Document of The World Bank
FOR OFFICIAL USE ONLY
Public Disclosure Authorized Report No: 76301-CI
INTERNATIONAL DEVELOPMENT ASSOCIATION
PROJECT APPRAISAL DOCUMENT
ON A
PROPOSED PARTIAL RISK GUARANTEE
Public Disclosure Authorized IN THE AMOUNT OF US$60 MILLION
IN SUPPORT OF
THE GAS SUPPLY AND PURCHASE AGREEMENT BETWEEN THE BLOCK CI-27 JOINT VENTURE PARTNERS AND THE REPUBLIC OF CÔTE D’IVOIRE
FOR THE
BLOCK CI-27 GAS FIELD EXPANSION PROJECT Public Disclosure Authorized
May 20, 2013
Public Disclosure Authorized 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. CURRENCY EQUIVALENTS
(Exchange Rate Effective May 16, 2013)
Currency Unit = FCFA FCFA 510 = US$1
FISCAL YEAR January 1 – December 31
ABBREVIATIONS AND ACRONYMS
ANARE Agence Nationale de Régulation de l'Electricité (National Power Regulatory Authority) ANDE Agence Nationale de l’Environnement (National Environmental Agency) API American Petroleum Institute Bbl Barrel BOPD Barrels of oil per day Btu British thermal units CAS Country Assistance Strategy CIAPOL Centre Ivoirien Antipollution (Ivorian Antipollution Agency) CIE Compagnie Ivoirienne de l'Electricité (Private Ivorian Electric Company) CIPREL Compagnie Ivoirienne de Production d’Electricité (Private IPP) CNR Canadian Natural Resources COLREG Convention on the International Regulations for Preventing Collisions at Sea CPS Country Partnership Strategy DSM Demand side management ECF Extended Credit Facility EE Energy Efficiency EHS Environmental Health and Safety EIRR Economic Internal Rate of Return EMP Environmental Management Plan ENERCI Société Energie de Côte d’Ivoire (Private energy company) EPC Engineering, Procurement and Construction ESIA Environmental and Social Impact Assessment ESRS Environmental and Social Summary Review EU European Union FCFA Franc de la Communauté Financière d’Afrique (National currency) FEED Front end engineering design activities GdF Gaz de France (French Gas Utility) GDP Gross Domestic Product GHG Greenhouse Gases GoCI Government of Côte d’Ivoire GSPA Gas Supply and Purchase Agreement HIPC Highly Indebted Poor Country HSE Health, Safety and Environment Management System HVO Heavy Vacuum Oil IBRD International Bank for Reconstruction and Development IDA International Development Association IFC International Finance Corporation IMF International Monetary Fund IMS Integrated Management Systems IOC International Oil Company IPP Independent power producer IRR Internal Rate of Return km Kilometers L/C Letter of Credit LNG Liquified natural gas MARPOL International Convention for the Prevention of Pollution from Ships MCF 1000 cubic feet MIGA Multilateral Investment Guarantee Agency MW Megawatt mmbtu Millions british thermal units mmscf Millions standard cubic feet mmscfd Millions standard cubic feet per day NPV Net present value Opex Operation expenses ORAF Operational Risk Assessment Framework PAD Project Appraisal Document PETROCI Société Nationale d’Opérations Pétrolière de la Côte d’Ivoire (National Petroleum Company) PDO Project Development Objective PPP Public Private Partnership PRG Partial Risk Guarantee PRSP Poverty Reduction Strategy Paper PSC Production Sharing Contract SAUR Société d’Aménagement Urbain et Rural (Private French Company) SCDM Private French oil and gas company SECI SAUR Energie Côte d’Ivoire (Private energy company) SIR Société Ivoirienne de Raffinage (Ivorian Refining Company) SOGEPE Société de Gestion du Patrimoine du Secteur de l’Electricité (Holding company for sector assets) SOLAS International Convention for the Safety of Life at Sea Tcf Trillion cubic feet tCO2e Ton of carbon dioxide equivalent ToP Take or Pay UERP Urgent Electricity Rehabilitation Project WAEMU West African Economic and Monetary Union WBG World Bank Group WTI West Texas Intermediate
Regional Vice President: Makhtar Diop Country Director: Madani M. Tall Sector Director: Jamal Saghir Sector Manager: Meike van Ginneken Guarantee Manager: Pankaj Gupta Task Team Leaders: Sunil Mathrani & Patrice Caporossi CÔTE D’IVOIRE Block CI-27 Gas Field Expansion Project
TABLE OF CONTENTS
Page
I. STRATEGIC CONTEXT ...... 1 A. Country Context ...... 1 B. Sectoral and Institutional Context ...... 1 C. Higher Level Objectives to which the Project Contributes ...... 5
II. PROJECT DEVELOPMENT OBJECTIVES ...... 6 A. PDO...... 6 B. Project Beneficiaries ...... 6 C. PDO Level Results Indicators ...... 6
III. PROJECT DESCRIPTION ...... 7 A. Project Components ...... 7 B. Project Cost and Financing ...... 8 C. Lending Instrument: Guarantee ...... 9
IV. IMPLEMENTATION ...... 13 A. Institutional and Implementation Arrangements ...... 13 B. Results Monitoring and Evaluation ...... 15 C. Sustainability...... 15
V. KEY RISKS AND MITIGATION MEASURES ...... 15 A. Risk Ratings Summary Table ...... 15 B. Overall Risk Rating Explanation ...... 16
VI. APPRAISAL SUMMARY ...... 16 A. Economic and Financial Analyses ...... 16 B. Technical ...... 17 C. Financial Management ...... 18 D. Procurement ...... 18 E. Environmental and Social Performance Standards ...... 19 Annex 1: Results Framework and Monitoring ...... 22
Annex 2: Detailed Project Description ...... 24
Annex 3: Implementation Arrangements ...... 33
Annex 4: Project Financial and Economic Analysis ...... 38
Annex 5: Operational Risk Assessment Framework (ORAF) ...... 44
Annex 6: IDA Guarantee...... 47
Annex 7: Power Sector Finances ...... 51
Annex 8: Power Generation Expansion & Gas Supply Issues ...... 58
Annex 9: Project Preparation and Appraisal Team Members ...... 64
MAPS IBRD 36874 and 40029 ...... 65
PAD DATA SHEET CÔTE D'IVOIRE
CI - 27 GAS FIELD EXPANSION PROJECT
PROJECT APPRAISAL DOCUMENT
AFRICA
AFTG2
Date: May 20, 2013 Team Leaders: S. Mathrani/P. Caporossi Country Director: Madani M. Tall Environmental category: A Sector Manager: Meike van Ginneken Joint IFC: Guarantee Manager: Pankaj Gupta Project ID: P144030 Joint Level: Lending Instrument: IDA Guarantee
Project Financing Data [ ] Loan [ ] Credit [ ] Grant [X] Guarantee [ ] Other:
For Loans/Credits/Others: Total World Bank financing (US$m.): 60.00 Proposed terms: PRG for a maximum period of 8 years against defined risk coverage. Financing Plan (US$m) Source Local Foreign Total Bloc CI-27 Joint Venture 374 586 960 Senior debt 180 180 Equity 36 30 66 Cash-flows from operations (not 338 376 714 distributed to partners) Total: 374 586 960 IDA Guarantee 60 60
Borrower: Republic of Côte d' Ivoire
Guarantor: IDA
Project Sponsor: Block CI-27 Joint-Venture (JV) members : Foxtrot International, SECI, ENERCI, PETROCI
Beneficiaries of the PRG : Foxtrot International, SECI, ENERCI
Content For Guarantees: [ ] Partial Credit [x] Partial Risk [ ] Both Partial Credit & Risk Proposed Coverage: Guarantee of GoCI gas payments to the JV as detailed in the GSPA Nature of Underlying Letter of credit from commercial bank(s) Financing: Principal Amount 60 (US$m): Terms of Financing for Final Maturity: 8 years IBRD/IDA Guarantee: Amortization Profile: N/A Grace Period: None Financing available without [ ] Yes [x] No Guarantee: If Yes, estimated Cost or N/A Maturity: Estimated Financing Cost or N/A Maturity with Guarantee: World Bank Group [ ] IFC [ ] MIGA Participation:
Estimated disbursements (World Bank FY/US$m) FY 14 15 16 17 18 19 20 21 Annual N/A Cumulative N/A Expected effectiveness date: June 30, 2013 Expected closing date: June 30, 2021
Does the project depart from the CAS in content or other significant respects? [ ]Yes [x] No Does the project require any exceptions from World Bank policies? [ ]Yes [x] No Have these been approved by World Bank management? [ ]Yes [ ] No Is approval for any policy exception sought from the Board? [ ]Yes [x] No Does the project include any critical risks rated “substantial” or “high”? [x]Yes [] No
Does the project meet the Regional criteria for readiness for implementation? [x]Yes [ ] No
Project development objective The Project’s Development Objective (PDO) is to maintain the availability of clean natural gas for lower-cost power generation.
Project description The proposed operation consists of a credit enhancement mechanism to address the low credit worthiness of the Ivorian power sector and of the Government of Côte d’Ivoire (GoCI), thus enabling the development and expansion of the Block CI-27 gas field. The proposed instrument is a Partial Risk Guarantee (PRG), back-stopping gas payments under the Gas Supply and Purchase Agreement (GSPA) between GoCI and the Block CI-27 Joint Venture Partners. The detailed content and coverage of this guarantee will be negotiated with SECI, Foxtrot International and ENERCI (the foreign private investors in the JV) and GoCI. The PRG will use a letter-of-credit (L/C) structure to support GoCI’s payment obligations under the GSPA to the JV partners, excluding the share corresponding to PETROCI. Which safeguard policies are triggered, if any? The World Bank’s team has reviewed and endorsed the Environmental and Social Review Summary (ESRS) report prepared by MIGA. Based on current information and MIGA environmental and social due diligence, it is expected that the CI-27 expansion project will have impacts that will be managed in a manner consistent with the following Performance Standards: PS 1: Social and Environmental Assessment and Management Systems PS 2: Labor and Working Conditions PS 3: Pollution Prevention and Abatement PS 4: Community Health, Safety & Security PS 5: Land Acquisition and Involuntary Resettlement PS 6: Biodiversity Conservation & Sustainable Natural Resource Management
Significant, non-standard conditions, if any, for:
Sector Board Sector Board: Energy and Mining
Sectors / Climate Change Sector (Maximum 5 and total % must equal 100) Major Sector Sector % Adaptation Co- Mitigation Co- benefits % benefits % Energy and mining Oil and gas 100 I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable to this project.
Themes Theme (Maximum 5 and total % must equal 100) Major Theme Theme % Financial and private sector Infrastructure services for private sector 100 development development
I. STRATEGIC CONTEXT
A. Country Context
1. Côte d’Ivoire has a population of approximately 23 million and is the largest economy in the West African Economic and Monetary Union (WAEMU), accounting for around 40 percent of the Union’s Gross Domestic Product (GDP). The country plays a leading role in the economy of the region, with significant industrial and service sectors, a diversified agricultural base and a favorable geographic position. With its large immigrant population, Côte d’Ivoire has also been an important source of worker remittances for other countries in the sub-region. Côte d’Ivoire is the world’s top exporter of cocoa, a net (albeit small) exporter of oil, and has a crucial role in the transport of goods to and from landlocked neighboring countries of the Sahel. 2. Following the Ouagadougou Political Accords (OPA) of 2007, Côte d’Ivoire started to recover from the political and security crises that erupted in 2002, and to gradually emerge from a long period of poor governance that increased poverty, eroded institutional capacity, and deteriorated basic social and economic infrastructure1. In 2007, the World Bank Group (WBG) and the International Monetary Fund (IMF) re-engaged with the coalition transition government established by the OPA. In 2010, the WBG approved a new Country Partnership Strategy (CPS) for FY10-13, which outlined a program to support the implementation of the PRSP. 3. Since the inauguration of Alassane Ouattara as the new president in May 2011, the country has made substantial progress towards normalization. The new Government of Côte d’Ivoire (GoCI) has embarked on an ambitious program for economic and social recovery and reached the HIPC Completion Point in July 2012, opening the door for the country to obtain debt relief. With the cessation of hostilities, the government has also moved to restore security, address the social needs of the affected population, and improve governance. Parliamentary elections took place in December 2011, although these were boycotted by the main opposition party. The limited progress towards post-conflict national reconciliation remains a cause of political uncertainty. 4. The economy has rapidly recovered since the reopening of banks and financial institutions at the end of April 2011 and the lifting of the European Union (EU) embargo at the end of the post-election crisis. Economic activity rebounded more strongly than projected in 2012 following a contraction in 2011 induced by the crisis. GDP increased by 9.8 percent in 2012. In November 2011, the IMF approved an Extended Credit Facility (ECF) of US$616 million to be disbursed over the next three years. The second tranche was released on 30 November 2012. Most economic indicators have evolved favorably since May 2011 and the economic outlook for 2013 and over the medium term is favorable. Real annual GDP growth of 8.5% is forecast for 2013-15. B. Sectoral and Institutional Context
5. Approximately 34 percent of the Ivoirian population has access to electricity today. This is down from 40 percent before the political and security crisis, which was the highest service ratio in Sub-Saharan Africa at that time. Côte d’Ivoire has been a pioneer in introducing private sector participation in the power sector in the region. In 1990, Compagnie Ivoirienne de
1 Poverty increased from 10% in 1985 to 49% in 2008 (using a poverty line of approximately US$1.50 per day)
1 l'Electricité (CIE), a private company, was awarded a fifteen-year lease contract ("affermage") to manage the country's grid and run the existing state-owned generation assets. The contract was subsequently extended to 2020. CIE is paid a management fee per unit of electricity sold. The GoCI retained ownership of power sector assets managed by CIE, and only recently transferred them to a newly created asset holding company, CI-ENERGIES. Thermal generation was left to the private sector to develop via Independent Power Producers (IPPs). The sector is governed by the Electricity Law of 1985, that no longer reflects prevailing conditions, and is undergoing an extensive update2. It defines the transmission, distribution, import and export of electricity in Côte d’Ivoire as a state monopoly, while electricity generation is open to the private sector. The regulatory body, Autorité Nationale de Régulation du secteur de l'Electricité de Côte d'Ivoire (ANARE), set up in 1998, has a purely advisory role on tariff matters and the Ministry of Mines & Energy retains most decision-making authority. 6. In 1994, the country also awarded the first Independent Power Producer (IPP) contract in Africa to CIPREL, and in 1998 it awarded the then largest IPP in Africa to Azito Energie, a project that was supported by the first IDA Partial Risk Guarantee. 7. While the sector experienced marked improvements during the first decade of private sector participation, the subsequent political upheavals, beginning with the coup d’état in 1999 and the political crises thereafter were a setback to progress. As a result of the political turmoil, the sector’s commercial performance declined sharply and investors’ perception of risk was adversely affected. 8. Today, Côte d’Ivoire electrical system is still among the largest in West Africa, (the third in size after Nigeria and Ghana), although political instability in the last decade has led to a substantial investment backlog. Since 2000, only 110 MW of new generation capacity has been added, while electricity demand has been growing at over 5 percent per year on average, despite the political crisis. In early 2010, the country experienced severe load shedding for the first time since 1984. 100 MW of emergency units had to be rented as a stop-gap measure. Currently, load shedding is limited to peak demand periods, but this is mostly due to transmission and distribution network constraints. If economic growth is as robust as forecasted, the risk of capacity deficits in 2014 is considerable. As a result, the Government has contracted a further 100 MW of rented generation capacity in order to cover the generation gap until new capacity is commissioned in 2015-16. 9. The historical involvement of private players in the sector has in part shielded it from the political instability. The affermage contract with CIE and the formalized cash flow distribution mechanism in the sector (“cash waterfall”)3, which guarantees stability of remuneration to the private players, have helped Côte d’Ivoire attract further private investments in generation, despite the civil and political turmoil. Both supply contracts with Azito and CIPREL have withstood the crisis and continue to supply power effectively and are now expanding their generation capacity. 10. Nevertheless, the prolonged economic and political crisis of the past decade has taken a toll on the sector. There has been a significant decline in CIE’s operational and commercial performance in recent years, with a sharp rise in energy losses that are now close to 25 percent.
2 It makes no provision for the development of renewable energy by private parties and is not compatible with the country’s obligations under the ECOWAS Energy protocol. 3 Described in detail in Annex 7.
2 In addition, since the affermage contract with CIE does not require it to carry out major investments, (which remain the responsibility of GoCI), the sector was starved of investment resources during the long period of civil strife. Also, the de facto partitioning of the country over the course of several years also meant that CIE was unable to bill and collect revenues in a large area of the country, although it continued to supply power there. 11. As a consequence, sector financial fundamentals remain challenging. For the past several years the sector has suffered major financial shortfalls exceeding FCFA 100 billion (US$200 million) per year. This is mainly due to: (a) insufficient revenues following limited tariff increases in the last ten years, despite the greater reliance on higher-cost gas rather than hydroelectricity; (b) large increases in costs, particularly of gas supply, following a decision in 2007 to remove a price cap from the existing gas supply contracts; (c) expensive liquid-fueled emergency power rentals needed because of lack of timely decisions to expand gas supply and power generation capacity; and
(d) disruptions in collection of revenues in parts of the country. 12. The financial situation of the sector is now improving, thanks to a comprehensive power sector Financial Recovery Plan agreed with the IMF in late 2012, that GoCI has started to implement4. The Plan includes renegotiating down the high gas price, as well as other cost savings, while also increasing sector revenues through inter alia, tariff increases for industrial users. The GoCI agreed with Block CI-27 Joint Venture partners on a retroactive price reduction effective from January 1, 2012. This is resulting in cost savings to the power sector of about FCFA 80 billion (about US$160 million) per year. While there has been progress on cost reduction, the GoCI has been reluctant to take action on tariffs for residential users, due to potential socio-economic impacts associated with rate increases. 13. Although the GoCI financial recovery plan is significantly reducing the costs and the deficit of the power sector, continuing subsidies for 2013-14 by GoCI is unavoidable. Full implementation of the financial recovery plan, including an overall tariff adjustment of about 15 percent, over the coming two years is required to restore financial sustainability5. 14. The proposed operation complements GoCI’s turnaround strategy for the sector and fits into a series of policies and instruments being deployed by the Government, with the support of the donor community, to address the sector’s challenges. In addition to the ongoing IDA-funded Urgent Electricity Rehabilitation Project (UERP), which aims at addressing bottlenecks in the existing power distribution systems, a Development Policy Operation (DPO) is under preparation to support a balanced economic reform program strengthening public-sector governance and administration and facilitating private-sector led growth. Increasing the rate of investment in the energy sector is a key aspect of the DPO pillar on Improvement of the Business Climate and Increased Private Investment. In parallel, the IMF Extended Credit Facility (see para. 4 above) provides the country with supplementary budget resources.
4 More details on the Plan and the sector financials are outlined in Annex 7. 5 Forecasts still indicate a loss of 69 CFA billion in 2013 and 52 CFA billion in 2014. GoCI’s share of the gas revenues will be sufficient to cover this deficit, in the event that tariffs are not raised.
3 15. As the Ivorian economy recovers and growth accelerates, demand for power is expected to increase sharply. Electricity demand is forecast to grow by about 9 percent per year on average over the next five years. An additional 150 MW/year of new capacity would be required to meet the forecasted demand and provide a small reserve margin. New production will be from thermal plants until 2017-18, prior to the completion of a major hydropower plant, Soubré, for which construction has just begun. 16. The power sector is heavily dependent upon gas supply. All expansion of generation capacity during the past 25 years has been gas-based. Given the untapped hydropower potential of Côte d’Ivoire and the fact that the next hydropower generation project will not enter service until at least 2017, the power sector’s dependency on gas will increase even further over the next few years. The two existing gas-fired plants are being expanded to add over 300 MW of new capacity and a new developer has advanced plans to add a further 360 MW of gas-fired generation capacity at a new site. Achieving financial closure for this latter project may also require risk mitigation by multilateral development banks. 17. The power and gas sectors in Côte d’Ivoire are deeply interlinked. Power is virtually the sole market for gas producers and electricity production is heavily dependent upon natural gas. Consequently, investment decisions in one sector depend upon a commensurate response in the other. Sustainable and affordable gas supply is the key to maintain and expand the power supply in Côte d'Ivoire by timely construction of efficient combined-cycle gas-fired plants that can deliver power at a cost of less than half that of liquid fuels – USc8/kWh vs. USc17/kWh6. Power from combined cycle plants running on local gas is highly competitive and Côte d’Ivoire is well placed to export such power to its northern neighbors, provided that adequate gas can be supplied. 18. Due to inadequate coordination and financial constraints, the expansion of power generation capacity is today hindered by lags in development of new gas resources. Current gas producers have attained the maximum output levels that their gas reserves can sustain. Exploration is under way to discover new gas and oil reserves, but long lead times, post- discovery, mean that indigenous gas supply cannot be raised significantly for at least another 5-6 years. 19. Côte d’Ivoire has consolidated its role as key power exporter in the region, supplying neighboring Burkina Faso and Ghana, as well as Togo and Benin (although on an intermittent basis). A transmission line to interconnect with Mali has recently been commissioned, thereby increasing export opportunities. The growing role of the country as key regional player has increased expectations for power exports in the region, which exerts further pressure on an overstretched power and gas supply system. Further progress in regional power trade under the aegis of the West African Power Pool is constrained by the lack of natural gas and combined cycle plants for Côte d'Ivoire to meet its export ambitions in the next few years. 20. Due to a gas deficit, the sector will continue to use substantial amounts of liquid fuel (HVO) in 2012-14. The cost of this liquid fuel is very high (almost four times the cost of gas7) and over the next five years, an estimated US$250 million of liquid fuel will be required to offset the lack of gas in the sector. Over the medium term, to mitigate the impact on end user tariffs, Côte d'Ivoire's power sector needs to pursue demand side management and energy efficiency
6 With gas priced at $5.50/mmbtu and oil at $100/bbl. 7 The cost is about 142 FCFA/kWh only to purchase the fuel, compared with about 38 FCFA/kWh for gas.
4 measures, as well as aggressively explore renewable energy sources such as grid-connected solar. In the longer term, larger-scale hydro also offers an alternative source of power, since the country still has considerable unexploited hydro potential. 21. The expansion of the CI-27 gas field production facilities will ensure that firm gas supply at current levels can be sustained until 2024. This project is therefore key to the power sector’s financial health as current tariff levels do not cover the cost of generation based on liquid fuel. Without the expansion of the CI-27 gas field, the additional cost of liquid fuel to the sector of US$1.5 billion until 2020, or an additional US$215 million per year on average. 22. Until 2012, the gas price for the CI-27 gas field was indexed to the West Texas Intermediate index. This indexation formula, linked to the price of crude oil, exposed the GoCI to unpredictable energy prices, often as high as US$9/mmbtu. This agreement was amended in 2012 with a new framework to calculate the gas price. The revised 2012 GSPA reduces the GoCI exposure to future gas price shocks, by setting a new base price of US$5.5/mmbtu and partial indexation to local exploration and production costs, with a clause enabling renegotiation if the price increases or decreases by more than 10 percent. This revised contractual framework contributes to bringing down the average cost of electricity for the country by reducing the gas price to the power sector. It also helps to restore the power sector’s financial viability. 23. The CI-27 development is the most advanced of various projects and would deliver gas in a much shorter timeframe than other smaller marginal gas field development possibilities in offshore Ivorian waters. Based on current knowledge of Ivorian offshore petroleum prospects, no other discoveries can deliver equivalent volumes of gas. Even if substantial new discoveries take place within the next year, developing them would take a minimum of 5 years, during which time gas demand will have risen steadily. 24. Annexes 7 and 8 present an overview of the Ivorian oil and gas sector, further details on the power sector financial situation and issues related to power generation expansion and gas supply. C. Higher Level Objectives to which the Project Contributes
25. The proposed PRG contributes to promoting economic growth by addressing the fuel supply needs of the electricity sector, which is crucial to all modern sector development. The PRG will enhance the financial viability of electricity supply in Côte d’Ivoire by reducing the risk of recourse to high-cost and more polluting liquid fuel. It also supports an inflow of foreign private investment in the economy at a time when political uncertainty still affects the investment climate. 26. In May 2010, the World Bank Board of Directors adopted a four-year Country Partnership Strategy (CPS) for the Republic of Côte d’Ivoire that aims to: (i) improve governance and rebuild institutions; (ii) strengthen the performance of agriculture; (iii) support private sector development; and, (iv) renew infrastructure and basic services. By supporting the expansion and upgrading of an essential energy sector asset, the proposed PRG will primarily support the fourth CPS pillar (renewing infrastructure and basic services). This CPS pillar is in turn aligned with the third outcome of the Country’s Poverty Reduction Strategy Paper: ensuring the well-being of the population though increased access to electricity. The PRG is also aligned with the growth pillar of the World Bank’s Africa Strategy, by contributing to reliable supply of electricity for growth and private investment.
5 27. The WBG is broadly engaged in Côte d'Ivoire, with a large portfolio, and has been deeply involved in several power sector financing and reform operations over the past 15 years. The PRG is part of a suite of instruments supporting the energy sector in Cote d’Ivoire, including a strong sectoral dialogue with the authorities. Within this broader suite of support, the PRG is used as an instrument to contribute to restoring investors' confidence in the energy sector in post- conflict Côte d’Ivoire. 28. The PRG is complementary to the ongoing IDA-funded UERP, approved in 2009, since it addresses the critical gas-to-power link and leverages IDA resources to minimize business and regulatory risks faced by private investors. The PRG will help secure production of cheaper electricity, while reinforcement of the distribution system under the UERP will improve supply to clients and increase access to electricity. In addition, the Development Policy Operation (currently under preparation) will support a balanced economic reform program including measures to increase the rate of investment in the energy sector. 29. The IFC and MIGA Boards approved support for the expansion of the Azito power plant in mid-2012. During the last 12 months, both CIPREL and Azito power projects have arranged firm financing to expand power generation capacity in 2014-15; however at the same time the risk of timely payments from the power sector to private parties remains a key risk to further upstream gas development. Yet additional gas is required to be brought on stream concurrently with new power generation capacity. This non-payment risk is a key constraint to the expansion of gas supply, as in the recent past delayed payments and arrears have accrued for up to 6 months. II. PROJECT DEVELOPMENT OBJECTIVES
A. PDO
30. The Project’s Development Objective (PDO) is to maintain the availability of clean natural gas for lower cost power generation.
B. Project Beneficiaries 31. The direct beneficiaries of the proposed project are (i) the private commercial banks that are providing loan funds to the project developers, (ii) the shareholders of the Block CI-27 Joint Venture, and (iii) PETROCI and GoCI that will earn substantial revenues from the additional gas to be sold over the next 12 years. 32. The indirect beneficiaries are consumers of electricity, whose tariffs are lower than they would otherwise be in the absence of the project, because the alternative to Foxtrot gas is high- cost liquid fuel. The air quality in Greater Abidjan will also be cleaner since the Greenhouse gases (GHG) released by burning natural gas are significantly lower than from burning oil.
C. PDO Level Results Indicators 33. The proposed PDO indicators are: a) The quantity of gas supplied to power plants (mmscf/month); b) Greenhouse gas emissions avoided (tons of CO2 emissions reduced per year); c) Power sector savings associated with burning gas instead of liquid fuel (US$/year); d) Indirect Project Beneficiaries (number); and
6 e) Female Beneficiaries (percentage). 34. The project’s intermediate indicators will relate to the commissioning of the project on time and budget. The intermediate indicators include: a) Gas production capacity achieved by the project (mmscf/month); b) Commissioning of the project completed on schedule (yes/no); and c) Commissioning of project according to budget (yes/no).
III. PROJECT DESCRIPTION
A. Project Components
35. The proposed operation consists of a credit enhancement mechanism to mitigate the risks of the low creditworthiness of the power sector and the GoCI, thus enabling private investment in the expansion of the CI-27 block gas fields. The proposed instrument is a Partial Risk Guarantee (PRG) back-stopping gas payments under a Gas Supply and Purchase Agreement (GSPA) between the Republic of Côte d’Ivoire, CI-ENERGIES and the Block CI-27 Joint Venture Partners (JV), - Foxtrot International, SECI, ENERCI and PETROCI. Under the GSPA, GoCI has agreed to guarantee CI-ENERGIES’ payment obligations for gas supply to the JV partners, but given recent history of payment arrears, this alone is perceived by commercial lenders as inadequate risk mitigation. Hence the PRG will support GoCI’s payment obligations under the GSPA to the JV partners, excluding the share corresponding to PETROCI, the state- owned petroleum company 36. Block CI-27 is located offshore Côte d'Ivoire approximately 70km southwest of Abidjan. The expansion project comprises two components: (i) upgrading of the existing Foxtrot platform and, (ii) addition of a new production platform, wells and pipelines to develop the adjacent Marlin field within the CI-27 block. 37. Foxtrot is the only field in Block CI-27 currently in operation. Gas and a small volume of oil are transported via pipelines to the Vridi terminal in Abidjan, where the gas is sold to the Azito and CIPREL power stations and the oil to the SIR refinery. The supply lines and facilities that service the existing Foxtrot platform will be reconfigured to ensure reliability and uninterrupted gas supply after the field expansion. 38. The Marlin field will be developed as a new separate four-leg fixed platform with eight slots and five wells. The Marlin platform was ordered in February 2013, after a 2-year delay, resulting from the unstable political situation in Côte d'Ivoire, and gas payment arrears of the power sector. 39. The investment will enable Block CI-27 to maintain production of 140 mmscfd, with a peak production capability of 154 mmscfd and allow liquid handling of 12,000 bbls/day, with a contractual commitment to produce and sell gas to GoCI until 2024. The diagram below shows the production profile of the CI-27 gas field. It is worth noting that without the investments, production will decline quickly over time. More details of the CI-27 expansion project are available in Annex 2.
7 Figure 1: Production profile of the CI-27 gas field (existing and expansion)
B. Project Cost and Financing
40. Project costs. The table below summarizes the main investment costs of the JV for the period 2012-2016. These cost items include built-in contingencies. All of the JV partners have to make a contribution pro rata to their share in the JV. A significant portion of the JV sources of funds will be provided by the cash-flow generation from existing and to-be-developed assets in Block CI-27. Each JV partner has decided to allocate a portion of these revenues, which it is entitled to distribute, to finance the investment plan.
8
Table 1: Use and sources of funds - Block CI-27 Investment Program for the period 2012-2016 Project Cost US$m Joint Venture Sources of Funds US$m
Exploration/Evaluation wells 70 Total Equity 65 New Production wells 420 Petroci 36 Mahi and Manta gas 180 Enerci 18 Foxtrot O&G wells 155 Mondoil 12 Marlin O&G wells 85 Cash-flow from operations 715 SECI 205 315 New Marlin Production platform Petroci 338 Process expenses, extension of Enerci 97 155 existing facilities, piping Mondoil 77 Senior debt 180 SECI 180
Total Investment costs 960 Total sources 960
41. SECI expects to finance its stake in the JV with US$328 million of revenues from operations, counted as equity, and US$200 million of debt financing. Debt is provided by four commercial banks, led by HSBC, which SCDM8 has appointed as Lead Arranger. The debt tenure is expected to be 6-8 years. ENERCI (Suez group) and PETROCI will finance the additional investment needs through a combination of cash-flows from existing operations and additional equity. 42. Over US$300m of the total investment costs have already been committed. The investments to date comprise drilling the additional wells connected to the Foxtrot platform, adapting the Foxtrot platform to these new wells, and ordering the Marlin platform. The bulk of the funding so far has been from the sponsors’ equity contributions, which will be rebalanced with additional JV cash-flows from operations and senior debt (for the SECI portion) during the remaining investment period. C. Lending Instrument: Guarantee
43. The proposed project consists of providing a credit enhancement mechanism to address the low credit worthiness of the power sector and the GoCI, thus enabling the development and expansion of the CI-27 block gas and oil field. The proposed instrument will be a US$60m Partial Risk Guarantee (PRG), back-stopping Côte d’Ivoire’s guarantee obligations for the gas payments under the Gas Supply and Purchase Agreement (GSPA) between GoCI, CI- ENERGIES, and the Block CI-27 JV private partners (SECI, ENERCI, Foxtrot international).
8 SCDM Energie SAS, France, or SCDM SAS (SCDM), which is the recipient of the MIGA coverage, owns 24 percent of the Block CI-27 JV through the company SECI. See Figure 1 in Annex 2 for the detailed Shareholding structure of the CI-27 JV.
9 44. To this extent, IDA received a request to provide a Partial Risk Guarantee benefitting the Block CI-27 from the GoCI on July 19th 2012. 45. The PRG will be structured to support international members of the JV, i.e, SECI, ENERCI and Foxtrot International. The specific risk coverage requested by the JV partners includes backstopping of the ongoing payments for gas supplies to the power sector. This is required in order to allow the JV to make timely payments to commercial banks providing senior loans to SECI; such credit enhancement will prevent these commercial banks from claiming any payment defaults under the financing agreements and from requesting immediate acceleration of their loans in case of missed payments, as they would be entitled to do if a PRG was not in place. The PRG support is part of the security requirements that private commercial lenders to SECI have put forward in their financing agreements with SECI. 46. Lenders to SECI and investors in the expansion project need additional security to cover termination risks, which are not included in the PRG coverage under consideration. In this regard, the MIGA Board approved in November 2012, a US$380m insurance coverage to SECI and its lenders. MIGA Partial Risk Insurance has been provided only for a portion of the equity investment in the project –that of SECI. Therefore, complementing MIGA support, the proposed PRG aims at securing investors against commercial risks and to ensure timely payment for gas supplied while enhancing the long-term sustainability of the project, thereby allowing a scale-up of large private investments to be undertaken in the upstream gas sector. However the other private partners in the JV are only seeking PRG support for ongoing payments. 47. The proposed PRG will use a letter-of-credit (L/C) structure to support Côte d’Ivoire’s payment obligations under the GSPA to the JV partners, excluding the share corresponding to PETROCI. Annex 6 provides an indicative term sheet for the typical PRG structure based on an L/C, the key features of which are set forth below: (a) A revolving L/C is issued by a commercial bank (L/C Bank and PRG beneficiary) in favor of Foxtrot International acting on behalf of the Joint Venture Partners. The L/C could be drawn in the event GoCI fails to comply with certain of its contractual payment obligations under the relevant GSPA, as detailed under the PRG Support Contract. (b) GoCI would reimburse the L/C Bank amounts drawn under the L/C within an agreed time period -12 months. If reimbursement is made within the agreed time period, the L/C would be reinstated by the L/C Bank. However, if GoCI fails to reimburse the L/C Bank within the agreed time period, the L/C Bank would have the right to request reimbursement directly from the World Bank under the PRG. 48. The L/C amount is expected to cover up to a capped amount US$60 million of gas payments corresponding to an estimated 4-5 months9 of deliveries under the GSPA, excluding PETROCI’s share of revenues, which is not covered by the PRG.
9 The JV gas supply obligation is 140mmscfd with a base price, subject to indexation, of $5.5/mmbtu. The monthly payment corresponding to this contractual quantity and to the base price is about $23m. Given the 60% ownership of the private investors (PETROCI owns 40% of the JV, and its payments are not covered by the PRG), the monthly gas payment to private investors is about $14m. A $60m PRG will therefore cover 4.3 months of gas payments under the GSPA.
10 49. The PRG would cover principal, capped at US$60 million and interest, due and unpaid by GoCI to the L/C Bank related to advances made by the L/C Bank to Foxtrot International under the letter of credit. This total amount of the PRG is deemed appropriate by the World Bank, taking into consideration: (i) the precedents of arrears which the country has gone through; (ii) the ongoing gas projects that the World Bank is involved in; (iii) the brownfield nature and advanced stage of the project; and (iv) the complementarity of the PRG with the MIGA Partial Risk Insurance. 50. The availability of the proposed risk mitigation through the PRG was considered a key condition, (albeit implicit), for the signing of the amendment to the GSPA between GoCI and the JV. The main advantage of the proposed PRG is that minimal security (equivalent to only few months of GSPA payments) is being provided to the JV partners through the PRG, while leveraging IDA resources. The catalytic effect of the PRG is demonstrated by the fact that PRG support for US$ 60 million (counted as only US$ 15 million from the IDA Country allocation) will leverage substantially larger gas payment flows over the terms of the GSPA (12 years) and facilitate an investment in the Foxtrot Gas Field of about US$ 1 billion. 51. The PRG structure is well defined and has been extensively discussed with the GoCI, and with the private partners of the JV. The PRG structure has in addition been tested with several commercial banks through market soundings. 52. The diagram below illustrates the PRG-related agreements and structure.
Figure 2: PRG-Related Agreements and Structure
11
L/C Bank Selection Process 53. The L/C bank will be chosen on the basis of a competitive process handled jointly between GoCI and Foxtrot International. The L/C bank will be selected from a shortlist of banks meeting the following criteria: (i) a strong experience in the field of structured finance and trade finance activities, (ii) creditworthiness acceptable to address the long term drawdown needs over the L/C tenure; and (iii) competitive pricing of the L/C. 54. Banks have already shown considerable interest to provide the L/C guaranteed by IDA, as the L/C bank risk will rely not on the project merits but on IDA’s creditworthiness. Given the visibility of the project, a major oil and gas project in Africa, the familiarity of some banks with the project, as existing financiers of SECI, their relationships with some of the JV partners (in particular GdF-Suez and Bouygues), and the banks already present in Côte d'Ivoire, the L/C tender is expected to attract interest from a number of commercial banks. 55. IDA expects the L/C bank selection to be made in July 2013, and financing documents signed shortly thereafter. Lessons Learned and Reflected in the Project Design 56. Lessons learned and incorporated in the project design include the World Bank‘s worldwide experience with IPP projects, in particular project experience in Pakistan, Jordan, Bangladesh, Kenya, Nigeria and Côte d‘Ivoire. In Côte d’Ivoire, the PRG in support of the Azito Power Plant (1998) has been successfully concluded without any instances of default or a call on the PRG, despite the turmoil which affected the country during the civil war. 57. From the above mentioned transactions several lessons can be derived : (a) A PRG can mitigate the power sector’s financial and institutional position for investors in the sector, provided the WBG has a strong sectoral dialogue with the authorities. This is particularly the case in Côte d'Ivoire, as the WBG is broadly engaged in Côte d'Ivoire, with a large portfolio, and has been deeply involved in several power sector financing and reform operations over the past 15 years. A PRG does not directly address the financial viability of the energy sector. However, it can be used as an instrument in a broader suite of WBG support, and contribute to restoring investors’ confidence in a country and a sector. (b) A well-structured power sector can adequately limit the risk that the Guarantee would be called. In Côte d'Ivoire, the cash flow distribution mechanism and the recourses on GoCI which are embedded in the GSPA, make it unlikely that the IDA guarantee would be called upon. Furthermore, it is in the interest of all the parties - as is observed in most, if not all PRG operations - that the PRG is not called, in order to preserve Côte d'Ivoire's reputation as a creditworthy partner. (c) PRGs have favored private investments in the power sector, mainly IPPs, but are not sufficient by themselves to ensure financial sustainability of a country’s power sector. This is particularly true in Côte d'Ivoire, as the PRG has to be accompanied by credible reform measures and visibility over tariff policy. The WBG is particularly well placed to favor this discussion, as it is deeply involved in the Ivorian power sector, through its IDA, IFC and MIGA operations.
12 (d) The WBG has limited the amount and the tenure of the guarantee it would provide, in order to limit the "burden" on GoCI, should the guarantee be called, and to leverage as much as possible its intervention. As a general principle, IDA tries to limit the extent of its guarantees, and takes the benefit of being complementary with MIGA guarantees. (e) The L/C PRG structure has a proven record of mobilizing private investment (e.g. Cameroon, Kenya and Nigeria) through efficient mitigation of the liquidity risks due to failure of meeting on-going payments. The PRG with a L/C facility puts in place a cost efficient security instrument to lower the counterpart credit risks. In the case of a payment delay, the L/C structure gains the project valuable time to sort out the irregularities while still being able to serve the debt and avoid default. In this way the L/C PRG structure ensures the continuous operation of the gas field to provide stable gas supply to the power sector during the disruption period. From the WBG perspective, the L/C PRG structure minimizes the use of IDA resources and complements the MIGA Partial Risk Insurance which covers termination risks to SECI lenders and shareholders. 58. The project design not only incorporates best practice experience from these projects, but further builds on this experience through the harmonization of the risk mitigation package and minimizing support to the extent appropriate for GoCI, given the creditworthiness issues affecting the energy sector. Synergies between the IDA PRG and the MIGA Partial Risk Insurance are expected to encourage other private investments in the county by demonstrating that GoCI can offer a tested credit enhancement framework to attract investors in other projects, both in energy as well as other infrastructure sectors. IV. IMPLEMENTATION
A. Institutional and Implementation Arrangements
59. Foxtrot International is the operator of Block CI-27 and is responsible for the project implementation. Foxtrot International has a strong track record of operating in Côte d’Ivoire and is well equipped from technical, contractual and financial standpoints to develop this large scale project. 60. The main contracts governing activities in the CI-27 Block are the Production Sharing Contract, (PSC, signed in 1994), and the Gas Supply & Purchase Agreement (GSPA, signed in 1997), described below. Production Sharing Contract (PSC) 61. The PSC for Block CI-27 was signed in 1994 between the Republic of Côte d’Ivoire, PETROCI and Foxtrot, SECI, ENERCI. This contract has been modified on several occasions. The last modification (signed in November 2012) revises the cost recovery and profit gas shares between the JV partners and the State. The contract has been extended to August 2024. The PRG itself will extend until year 2021. 62. The PSC specifies that the gas and oil sales will first be used to reimburse the investment costs of the JV partners in Block CI-27. Additional production beyond cost oil and gas, “profit gas” and “profit oil” will be shared as follows: 50 percent is allocated to GoCI, and 50 percent is
13 allocated to the JV members. Both the cost gas and profit gas share of the JV increased after the negotiation of the new gas sales price10. Gas Supply and Purchase Agreement 63. A Gas Supply and Purchase Agreement, originally signed in 1997, was amended in 2007 and 2012. The GSPA specifies that the JV will provide daily gas supply capacity of 140 mmscfd starting from July 2012 until 2024, from an initial contractual quantity of 90 mmscfd. The GoCI is obliged, under a Take or Pay clause, to offtake 70 percent of this capacity. However, the take or pay is not considered an issue, given the potential shortage of gas for the power sector. As mentioned above, despite the project, GoCI would still need to buy HVO to complement gas based power generation. Gas and Power Sector Institutional and Implementation Arrangements 64. The project institutional and implementation arrangements can be summarized as follows: (a) The assets of the power sector (apart from private generation assets) are owned by CI-ENERGIES (a 100 percent state-owned enterprise, set up under company law). CI-ENERGIES’ role and responsibilities are management and renewal of sector assets, planning and development of new sector investments and managing the cash flows of the power sector. In particular, CI-ENERGIES is the party to the GSPA signed with the various gas suppliers. (b) CIE, partly owned by Bouygues through Finagestion is in charge of transmission, distribution and generation of electricity from publicly owned power sector assets (ie. the ones not handled by IPPs). CIE’s role is limited to operation and maintenance of these assets. Replacement of assets is the responsibility of CI-ENERGIES. (c) CI-ENERGIES has the monopoly to buy power and gas from private suppliers. (d) Generation IPPs are currently limited to Azito Energies and CIPREL. (e) The operation of the power sector is governed by Decree no. 10-2010, which defines the cash flow distribution mechanism of the power sector. This mechanism guarantees stability of remuneration to the private players. The Decree states that the revenues of the sector will be attributed in order of priority among : (i) CIE remuneration (ii) Gas suppliers (iii)IPP suppliers (iv) Provision for new investments (v) Other operating expenses of the sector.
10 The initial PSC defined a maximum share of 40% of cost gas in the gas extracted where sea depth is inferior to 200m, and of 50% for sea depth over 200m. The third amendment to the PSC set a new maximum share at 60% regardless of sea depth. The share of total gas with gas production level between 110 and 140MCF/day was set at 30% to 50% depending on sea depth in the initial PSC. The third amendment set 50% profit gas share for volumes below 154mmscf/day.
14 B. Results Monitoring and Evaluation
65. Overall monitoring of project outcomes and results indicators will be done by CI- ENERGIES, together with Foxtrot International. Data for monitoring project outcomes and results indicators will be generated by Foxtrot International in regular progress reports. IDA will monitor results through the submission of relevant reports by Foxtrot, as required under IDA’s Project Agreement and submission of relevant reports by GoCI/CI-ENERGIES required under IDA’s Indemnity Agreement with GoCI, as well as through regular field visits. Annex 1 presents the project’s Results Framework that defines specific results to be monitored. C. Sustainability
66. The project will assist GoCI to obtain guaranteed deliveries of a substantial volume of gas to the power sector, until 2024. The power sector in Côte d’Ivoire currently enjoys relatively low electricity tariffs compared to its neighboring countries, thereby favoring economic growth, but these cannot be sustained without access to even larger volumes of lower-cost gas from new sources. The financial health of the power sector is dependent upon minimizing the use of liquid fuel. Locally extracted gas is the cleanest and cheapest source of fuel for the power sector in Côte d’Ivoire and maximizing its production is the best way to ensure electricity prices are not forced up unduly. However, the demand for gas is expected to outstrip available supply in the next few years. Côte d’Ivoire has ongoing exploration activities with major oil companies, which may yield new reserves, but is also envisaging gas imports, through an LNG regasification plant. 67. Long term sustainability of the investments is ensured by Foxtrot International, which has been successfully operating the CI-27 gas field over the past 20 years following oil and gas industry best practices. By backstopping the power sector payments, the PRG will help ensuring that funds are available to properly operate and maintain the assets over time. V. KEY RISKS AND MITIGATION MEASURES
A. Risk Ratings Summary Table
Risk Rating Stakeholder Risk M Implementing Agency Risk - Capacity L - Governance L Project Risk - Design M - Social and Environmental S - Program and Donor L - Delivery Monitoring and Sustainability S Overall Implementation Risk S
15 B. Overall Risk Rating Explanation
68. The overall risk rating is Substantial. This reflects the good track record of the JV partners, the status of the main project agreements (including the Gas Supply and Purchase Agreement), which are agreed and signed by the parties, the construction already underway, with therefore limited risks for cost increases and delays, and the brownfield nature of this project. However, the operating environment risks are high - due to the country’s political fragility and the electricity sector’s recent poor operational and financial performance (in particular the weak revenue generation mechanisms of sector institutions and infrastructure). A more detailed description of risks can be found in Annex 5.
VI. APPRAISAL SUMMARY
A. Economic and Financial Analyses
69. The Block CI-27 unincorporated JV had a solid financial performance in the past two years, with Net Income after Depreciation, Amortization, Interest and Tax rising from FCFA 47 billion (US$93 million equivalent) in 2010 to 54 billion (US$107 million equivalent) in 2011 mainly due to decreases of non-recurring charges. This result reflects the good operational performance as well as the high profit margin under the previous Gas Supply and Purchase Agreement. 70. The new gas price of US$5.5/mmbtu took effect at the beginning of 2012. Despite this price reduction, the JV generates significant amount of cash which can be used to re-invest in the project expansion. The reinvestment will be recovered with gas sales proceeds from existing and future ring-fenced gas production (e.g. cost oil and profit oil) in the Production Sharing Contract. Under the agreement, the annual cost recovery is capped at 60 percent of gas revenue and 40 percent of oil and condensate revenues. Both the cost gas and profit gas share of the JV increased after the negotiation of the new gas sales price11. The remaining revenue after cost recovery could be harvested through the profit gas and profit oil mechanism, which is set at 50 percent of the remaining production after cost recovery. 71. The financial model developed by the JV to assess the project’s financial performance indicates that the field expansion project will generate healthy returns. The result showed a cumulative cash flow to the JV of about US$1.3 billion over the period of the GSPA. The Net Present Value (NPV) of the cash flow is about US$530 million. The project financial IRR is about 42 percent12, based upon a US$ 69/Bbl13 oil price. 72. The expansion remains largely a gas field development project with limited upside prospects of substantial liquid production and therefore its rate of return is less sensitive to oil
11 The initial PSC defined a maximum share of 40% of cost gas in the gas extracted where sea depth is inferior to 200m, and of 50% for sea depth over 200m. The third amendment to the PSC set a new maximum share at 60% regardless of sea depth. 12 The Internal Rate of Return is computed on the incremental cash flow generated from the new investment. 13 $69/bbl is the oil price assumption used in the project valuation by the lenders (club financing led by HSBC). It reflects cost associated with oil storage and transportation as well as a conservative oil price forecast. More oil price scenarios are included in Annex 4.
16 price fluctuations. If the current oil price (Brent crude at about US$100/Bbl) is sustained in the next decade, the project will generate a return of about 45 percent. 73. The Foxtrot expansion project is also expected to create a strong cash flow and positive NPVs for the State. PETROCI, the state-owned oil company (with a 40 percent stake in the JV), is expecting US$480 million positive cumulative cash flow from the project, about US$200 million in NPV terms. GoCI will have a profit share in excess of US$1.2 billion under the fiscal agreement, with a NPV of about US$480 million. Significant net revenue amounting to US$1.7 billion will flow to PETROCI and GoCI combined over the course of the 12-year contract period. The governmental share of the total cash flow would have been about US$200-300 million higher in total, if the old PSC terms had continued, on the basis of the project being expanded. 74. A separate economic analysis has been carried out to assess the project benefits from the perspectives of Côte d’Ivoire. In this case, project costs remain the same, but the benefit takes into consideration the opportunity cost of not proceeding with the expansion of the Block CI-27 gas production facilities. Project benefits consist therefore of the cost of substituting Foxtrot gas with liquid fuel, the only available alternative at this time. From the country point of view, the project is extremely viable with a cumulative undiscounted cash benefit of about US$4.1 billion14 and an NPV around US$ 1.8 billion. The project will also bring savings in terms of CO2 emissions, which have been quantified at about US$0.5 million15 per year. 75. Further details on the project’s economic and financial assessment are included in Annex 4. B. Technical 76. The project’s technical design has been reviewed as part of the preparation process and been found to be appropriate and to follow international oil and gas industry best practices. 77. An independent technical consultant (Shaw Consultants International, Inc.), was engaged by the lead bank (HSBC) of SCDM to perform technical due diligence of the project. Most of the technical conclusions hereafter are based on this technical consultant’s report. 78. Foxtrot is a small organization. Therefore, in order to maintain a full project management team for the duration of the project, an Owner’s Management Team has been assembled to provide oversight of the engineering contractors during the Front End Engineering Design Activities (FEED). The FEED were completed in early 2013 and bids for Engineering, Procurement and Construction (EPC) contracts have been received and evaluated for the major components of the project. 79. The project management team during the EPC phase will be complemented by personnel from external engineers (Mustang Engineering and JP Kenny) to ensure that the requirements of the design, quality standards and effective health, safety and environmental standards are implemented. For engineering services and project management, reimbursable contracts have been used while a lump-sum type contract has been used for EPC agreements like fabrication, transport and installation of the platform.
14 Depending on liquid fuel cost assumptions. The current estimation based on a $15c/kWh replacement cost of liquid fuel. 15 The calculation is based on the assumption of a carbon price of $1/ton in the next three years.
17 C. Financial Management 80. There are no traditional financial management issues as there will be no World Bank- financed procurement or procurement-related disbursements under the project. Foxtrot International will be responsible for the financial management of the gas expansion project. Foxtrot possesses adequate financial management systems, including accounting, reporting, auditing, and internal controls, and relevantly qualified staff. The annual financial statements are prepared using internationally accepted accounting principles. In addition, Foxtrot’s financial statements are audited in accordance with international standards on auditing. 81. The cash flows of the power sector are channeled by CI-ENERGIES, according to the rules defined in Decree no. 2010-200, which sets the priority order for cash distribution. The revenues from gas sales are attributed to the government (as per the PSC) and to each of the joint venture members, through Foxtrot International, as operator of the Joint Venture. 82. Each JV member (excluding GoCI, which does not participate in the investment financing) is free to finance its share of the joint venture investments through its own equity or from its portion of the CI-27 revenues, through cash calls which Foxtrot International will make. Foxtrot will contract and pay the various contractors responsible for the investments on behalf of the JV members. Foxtrot has a dedicated project unit in charge of designing and contracting the various investment components, through its own competitive bidding process, which is in line with market practice in the oil and gas private sector. 83. While the PRG provided by IDA does not finance investments of the Joint Venture, the proceeds of the L/C which IDA will guarantee will be directed to Foxtrot which will be in charge of distributing these proceeds to the JV members (Foxtrot, SECI, ENERCI) pro rata to their share in the joint venture. To this effect, Foxtrot, as operator, will sign a back-up agreement with the JV members to share these proceeds. Foxtrot will also be responsible, on behalf of ENERCI, Foxtrot and SECI, to pay for the costs associated with the L/C PRG structure, including the L/C bank cost, and the IDA PRG costs. D. Procurement 84. The World Bank’s operational policies for guarantees (OP/BP 14.25) require that procurement of goods and services for a supported project must be carried out with due regard to economy and efficiency. 85. IDA reviewed the process for the concession of CI-27 to Foxtrot International. In 1990, through a bidding process, the Government invited proposals from twenty-four potential private investors to produce gas from the Foxtrot offshore field. In December 1992 the Government signed a Concession Agreement with a consortium of predominantly private project sponsors, CENCI, which would produce gas and electricity as one combined project. After a series of ownership changes (see Annex 2 for details), in 1999, exclusive rights to exploit Block CI-27 were granted to Apache Côte d’Ivoire, which, a year later, became Foxtrot International. The GSPA was then extended in accordance with common industry practice. 86. As indicated by the independent technical consultant, the project is robust and is being executed by experienced, world-class contractors operating under lump sum contracts when practicable. This formula reduces the risk of cost and schedule overruns for the defined scope of work. Also, the contracting strategy of having six work packages of homogeneous works and activities ensures a competitive process driving costs down.
18 87. IDA´s appraisal concluded that the overall procurement process carried out by Foxtrot in implementing the project is following a classic oil industry pattern and meeting general principles of good practice, industry-wide standards of economy, efficiency and transparency for this type and size of project. 88. In addition, project agreements will, inter alia, make warranties, representations and covenanted undertakings, including in respect of World Bank anti-corruption policies and procedures, including those relating to sanctionable practices. E. Environmental and Social Performance Standards
89. Since the CI-27 Block gas field development is a private sector project, jointly supported by IDA and MIGA, the proposed operation will follow the World Bank Performance Standards applicable to private sector projects. In June 2012 the Board approved the adoption of the IFC Performance Standards as the World Bank Performance Standards for private sector projects supported by IBRD/IDA. Thus, the project has been categorized as a Category A project in accordance with the draft World Bank procedures applicable to Performance Standards #1. The Table below provides further details on what Performance Standards apply.
19 Table 2: Performance Standards triggered by the Project
Performance Standards Yes No TBD PS 1: Assessment and Management of Environmental X and Social Risks and Impacts The project has been categorized as a Category A project in accordance with the draft World Bank procedure applicable to Performance Standards #1.
The proposed works to install the Marlin Platform, pipelines and development of drilling operations, the future oil and gas production as well as existing operations on the Foxtrot Platform present potential significant adverse environmental and social impacts which may affect an area broader than the sites and/or facilities given its location near ecologically sensitive areas. The key environmental and social issues include: air quality and emissions, noise, management of drilling wastes and cuttings, oil spills, occupational health and safety, aquatic/benthic life disturbance (marine mammals and turtles), well blowout, community health and safety, accidental ruptures of pipelines, fishing activities, hazardous materials and waste management. These potential risks and impacts can be managed through mitigation measures and/or well-known procedures and technologies.
PS 2: Labor and Working Conditions X Foxtrot follows labor and working conditions policies compatible with international practice. PS 3: Resource Efficiency and Pollution Prevention X The Environmental and Social Review Summary (ESRS), prepared by MIGA, provides information that the project follows good international industry practice as found in MARPOL, API standards, Guidelines of the International Association of Oil and Gas Producers, etc. Moreover the updated ESIA refers and is consistent with the WBG EHSGs for Offshore Oil & Gas. PS 4: Community Health, Safety, and Security X The company has emergency response procedures in place compatible with international practice, in particular with regards to oil spills response PS 5: Land Acquisition and Involuntary Resettlement X In its report, MIGA concluded that there were no major social safeguards risks for the operation. Following approval of the MIGA operation by the Board on November 29, 2012, a situation related to land acquisition surfaced and was addressed diligently by the project sponsor in accordance with World Bank applicable policies; hence the triggering of PS 5 for this operation. PS 6: Biodiversity Conservation and Sustainable X Management of Living Natural Resources See Performance Standard 1 above PS 7: Indigenous Peoples X Indigenous People PS is not applicable as no indigenous peoples, as defined by the policy, have been identified in the vicinity of the project area PS 8: Cultural Heritage X Cultural Heritage PS is not applicable as no impacts to cultural resources have been identified resulting from on-shore or offshore activities.
20 90. The assessment of the client’s capacity was carried out by MIGA in the course of the preparation of its guarantee operation and validated by the IDA team. The review of the documents submitted by Foxtrot International, shows that the firm follows appropriate industry practice and maintains a health, safety and environment unit tasked with the management of the project’s environmental, health and safety procedures. In particular, the company has adopted emergency plans that would allow the timely and efficient management of contingencies such as, in particular, oil spills. The company is also implementing a corporate social responsibility policy and finances community development programs for nearby coastal villages. 91. The Environmental and Social Review Summary prepared by MIGA was disclosed on August 30, 2012, along with the ESIAs (see Annex 3 for details)16. The GoCI carried out in 2010, as part of the implementation of an IDA financed Governance and Institutional Development Project, a Strategic Environmental Assessment of the Oil and Gas sector in Ivory Coast17. This report is quite comprehensive and addresses the actual and potential challenges of oil and gas development along the coast of Côte d’Ivoire. The study represents a good basis for dialogue and monitoring of progress in the way impacts of the oil and gas developments on- shore as well as off-shore are mitigated. 92. The project activities have been subjected to Environmental and Social Impact assessments in compliance with the GoCI regulations (in particular the Decree no. 96-984 dated November 8 1996), which were disclosed in August 2012, along with the ESRS. The Government has issued the required permits. Foxtrot has finalized an updated ESIA consolidating and updating the previous separate ESIA for Foxtrot (2007) and Marlin Platform (2010). This consolidated ESIA was shared with the World Bank and was found consistent with the project parameters. The revised ESIA was re-disclosed in the InfoShop on April 19, 2013. Consultations took place with the local population at the time of the initial ESIAs as well as during the preparation of the consolidated ESIA in early 2013.
16 The ESRS was revised and re-disclosed on October 25, 2012 and April 19, 2013 to include updated information on environmental and social impacts. 17 «Développement du secteur des hydrocarbures onshore & offshore en Côte d’Ivoire», September 22, 2010.
21 Annex 1: Results Framework and Monitoring Côte d’Ivoire - Block CI-27 Gas Field Expansion Project Project Development Objectives (PDO): Maintain the availability of clean natural gas for lower cost power generation.
PDO Level Cumulative Target Values Responsibility Description Unit of Data Source/ (indicator definition Results Baseline YR YR YR YR YR YR YR YR Frequency for Data Core Measure Methodology etc.) Indicators 1 2 3 4 5 6 7 8 Collection PDO INDICATORS The project will keep gas delivery from the Quantity of gas Block CI-27 constant JV Partners supplied to mmscfd 140 140 140 140 140 140 140 140 140 Yearly JV Partners averting a decrease and GOCI power plants over years in availability of gas for the power sector. Tons of CO2 saved Greenhouse gas Estimates Tons of JV Partners due to the project – emissions 0 419 458 458 458 458 458 458 458 Yearly based on gas CO2 and GOCI see Annex 8 for avoided availability details Savings associated with burning gas Power sector US$ JV Partners from the project 0 123 215 288 217 343 414 401 384 Yearly JV Partners savings million and GOCI instead of liquid fuel – see Annex 8 for details By promoting the CI- 27 gas field expansion project, the PRG will provide indirect benefits to all CIE custumers. The number of indirect Indirect Project Number 7.2 7.6 7.9 8.3 8.8 9.2 9.7 10.1 10.7 beneficiaries is Beneficiaries18 (million) therefore calculated based on CIE’s number of customers (with average household size of 6 persons) assuming a 5 percent increase per
18 Direct Project Beneficiaries has been substituted with indirect project beneficiaries based on the PRG nature of the proposed operation.
22 year.
Based on share of female population as Female % 49 49 49 49 49 49 49 49 49 per the World Bank Beneficiaries Development Indicator (est. 2012) INTERMEDIATE RESULTS The project will keep gas delivery from the Gas production Block CI-27 constant capacity JV Partners mmscfd 154 154 154 154 154 154 154 154 154 Monthly JV Partners averting a decrease achieved by the and GOCI over years in project availability of gas for the power sector. Commissioning JV Partners of the project Yes/No No No No Yes Yes Yes Yes Yes Yes Yearly JV Partners and GOCI completed Commissioning of project JV Partners Yes/No No No No Yes Yes Yes Yes Yes Yes Yearly JV Partners according to and GOCI budget
23 Annex 2: Detailed Project Description Côte d’Ivoire - Block CI-27 Gas Field Expansion Project
1. Block CI-27 is located offshore Côte d’Ivoire approximately 70km southwest of Abidjan. The project comprises two components: (i) upgrading the existing Foxtrot platform and, (ii) adding a new platform, to develop the Marlin field. 2. The Foxtrot field has been producing natural gas since 1999 through four wells. Foxtrot is the only field in Block CI-27 currently in operation. Gas is produced from a four-leg fixed platform with 11 slots and six producing wells. Gas is transported via pipeline to the Vridi terminal in Abidjan, where it is sold to the Azito and CIPREL power stations. Condensate is taken to the SIR refinery via a separate liquids pipeline. The supply lines and facilities that service the existing Foxtrot platform will be reconfigured to ensure reliability and uninterrupted gas supply after the field expansion. 3. The Marlin field will be developed as a new separate four-leg fixed platform with eight slots and five wells. The Marlin platform order was placed in October 2012 after a 2 year delay, resulting from the unstable political situation in Côte d’Ivoire, and arrears of payments of the power sector. The investment will enable Block CI-27 to reach a production capacity of 154 mmscfd and allow liquid handling of 12,000 BOPD, with a contractual commitment to produce and sell gas to GoCI until 2024. 4. The total cost to complete the project plan as approved by the GoCI amounts to approximately US$1 billion. This includes the construction and installation of a new platform (Marlin), the drilling of twelve wells, and the reconfiguration of supply lines and facilities that service the existing platform (Foxtrot). 5. The current Foxtrot platform is dedicated to the production of gas and condensates coming from the Foxtrot field and is located 17 km offshore in a water depth of 95 m. Gas transportation and onshore facilities are composed of a 12” gas pipeline 110 km long, a 14” gas pipeline 70 km long and a 4” condensate pipeline 96 km long. These pipes deliver gas onshore to Vridi and Azito power plants. 6. The new facilities under construction include the Marlin field production platform (jacket and deck) which will be installed in slightly deeper water, one 14” gas pipeline 17 km long to the shore, one 6” oil pipe 17 km long to shore, one 14” gas pipe 8 km long and one 4” oil pipe 8 km long to Foxtrot Platform. 7. The new Marlin platform under construction will have a processing capacity of 12 000 BOPD and of 156 mmscfd of gas. The Marlin platform construction and installation cost is estimated at $315 million. This platform will support the development of two new fields, Marlin and Manta. When all the equipment and facilities are integrated and operational, the Marlin platform will add a welcome redundancy to the Foxtrot platform, allowing a greater Block CI-27 security of supply. 8. The reserves evaluation provided by SPROULE, a reputable consulting firm specialized in oil and gas, for Block CI-27, based on technical data on Foxtrot, Mahi, Manta, Marlin fields gives a reasonable comfort on the total level of reserves (1P reserves (proven reserves both proved developed reserves + proved undeveloped reserves) and 2P reserves (1P reserves) + probable reserves) for oil, condensate and gas and on contingent resources to match Foxtrot’s contractual obligations under the Production Sharing Contract and GSPA.
24 9. The project includes the drilling of 12 oil and gas wells on the four fields involved in the project: Foxtrot, Mahi, Marlin and Manta. The cost of this drilling program is evaluated at US$490 million and covers 1 exploration and 1 appraisal well on Foxtrot field, 2 gas wells on Mahi field, 2 gas wells on Manta field, 3 oil/gas production wells on Foxtrot field and 2 oil/gas production wells plus 1 re-entry well on Marlin field. These investments appear to be appropriate to ensure the contractually guaranteed volume of gas Foxtrot is obligated to deliver over the next 12 years. Ownership structure & Contractual agreements 10. Foxtrot International is the operator of CI-27 and takes the main responsibility to run the day-to-day operations and to implement the significant investments determine by the JV members. Foxtrot International has a strong track record of operating in Côte d’Ivoire and is well equipped from technical, contractual and financial standpoints to develop this large scale project. SECI (ultimately Bouygues owned) and Mondoil are Foxtrot International’s main shareholders 11. In addition, it benefits from a strong shareholder support from SCDM and GdF Suez (respectively shareholders of SECI and Enerci JV members), both of them having a extensive experience in developing gas fields. SCDM has carefully led the procurement process with its technical team based in Houston, Texas. GoCI is also associated with the JV’s investment decisions through the presence in the JV of PETROCI. 12. Foxtrot is the operator of the joint venture and engages in the exploration for, and the production of gas, oil, and their by-products. It supplies natural gas for the industrial sector and for electricity production. Foxtrot International LDC was formerly known as Apache Petroleum Ivory Coast and company is based in Abidjan, Côte d’Ivoire. 13. ENERCI is a Côte d’Ivoire registered Company with 1.25 FCFA billion of capital. ENERCI, which holds 12 percent of the joint venture, is fully owned by GdF Suez, the French utility. 14. PETROCI was created as a public company pursuant to law number 97-519 of 4 September 1997 relating to the definition and organization of Ivorian State corporations. It is 100 percent owned by the Government and fulfills the role of the National Oil Company of the Côte d‘Ivoire. According to the Decree No. 98-262 of 3 June 1998. PETROCI’s purpose is to act on behalf of the Government in its contractual relations with the private sector in different activities related to oil and gas in Côte d’Ivoire. The company is registered in the Cayman Islands and is domiciled in Abidjan, Côte d’Ivoire. 15. Mondoil LLC (“Mondoil”) is a company owned and managed by Mr. Bijan Mossavar- Rahmani, previously Chairman of Apache Côte d’Ivoire. 16. SCDM is an oil and gas company owned by SCDM SAS, France. SCDM SAS is a holding company belonging to Martin and Olivier Bouygues which owns 21 percent of Bouygues SA, a major listed company on the Paris Stock Exchange, and Bouygues-Construction, Bouygues Telecom, TFI and Colas. SCDM owns 100 percent of SECI SA. SCDM is registered in France and SECI SA is registered in Côte d’Ivoire. 17. The diagram below illustrates the shareholding structure of the CI-27 Joint Venture.
25 Figure 1: Shareholding structure of the CI-27 Joint Venture
18. Gas Supply and Purchase Agreement. The Block CI-27 JV partners signed a Gas Supply and Purchase Agreement (GSPA) under Take or Pay conditions (ToP) with the GoCI and the State owned off taker: Société de Gestion du Patrimoine du Secteur de l'Electricité (SOGEPE)19 in 1997. The ToP conditions entered into force in June 1999 and include USD payments into an offshore bank account. The GSPA was amended in 2012 with the extension of the supply obligation to 2024. The new agreement includes a gas supply quantity between 140 mmscfd and 156 mmscfd at a fixed price of US$5.5/mmbtu. 19. Share of Revenues. The project revenues sharing formula among the JV partners and GoCI is governed by a Production Sharing Contract (PSC) signed in 1994 and modified in 2012. Under this PSC, up to 40 percent of oil revenue can be used to recover initial capital cost and the remaining 60 percent will be split equally between the JV and the GoCI. Up to 60 percent of the gas revenue can be used for cost recovery, with the remaining 40 percent distributed pro rata between the JV partners and GoCI. The PSC has been extended until 2024. Financing 20. The table below summarizes the use and the sources of funds of the JV partners, all of whom have to make a contribution pro rata their share in the JV.
19 Now liquidated and replaced by CI-ENERGIES 26 Table 1: Project’s use of funds and the sources of funds of the JV partners Joint Venture Sources of Project Cost US$m US$m Funds Total Drilling Cost 444 Total Equity 65 Exploration Well 24 Petroci 36 Mahi Wells 95 Enerci 18 Foxtrot Wells 95 Mondoil 12 Marlin Wells 130 Cash-flow generation 715 Manta Wells 100 SECI 205 Marlin Platform 395 Petroci 338 Engineering Studies, Enerci 97 Geosciences and Other Costs 106 Mondoil 77 Contingencies 15 Senior debt 180 SECI 180 Total Investment costs 960 Total sources 960 21. SECI expects to finance its stake in the JV with US$328 million of revenues from operations, counted as equity, and US$200 million of debt financing. Debt is provided by four commercial banks, led by HSBC, which SCDM20 has appointed as Lead Arranger. The debt tenure is expected to be 6 years. ENERCI (Suez group) and PETROCI will finance the additional investment needs through a combination of cash-flows from existing operations and additional equity. 22. The table below summarizes the principal risks that the project will be subject to, the entities best placed to deal as well as the WBG guarantees that are most appropriate for each type of risk.
Table 2: Risk allocation matrix Private MIGA Phase Risk GoCI PRG Sector Insurance Project design X Pre-construction Debt and Equity Funding X X Cost Overrun X Construction Delays in Construction X Access to public infrastructure X X Operation & Maintenance X Operation Performance Indicators X Gas payments X X Currency devaluation X Convertibility and Transfer X X Political Force Majeure X X During GSPA Change in Law X X Expropriation X X Natural Force Majeure X X X
20 SCDM Energie SAS, France, or SCDM SAS (SCDM), which is the recipient of the MIGA coverage, owns 24 percent of the Block CI-27 JV through the company SECI. 27 Procurement status
WP 1 Main platform 23. A call for bids has been sent to qualified contractors with experience in fabricating this type of platform in West Africa and bids were received from contractors in September 2012, the Foxtrot project engaged in negotiations and detailed evaluation of alternative installation mechanisms to obtain the most favorable cost and technical solution. The WP 1 contract was awarded to Rosetti Marino (Italy) in early 2013. WP 2 Deck transport and installation 24. Negotiations for transport and installation of the deck (and jacket see hereafter) have been concluded with Heerema Marine Contractors. This company proposed two heavy lift barges the “Thialf” and the “ Hermod”, able to install the jacket and deck and install the conductors. The contract was awarded in early January 2013. WP 4 Offshore pipelines and jacket transport and installation 25. Three well qualified contractors with international experience were invited to bid. Although installation of the jacket was considered under this contract, the work has been awarded to Heerema Marine Contractors. The offshore pipeline installation was awarded in early January to Micoperi with the “ Seminole” barge. WP 5: Beach Crossing 26. The contract was awarded in September 2012 to a joint venture of Geocean and Horizontal Drilling International (HDI). The line pipe was delivered in December 2012, the construction is ongoing, and is scheduled to end in June 2013. WP 5 and 6 Onshore Works and Brownfield works on Foxtrot platform 27. The detailed design related to the onshore facilities and the Foxtrot platform has been completed by Mustang Engineering. The final tie-ins have finally been deleted from the contractor’s scope of work and will be performed by the Foxtrot International technical team. Since these operations will likely be determined by operational requirements and subject to change, the fact that Foxtrot will operate these activities avoids claims that a contractor would request for delays and changes, provided that the necessary construction skills and equipment are available. The operations recently implemented by Foxtrot technical teams on site show that they have the required competencies and abilities. 28. The remainder of the operations included in the scope has been proposed to a list of bidders including Boccard, Technip and Rosetti but the bids have been declared unsatisfactory. Foxtrot is currently amending the scope of the works and preparing a new call for tenders. The works are not on the critical path and should be implemented by mid-2014.
28 Table 3: Marlin Project Work Time Schedule
2012 2013 2014 2015 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12 Q13 Q14 Q15 Q16
Project Financing 8/2
Mustang FEED 31/05/12
Work Packages Tendering with dates of proposals WP1 - EPC Deck 7/9 WP2 - T&I Deck 15/4 WP4 - EPCI Jacket & Pipes 7/9 WP5 - Pipelines onshore approach at Addah 22/6 WP6 & 7 - Foxtrot A Brownfield & Onshore Works 7/9 1/5 Drilling 15/4 Proposals In, Negociations And Effective Date WP1 - EPC Deck 2/1 WP2 - T&I Deck 1/1 WP4 - Pipelines 1/1 WP5 - Pipelines onshore approach at Addah 7/9 WP6 & 7 - Foxtrot A brownfield & Onshore Works 01/09/13 Drilling 01/08/13 WP1 - Jacket Contruction (ready for sail away) 27/08/14
WP1 - Deck Contruction (ready for sail away) 11/01/15
WP6 & 7 - Foxtrot A brownfield & Onshore Works 30/06/14
WP5 - Pipelines onshore approach at Addah 30/04/13
WP2 - Jacket Transport 28/08/14 30/09/14
WP2 - Jacket Installation (including 1 month Window) 01/10/14 15/11/14
WP4 - Pipeline Installation 15/11/14 15/02/15
WP2 - Deck Transport 12/01/15 14/02/15
WP2 - Deck Intsallation (including 1 month Window) 15/02/15 29/03/15
WP1 - Hook-Up & Commisioning 30/03/15 15/06/15
Start-up 30/06/15
Drilling 01/06/15
First Oil or Gas 01/07/15
29 Table 4: Project Gross Reserves Estimates (by SPROULE)
30 Procurement history and changes in Foxtrot ownership
The chronology below summarizes key milestones in the life of the Foxtrot field: 1981: Philips Petroleum discovered Foxtrot field which remained undeveloped due to the lack of gas market. 1989: Philips relinquished the license when it withdrew from the country. Following this event, PETROCI drilled a single appraisal well which successfully tested gas and condensate. 1990: Through a bidding procedure, the Government invited proposals from twenty-four potential private investors to produce gas from the Foxtrot offshore field. 1992: Government signed a Concession Agreement with the consortium of predominantly private project sponsors, CENCI, who would produce gas and electricity as one combined project. 1994: Government and CENCI signed “Protocole d’accord numero 2” by which Government expressed intention to sign with CENCI a “contrat de partage de performance” which was signed December 14, 1992. With the consent of GOCI, CENCI allocated to Apache, SAUR Energie, EDF and PETROCI rights related to Foxtrot field. December 1994: GOCI signed with Apache Côte d’Ivoire Petroleum LDC, SAUR Energie, EDF International and PETROCI an agreement called “Contrat de partage de performance”. December 1994 : A Joint Operating Agreement (JOA) was signed. September 1997: Grant of an operating license for 25 Years by GOCI. June 1999 : The Contrat de vente et d’achat de gaz naturel du BlocCI-27 enters into force August 1999: Presidential Decree confirms the right to operate until August 3, 2024. It also spells out: (a) grant of licenses for exploration and exploitation (b) sharing of production between JV partners and the State of Côte d’Ivoire (c) fiscal terms September 1999: Apache sold its wholly owned subsidiary, Apache Côte d'Ivoire Petroleum LDC, for a total sales price of $46.1 million to a consortium consisting of Mondoil Côte d'Ivoire LLC and SAUR Energie Côte d'Ivoire. The sale consisted of 13.7 mmboe of proved reserves and a gain was recorded to other revenues in the accompanying statement of consolidated operations. September 1999: A Shareholder agreement of Foxtrot International mentioned the control by SECI with 2/3 of Board of Directors. April 2000: A Special Resolution mentioned that the name of the company is changed from “Apache Côte d’Ivoire Petroleum LDC” to “Foxtrot International LDC”. September 2005: SCDM acquired the all shares of SAUR Energie.
31 October 2005: The General Meeting of SAUR Energie Côte d’Ivoire “SECI” resolved to change the name of the company to “SECI”. October 2005: SCDM acting as the sole shareholder of SAUR Energie decided to change the name of said company to “SCDM Energie”. March 2007: Signature of a sale and gas purchase agreement between Block CI-27 Partners, the Electricity Sector (SOGEPE) and the GoCI. April 2007: Signature of Amendment No. 3 to the GSPA, covering inter alia; (d) contractual quantities (70 mmscfd) (e) extension of the contract until 15/04/2015 March 7, 2012: New Agreement signed (protocol), stating: (f) contractual quantities (minimum: 140 mmscfd / maximum: 156 mmscfd) (g) extension of the GSPA until 04/08/2024 (h) new fiscal terms
32 Annex 3: Implementation Arrangements Côte d’Ivoire - Block CI-27 Gas Field Expansion Project
Project Institutional and Implementation Arrangements
33 Environmental and Social (including safeguards)
1. The following is an extract from the MIGA due diligence carried out in the context of the project. Further information are available in the Environmental and Social Review Summary prepared and disclosed by MIGA (link: http://www.miga.org/projects/index.cfm?esrsid=63) and initially disclosed on August 30, 2012, with updates in October 2012 and April 2013. This project is Category “A” under MIGA’s Policy on Social and Environmental Sustainability as well as under the World Bank draft procedures applicable to Performance Standards. The proposed works to install the Marlin Platform, pipelines and development of drilling operations, the production and post-exploitation operations as well as existing operations of the Foxtrot Platform and on shore pipelines and terminals present potential significant adverse environmental and social impacts which may affect an area broader than the sites and/or facilities given its location near ecologically sensitive areas. The key environmental and social issues include: air quality and emissions, noise, management of drilling wastes and cuttings, occupational health and safety, aquatic/benthic life disturbance (marine mammals and turtles), well blowout, oil spill, accidental ruptures of pipelines, community health and safety, fishing activities, hazardous materials and waste management. These potential risks and impacts can be managed through mitigation measures and/or well-known procedures and engineering technology. 2. An environmental and social impact assessment (“ESIA”) was prepared for the Marlin Platform in 2010 that identified and assessed the impacts related to the construction and operations phases of the Marlin Platform against IFC’s Performance Standards and national regulations. Most of the impacts identified and assessed in the ESIA were assigned a low or medium impact category. The environmental assessments prepared for the Foxtrot expansion operations (2007) and Marlin operations (2010) were approved by the Agence Nationale de l’Environnement (ANDE) of the Republic of Côte d’Ivoire (RCI), disclosed by MIGA along with the ESRS in August 2012, and permits have been issued for exploration activities. Risk surveys for the existing Foxtrot Platform were conducted in 2002, 2003 and in 2010. The audit gaps in between were due to the conflict situation in the country. An environmental audit for the Foxtrot Platform and onshore facilities was prepared in September 2012 confirming that Foxtrot is operating their existing investments, including platform, production wells and pipeline network in compliance with environmental and social requirements, applicable laws, regulations and conventions ratified by RCI. Foxtrot International LDC (“Foxtrot”) will prepare decommissioning plans for the rehabilitation or demobilization of the sites which will address issues related to potential oil spill, waste discharge, sea water quality, sensitive coastal elements, and disturbance of marine biodiversity. 3. Foxtrot commissioned in early 2013 a consolidated and updated ESIA that present an updated snapshot of the situation considering the implementation delays of the project. This consolidated ESIA presents a modeling tool developed for Foxtrot in order to simulate behavior of oil spills under different conditions. Preliminary results have been included in the consolidated ESIA. This modeling was a requirement of MIGA explicitly included in the environmental covenants in the guarantee agreement. Also, in the context of the preparation of this updated ESIA, a case of a complaint submitted to Foxtrot early 2013 was described and documented. The case was about a request for compensation by members of an extended family that felt had been left out of a previous compensation paid by Foxtrot. The issue concerns a
34 small plot (about 70m by 190 m) of unoccupied coastal land at the pipeline’s shore landing point, about 2 km east of Addah. 4. Although Foxtrot had actually paid compensation to an earlier claimant through the Oil and Gas Committee that had been set up to resolve issues between local populations and the company, Foxtrot nevertheless has expressed willingness to compensate the new claimant, provided it submits an acceptable proof of ownership. The case has been resolved and documented in the newly updated Environmental and Social Impact Assessment, which was re- disclosed at the InfoShop in April 2013, along with the updated ESRS. 5. The environmental and social assessment prepared by the company mentions claims from fishermen about the need for better communication from the company in order to minimize the impact of the platforms operations on their fishing activities. Impacts related to the construction and operation of the project on these resources were assessed in the ESIA to be low. 6. Foxtrot operations comply with the standards of American Petroleum Institute (“API”) on operational integrity, safety and environment which are similar to the guidelines on safety and environment established by the International Association of Oil and Gas Producers and the International Association for the Petroleum Industry Environmental Conservation Association. Foxtrot operations also comply with the Convention on the International Regulations for Preventing Collisions at Sea (“COLREG”), the International Convention for the Prevention of Pollution from Ships (“MARPOL”), and the International Convention for the Safety of Life at Sea (“SOLAS”). 7. Foxtrot has an Integrated Management Systems (IMS), which includes a Health, Safety and Environment (HSE) management system which outlines the processes and procedures for monitoring, auditing, reporting and assessment. Foxtrot is pursing certification for ISO 14001 Environmental Management Systems and ISO 9001 Quality Management Systems. An environmental management plan (EMP) for both construction and operational phases of the Marlin Platform are provided in the ESIA, with the proposed mitigation measures based on industry studies and standards, the guidelines of the government and of non-governmental organizations, Foxtrot policies and practices and the ESIA recommendations. HSE management system procedures ensure that all contractors operate according to Foxtrot’s HSE policies and procedures as well applicable national laws, good international industry practice and the Performance Standards. Foxtrot and key construction and drilling contractors report on several aspects of the company’s environmental, health and safety performance, as well as on its corporate social responsibility activities. As per national guidelines, an environmental audit is required every 3 years. An independent Engineer will also assess compliance, effectiveness of mitigation systems and reports accordingly to the management team. 8. The risk of accidents causing oil spill was assessed as low or unlikely in the ESIA. The project will strengthen existing plans to manage accident risks during drilling and production. The drilling rig is equipped with a blow-out preventer system that complies with API and International Drilling Contractor Association standards. The Foxtrot Platform production wells are equipped with standard subsea safety control valves and well heads following API oil and gas standards. Foxtrot is a member of the Oil Spill Response Association, which provides expertise and regional resources for pollution management (24/7 and 365 days a year). In addition, Foxtrot can request the assistance of the Centre Ivoirien Antipollution (“CIAPOL”) of the Ministry of Environment, Water and Forests, the operators of the Ivorian Refining Company
35 (SIR) and the Abidjan Terminal, who generally share management responsibilities, equipment and technical support as part of a collaborative approach to managing pollution risks. 9. Additional spill prevention measures include daily equipment maintenance inspections and an equipment maintenance schedule, as well as implementing procedures related to refueling and pipeline management. Onshore and offshore pipelines and structures are verified for mechanical, dimensional and corrosion damage/integrity. All pipelines are regularly inspected internally with “intelligent pigs” to monitor integrity and identify potential internal/external damage. Pressure in pipelines is subject to continuous monitoring to detect deviations from normal parameters. 10. Impacts related to biodiversity were assessed in the ESIA and assigned a low impact category. Whales migrate through waters near the project area in addition to the potential presence of manatees, dolphins and sea turtles forage and settle near the coast, just outside the CI-27 block. Mangrove forests, two classified protected forests and a national park, Assagny National Park are located along the coast, less than 50 km from the project area. Another national park, Ehotilés Islands is located 120 km north east of the project area. As part of the environmental auditing exercise and to confirm adequacy of existing environmental management practices, Foxtrot will retain a qualified marine biologist to assess population and distribution of the national and international protected species in the project area of influence. 11. The impact of potential fuel spills from vessels operating in the project area is expected to be localized because such released fuel would rise to the surface to disperse and evaporate in ambient conditions. To mitigate and minimize marine ecological impacts of potential oil spills during supply operations, offshore supply operations will be carried out exclusively in acquisition and clearance zones at least 40 km from the nearest sensitive areas. Oil spill emergency plans have been developed and will be implemented. The accidental rupture of pipelines is expected to be mitigated by pipelines management and safety and spill response measures. Additionally, tidal movement is expected to follow a south-south/west direction in the project area, indicating a tendency for potential oil spills to move in the opposite direction of land. 12. Cuttings and muds generated during drilling activities include water-based muds, brines, cements and mixing water, and mineral oil-based muds. Foxtrot and its partners have selected the highest performing fluids in terms of environmental protection, which are recycled and re-used. Drill cuttings are pre-treated prior to being dispersed, consistent with World Bank Group Environmental Health and Safety (“EHS”) Guidelines. Monitoring of the drilling phase for Foxtrot operations are conducted by divers deployed into the areas to verify adequate dispersion of cuttings. 13. Ground food waste and treated wastewater effluent generated by offshore activities will be discharged into the ocean in accordance with the standards of the MARPOL convention and EHS Guidelines. Solid waste generated by offshore activities including non-hazardous and hazardous waste streams will be segregated offshore and transferred from the platform to supply vessels for transport to licensed onshore treatment and disposal facilities. A waste management plan will be prepared to document these procedures. 14. Ambient air quality is not expected to be adversely impacted, as potential impacts will be limited to the immediate vicinity of the emissions sources and air emissions are expected to comply with RCI regulations and the EHS Guidelines. The production of electricity and heat on
36 the offshore facilities are estimated to emit 36,000 tons of carbon dioxide equivalent (tCO2e) annually which is below the threshold in the Performance Standards for annual greenhouse gas emissions quantification and monitoring. 15. Based on the Foxtrot Platform experience and assessment of the future Marlin Platform activities, the combined operations are not expected to have significant adverse impacts to offshore fishing activity or onshore settlements. A 500-meter safety zone will be established around each offshore site to protect public health and safety. Foxtrot will have one or more support vessels in the area to ensure security of the safety zone. Maritime communications standards are in place for ships passing through the area and all vessels operating in the area are required to comply with COLREG. 16. On-shore, the project location has been designated as an oil and gas exploration and production zone resulting in familiarity by the local communities with the common safety rules regarding this type of activity. Communications procedures between Foxtrot, contractors and sub-contractors, regulators, local authorities and communities have been established for current operations and will cover activities for the new installation, especially for issues related to fishing in the region, health and safety (including the event of oil spills). Foxtrot maintains a register of complaints and actions taken to address the complaints during construction/operation phases. 17. A community development program has been established, which is overseen by a community committee responsible for the development and monitoring of social micro-projects. Through the work of this committee, Foxtrot has supported more than US$1million for microprojects (provision of classroom blocks, teachers’ quarters, provision of pipe-borne water, fishing equipment, health centers/maternities, etc.) in 40 communities in the coastal areas. Corporate social responsibility/community development activity reports are issued yearly.
37 Annex 4: Project Financial and Economic Analysis Côte d’Ivoire - Block CI-27 Gas Field Expansion Project
Summary of JV Audited Financial Result
1. The Block CI-27 unincorporated JV had a solid financial performance in the past two years. Its Net Income after Depreciation, Amortization, Interest and Tax rose from FCFA 47 billion (US$93 million equivalent) in 2010 to FCFA 54 billion (US$107 million equivalent) in 2011 mainly due to decreased non-recurring charges. This result reflects good operational performance and was partially driven by the high oil-indexed gas sale price negotiated under the previous Gas Supply and Purchase Agreement. Due to the West Texas Intermediate crude oil price related formula, the JV achieved a realized gas sales price between US$8 and US$10 per mmbtu between 2010 and 2011.
Summary of New Investment Plan
2. Under the amended Gas Supply and Purchase Agreement, the contractual quantities of minimum government purchase increased from 110 mmscfd to140 mmscfd and the gas price reduced from effectively US$8-10 /mmbtu to US$5.5/mmbtu21. This new price reduces the short term gas revenue to JV with revenue and profit upside in the medium to long term.
Table 1: Investment Program
21 The new price is indexed to a basket of cost items with a soft cap of 9%. According to the Fourth Amendment of the Sale and Purchase Agreement of Natural Gas from Block CI-27, “The Parties agree to meet as soon as possible when[sic] the price revised by application of the above indexing formula varies by more than 9% up or down in relation to the initial sale price.”
38 3. Meanwhile, the JV partners have embarked on an ambitious investment program. They plan to drill additional exploration and production wells, lay down new pipelines and construct a new Marlin production platform. The total capital investment amounts to US$960 million. The investment started in 2012 and will reach its peak in 2013 and 2014. The platform will be commissioned in early 2016. 4. The total Opex (operations, maintenance, general administration and insurances) of Foxtrot platform is around US$27 million at the moment. As indicated in the technical due diligence, the Opex is likely to increase to around US$35-40 million for the combined operation of the Foxtrot and Marlin facilities considering the increasing headcount and maintenance cost associated with expansion. 5. The JV will fund the investment with a combination of equity, debt and reinvestment of the cash flow generated from ongoing operation. A draft funding plan is presented in the table below. Table 2: JV Funding Plan
Joint Venture Sources of Project Cost US$m US$m Funds Total Drilling Cost 444 Total Equity 65 Exploration Well 24 Petroci 36 Mahi Wells 95 Enerci 18 Foxtrot Wells 95 Mondoil 12 Marlin Wells 130 Cash-flow generation 715 Manta Wells 100 SECI 205 Marlin Platform 395 Petroci 338 Engineering Studies, Enerci 97 Geosciences and Other Costs 106 Mondoil 77 Contingencies 15 Senior debt 180 SECI 180 Total Investment costs 960 Total sources 960
Fiscal Framework
6. The distribution of the project returns between the government and the JV partners is regulated by the Production Sharing Contract (PSC). The PSC terms for Block CI-27 were signed in 1994 between the Republic of Côte d’Ivoire, Foxtrot, SECI, ENERCI and PETROCI. The fiscal terms are in line with the standard 1990 model contract, pursuant to which production lasts for an initial period of 25 years. On March 7, 2012, new terms for the cost gas recovery ceiling and profit gas split were agreed between the government and the JV partners. 7. Under the PSC, the contractor receives revenue through sales of cost recovery production and its share of profit oil/gas production. The cost recovery ceiling is limited to 40 percent of annual oil production and to 60 percent of annual gas production.
39 8. Administrative expenditures, training fees, exploration expenditures and development costs are all recoverable in the year in which they are incurred after the commencement of commercial production. Operating costs are recoverable in the year in which they are incurred. Any unrecovered costs can be carried forward for relief in subsequent years without limit. 9. The State is carried for all costs prior to first production. The JV members are then reimbursed for its pro-rata share of these costs. 10. Overall the new fiscal framework agreed between the JV and the government entails an increase of minimum government gas purchase from 110 mmscfd to140 mmscfd with a lower gas price from effectively US$8-10 /mmbtu to US$5.5/mmbtu22 This new price reduces the short term gas revenue to JV with revenue and profit upside in the medium to long term. In exchange of the gas sale price reduction, the fiscal terms have been modified. The cap of cost gas changed from 40-50 percent23 to 60 percent24 and the cap of profit gas changed from 30-50 percent25 to 50 percent26.
Financial Forecast
11. The team has reviewed the financial model developed by the JV. The model has been set up based on the investment plan and PSC fiscal framework. 12. The main assumptions of the model are listed below: (a) The production forecast is based on 1P certified reserve; (b) Constant gas price over the period (no indexation taken into account) at US$5.5/mmbtu; (c) Constant gas production from 2013 onwards of 140 mmscfd, meaning that production will not exceed the level of required minimum production; (d) Conservative oil production forecast used in the model. The price deck used to calculate oil and condensate revenue is set to US$69/bbl27; (e) No remaining value has been assigned at the end of the current Gas Purchase Agreement (i.e. 2024). No project liability has been assumed either; (f) Cumulated capital expenditures over the period stand at US$960 million and yearly operating expenditures are of around $36 million.
22 The new price is indexed to a basket of cost items with a soft cap of 9%. According to the Fourth Amendment of the Sale and Purchase Agreement of Natural Gas from Block CI-27, “The Parties agree to meet as soon as possible when[sic] the price revised by application of the above indexing formula varies by more than 9% up or down in relation to the initial sale price.” 23 The initial PSC defined a maximum share of 40% of cost gas in the gas extracted where sea depth is inferior to 200m, and of 50% for sea depth over 200m (article 21.3.1). 24 The third amendment to the PSC sets a new maximum share at 60% regardless of sea depth (article 2.1) 25 The share of total gas appropriated by the operator for trench of gas production between 110 and 140MCF/day was set at 30% to 50% depending on sea depth in the initial PSC (article 21.3.2) 26 50% for volumes below 154MCF/day (article 2.2, 3rd amendment to the PSC), a threshold the production will not exceed according to the 4th amendment to the TOP 27 $69/bbl is the oil price assumption used in the price valuation by the lenders (club financing led by HSBC). It reflects cost associated with oil storage and transportation as well as a conservative oil price forecast.
40 13. The financial result showed that the project will generate a cumulative cash flow to the JV of about US$1.3 billion over the period of the Gas Supply and Purchase Agreement. The Net Present Value of the cash flow is about US$530 million. The IRR of this project is about 42 percent28. It should be noted that the valuation of the project is based on a US$69/bbl oil price. If the current oil price (Brent crude at about US$100/bbl) is sustained in the next decade, the project will generate a higher return. A scenario with higher oil prices is shown in the sensitivity section. 14. The Foxtrot expansion project is expected to create strong cash flow and positive NPVs for the state. PETROCI, the state-owned oil company who has 40 percent stake in the JV, is expecting US$480 million positive cumulative cash flow from the project, equivalent to about US$200 million NPV. The government will have a profit share in excess of US$1.2 billion under the fiscal agreement with a NPV of about US$480 million. PETROCI and government combined will receive about US$1.7 billion from the project.
Table 3: Summary of Project Returns
USD millions NPV Cummulative Cash flow JV Cash Flow 528 1,292 Petroci Cash Flow 198 487 Government Cash Flow 593 1,248 The NPV is calculated with a 12 percent discount rate. All the numbers are in nominal terms.
15. Over the period of the new Gas Supply and Purchase Agreement (2012-2024), the Foxtrot project will generate a net cash flow of around US$1.2 billion and a NPV of about US$530 million with a discount rate of 12 percent.
Economic Analysis
16. The economic analysis assesses the benefits of the Foxtrot expansion project from the shareholders and the country perspectives. 17. The analysis of various alternatives to the Foxtrot project has concluded that expanding Foxtrot is the most cost-effective means of meeting the anticipated growth in regional energy demand. Substitution of oil by gas will also yield environmental benefits. 18. Alternatives to the proposed project. There is no viable immediate alternative to Foxtrot expansion at this time. There have been scattered discoveries of smaller offshore natural gas fields, but no large and low-extraction-cost field has been discovered. It is possible to meet the short to medium term demand is to use liquid fuels. However, as shown in Annexes 7 and 8, the cost associated with the liquid fuel and its environmental footprint makes it an inefficient investment option. Without the Foxtrot project, electricity blackouts would likely become so frequent in the future as to constrain economic growth. Even with Foxtrot, electricity blackouts
28 The Internal Rate of Return is computed on the incremental cash flow generated from the new investment.
41 may become more pronounced in the future, but this will be more due to not having sufficient generation capacity than having fuel shortages.
Project economic costs and benefits 19. In addition to the positive NPV the project generated, the economic benefit derived of the net savings from using more expensive liquid fuel should also be considered. The opportunity cost of the Foxtrot project has been calculated in Annex 7. It is estimated that the annual savings of using additional gas from Foxtrot expansion instead of liquid fuel for power generation is between US$150-300 million, depending on the fuel cost assumptions. The indicative figures of annual savings of power sector in Table 4 below are calculated based on a liquid fuel price of $15c/kWh. 20. Additionally the gas based power plant will also have environment benefit by saving CO2 emissions compared to liquid base power plant. Table 4 below shows the benefits associated with CO2 savings equal to about US$0.5 million per year (assuming a price of US$1 per ton of CO2 equivalent).
Table 4: Project benefits associated with CO2 savings Liquid Fuel Replacement Requirements and Carbon Savings 2013 2014 2014 2016 2017 Expected National Gas Availability mmscfd 190 195 235 230 255 Gas Available w/o Project mmscfd 135 140 175 170 195 Deficit to be made up with liquid fuel mmscfd 55 55 60 60 60 Calorific value of deficit mmbtu/d LHV 52,250 52,250 57,000 57,000 57,000 Equiv Electricity Prod at 50% efficiency GWh/d 7.7 7.7 8.4 8.4 8.4 Calorific amount of liquid fuel at 35% effcy mmbtu/d 74,643 74,643 81,429 81,429 81,429 Approx volume at 38,000 Btu/litre millions liters /d 2.0 2.0 2.1 2.1 2.1 Approx Cost at US0.80/l millions $/day 1.6 1.6 1.7 1.7 1.7
Annual savings of power sector millions $/year 160 280 375 283 447
Carbon production with project tons/year '000 993 993 1,083 1,083 1,083 Carbon production w/o project tons/year '000 1,412 1,412 1,541 1,541 1,541 Carbon savings tons/year '000 419 419 458 458 458 Source: World Bank/IFC Thermal Power Guidelines CO2 emissions CCGT Natural Gas of 355g/kWh and oil-fuel of 505g
21. Overall, it can be concluded that the Foxtrot project is economically and environmentally beneficial to the shareholders and the government.
Table 5: Sensitivity Analysis (Oil Price) Oil Price IRR $69/bbl 42% $80/bbl 43% $100/bbl 45% $120/bbl 50%
42 22. The oil production forecast ranging from 1kboe/d to 7kboe/d is relative small compared to the gas volume and its contribution to the total project revenue is small. Therefore the overall project profitability is not sensitive to the oil price. The project IRR is 43 percent, 45 percent and 50 percent respectively in the US$80, US$100 and US$120/bbl oil environment.
43 Annex 5: Operational Risk Assessment Framework (ORAF) Côte d’Ivoire - Block CI-27 Gas Field Expansion Project
Project Stakeholder Risks Rating M Description : Risk Management: The project is of strategic importance for the Government, the sponsors, the countries depending A source of potential reputational risk derives from on Côte d’Ivoire for power, businesses and the local population. The World Bank is closely associating the World Bank with activities carried out in engaged in the dialogue in the country and will continue the stakeholder communications and the oil and gas sector, despite the many challenges to dialogue with Government and civil society to highlight the benefits of the project. Transparency increasing access to electricity in the country. However, will be provided through disclosing key documents at strategic locations in the country (including due to the nature of this PRG-only operation, this risk is not at the World Bank’s Country office and Foxtrot office in Abidjan), as well as implementation of envisaged to be significant in term of impact for the World the ESMPs and consultations with stakeholders as needed. Bank. Resp: GoCI, Stage: Prep and Status: Developers, Due Date : Ongoing Implementation Ongoing WBG Implementing Agency Risks (including fiduciary) Capacity Rating: L Description : Risk Management :
Foxtrot International has a strong track record of operating In addition to its technical capacity, Foxtrot benefits from strong shareholder support from SCDM in Côte d’Ivoire and is well equipped from technical, and GdF Suez, both having extensive experience in developing gas fields. SCDM has carefully contractual and financial standpoints to undertake the led the procurement process with its technical team based in Houston, Tx. GoCI is furthermore project. associated with the JV investment decisions through the presence in the JV of PETROCI.
Resp: GoCI Due Date : during Status: Stage: Implementation and WBG Implementation Ongoing Governance Rating: L Description : Risk Management :
As implementing agency, Foxtrot International has The project team has been in close dialogue with the Government to ensure a transparent decision- appropriate internal governance mechanism deemed making process and governance structure during project preparation and implementation. The adequate to implement the project. existing project has not been subject to any governance issue despite the climate of political instability in the country.
Resp: GoCI Stage: Prep and Status: Due Date : Ongoing and WBG Implementation Ongoing
44 Project Risks Design Rating: M Description : Risk Management :
No particular risks are associated with the design of the Project design is considered usual practice in private oil and gas operations. project. However, the fact that IDA involvement is only at the end of the project design phase means that there will be Regarding the gas expansion project, supported by the PRG, Technical risk is deemed limited. limited space to influence project design. This is a brownfield project, with considerable visibility over the reserves and the new investment needed. However geological risks cannot be entirely mitigated. Front-engineering is completed, There is however an associated risk of the project not as well as procurement. Construction has already started. No cost overruns/delays are expected, achieving its PDO due to technical, technological or but cannot be fully discounted at this early stage. Strong technical capacity in Foxtrot International implementation complexities of the gas expansion project. (current operator) and its main shareholders. Resp: GoCI Due Date : during Status: Stage: Implementation and WBG Implementation Ongoing Social & Environmental Rating: S Description : Risk Management : This is a category A project. The proposed works to install The project has completed an ESIA and ESMP. MIGA and IDA due diligence has been carried out the Marlin Platform, pipelines and development of drilling according to WBG performance standards. Commercial banks will apply Equator Principles on operations, the future oil and gas production as well as this transaction, similar in nature to the IFC and WBG performance standards. existing operations on the Foxtrot Platform present potential significant adverse environmental and social impacts which may affect an area broader than the sites Proper monitoring and evaluation of environmental and social impacts will be carried out during and/or facilities given its location near ecologically project implementation to ensure that environmental and social management plans are sensitive areas. The key environmental and social issues implemented appropriately. Where project activities will potentially impact negatively on people include: air quality and emissions, noise, management of living and/or working on or near the project areas, the procedures as described in the performance drilling wastes and cuttings, oil spills, occupational health standards will be applicable. and safety, aquatic/benthic life disturbance (marine mammals and turtles), well blowout, community health and safety, accidental ruptures of pipelines, fishing activities, As part of the updated and consolidated ESIA prepared by Foxtrot early 2013, a situation related to hazardous materials and waste management. These a claim for compensation is described and its resolution documented in the updated ESIA and potential risks and impacts can be managed through ESRS. mitigation measures and/or well-known procedures and Resp: GoCI Stage: Prep and Status: Due Date : Ongoing technologies. Further details in Table 2. and WBG Implementation Ongoing Program & Donor Rating: L Description : Risk Management : There is no particular risk associated with donors or programs for this project Resp: GoCI Stage: Prep and Status: Due Date : Ongoing and WBG Implementation Ongoing
45 Delivery Monitoring & Sustainability Rating: S Description : Risk Management : Inability of the GoCI entities to process and manage The team will work in close collaboration with the Government to ensure that timely preparation contractual and financial agreements associated with the and implementation of the various agreements. At the same time, the World Bank will continue operations. the close dialogue with the Government to support improvement in the fundamentals of the power sector. Solving the bottlenecks in the gas sector will help reduce power costs and enable power Systemic financial imbalances in the power sector could sector financial equilibrium to be reached in 2014. jeopardize the sustainability of the project.
Resp: GoCI Stage: Prep and Status: Due Date : Ongoing and WBG Implementation Ongoing Overall Risk Following Review Implementation Risk Rating: Substantial Comments: The rating reflects the relatively straightforward project design that will facilitate implementation but also recognizes that the operation will be sustainable only if fundamentals in the power sector improve over time. If this is not the case, imbalances may cause a continued dependency on donor funding of budget support. Furthermore, power distribution constraints may limit the efficacy of the PRG scheme if not supported by an overall sector approach.
46 Annex 6: IDA Guarantee Côte d’Ivoire - Block CI-27 Gas Field Expansion Project
SUMMARY OF INDICATIVE TERMS AND CONDITIONS OF IDA PARTIAL RISK GUARANTEES IN SUPPORT OF GAS SUPPLY AGREEMENT IN CÔTE D’IVOIRE
L/C Applicant: Côte d’Ivoire, as contractual guarantor of gas payments obligations of CI-ENERGIES, as the “Buyer”29 under a Gas Supply and Purchase Agreement (GSPA) with the Gas JV partners. IDA/Guaranteed L/C: Revolving standby letter of credit (L/C) issued in favor of the L/C Beneficiary by the L/C Bank.
Côte d’Ivoire’s obligations to repay the L/C bank amounts drawn under the L/C will be guaranteed by IDA. Any amounts drawn by the L/C Beneficiary under the L/C that are repaid by Côte d’Ivoire to the L/C Bank within the L/C reimbursement period would be reinstated as described below. L/C Beneficiary: SECI, ENERCI and Foxtrot International
L/C Bank: A commercial bank acceptable to IDA, Côte d’Ivoire and the L/C Beneficiary.
L/C Form: The L/C will be issued in a form satisfactory to the L/C Beneficiary, Côte d’Ivoire and IDA. Purpose: The IDA PRG would backstop the failure by Côte d’Ivoire to repay the L/C Bank for the amounts drawn by the L/C Beneficiary under the L/C on account of payments due to the L/C Beneficiary from Côte d’Ivoire in respect of various obligations under the Gas Supply and Purchase Agreement (GSPA) following the occurrence of a Guaranteed Event (as defined below). Guaranteed Events: Côte d’Ivoire’s failure to comply with certain of its contractual obligations under the GSPA as will be detailed in a PRG Support Agreement to be concluded between Côte d’Ivoire and the Gas JV Maximum L/C Amount: TBD (expected to be equal to the IDA PRG Maximum Guaranteed Amount) L/C Fees: To be payable by the L/C Beneficiary to the L/C Bank. L/C Reimbursement Following a drawing under the L/C by the L/C Beneficiary, Period: Côte d’Ivoire would be obligated to repay the L/C Bank the
2929 Côte d’Ivoire is the contractual guarantor of state company Société des Energies de Cote d’Ivoire as Buyer under the GSPA. 47
amount drawn under the L/C together with accrued interest thereon within a period of 12 months pursuant to a Reimbursement and Credit Agreement to be concluded between Côte d’Ivoire and the L/C Bank. In the event of a timely re-payment by Côte d’Ivoire, the L/C will be reinstated by the amount of the repayment. In the event of a non-repayment by Côte d’Ivoire by the due date, the L/C Bank would have the right to call on the PRG for principal amounts plus accrued interest due from Côte d’Ivoire. Any amount paid by the Bank to the L/C Bank under the PRG would be deducted from the Annual IDA Guaranteed Amount and the Maximum IDA PRG Guaranteed Amount and even if Côte d’Ivoire’s payment default is remedied, following a payment under the PRG, those amounts would not be reinstated. Conditional payments in the In the event of a dispute between the L/C Beneficiary and event of dispute: Côte d’Ivoire in connection with a Guaranteed Event, the L/C can also be drawn for provisional payments pending the settlement of the dispute, provided that the L/C Beneficiary shall provide to Côte d’Ivoire with appropriate security (acceptable to Côte d’Ivoire and to be reflected in the PRG support agreement) in the amount of provisional payments in the event the final decision determines that Côte d’Ivoire had no liability or its liability was for less than the amount of the provisional payments. Maximum IDA PRG US$60 M - (expected to be equal to the Maximum L/C Guaranteed Amount: Amount) plus accrued interest Validity Period of the L/C: Period to be agreed. Maximum IDA Guarantee 8 years from date of issuance of the L/C plus 14_ months. Period: Interest Rate on Drawings A ‘spread’ above LIBOR acceptable to Côte d’Ivoire and During the Reimbursement, agreed by the L/C Bank. Period Charged by the L/C Bank: Bank Guarantee Fees:30 IDA will charge a guarantee fee of 0.75% per annum on the Annual IDA Guaranteed Amounts, payable six monthly in advance by the L/C Beneficiary from effectiveness of the L/C or Commissioning Date.
Bank Front-end Fees: IDA will charge the following front-end fees for guarantees: (a) An Initiation Fee of 0.15% of the Maximum IDA Guaranteed Principal Amount (but not less than US$ l00,000) for internal Project preparation, payable by the L/C
30 The World Bank’s Board of Executive Directors typically reviews loan and guarantee fees once a year in respect of the next fiscal year. The fiscal year begins on July 1st..The applicable fee as of the date that the Guarantee Agreement becomes effective remains constant throughout the term of the guarantee. 48
Beneficiary. (b) A Processing Fee of up to a maximum cap of 0.50% of the Maximum IDA Guaranteed Principal Amount to cover IDA‘s reimbursable expenses and third party costs, payable by the L/C Beneficiary Conditions Precedent to the Conditions precedent will include, inter alia, the following: effectiveness of the IDA Guarantee: (a) Relevant host country environmental approvals required for the operation and compliance with all applicable requirements relating to World Bank performance standards.
(b) Provision of relevant satisfactory legal opinions, including from: (i) the Attorney General of the Republic of Côte d’Ivoire relating to the Indemnity Agreement; (ii) counsel to Côte d’Ivoire relating to the PRG support agreement and the Reimbursement and Credit Agreement, and (iii) counsel to the L/C Beneficiary relating to the Project Agreement.
(c) Payment in full of the Initiation and Processing Fees, and the first installment of the Guarantee Fee.
(d) Conclusion on terms acceptable to IDA of a Guarantee Agreement between the L/C Beneficiary and IDA, Reimbursement and Credit Agreement between L/C Beneficiary and IDA, a PRG Support Agreement between the L/C Applicant and the L/C Beneficiary, a Project Agreement between Foxtrot International and IDA, and an Indemnity Agreement between IDA and Côte d’Ivoire.
Guarantee Agreement: The terms and conditions of the IDA Guarantee would be embodied in a Guarantee Agreement between the L/C Bank and IDA. Project Agreement: The L/C Beneficiary would enter into a Project Agreement with IDA in respect of IDA’s Guarantee. Under such Agreement, the L/C Beneficiary will, inter alia, provide reports (including audit reports) and other Project information, and make warranties, representations and covenanted undertakings, including in respect of compliance with applicable Côte d’Ivoire environmental laws and relevant World Bank environmental and social safeguards and World Bank anti-corruption policies and procedures, including those relating to sanctionable practices31.
31 Sanctionable practices” include corrupt, fraudulent, collusive, coercive, or obstructive practices 49
IDA may suspend or terminate the PRG if the L/C Beneficiary breaches the warranties, representations or undertakings under the Project Agreement.
Indemnity Agreement: The Republic of Côte d’Ivoire would enter into an Indemnity Agreement with IDA. Under the Agreement, the Republic of Côte d’Ivoire would, inter alia, undertake to indemnify IDA on demand, or as IDA may otherwise determine, for any payment made by IDA under the terms of the Guarantee. The Indemnity Agreement will follow the legal regime, and include dispute settlement provisions, which are customary in agreements between member countries and IDA.
PRG Support Agreement: Côte d’Ivoire will enter into a PRG Support Agreement with the L/C Beneficiary under which Côte d’Ivoire would undertake to indemnify the L/C Beneficiary for the loss of revenues resulting from the occurrence of a Guaranteed Event on the basis of drawdown and dispute resolution mechanisms and supporting documentation to be agreed between the parties and satisfactory to the World Bank and to be consistent with the provisions under the GSPA. L/C Reimbursement and Côte d’Ivoire will enter into a Reimbursement & Credit Credit Agreement: Agreement with the L/C Bank in which it will undertake to repay the L/C Bank for the amounts drawn under the L/C plus accrued interest within a period of twelve (12) months from the date of each drawing.
50
Annex 7: Power Sector Finances Côte d’Ivoire - Block CI-27 Gas Field Expansion Project
1. The financial situation of the sector is improving due to a comprehensive power sector financial recovery plan (Plan) that GoCI has started implementing. GoCI will need to fully implement the Plan, including additional tariff adjustments, to completely restore the financial sustainability of the sector. 2. In recent years, the power sector has made large losses of about FCFA 100 billion (US$200 million equivalent) per year in 2010-12. This is mainly due to: (i) Insufficient revenues following limited tariff increase in the last ten years despite the higher reliance on gas ; (ii) Large increases in costs in particular of the cost of gas supply following a decision in 2007 to remove a price cap from the existing gas supply contracts ; (iii)Expensive emergency power needed because of lack of decision to expand gas supply and generation. 3. Since 1998, the power sector cash flows are managed through a “cash waterfall” mechanism as shown below, which gives priority of payment to private investors. CIE gets its contractual remuneration first, followed by the IPPs and gas field operators on a pari passu basis.32 When revenues have been insufficient, GoCI has often sacrificed some, or all of its revenues from the gas production sharing agreements (currently around US$150-200 million per year) to subsidize the cash shortfall. This was to the detriment of using those revenues for other purposes such as financing required investments in the sector. Figure 1: Electricity Sector Cash Waterfall
4. Table 1 below presents the tariff structure for the sector. The Government was unable to
32 The cash waterfall allowed the sector to meet its obligations to the IPPs until mid-2010, when the increase in gas prices and the disruption caused by the political crisis led to arrears to IPPs at about 2-3 months’ payment. These arrears have now been cleared. 51 proceed with a 10 percent tariff increase planned for January 2011 as the post electoral crisis was ongoing, and despite the ever-rising cost of gas - linked to the price of oil. The average cost of US$6.9 per mmbtu in 2010 rose to US$7.9 per mmbtu in 2011. Since then, GoCI increased tariffs to non-residential users by 10 percent in May 2012, but is deferring a planned 5 percent increase for residential users due to unfavorable socio-political conditions.
Table 1: Tariff Structure
Source: MacroConsulting 2011 tariff study based on 2009 data from utility.
5. This tariff increase is part of a Plan that GoCI agreed with the IMF in late 2012. The Plan is a major step to restore the sector’s financial viability as it includes renegotiating down the high gas prices as well as other cost savings, while also increasing sector revenues through targeted tariff adjustments. The main measure (renegotiation of the price of gas from the main provider Foxtrot) is already effective. GoCI has agreed with Block CI-27 Joint Venture partners, on a retroactive price reduction effective from January 1, 2012. This results in cost savings to the power sector of about FCFA 80 billion per year. More details on the Plan are given in paragraphs 11-12. 6. Despite this key measure, the sector’s financial loss remains large and similar to 2011 (about FCFA 125 billion loss in 2011 and FCFA 108 billion in 2012 before government subsidies)33 due to: (a) Expensive short term solutions (emergency power rentals34 and HVO35 usage), due in part to lack of gas. The use of HVO cost GoCI 62 FCFA billion in 2012. This is the consequence of (i) delays in taking decisions to expand gas production and additional generation capacity, (ii) unusual gas supply interruptions36, and (iii) low hydrology. GoCI has finally signed with private parties to expand gas production and generation capacity, but pays a high price for the delays in doing so. In addition, a deficit in the gas supply-demand balance is projected, (See Annex 8). as a result of which over the next five years, an estimated US$250 million of liquid fuel will be required. The need for liquid fuel would be significantly higher without Foxtrot, with an additional cost of
33 GoCI figures are similar (FCFA 107 billion loss in 2011 and 111 in 2012). 34 Aggreko is providing 100MW since July 2012 and will add an additional 100MW from March 2013. 35 Heavy Vacuum Oil is produced by the national refinery SIR (Société Ivoirienne de Raffinage). PETROCI buys the HVO from SIR and Ministry of Finance is to reimburse PETROCI. The CIPREL power plant can use HVO. 36 Foxtrot sometimes produced less because of its drilling program. Afren had problems with compressors. 52
about US$1.5 billion until 2020 (net present value as of 2013), were the project not to proceed. (b) Inadequate tariffs. The Plan forecasts progressive tariff increases and modification of the LV tariff structure to make it progressive (i.e. higher consumption slabs will pay a higher unit price). So far GoCI has taken only modest measures on tariffs, (10 percent increase for industrial users in May 201237, but the reclassification of over 250,000 LV customers from the lifeline to the normal residential category with effect from January 2013 will contribute about FCFA 5 billion in extra revenues. Additional increases and an automatic indexation formula are necessary to ensure the sector’s long-term sustainability. (c) High losses. The Plan forecasts improvements thanks to measures to reduce fraud and ongoing technical work (such as the World Bank UERP project) but more investments are needed. (d) Insufficient revenue collection. The Plan forecasts improvements in the CNO zone. 7. The Plan will significantly reduce the costs and the deficit of the sector (as shown in the graph below, the gap is closing between average revenue and average cost). However, our forecasts38 still indicate a loss of FCFA 69 billion in 2013 and FCFA 52 billion in 2014. GoCI’s share of the gas revenues will be sufficient to cover this deficit but GoCI will not be able to use those funds for other uses. 8. In addition to implementing the measures currently planned, the Government will therefore have to continue increasing tariffs revenues to ensure full sustainability for the sector. The Plan does forecast progressive tariff increases and a tariff restructuring as per the recommendations of the tariff study conducted last year. To become fully sustainable (that is make a profit, but not contribute towards debt service or new investments) the sector would require an additional 15 percent tariff increase in January 2014.
37 GoCI also subsidizes exports. While it negotiated new tariffs in October 2012 (at around FCFA 60/kWh), this is still below the average cost (around FCFA 84/kWh in 2012) and the marginal cost (around FCFA 200/kWh). 38 GoCI forecasts a loss of FCFA 25 billion in 2013 and a small profit in 2014. The difference is mainly because GoCI’s estimate of the impact of some measures is higher. 53
Figure 2: Comparison of Average Revenue and Average Cost (FCFA/kWh), Sector Deficit and GoCI Share of Gas Revenues (FCFA billion)
Source: World Bank Group sector model based on GoCI data.
9. The graph below shows the breakdown of costs (and compares it to the average revenue – red line). For instance in 2012, for each kWh sold, the costs were gas (FCFA 37.5 /kWh), the management contractor CIE (FCFA 19.3 /kWh), IPPs (FCFA 12.9 /kWh), liquid fuel (FCFA 12.1 /kWh), and the regulator and others (FCFA 1.7 /kWh). 10. As the graph shows, the sector has to use larger than usual amounts of liquid fuel (HVO) in 2012, 2013, and 2014. The cost of this liquid fuel is high (about FCFA 142/kWh only to purchase the fuel39 compared with about FCFA 38/kWh for gas). Going forward, if the gas supply is not sufficient, the sector will have to use expensive liquid fuel and GoCI will be obliged to subsidize it.
39 According to CI Energies, the power sector had bought for FCFA 58 billion of HVO and produced 410 GWh with it (as of end November 2012). This represents about 7% of the energy produced so far in 2012 but 27% of the costs. 54
Figure 3: Breakdown of Costs in the Power Sector (FCFA/kWh sold)
Source: World Bank Group sector model based on GoCI data.
Power Sector Financial Recovery Plan 11. The Government has adopted a power sector financial recovery plan (“Plan”)40 in November 2012 partly in response to discussions with IDA, IFC, and IMF. The measure with the most significant impact is the renegotiation of the price of gas from Foxtrot, provider of about 65 percent of the gas for the power sector, from about US$9/mmbtu to US$5.5/mmbtu41. This became effective as of January ,1 2012, providing about FCFA 80 billion relief for 2012. 12. The table below shows the measures and the impact GoCI assumes for each of them. GoCI subsidies and the gas price renegotiations with Foxtrot and CNR have the highest impact. About half of the measures are effective.
40 The Ministries of Energy and Finances officially presented the plan to the Conseil des Ministres on November 15, 2012. It includes a series of past, ongoing, and future measures to restore the financial situation of the sector. 41 The indexation formula is not linked anymore to the price of oil, one of the main reasons for the rise of the price in recent years. 55
Table 2: GoCI Measures in GoCI Power Sector Financial Recovery Plan, Expected Economies, and Status of the Measures (FCFA billion)
Measure 2012 2013 2014 Status Renegotiation Foxtrot gas price 88.5 100 100 Done. Signed in November 2012, retroactively applicable January 1st Renegotiation CNR gas price - 27 27 Not yet. Negotiations ongoing Renegotiation CIE concession - 8 8 Not yet. Negotiations ongoing Ceiling to GoCI share in gas - ? ? Not yet. Ceiling not decided yet revenues National tariff increase 7 8 16 Done. 10% for industrial users, May 2012. Further adjustments needed. Export tariff increase - 10 10 Done. Slight increase in Oct. 2012 Consumer structure change - 5.5 5.5 Done. Applicable January 1, 2013 Better collection in CNO zone 1 2 3 Not yet. Ongoing Better network efficiency 3 3 3 Not yet. Ongoing Demand side management (lamps, - 1.2 1.2 Not yet. Not implemented yet public lighting) Sector development levy - ? ? Not yet. No decision made yet GoCI subsidies for arrears for IPPs 32 Done. Done in September 2012 & for HVO for thermal generation 61 39 ? Done. Ongoing Total (if all measures applied) 193 204 174 Source: Ministry of Energy and Ministry of Finances Communication en Conseil des Ministres, November 15 2012
Investments 13. Few investments occurred in the last 10 years given the political situation, the lack of decision making, and the financial weakness of the sector. Going forward, large investments are needed in all sub-sectors: 14. Generation – Most of the generation investments are done by private companies and embedded in the power purchase agreements (PPAs) signed by CI-ENERGIES. GoCI will nevertheless need to contribute counterpart funds to some projects, including the Soubré hydropower plant, which will be entirely-public sector. 15. Transmission – GoCI is negotiating a FCFA 400 billion loan with China Exim Bank for a number of major T-line projects. The loan would be concessional with 15 year tenure, 9-year
56 grace, and 1.75-percent interest rate. 16. Distribution – Investments in the ageing and limited42 distribution network are essential. GoCI expects donors to finance most distribution investments but this will probably not be sufficient. The Plan also forecasts a sector development levy (redevance de développement) that would be included in the tariff to cover costs of investments. A decree (no. 210-195 of July 15 2010) already included this development tax/fee/royalty. This would be an excellent way to ensure sustainable financing of future investments, but would oblige GoCI to raise tariffs beyond its current plan.
42 CIE has about 1.5 million customers compared with about 2.9 million in Ghana for a similar population. 57
Annex 8: Power Generation Expansion & Gas Supply Issues Côte d’Ivoire - Block CI-27 Gas Field Expansion Project Introduction 1. The power and gas sectors in Côte d’Ivoire are deeply interlinked. Power is virtually the sole market for gas producers and electricity production is heavily dependent upon natural gas. Consequently, investment decisions in one sector depend upon a commensurate response in the other. Unfortunately, due to inadequate coordination and financial constraints, the expansion of power generation capacity is today hindered by lags in development of new gas resources. Current gas producers have attained the maximum output levels that their gas reserves can sustain. Power generation is now reliant upon a significant input of highly expensive liquid fuels in order to avoid blackouts. In 2012, US$120m of liquid fuel was consumed by the power sector to avoid power outages. Despite the conversion of single cycle gas turbines to combined cycle mode and the start of construction of a major new hydro project, robust economic growth prospects for the coming years raise the risk of greater reliance on liquid fuels and/or equally costly imported LNG. 2. To mitigate the impact on end user tariffs in the medium term, Côte d’Ivoire’s power sector needs to pursue demand side management (DSM) & energy efficiency (EE) measures, as well as aggressively explore renewable energy sources such as grid-connected solar in tandem with existing hydro sources. In the longer term, larger-scale hydro also offers some alternative sources of power, since the country still has considerable unexploited hydro potential. Oil and Gas Sector 3. The Ivorian oil and gas sector is relatively small compared to some other sub-Saharan countries like Nigeria or Angola. However, recent exploration successes in Ghana may be replicated in Côte d'Ivoire as numerous major oil companies are exploring actively, including in deep waters. The liquid hydrocarbon reserves of Côte d'Ivoire are currently about 18 billion barrels and the gas reserves about 0.53 tcf. The total liquid production is about 49,000 b/d and current gas production is about 150 million standard cubic feet per day (mmscfd), which will rise to about 190 mmscfd in the near term, of which the Foxtrot field alone will account for 140 mmscfd. Virtually all of Côte d’Ivoire’s gas production is consumed by the power sector. 4. Hydrocarbon production started in the early 1980s. In 1995, the first gas field, Panthere, came onstream. Four years later, the Foxtrot gas field also started producing. Fiscal terms were relaxed slightly in the 1990s which in turn prompted fresh investment and exploration, leading to the deepwater Baobab discovery in 2001. The civil war of 2002-2004 had little impact on the oil and gas industry and liquids production reached a new peak in 2006. Production has since stabilized before existing fields begin a natural decline. Future production is therefore reliant on the discovery and development of new fields. 5. The corporate landscape in Côte d'Ivoire contains both large international oil companies (IOCs) and a number of small independent companies. The national (fully state-owned) oil company PETROCI has a carried interest in all blocks. Recent farm-in activity has seen Total take an interest in the deepwater licenses, adding to the growing list of IOCs including Anadarko, Tullow and Lukoil. Foxtrot International appraised the Marlin discovery with a further well in 2010. Vanco drilled two exploration wells on block CI-401 and in 2012 Anadarko made a discovery (Paon) on block CI-103 in mid-2012. Rialto (in which IFC has
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US$15.7 million investment) has a three appraisal oil and gas wells drilling campaign planned in block CI-202 in 2012/13. As industry interest raises, farm-ins by new entrants are expected to continue. 6. Currently the main gas producing blocks are CI-11 Lion and Panthere, CI-27 Foxtrot as well as CI-26 Espoir and CI-40 Baobab fields, which produce associated gas. CI-27 Foxtrot produces only a small quantity of oil and for all practical purposes is considered a non-associated gas field. It has 304bcf remaining gas reserves, followed by CI-26 Espoir’s 100bcf. The other discoveries and future prospects have no certified reserve data available. In 2012, two-thirds of all gas produced came from the CI-27 block, which will remain the country’s largest gas producer for at least the next decade, provided the investments foreseen as part of the expansion project under consideration, and to be covered by the proposed PRG, take place. Without these, in fact, the original Foxtrot field will go into decline and gas production from Block CI-27 would taper off. 7. There appears to be little upside potential for raising production from Block CI-27 beyond the already increased volume which the expansion project provides for. There are however reasonable prospects of developing three small fields (Kudu, Eland & Ibex) in Block CI-01 (Afren), possibly in conjunction with the adjacent Gazelle field being evaluated for development by Rialto. These may add 50 mmscfd to available gas supply around 2017, but these projections are subject to considerable uncertainty. In the interim, gas supply is expected to be short of projected demand from the power sector by about 30 mmscfd, with major cost implications, since the only alternative fuel available for power generation is petroleum. Liquified natural gas (LNG) imports are being studied as an option to enhance gas availability. However, were these to be found to be economically justified, they would not be able to replace liquid fuel use before 2016, due to the lead times needed for such projects. Power Sector Current Capacity 8. Total installed generation capacity in Côte d'Ivoire is about 1400 MW. The actual available generation capacity varies between 800-1200 MW, due to plant scheduled maintenance, plant outages and variations in hydrology. The country does not have adequate reserve generation capacity, which makes it vulnerable to load-shedding at peak times. In 2012, peak demand was slightly over 1000 MW. Total electricity production was about 8000 GWh, of which 6000 GWh was produced with gas. Future Demand for Electricity: 9. Historical Demand Growth. During the past 20 years, electricity demand has grown at a remarkably consistent rate of 5.6 percent. Even in 2003 during the peak of civil strife, demand only fell by 1.3 percent and recovered the year after. For Côte d’Ivoire, the average historical correlation factor between GDP and electricity demand growth is 1.09. 10. Prognosis for Power Demand Growth. For the next five years it is reasonable to anticipate the unconstrained demand for electricity will grow at 8.8 percent, which is 1.09 times projected GDP growth and somewhat less than the Government’s forecast of 11 percent. In the longer term, a gradual return to historical growth of 5.6 percent is assumed. Peak Load. The present peak demand for electricity is currently 1,040 MW and estimated to be growing at rate that will double in the next ten years to over 2,000 MW. 59
Table 1: Electricity Demand Forecast Real GDP Power Growth Growth % % MW Actual 2000 -4.6 5.1 594 2001 0.0 -0.2 593 2002 -1.6 3.6 615 2003 -1.7 -1.3 606 2004 1.6 6.1 643 2005 1.9 5.8 680 2006 0.7 4.8 713 2007 1.6 6.9 762 2008 2.3 7.0 815 2009 3.8 5.2 857 2010 2.4 6.4 912 2011 -4.7 1.4 925 2012 9.8 8.8 1,006 Projected 2013 8.0 8.7 1,094 2014 8.5 9.2 1,195 2015 8.5 9.2 1,305 2016 8.0 8.7 1,419 2017 7.5 8.2 1,534 2018 7.1 7.7 1,653 2019 5.6 1,746 2020 5.6 1,843 2021 5.6 1,947 2022 5.6 2,056 2023 5.6 2,171 2024 5.6 2,292 Source: Historical GDP: IMF; Historical Power Demand: CIE Projected GDP: IDA/IMF; Projected Power Demand: IDA
11. New Power Supply Options: There are three firm generation projects underway to expand the power supply capacity of Côte d’Ivoire, (Azito, CIPREL and Soubré) and two projects at an advanced stage of preparation. 12. Azito Expansion (130 MW, expected by late 2015/early 2016). The existing Azito plant consists of two simple-cycle ABB GT13E gas turbines and was commissioned 13-years ago with base financing provided by a consortium arranged by IFC and supported by an IDA PRG. The plant has an International Standards Organization capacity rating of 280 MW, although in practice its site-rating is closer to 250 MW. The plant will now have its capacity increased by addition of a combined-cycle steam turbine with financing from IFC, Proparco and other lenders. This expansion is highly desirable as the additional 130 MW obtained will not require any additional fuel nor will it result in higher emissions.
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13. Soubré Hydro (126MW average, 275MW peak, expected by 2018-19). The Soubré plant consists of three 90 MW hydroelectric turbines and construction has just begun with site preparation. 85 percent of project cost, (US$556 million) is funded by the China Exim Bank. The maximum rated capacity of Soubré is 275 MW, but it is considered to have an average rating at peak hours of about 165 MW, with an average output over 24 hours of 126 MW. 14. CIPREL TAG10 and TAV1 (200 MW, expected by 2015/16). The CIPREL plant presently has a capacity of 320MW, which will increase with the addition of a new turbine, a simple cycle GE9E unit, which together with its twin (already operating TAG9), will have its exhaust gases diverted to a heat recovery steam generator which will generate another 100 MW. This project is highly attractive economically due to the lower call on gas supply and emissions avoidance. 15. Green field Combined Cycle IPP. (300 MW expected by 2017). Several firms are looking at the possibility of developing a private combined cycle power plant in the region of 300 MW and costing in the order of US$500 million, including financing charges. It usually takes several years to raise financing for a private power project and another 3 years to construct, so the private plant is unlikely to enter service before 2017-18. All current proposals are handicapped by the lack of firm gas availability and payment risks from the power sector. Table 2: Summary of expected Capacity Increase by 2020
Firm Capacity Additions Additional . 2013 to 2020 Capacity Gas requirement MW mmbtu/day Azito Combined Cycle 130 -- CIPREL additional unit 10 100 26 CIPREL Combined Cycle 100 -- Soubré hydro 125 New Combined Cycle 300 52 755 78
16. Capacity Deficit. During the 2013 to 2020 period, demand is expected to grow by about 750 MW. The additional 755 MW shown above does not include reserves for machinery breakdown and dry years when hydro output is cut, so the actual amount of additional capacity needed would be somewhat more in order to maintain the same reliability of service. Least-Cost Generation Expansion Plan 17. Preparing this plan involves reviewing all alternatives for increasing electricity production over a period of at least twenty years and making assumptions about future fuel costs, the economic cost of adverse environmental impact, operation and maintenance expenses, etc. For Côte d’Ivoire, such a plan has not been prepared for well over a decade43, so a more pragmatic approach has been taken to generation planning, for the following reasons:
(a) it is obvious that natural gas at US$5.50/mmbtu is a cheaper option than the alternatives of diesel fuel (US$25/mmbtu), heavy vacuum oil (US$16/mmbtu), or light crude (US$17.50/mmbtu).
43 The procurement process to hire consultants to undertake a power sector master plan has just begun. 61
(b) preparing a least cost plan requires more certainty about future natural gas availability than currently is the case in Côte d’Ivoire.
Private Sector Generation issues. 18. Fuel Constraints. Private Independent Power Project (IPP) developers generally must have long-term Fuel Supply Agreements in place in order to raise long-term debt funding. Lenders would normally expect a fuel agreement to provide a guarantee of supply for 20-years. Since long-term FSAs are not possible at this juncture in Côte d’Ivoire, except for smaller quantities of gas for smaller power plants, it will be difficult for the private sector to reach financial closure for new gas-fired power generation capacity for several years to come. 19. LNG Option. Eventually, the Government may decide to import LNG as a power plant fuel. However, until at least 2018, the LNG market is expected to be supply-constrained and have high prices. LNG spot prices are presently in the order of US$14/mmbtu. In 2018, a number of new liquefaction trains enter into service and some long-term supply contracts expire and it is reasonable to expect that LNG prices will start to decline as that date approaches. 20. At the present price of LNG (about US$14/mmbtu), burning light crude as a power plant fuel at a cost of around US$17.50/mmbtu in a combined cycle power plant might be an interim solution. Heavy vacuum oil (HVO) at a cost of US$16/mmbtu is another option, although it is technically more challenging. A definite commitment by the Government to proceed with an LNG import scheme is dependent upon whether the ongoing offshore deep water exploration activity yields significant new gas finds, which would undermine the rationale to import LNG. 21. Provided that fuel prices are fully pass-through, the private sector might be willing to construct combined cycle power plants that would temporarily use liquid fuel and later be converted to natural gas. The approximate cost of power would be:
Table 3: Comparative Generation Costs Light Crude at $100/barrel Natural Gas at $550/mmbtu US¢/kWh FCFA/kWh US¢/kWh FCFA/kWh Fuel Cost 12.5 63 4.2 21 Capital cost recovery 4.0 20 3.8 19 O&M and insurance 0.6 3 0.4 2 17.1 86 8.3 42
Gas Supply and Demand Balance. 22. Shortages. The 2013-14 gas deficit is triggered largely by the need for gas as fuel for the high-speed diesel rental power plant, prior to the entry in service of the new combined cycle units. Given that none of the existing gas producers (Foxtrot, Afren & CNR) can increase their firm gas output in the short-term, additional demand from the power sector can only be covered by recourse to liquid fuel. The gas deficit becomes particularly pronounced about 2017-18, when a new IPP/PPP plant is likely to enter into service. At that time, operation of older, less efficient units might be phased out. If the steam units of Vridi and the CIPREL simple cycle gas turbines were put into standby and replaced by more efficient combined cycle plant, the gas shortages perhaps would not occur, particularly if smaller offshore gas fields east of Abidjan are brought into production by Afren and Rialto by that date. For the longer term, much depends on the outcome of ongoing deep water exploration being conducted by several IOCs. In the event
62 that these discover economically recoverable gas reserves, commercial exploitation could not begin for 5-6 years after the discoveries take place. Hence the gas supply-demand balance for the remainder of this decade is known with reasonable certainty. Demand for gas will outstrip available supply in most years. 23. Supply Risk and Outages. The following supply and demand figures are largely without scheduled maintenance outages, which would normally be performed during the wet season when hydro production is high, so the impact would be minimal. However, in both gas and electricity production the risk of major outages is high, especially in case of a Foxtrot platform force majeure event, which would result in electricity production falling by about 700 MW or around 60 percent of supply, depending on the season. Table 4: Projected Gas Supply/Demand Balance millions scf/day 2013 2014 2015 2016 2017 2018 2019 2020 Gas Supply Foxtrot Block 27 140 140 140 140 140 140 140 140 Afren Blocks 01 and 11 20 20 35 30 30 30 30 30 CNR Blocks 26 and 40 30 35 35 35 35 35 35 35 Others (eg Rialto) 25 25 50 50 50 50 190 195 235 230 255 255 255 255 Gas Requirements Refinery & other 13 14 15 25 25 25 25 25 Azito Power Plant 68 68 68 72 72 72 72 72 CIPREL Power Plant 81 95 104 110 110 110 110 110 HS Diesel 27 27 27 Vridi steam 18 18 18 20 20 20 20 20 New private combined cycle 52 52 52 207 222 233 227 227 279 279 279 Gas Deficit (17) (27) 2 3 28 (24) (24) (24) Sources: Compilation of data provided by different sources within the Ministry of Mines, Petroleum and Energy
24. Gas Allocation Priorities: Gas would be directed in order of priority to the combined cycle power plants, since they are more reliable, efficient and function better on natural gas. These are: Table 5: Projected gas demand by power plant Gas Thermal Required Efficiency Priority Plant MW mmscfd % 1 Azito Comb cycle 390 76 50 CIPREL Comb 2 Cycle 300 52 50 CIPREL simple 3 cycle 210 64 33 4 HS Diesel rental 100 30 33 5 Vridi Steam 63 20 28 1063 242
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Annex 9: Project Preparation and Appraisal Team Members Côte d’Ivoire - Block CI-27 Gas Field Expansion Project
Name Title Unit Sunil Mathrani Sr. Energy Specialist, co-TTL AFTG2 Patrice Caporossi Sr. Infrastructure Finance Specialist, co-TTL TWIFS Manuel Berlengiero Energy Specialist AFTG2 Zhengjia Meng Finance Specialist TWIFS Hocine Chalal Lead Environmental Specialist AFTN1 Lucienne M’Baipor Sr. Social Development Specialist AFTCS Frederic Manuel Cegarra Sr. Adviser SEGM1 Paul Nickson Oil and Gas Consultant Neil Pravin Ashar Counsel LEGSO Mark Walker Adviser LEGSO Monica Restrepo Sr. Counsel LEGSO Arnaud Braud Jr. Professional Officer AFTG2 Ines Perez Arroyo Operations Analyst AFTG2 Haoua Diallo Team Assistant AFCF2 Rita Ahiboh Program Assistant TWIFS Thanh Lu Ha Sr. Program Assistant AFTG2
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MAY 2013 IBRD 40029 4°30'W 4°00'W CÔTE D´IVOIRE CI-27 GAS FIELD EXPANSION PROJECT
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KILOMETERS Gulf of Guinea 0 40 80 120 Kilometers 4°30'W 4°00'W MAY 2013