invest over $200 million in a polymer production plant.
9
ZHONGYUAN-WENLIU PETROLEUM PROJECT(LOAN 2252-CHA)
1. BACKGROUND
1.1 China's petroleum production increased from 10 million tons per year in 1960 to nearly 110million tons in 1980, but declined in 1981 and 1982. There had been no major discoveries in the1970's, and the Ministry of Petroleum industries (MOPI) came to the conclusion that China wasunlikely to maintain its petroleum production level, let alone increase it significantly if it continued touse the outdated technology. MOPI also decided that, while there was great potential for finding newlarge sources of supply from prospective off-shore areas, there was little likelihood that new largeonshore discoveries would add to production during the next decade. Therefore, it concluded thatincreased production would have to be achieved primarily through expanding the production in andaround existing oilfields, which would only come through the introduction of modem production andexploration technology. It was within this framework that the Government of China (GOC) approachedthe Bank for assistance in rehabilitating and modernizing China's petroleum sector.
1.2 The Bank's lending in the petroleum sector in China was to have three basic objectives: firstly,to develop the known hydrocarbon bearing structures in order to partially offset the anticipated declinein national oil production. Secondly, providing a vehicle for the introduction of modern technologythrough the financing of modem equipment and the technical assistance in optimum operation of thisequipment. Thirdly, in training and upgrading the operating, technical and managerial skills of China'soil industry personnel.
1.3 The Zhongyuan project was one of the first three projects identified by the Government ofChina as among the highest priority projects (the other two were Daqing and Karamay) for modernizingpetroleum practices, where the introduction of modern technology would be a critical element in thesuccess of the country's oil development program. Modern technology was critical in the Zhongyuanoilfields because the reservoirs were quite deep with high pressure gas zones, which made drilling verydifficult, and the field geology was quite complex, so that the primitive seismic equipment being usedmade it difficult to identify optimum drilling locations.
2. PROJECT OBJECTIVES
2.1 The broad project objectives of the Zhongyuan project were to:
(i) increase oil and gas production and reserves in the project area;
(ii) enhance operational efficiency and strengthen ZPEB's institutional capabilities throughstaff training and the modernization of their oilfield operating practices; and
(iii) extract LPG from the associated natural gas which was being flared.
10
3. PROJECT IMPLEMENTATION AND RESULTS
3.1 All the major project objectives were successfully achieved, in spite of the long delaysexperienced during implementation.
3.2 The transfer of advanced oilfield operating technology was the most important achievement ofthe project. The transfer took place through many channels, the most important of which were:
* The importation of modem and sophisticated equipment and the related trainingprovided by suppliers of equipment and services, both in China and abroad.
* The involvement of ZPEB counterpart staff working with the consultants on thereservoir, oilfield practices and safety studies.
The field trips arranged by the equipment manufacturers and the study consultantswhich acquainted ZPEB staff with actual operating practices in western oilfields, mostlyin the US and Canada.
* Consultant assistance with the initial implementation of the recommendations emanatingfrom their studies, particularly in the areas of drilling and oilfield practices and safetystandards.
* The establishment of a training center for 3000 workers a year and the training ofteachers, both in Zhongyuan and overseas, in the methodology for preparing thespecialized curricula for teaching advanced oilfield techniques and in the utilization ofmodem audio-visual and simulation model for assisted teaching methods.
3.3 In addition to the transfer of technology, the project also reached its major physical targets, asdescribed in the PCR and summarized below:
ZPEB was able to implement the full development of the South Wenliu oilfield;
One hundred and twenty million tons of additional proven reserves were confirmed inthe East Wenliu structure and are now under development;
The gas processing plant for the recovery and treatment of LPG products from theassociated natural gas was installed and is fully functional.
3.4 Environmental impact became a serious concern during project implementation. During theearly supervision missions, Bank staff noted that corrosion from untreated water had caused seriousproblems in the tubing of both injection and production wells, and in the production pipelines, whichwas increasing production costs and also producing environmental pollution, as the number of waterand oil spills began to increase. The Bank recommended, and ZPEB agreed to amend the scope of theproject to include a study on the appropriate methods for treating water produced by the field and forconstructing a water treating facility. Once the water treatment study had been completed, a new watertreatment facility was constructed to treat both the produced and injection water. Recommendations
11
for upgrading water handling techniques have been disseminated to and applied in oilfields throughoutthe country.
3.5 Four consultant assisted studies were also expected to introduce modem oilfield practices andtechnology, as follows:
* A Safety Practices Study, which was to bring the field operations safety practices inline with Western safety standard;
* A drilling and well completion practices study and demonstration program which wasto analyze the problems that had been encountered in the past and propose ways toovercome them;
* A reservoir analysis of the South Wenliu oilfield, which would include an optimizedlong-term development plan for this field;
* A Management Information System, which was to assist with the introduction ofmodem oilfield management techniques, including modem cost accounting;
3.6 The first two of these consultant studies were highly successful; the third had many problemsand was never completed; and the fourth was never initiated.
4. PROJECT ISSUES
Findings and Lessons Learned from PCR
4.1 Procurement. Factors that contributed to the early project delays were ZPEB's lack offamiliarity with the Bank's procurement procedures, cumbersome internal processing and clearanceprocedures, and extended delays in contract negotiations. Coordination of clearances among threeentities, (ZPEB, CNPC and CNTIC) made the process particularly difficult. Recommendation: In thefuture the central authorities should delegate procurement authority to the local implementing entity.
4.2 Studies: The Bank should help the executing agency prepare focussed terms of reference forall studies during project preparation, rather than leave this to subsequent supervision missions. Thiswould greatly accelerate the implementation processes.
4.3 Petroleum Prices: Appropriate domestic pricing policies for oil and gas need to be establishedto assure that production companies can remain financially sound.
4.4 The Audit agrees with all these conclusions and recommendations. Other issues, not fullycovered in the PCR are discussed below.
Delay in Project Implementation
4.5 The project met with substantial delays in all components with the exception of the drilling ofexploration wells. Import of oilfield equipment was delayed on average by two and a half years, studies
12
were delayed by about four years, construction of the building for the training programs, the computercenter and the laboratory were delayed by about five years, and operation of the LPG plant was delayedby almost six years.
4.6 Learning Bank Procedures. Bank supervision missions and the PCR tended to lay most of theblame for delays on the inexperience of the various Chinese agencies in working with Bankprocurement procedures. While this inexperience played an important role in perpetuating the delays,it is neither a complete explanation nor an adequate justification for them. To the extent that it was amajor contributing factors it could have been substantially overcome if the Bank had recognized it earlyand taken action to overcome it by establishing a procurement training program in the project cycle.This training program was established many years later, after the problems became pervasive in allBank lending operations.
4.7 Coordination of Chinese Agencies. The problem of the Borrower's lack of experience withBank procurement procedures was exacerbated by the cumbersome Chinese intemal procurementapproval process, which required coordination of approvals by five separate Chinese agencies. Theexecuting agency (ZPEB) had to obtain the approval of the Ministry of Petroleum Industry (MOPI) andthe Machinery and Electrical Equipment Import Inspection Wing under the State Council for alltechnical aspects of the bids. The National Import Agency (CNTIC) had to approve the specificationsand issue the bidding documents. All four agencies were jointly responsible for evaluating the bids andnegotiating details with the winning bidder. Finally, after the contract was written by CNTIC, theNational Committee for Contracts had to approve it.'
4.8 The bidding documents, the bid appraisals and the award of the final contract also had to bereviewed by the Bank. All had to be translated into Chinese, reviewed, then translated back intoEnglish for communication to the Bank. Furthermore, since the approval process was a sequential one,in which Bank approvals were requested only after all other approvals were obtained, the wholesequence of translations and approvals having to be repeated when the Bank requested changes toconform with its standards. Finally, when the time came for payments to be made, the National Bankof China had to also review the documentation and approve each step.
4.9 Even after the problems came to light during the first year of project implementation, the Bankwas unable to convince the GOC to make the changes needed to improve the situation. The GOC wasunwilling to remove CNTIC's monopoly position on foreign trade activities. Nor would the GOCestablish an effective inter-agency working groups to facilitate procurement processing.
4.10 The lack of urgency in resolving these types of problems can be seen in the agreement duringnegotiations, that the project team for ZPEB would be in place within six months after Boardpresentation (i.e. by September 1983, a year after the Appraisal). In fact, it was not until the firstprocurement supervision mission in September 1983, that the institutional procedures were reviewedby Bank staff. And in March 1984, a procurement mission noted that procurement was delayed as aresult of the Borrower's inexperience with Bank procedures. By this time the Bank had recognized theproblems created by the lack of coordination among the responsible agencies, but it appears to havedone little to find a resolution to them besides exhorting the GOC to set up a coordination committee.
'The China National Petroleum Corporation (CNPC), which has taken over the role of MOPI, hasnoted that "the approved procedure among the five agencies was not exactly like that expected" inthis simplified description.
13
The problem was supposed to be resolved by the reorganization of CNTIC in March 1985, but Bankmissions continued to complain about inexperienced and overworked staff. With such a complexprocess, it is not surprising to find that there were substantial delays in the initial project phases, delaysoften of twelve months and more.
4.11 Lesson: This coordination problem should have been identified at the time of appraisal andaddressed early on in the project cycle. Although it was already recognized that these procedures wouldbe cumbersome, the Appraisal Mission failed to analyze the implications of these complex institutionalarrangements in terms of institutional interface requirements among the institutions through eachprocedural step.
4.12 Lesson: After a close inspection of supervision mission Back-To-Office Reports andAide-Memoires, the Audit concludes large supervision missions and new project preparation missionsvisited China, they held few, if any, discussions with senior level officials about the actions needed tobe taken for institutional strengthening. The Audit therefore concludes that one of the major reasonsthat this problem remained unresolved for so long was that the lone petroleum project procurementspecialist was, for all practical purposes, the only person actively engaged in trying to establish theinstitutional change needed to improve the situation. Although he was able to bring the problem to theattention of the Government, he was unable to get the Government to commit itself to a specific courseof action to achieve institutional reforms that could improve interagency communications.
4.13 Both the Bank and the GOC have learned from their experiences with these projects. Many ofthe procurement problems associated with these projects have for the most part been resolved duringthe last few years, and it is likely that China's new procurement staff will be much better prepared.In the recent Sichuan Gas Project (Loan 3716-CHA), the Government has organized a CoordinationCommittee to ensure that procurement processing remains on track. The detailed operation of thiscommittee and its impact on the interface among the various agencies is yet to be determined, and itseffectiveness is yet to be tested, but its establishment does indicate that the problem has been recognizedat the highest levels.
4.14 Negotiation of Contracts. Substantial delays also took place after the winning contractor hadbeen agreed upon. Negotiations on the final terms and conditions of contracts often took up to 10months, an exceptionally long time by Bank standards. For consultant study contracts, somenegotiations took up to 18 months. In addition, implementation process was also far from smooth.Studies were often extended or delayed due to the borrower's expectations about what the final resultsshould be. These delays were often caused by differences in opinion between the project entity and thecontractors on the appropriate scope of the work to be performed and, sometimes on the insistence ofthe project entities to expend the coverage of certain aspects of the scope.
4.15 Writing the Bidding Documents: There were, in addition, other significant causes for delayedproject implementation that could be avoided in the future. The most critical of these was the initialimplementation delay, which was in writing the technical specifications for the bidding documents.. Thisbid preparation process took nine to twelve months instead of the three that had originally beenscheduled. The Bank could have greatly reduced this delay. First, it initiated this critical path activityrather late in the project preparation cycle: only shortly before the project was taken to the Board.Second, it apparently chose a firm that it had not worked with before and failed to enforce the agreedtime schedule. Having started so late, the Bank needed to maintain a close control and supervision tominimize further delays.
14
4.16 Recommendation: Training programs for Bank procurement and loan disbursement practicesshould be a required part of any project with a new borrower or new executing agency. These programsare particularly important when the country itself has only recently joined the Bank Group, isundergoing a transformation to a more open economy and is, as yet, still unfamiliar with intemationalbidding and Bank procedures. Where inter-agency coordination is necessary, a procurement seminarshould be given exclusively for all the staff who will have to work together on the new project. In thisway the seminar could initiate the process of teamwork that is needed for efficient projectimplementation.
4.17 Recommendation: The Bank may need to consider intervening in the contract negotiationswhen they extend beyond what would appear to be normal and appropriate, or when a pattem ofextended negotiations begins to develop. In such cases the Bank could request a participatory role asa neutral facilitator, to keep the negotiations in line with the scope of the original bidding documents.Such intervention could be particularly important when the recommendations of the consultant studyare considered critical for proper implementation of other project elements.
4.18 Recommendation: If a project is expected to be implemented quickly, it may be necessary tohire a consultant company to prepare bidding packages during the Appraisal Mission, so that the initialbidding documents could be ready for discussion at, or before negotiations.
The Reservoir Study
4.19 The Reservoir Study was supposed to be the central element of an optimal development planfor the South Weiyuan oilfield. However it took four times as long to implement as expected, andnever produced the results expected by ZPEB. At appraisal (September 1982) it was agreed that itwould be initiated in April 1983, and would be completed within nine months, that is by the end of1983. Such timing would have been highly optimistic under any conditions. In China, with its complexprocurement procedures, and its lack of experience in working with foreign consultant firms, it wastotally unrealistic.
4.20 The study was actually started in May, 1984, a year behind schedule. Part of the delay was dueto a six-month long negotiations with the winning bidder during which the terms of reference wererevised and refined. The study got off to a bad start when ZPEB realized that the consultant'sexperience was primarily with marine sedimentary basins, rather than continental sedimentary basins,such as those found in Zhongyuan. The study was then dragged out for four years, during which timeZPEB was able to get the consultant to substantially deepen its investigation. Only about 80% of theagreed tasks had been completed when the consultant company declared bankruptcy and stoppedoperating. However, by this time study results were of only an academic interest, since almost all ofthe decisions on how to develop the field had already been made and the wells drilled and completed.Furthermore, ZPEB would have been unable to expand on the reservoir analysis for the next phase ofsecondary enhanced recovery, because the contract had not included the modeling software needed toextend the results.
4.21 In spite of the failure of the study to come to closure, ZPEB reported some important benefitsderived from the study in terms of transfer of technical knowledge. Engineers who participated in thestudy were trained at the consultant's headquarters in the advanced theory for conducting reservoirengineering studies, including the handling of the software and hardware. The experience gained while
15
working with the consultants has enabled ZPEB to design its own reservoir model with independentlypurchased software.
4.22 Lessons: First, technical studies in Bank projects often take much longer to organize andimplement than they would under ideal conditions in developed countries. Some of the more importantdifficulties are:
The borrower may be unfamiliar with working with foreign consultants, and maytherefore not be able to take into account the limitations of the consultant.
* There are likely to be confidentiality considerations and communications difficultiesbetween the consultant and the executing agency that make data transfer morecomplicated.
* The data base that the consultants must work with is often of a significantly lowerquality than that found in a similar situation in a technologically sophisticated OECDcountry company. In fact, information technology is often at the heart of thetechnological improvements that the Borrower is looking for.
* Physical distances and limited communications facilities that one often finds in oilfieldsin borrowing countries can slow down communications and direct interactions.
4.23 Second, the method of implementing the study was more important for the transfer ofTechnology in this project than the study's final technical conclusions. The process of sending theBorrower's technical staff to the consultant's headquarters to assist in implementing technical studiesproved to be an effective method for obtaining maximum benefits from the transfer of technology.
4.24 Recommendations. First, Bank staff need to take these difficulties into consideration if theyare to establish a realistic timetable for major studies; and if a study is supposed to be on the criticalpath for project implementation, as this one was, then Bank staff need to identify the likely problems,propose remedies, pay close attention to the implementation process, and react quickly to the first signsof problems.
4.25 Second, when borrowers have had little or no experience in working with foreign consultants,the Bank should consider suggesting that its technical staff be present during negotiations and duringinterim project reviews, to act as neutral facilitators.
4.26 Third, in the petroleum industry, where data gathering is an integral and continuous part ofresource development planning, project design should include the transfer of technology forcontinuously updating development planning studies. To accomplish this goal, petroleum reservoirstudies should always include funds for the purchase of the hardware and software needed to followthrough with continuous updating of the study results.
4.27 Finally, the Bank should consider copying in other countries the same framework as it hasutilized so successfully with the China petroleum loans for integrating on-the-job training with technicalassistance studies.
16
The Management Information System (NIS) Study
4.28 The Management Information System (MIS) Study was intended to establish a data managementand retrieval system that would allow ZPEB management to have at their fingertips up-to-dateinformation on the company's technical and financial operation, particularly those related to theirexploration and field development programs. This type of MIS is in use in all international companies,and, in theory, should have been a good working tool for Zhongyuan. However, after the bidding andbid proposal evaluation had been completed, ZPEB decided that the potential from the implementationof the study would not justify the cost of over $2 million dollars. After many delays and muchdiscussion, the Bank finally agreed to cancel this project component.
4.29 The study had been strongly recommended by the Bank Appraisal Mission, but ZPEB wasnever very enthusiastic about it. This difference of viewpoints was never fully resolved, at leastpartially because Bank staff failed to recognize the basic reasons for ZPEB reluctance. This reluctancewas based on a strongly held belief that a computerized MIS system could not be effectivelyimplemented into their operations. The Audit believes that their assessment was correct. At that timecomputers were very expensive and were used only for highly technical seismic analysis which couldbe handled in no other way. Outside this area, managers and staff were unfamiliar with their operation.More importantly, few people could be expected to learn to use the MIS system, because at that timeall programs had to be written and operated in English. (An effective method for writing in Chineseon a computer keyboard was not developed until 1989.) Without the use of Chinese characters, thesystem could be used by only a handful of English educated technical staff, and therefore, was highlyunlikely to become a working tool for management.
4.30 Recommendation: The Bank should continue to encourage enterprises in China to implementMIS Studies and to computerize their operations. Conditions for implementing such a study havegreatly improved in the last few years. Inexpensive desktop computers are now found at all levels,off-the-shelf software systems are available at a reasonable price, and a system for using Chinesecharacters has been developed and is in general use. Therefore, an MIS program would most probablybe a useful component for any future petroleum project in China, as well as in other countries.
5. PROJECT OUTCOME AND SUSTAINABILITY
5.1 Despite the long delays in the implementation process, the project was highly successful intransferring exploration and production technology to ZPEB, and in assisting ZPEB increase its oil andgas production. It had an important environmental impact, in that it ensured the utilization of naturalgas that was previously being flared, and found solutions during implementation for eliminatingenvironmentally unsound water processing practices. The Audit finds that the project was highlysatisfactory, and that its successes in improving ZPEB operating capacity are likely to be sustainable.It was less successful in helping ZPEB to improve its institutional management capabilities. Itsinstitutional development impact was therefore negligible.
17
KARAMAY PETROLEUM PROJECT(LOAN 2426-CHA)
1. BACKGROUND
1.1 Until the late 1970's , China was remarkably successful in implementing a policy of totalself-reliance in petroleum production. However, the rate of discoveries did decline throughout thedecade, and there were no major finds in the early part of the 1980's. In the early 1980's GOC turnedto the Bank to provide technical assistance to enhance the productivity of Chinese oil companies,primarily through the identification of technological problems, appraisal of hydrocarbon prospects, andassistance in the selection of technologies which could be disseminated rapidly and would help upgradeongoing production and exploration efforts.
1.2 The basic rationale for the Bank's participation in China's petroleum sector therefore lay in thepackaging of technical assistance programs and subsequently overseeing their implementation. Becauseconditions are so diverse within the different petroleum producing areas of the country, technicalproblems of each oil company are quite unique and require the creating of an individually focusedpackage of technical assistance for each oilfield.
2. PROJECT OBJECTIVES
2.1 Karamay was the third and last Bank project to focus on increasing oil production. As in thepreceding Daqing and Zhongyuan projects, the project objective was the provision of technicalassistance to enhance long-term productivity. In Karamay the assistance was tailored to therequirements for enhancing its heavy oil recovery program, in addition to updating its light oilexploration and production technology.
2.2 The project had four major components:
* Support for an expanded exploration program for light oil, including seismic dataacquisition, geological and reservoir studies, and processing and the drilling of about370 exploration, appraisal wells. This massive exploration program was expected toadd some 350 million tons of light oil reserves (oil-in-place), in support of KOC's plansto increase light oil production from 4 million tons in 1983 to 7 million tons in 1990.
* Evaluation of the potential for establishing production from heavy oil oilfields that havealready been discovered Karamay and in Liaohe, including design of pilot projects totest alternative methods for thermal recovery of this oil. This component was expectedto begin to increase heavy oil recovery in the 1990's.
Support KOC's overall operations by providing critically needed technical inputs forKOC's exploration and development program, and establishing a training center forskilled workers, while maintaining, through supervision, the implementation and
18
dissemination of new technologies, and implementing a costing study to improveKOC's methodology for investment planning.
Support future operations for the development of China's off shore gas resources bycarrying out a Gas Utilization Study for gas that had been recently discovered offshorein Southern China.
2.3 The project was approved by the Board on May 29, 1984, became effective September 15,1984, and was completed on March 31, 1991.
3. PROJECT IMPLEMENTATION AND RESULTS
3.1 As in the first two petroleum projects, there were significant delays in procurement and in theexecution of technical assistance components. As a result, some project benefits were delayed and theclosing date of the project had to be extended by two years. The primary reasons for these delays weresimilar to those for the previous projects: (i) lack of coordination in the procurement process amongconcerned agencies, with KOC responsible for deciding what to purchase, the International TradingCorporation responsible for communicating with purchasing from foreign suppliers, and the ChinaNational Petroleum Corporation (CNPC) responsible for approving all disbursements; (ii) the subsequentslow process of soliciting and evaluating bids; (iii) protracted contract negotiations, with frequentchanges in technical specifications; and (iv) frequent revisions of scope of contractual work, both duringcontract negotiations and during implementation.
Light Oil
3.2 The exploration program for light oil was much smaller and less successful than expectedduring appraisal. Only 201 exploration/appraisal wells were drilled, compared with the 370 wellprogram expected at appraisal. Discoveries of new fields and extensions of known fields added about150 million tons new light oil reserves (in-place). The relative lack of success led to substantialadjustments in developing drilling plans, including a shift in drilling efforts to the developing of thenew reserves, with the drilling of 500 development wells. The resultant increase in production of lightoil was about 1.9 million tons per year in 1990, compared with the increase of about 4.1 million tonsexpected during appraisal. Total light oil production from previous and new discoveries is expected toaverage about 4.4 million tons in the first half of the 1990's and decline to 2.2 million tons by 2000.
Heavy Oil at Karamay
3.3 Support for the heavy oil program was greatly expanded under the project. Instead ofsupporting experimental pilots, the project was restructured to support a program for full developmentof KOC's heavy oil resources, including the drilling of over 1100 wells. The development program hasbeen highly successful. Production, which was originally projected to remain at below 50,000 tons peryear, rose to 1.4 million tons in 1990 and is expected to increase to more than 2.7 million tons per yearby 2000. The reason for the restructuring is discussed in more detail in paragraphs 4.5-4.8
19
Heavy Oil at Liaohe
3.4 The studies for the Liaohe heavy oil pilot development program, which included an economicanalysis of the benefits, showed that while the program was feasible, the development would not beeconomically viable for Liaohe heavy oil. The large scale pilot was abandoned. The transfer oftechnology was, however, effectively implemented in that it was applied subsequently to other heavyoil fields in the Liaohe region.
Training Center
3.5 As in Daqing and Zhongyuan, a training center was built, a training curricula was establishedto systematically train KOC's skilled workers and engineers, and instructors for these courses weretrained. Completion of the center was greatly delayed by almost four years, primarily because it tookKOC a long time to initiate construction of the physical facilities and to initiate and implement the studyneeded to design the course program. When the program was established, a core of instructors weretrained abroad in modern training techniques and they returned to Karamay to train a cadre of localinstructors. When finally established, the program was highly successful, training some 4000 skilledworkers since it was opened. It has been hampered, however, by the failure of the drilling rigsimulation machine to function.
Studies
3.6 Four independent studies were carried out under the project in addition to the work related toestablishing a training program for skilled workers. The two technical studies were carried out byconsultants with the assistance of KOC staff. Both encountered significant delays, both before and afterthe contracts were signed. In addition to the direct benefits from the results, the studies createdimportant indirect benefits through the transfer of technical know-how to the KOC staff who workedwith the consultants, and were trained by them in modern methodology. The other two wereimplemented by local groups.
3.7 The Reservoir Study was successful in optimizing the development of the Wuerhe light oilfield. The study included the creation of a computerized dynamic reservoir simulation model, and thetesting of modern well completion techniques in the difficult "tight" reservoir conditions found in thisoil field. The results far exceeded expectations. Implementation of the consultant recommendationsfor existing wells in the field resulted in a doubling of production from 300,000 to 600,000 tons peryears and a reduction in the normnal decline in field production from the pre-study expectation of 15%per year, to only 3% per year.
3.8 The Geological Study was less than fully successful in providing new leads for KOC'sexploration efforts. It had originally been intended to develop a comprehensive understanding of thestructural geology and hydrocarbon potential of the entire Junggar basin where the Karamay oilfieldsare located. As implemented, however, it focused on only one small section of the basin, where KOChad direct control of the operations. The results were of limited use for KOC because they focusedalmost exclusively on identifying potential drilling locations in a set of local structures where KOC hadmade one small discovery. The study provided discouraging data on the quality of the reservoir rock,which was confirmed through the drilling of three exploration wells on the most promising identifiedlocations, all of which were non-productive.
20
3.9 The Costing Study was carried out by Chinese experts, rather than foreign consultants asoriginally proposed. Experts were chosen from ten petroleum institutions to recommend ways tointroduce modern financial management and cost control methodologies. Terms of reference werereviewed in depth with Bank staff. The comprehensive study identified the most serious problems inKOC accounting and cost methodology, and recommended specific practical improvements. Theseimprovements have allowed KOC to have a much more accurate picture of both the cost of producingoil from individual fields, and in many cases from individual wells, as well as the income generated bythese fields and wells. It also allowed KOC to determine the cost of drilling each well and to establishstandard drilling costs that could be used as comparators to judge future efficiency gains. KOCreviewed the study recommendations with the Bank and has integrated them into their operatingpractices.
3.10 The South China Gas Utilization Study was implemented by staff of the China NationalOffshore Oil Corporation (CNOOC), rather than by foreign experts as originally envisaged. CNOOCrequested that it do the work itself because it had a direct interest in the study and because it ownedthe gas that was the subject of the utilization study. The study was less than fully successful. It dida good job of evaluating the cost of developing and transporting the gas to potential users, but it failedto cover issues related to the economics of end user investments, which was the most critical input forthe process of developing an optimum gas utilization plan.
4. ISSUES
Findings and Lessons of PCR Report
4.1 Economic Return and Sustainability: The project is expected to have a 31% ERR, based onthe incremental cost and incremental volume of oil produced. In 1991, the cost of producing heavy oilwas $53 per ton compared with a value of $95 per ton, while the cost of light oil was $33 per tons, andits value was $110 per ton. While costs may have gone up slightly since 1991, the PCR found that therate of return is expected to still be in the highly respectable 25%-30% range. The production increasesare expected to be maintained over the next 10 to 12 years, assuring sustainability of the project. TheKOC staff were highly motivated to absorb new skills and use new technology. The technicalenhancement of KOC operations can be expected to be maintained with continued contact with theoutside world for exchange of technical knowledge, which is expected. The Audit is in full agreementwith these findings.
4.2 Studies: Some of the consultant studies were expanded to cover a wider scope than was strictlynecessary for the purpose of the project, which greatly increased the time required for their completion.The Bank could have assisted in trimming the scope to the project needs, and thereby helped to avoiddelays in study completion. (The Audit is in full agreement with this conclusion.)
4.3 Other issues and lessons that were covered in less detail in the PCR are discussed below, alongwith recommendations for improving implementation in the future.
21
Procurement
4.4 As with the previous two projects, procurement for the Karamay project started slowly, withthe same problems of coordination among the three concerned entities, KOC, CNTIC, and MOPI. Afterthree years of project implementation (end 1987) disbursement was only 41% of the appraisal estimate.Loan completion was delayed by two years. While the procurement coordination problem had beenrecognized shortly after the first two projects started to be implemented, little had been done to resolvethe problem before this third project had been sent to the Board. The Government had promised thata coordination task force would be established by December 1984, but they had still not been organizedby mid 1990. It might have been better to have focused early on this coordination problem and makeit a condition of Board presentation or at least of disbursement.
Lesson. The Bank should have insisted that these problems be resolved as a condition ofmoving forward with the Karamay project. Both the Bank and the GOC have learned from theirexperiences with these projects.
The Shift to Heavy Oil Development
4.5 Conditions in KOC's oilfields changed rapidly during the implementation of the project. Atthe time of the Bank's first identification mission to Karamay, KOC was producing less than 40,000tons of heavy oil per year, from a reserves estimated at that time of 1.2 billion tons. With thetechnology in use at that time, KOC was unable to establish an effective production program. In thehope that the use of modern technology would solve some of KOC's problems, MOPI requested thatthe Bank include a heavy oil component in the Karamay project.
4.6 The mission identified the most important reasons for KOC's lack of success in its previousattempts to recover heavy oil through steam injection ana encouraged KOC to expand it's heavy oilprogram. Solutions were suggested for many of KOC's technical problems, including those related toinadequate well completion and cementing techniques, untreated water that corroded the tubing,inadequate well spacing, and low quality steam boilers. However, the mission took the position thatthese solutions should be tested on a pilot basis, and some pilot programs should be undertaken toestablish the data needed to design an optimum investment program before full field development wasinitiated. The Bank project supported the work needed for these pilot programs, with the idea thatsubsequent projects would support full field development if it proved economically viable. Progress,however, proved much faster than anticipated.
4.7 Within a year after project effectiveness, KOC had successfully developed a number of smallscale heavy oil pilots and had decided to shift much of its attention to expanding heavy oil production.The shift was particularly timely in light of the lack of significant successes in the exploration programfor light oil. Subsequently, the consultant firm hired by KOC for design of the special pilot studies wasalso employed, with Bank concurrence, to undertake the basic conceptual design for full fielddevelopment and to review the technical parameters of this development.
4.8 The Bank worked closely with KOC to restructure the project to take advantage of newopportunities in the rapidly changing conditions in the oilfield. Funds were shifted from the light oilproject component to support a greatly expanded program to drill delineation and development wells(an increase from the original 160 to a final 1,126) and a concomitant growth in surface facilities,
22
particularly steam generators, which increased from 4 to 40 (29 of which were eventually financedunder the loan).
4.9 The program was highly successful: Production reached 1.5 million barrels by 1992, andbenefits of increased production will continue well beyond the turn of the century.
4.10 Recommendation: However, the resulting project went well beyond the scope of the originalproject, and the changes were made without formal agreement by Bank Management or the Board.Majority changes of this nature should be formally reviewed by Bank management and approved bythe Board. They do not always produce such positive results.
Training
4.11 Seven drilling rig simulators were bought for the three training centers financed by the Bank(Daqing, Zhongyuan and Karamay), and all had the same problem with their computer hardware andsoftware.
4.12 Recommendation: If the executing agency is unable to inspect the specialized equipment beforeit is shipped, contracts should call for inspection before shipping by an independent inspection agency.In this case such an inspection would have demonstrated that the design was incomplete and machinewould not work.
4.13 While on-the-job training for the use of new equipment was quite effective, the overseastechnical training program for engineers and managers got off to a very slow start, and did not train thenumber of people that it should have. By early 1989, four years after the project had started, only 15people had been sent for training at foreign academic institutions, out of the 55 people planned. Thetraining on heavy oil development was also cut short, with field training reduced by over 50% (29 to14 man months) and technical training at the headquarters of the consultant reduced by 25%. In allcases the problem appeared to be the organization and implementation of foreign language trainingneeded as a prerequisite.
4.14 Recommendation: Where foreign language training is needed, it should be included as aspecific project component. Institutional arrangements need to be worked out for this training atappraisal or, at the latest, at negotiations, since learning a foreign language is always a time consumingprocess. Some of this training need to be done in the foreign country. This language training programshould include training of management and business staff, in addition to technical staff, since technicalstaff rarely have time to translate materials when they return.
4.15 Conclusion: All of the training programs focused on the development of technical expertisein the fields of exploration and production. None were developed for the equally important area ofmodem management techniques for line managers and senior managers.
4.16 Recommendation: More attention should be paid to the training of managers, since this iswhere the modern attitudes towards operational efficiency can be most effectively introduced.
23
Technical Studies
4.17 For the Geological Study, the Bank failed to convince the implementing agency (KOC) toimplement the original terms of reference for a broad-based study of the entire basin, which wouldprovide wider benefits for all the petroleum enterprise operating in the region under the auspices of theXinjiang Petroleum Administration. The approach of looking at only one small part of the basin limitedits ability to determine the prospectiveness of the area and to prioritize regional exploration investmentopportunities. Thus, the results of the study provided minimal benefits to KOC, limited primarily toa confirmation of their existing understanding of the basin's geology and potential in their area ofoperation. Nevertheless, KOC believed that it benefitted indirectly through thc training and transfer ofknow-how in terms of the consultant's research methodology, and its techniques for computerized datacompilation for sophisticated geological maps. The study ran into a number of difficulties because theconsultant company changed many of the study team during the study implementation. This changewas made without the consent of the borrower, although the contract called for such consent to bereceived.
4.18 One of the most important aspects of the Reservoir Engineering Study was that the technologydeveloped was used by KOC staff after the study was completed. They were able to do so because thecomputer work stations and the reservoir simulation model software that was used for the Wuerhereservoir study were supplied by the consultant to KOC as part of the study package. Since KOC staffhad been trained in the operation of the model through on-the-job training, while they worked with theconsultants in the design and modification of the model to fit the Wuerhe reservoir, they were able tocontinue to update and optimize production programs as updated information was retrieved from newlydrilled wells.
4.19 Equally importantly, they were able to use the technology to design optimal productionprograms for many of their other oilfields. Although the study was extremely important for KOC, it'sinitiation was delayed by over a year, primarily by protracted negotiations on details of responsibilities,coverage, and costing of deleted and added components. The negotiations did, in fact, lead to bettercontractual conditions for KOC in terms of breath of coverage and cost. However, KOC paid a highcost in terms of delays in implementation and confusion about the extent of the consultant's contractualobligations. This confusion was exacerbated by repeated KOC's requests during project implementationfor the modification and extension of the consultant's work program. Many of these requests wereacceded to, although few led to a substantially improved final product. As a result, the study took 40months to complete instead of the contracted 18 months.
4.20 The Costing Study was highly successful in introducing modem management techniques foreconomic decision making both for day-to-day decision making and cost control and for longer termstrategic investment decision making. The increased consciousness of the importance of financialanalysis that these new techniques create has had an identifiable effect on how management makesoperational decisions. For instance, the analysis techniques has been used to decide which heavy oilfield development programs were economically justified and which were technically feasible buteconomically unjustified because of the excessively high costs. In addition, the study recommendationshave been distributed to all the oil companies whose experts worked on the study.
24
4.21 The creation of a special group of experts from a wide range of local oil enterprises, insteadof just from the executing agency (KOC) ensured that there would be an openness to outsideinformation and cross fertilization of ideas. Bank support through detailed review of the final terms ofreference with the technical group helped to assure that the study would focus on finding solutions forcritical issues. Finally, sector wide participation made it easier to disseminate the recommendations toall sector institutions.
4.22 The Gas Utilization Study considered only the issues of gas production, and neglected theissues of gas utilization that are central to the establishment of priorities for maximizing the benefitsfrom the use of the gas. The study therefore failed to meet the Bank's objectives for undertaking thestudy, which was to establish the basis for making a gas masterplan, or at least the basis for agreeingon meaningful economic priorities for its utilization.
4.23 Lesson: The implementing group was from the CNOOC, the entity that was responsible foroverseeing the study's implementation. This arrangement created three problems. First the narrowinstitutional base of the study team made it more difficult to view issues from a broad nationalperspective. Second, CNOOC had difficulty implementing the gas utilization portion of the study,without appearing to undermine the authority of the Ministry of Petrochemical Industries. Third,lacking an arms length relationship with the study team, CNOOC, the responsible agency was lessprepared to take a critical view of the study's weaknesses.
4.24 The Bank also failed to fill these gaps by undertake the critical review process or by insistingthat a technical consultant be used to help with structuring the study and/or reviewing its progress.Supervision missions failed to review with CNOOC management and the study team the final Termsof Reference to ensure that it maintained its original focus, probably because these missions did notinclude the needed technical skills.
Lessons Learned from Implementation of Studies
4.25 Changes in Terms of Reference (TOR) for consultant studies after they have been agreed withand approved by the Bank were, in many cases, detrimental to successful implementation of the study.If the study is on the project's critical time path, the TOR should to be confirmed by appraisal. It isimportant that all parties agree with the scope and direction of the study. The Bank should then makeevery effort to discourage borrowers from changing the TORs after bids have been received. Suchefforts have led to long, drawn out negotiations with the successful bidder, to the detriment of projectimplementation timetables. Since such practices are contrary to the Bank's normal procurementpractices, Bank staff should request to participate in negotiations to help both parties come to closure,when negotiations extend beyond the normally expected one or two weeks.
4.26 Studies were also delayed when borrowers suggested, and consultants agreed, to change thestudy scope in the course of its implementation. With hindsight, one can see that Bank staff shouldhave carefully monitored any agreed changes in study scope and should have worked with both partiesto ensure that unrealistic expectations on the part of the borrower did not push the consultant to promisemore than could be delivered, with eventual inconclusive results.
25
4.27 The inclusion of the hardware and software to continue to carry out the reservoir simulationmodeling allowed the implementing agency "to take possession, of' and " to own" the new technology.This ownership is a critical element in it adaptation and continued use. The alternative of just receivinga completed study with recommendations from a consultant has been shown, in other projects in Chinato be unsuccessful in having the new technology adopted into the ongoing operational procedures ofthe enterprise. Therefore, all studies that use computer modeling should include sufficient hardware andsoftware to enable the implementing agency to continue the activity, either on its own, or, whereappropriate, in conjunction with a local institution that specializes in this activity.
4.28 Financial accounting and costing studies can be successfully implemented by local groups, ifthese groups have access to the techniques used in more advanced countries. There are manyadvantages to implementing such studies with local groups, the most important of which may be thatit establishes the internal "ownership" of the results which makes dissemination and adoption muchmore likely.
4.29 When gas utilization planning studies are considered important for improving the planningprocess for optimization of investment programs, the Bank needs to ensure the cooperation acrossagencies responsible for planning supply and utilization. Such a study is unlikely to be successful ifonly one of the concerned agencies is involved in its implementation. If a local group is to undertakethe study it should be composed of a sufficiently wide range of participants to ensure access to dataneeded to cover both production and utilization data. There should be an arms length relationshipbetween the study team and the executing agency. If Bank staff are unavailable for detailed supervisionof studies undertaken by local groups, arrangements should be made to have an international expertreview the study at critical junctures during its implementation.
5. PROJECT OUTCOME AND SUSTAINABILITY
5.1 The project was highly successful in meeting its development objectives of introducing modernoilfield technology, including management financial costing and control, and of assisting KOC toincrease its oil production levels. It was less successful than expected at appraisal in increasing theproduction of light oils, but was much more successful than expected in increasing heavy oil production.Institutional development, particularly that related to financial management and controls also appearsto have been significant. The benefits are likely to be sustainable in the future.
5.2 The project scope was substantially altered to meet the evolving oilfield conditions. The shiftof emphasis to the development of heavy oil after it was learned that the potential for light oil was lessthan originally thought was appropriate. However, given the size of the shift in project scope, somemore formal internal approvals should probably have been sought.
26
CONCLUSIONS FOR ALL THREE PETROLEUM DEVELOPMENT PROJECTS
1. The three projects of this Audit reflect the first stage of the development of Bank assistance toChina's Petroleum Sector. They focused primarily on introducing modem technology, the training ofstaff at all levels in the use of this technology, and utilizing this technology to improve the productivityand safety of oilfield operations and to increase the volume of oil that could be produced from thesefields. In these endeavors they were completely successful. New technology was successfullyintroduced, training centers were established to train staff in all aspects of modem oilfield operations,productivity was increased, and a great deal more oil was produced than would have been possible usingthe older, outdated technology previously available.
2. The results of the technical assistance and staff training must be ranked as the most importantachievements of these three projects, in spite of the delay caused in the actual training program by theother delays in the procurement process and in overall project implementation. In this respect, thecapabilities of all three operating companies and their contribution towards the petroleum industry inChina have been significantly enhanced by the implementation of these projects.
3. A great many difficulties were encountered in procurement processing, many of which can beattributed to the cumbersome institutional arrangements that the Bank felt obliged to accept as a costof rapidly expanding its lending program in a country with highly centralized decision makinginstitutions. The projects were less successful in establishing institutional change in financial selfreliance, and financial decision-making using modem management tools.
4. The projects were appraised without any significant sector review or sector policy dialogue.Recognizing that it would take considerable time to develop a successful policy dialogue on institutionaland economic issues, the Bank accepted many constraints that might not have been accepted incountries where a dialogue had already been established over an extended period. By sidesteppingsector policy issues, the Bank was able to assist in speeding up the rate of technical progress in thepetroleum sector at a critical juncture in China's petroleum development efforts. The Audit believesthat this flexible approach greatly enhanced the Bank's effectiveness in making an important impact onthe sector.
5. There were, however, many sector issues where a policy dialogue might have helped sectorperformance. The project entities continued to suffer from the effects of operating in a highlycentralized central planning environment. The most important of these constraints was the lack ofindependence of the executing agency. Petroleum enterprises were closely controlled by centralgovemment agencies: by MOPI/CNPC for their investment policies and by CNTIC for their foreignpurchases. They were never expected to be efficient, profit maximizing entities, but were, instead,expected to meet specific quantitative output targets. Furthermore, prices were controlled, by the centralgovernment, and were never allowed to approximate international prices, while most operating profitswere redistributed to the central authorities.
6. The possible usefulness of a policy dialogue on these issues in the early 1980s is, of course,questionable. China was not ready to make the structural policy changes that were needed to make eachentity an independent efficiency oriented entity. However, China has been moving rapidly to a more
27
market oriented, decentralized economy, and the petroleum industry is likely to see significant structuralreform in the next few years. The Bank has been working with the Government on evaluatingaltemative ways of restructuring the sector so as to increase the level of competition among the manyoperating entities, and to introduce further competition through expanding the role of foreign producersand service companies.
7. The Bank has done little in the way of basic sector studies that are an essential element for afuture policy dialogue. The choice of the first projects was left to the Chinese authorities (MOPI), andthere was no independent effort made to determine whether these projects were the most important onesfor the sector as a whole. Given the time constraints, the size of the country, and the significance ofthe first three projects, this approach was a reasonable way to initiate a sector lending program. It wasundoubtedly expected that knowledge of the sector would mature over time. Unfortunately, the Bankstopped virtually all oil sector work after the introduction of the OMS 3.82 in 1984, along with theelimination of projects to assist China upgrade its technical capabilities to develop other alreadydiscovered oil resources. The Region did undertake a sector policy review in 1990, but this reviewlooked mostly at the institutional aspects of the sector. It has yet to undertake a review of all thecountry's major oil and gas operations, and is, therefore unable to discuss sector investment prioritieswith the petroleum authorities. Clearly, if the Bank intends to continue to be active in the energysector, it needs to better understand sector priorities.
Bank Lending for Oil Development in China
8. The Bank stopped virtually all oil sector work in China after the introduction of OMS 3.82 in1984. The next two projects were for technical assistance. OMS 3.82 presents a reasonable approachto the development of petroleum resources in countries with limited petroleum activities. It alsorepresents a reasonable approach to exploration programs, where the high risk nature of the undertakingmakes it unsuitable for the use of borrowed funds, and where international companies have a clearcomparative advantage in technology know-how. However it makes much less sense when applied tocountries with a very large, established sector and with a massive petroleum production. In theselimited number of cases, a substantial part of the established resources should and will continue to bedeveloped by local enterprises, since it is unlikely that these operations can be effectively transferredto foreign joint ventures. It makes little sense in these cases to refuse to assist in the transfer of moderntechnology to these local operations.
9. In the former situation, the domestic industry may have no comparative advantage in buildingup and maintaining an international level of expertise. Government support for such industries may,therefore, be an inefficient and costly way of developing its national resources. In the latter situation,since the domestic industry in countries is already well established, the alternative of selling off oilfieldsthat are under production to foreign joint ventures is unlikely to be a viable alternative.
28
ANNEX I
CHINA NATIONAL PETROLEUM CORPORATION
Telex 22312 PCPRC CN
Liu pu Kang, Beijing, CHINA
June 22, 1994
Dear Sirs,
We have reviewed your draft Performance Audit Report (PAR), passed by MOF, for four WorldBank financed projects in China's oil/gas sector.' As the coordinator of those projects, we would like,on behalf of China National Petroleum Corporation (CNPC), to give our comments as follows:
1) We highly appreciate the Auditor's significant and helpful work on those four projects.
2) We agree to the PAR's conclusion that implementation of all four projects are successfuland satisfactory, although Weiyuan T.A. project only partially achieved its originaltargets.
3) We agree to most basic points of PAR and the lessons and recommendation given by theAuditors for project implementation, particularly to the analysis of implementation andprocurement delay which was the common problem in all four projects. We have alreadytaken some measures for the ongoing Sichuan gas project to avoid such delays since wehave become aware of the significance of this problem.
4) Internal coordination among four Chinese agencies: We admit that inadequateinteragency coordination and cumbersome internal clearance procedures did exist in theproject implementation, but the approval procedure among the four agencies were notexactly like that expressed in PAR (See Zhong Yuan project 4.7-4.8).
Signed by:Zhou QingzuChina National Petroleum Corporation
Daqing Oilfield-Gaotaizi Reservoir Development Project (Loan 2231-CHA);Zhongyuan-Wenliu Petroleum Project (Loan 2252-CHA); Karamay Petroleum Project (Loan2426-CHA); and Weiyuan Field Technical Assistance Project (Loan 2580-CHA).
