ASIAN DEVELOPMENT BANK PPA: PHI 18039
PROJECT PERFORMANCE AUDIT REPORT
ON THE
PHILIPPINE NATIONAL OIL COMPANY ENERGY PROJECT (Loan No. 726-PHI)
IN THE
PHILIPPINES
May 1997 CURRENCY EQUIVALENTS
Currency Unit - Peso (P)
At Appraisal At Project Completion At Postevaluation P1.00 = $0050 $0.039 $0.038 $1.00 P20.00 P25.38 P26.29
ABBREVIATIONS
BPC 0 barrels per calendar day BPSD barrels per stream day EIRR Economic Internal Rate of Return FIRR Financial Internal Rate of Return ISS Institutional Strategy Study LRMC Long Run Marginal Cost MCC Malangas Coal Corporation MW megawatt NPC National Power Corporation PC Petron Corporation PCC PNOC Coal Corporation PCR Project Completion Report PNOC Philippine National Oil Company PPAR Project Performance Audit Report PSTC PNOC Shipping and Transport Corporation RSRS Refinery Sector Rationalization Study TA Technical Assistance
NOTES
(i) The fiscal year of the Government ends on 31 December. (ii) In this Report, "$' refers to US dollars.
PE - 482 CONTENTS
Page
BASIC PROJECT DATA II EXECUTiVE SUMMARY V MAPS VII
1. BACKGROUND 1
A. Rationale 1 B. Formulation 1 C. Objective and Scope at Appraisal 0. Financing Arrangements 2 E. Completion 2 F. Postevaluation 2
II. IMPLEMENTATION PERFORMANCE 2
A. Design 2 B. Contracting, Construction, and Commissioning 4 C. Organization and Management 5 D. Actual Cost and Financing 5 E. Implementation Schedule 6 F. Technical Assistance 7 G. Compliance with Loan Covenants 7
Ill. PROJECT RESULTS 8
A. Operational Performance 8 B. Institutional Development 9 C. Financial Performance 9 D. Economic and Financial Reevaluation 9 E. Socioeconomic and Sociocultural Results 11 F. Women in Development 11 G. Environmental Impacts and Control 11 H. Gestation and Sustainability 12
IV. KEY ISSUES FOR THE FUTURE 12
V. CONCLUSIONS 13
A. Overall Assessment 13 B. Lessons Learned 14 C. Follow-up Actions 14
APPENDIXES 15 11
BASIC PROJECT DATA Philippine National Oil Company Energy Project (Loan No. 726-PHI)
PROJECT PREPARATION/INSTITUTION BUILDING:
Person- TA No. TA Prolect Name Type months Amount Approval Date
595-PHI BRC Subproects (Energy Sector Loan) PP $70000 23 Mar 1984 552-PHI Refinery Sector Rationalization Study AD 27 $450,000 20 Dec 1964 653-PHI Institutional Strategy Study AD 14 $200000 20 Dec 1984
KEY PROJECT DATA ($ million): As per Bank Loan Documents Actual
Total Project Cost 109.00 81.13
Part A - Petroleum Refining 52.71 51.80 Part B - Coal Mining 25.38 5.90 Part C - Shipping 15.52 9.64 Interest During Construction 15.39 13.79
Foreign Currency Cost 85.00 63.50
Part A - Petroleum Refining 40.15 36.99 Part B - Coal Mining 19.37 5.73 Part C - Shipping 10.09 6.99 Interest During Construction 15.39 13.79
Local Currency Cost 24.00 17.63
Part A - Petroleum Refining 12.56 14,81 Part B - Coat Mining 6.01 0.17 Part C - Shipping 5.43 2.65
Bank Loan Amount/Utilization 85.00 63.50
Part A - Petroleum Refining 32.06 36.99 Part B - Coal Mining 15.97 5.73 Part C - Shipping 8.18 6.99 Interest During Construction 15.39 13.79 Unallocated 13.40
Bank Loan Amount/Cancellation 21.33
Part A - Petroleum Refining (1.94) Part B - Coal Mining 10.87 Part C - Shipping 1.36 Interest During Construction 1.60 Unallocated 9.44
Ill
KEY DATES: Expected Actual
Appraisal 13 Aug-21 Sep 1984 Loan Negotiations 16-21 Nov 1984 Board Approval 20 Dec 1984 Loan Agreement 28 Dec 1984 Loan Effectiveness 28 Mar 1985 11 Jun 1985 First Disbursement 30 Jun 1985 Project Completion 31 Dec 1987 30 Jun 1990 Loan Closing 30 Jun 1989 19 Feb 1992 Months (Effectiveness to Physical Completion) 33 61
KEY PERFORMANCE iNDICATORS (%):
Economic Internal Rate of Return Appraisal PCR PPAR
Part A: Petroleum Refining Vacuum Tower Debottlenecking above 100 n.e. above 100 Process Control Upgrading 78 n.e. 42.7 Addition of Merox Unit 39 n.e. 18.6 Miscellaneous Improvement 20 n.e. n.e. 5 MW Power Plant n .e. n.e. 32.0
Part B: Coal Mining Bislig Mines • 34 n.e. nil Little Baguio Mine 72 n.e. nil Malangas Mine above 100 nc. nil
Part C: Shipping Four Tanker Company Tankers above 90 n.e. n.a.
Financial Internal Rate of Return Appraisal PCR PPAR
Part A: Petroleum Refining Vacuum Tower Debottlenecking 92 n.e. above 100 Process Control Upgrading 52 n.e. 41.2 n.e.Addition of Merox Unit 39 15.8 Miscellaneous Improvement 25 n .e. n.e. n.e.5 MW Power Plant n.e. 30.2
Part B: Coal Mining Bislig Mines 87 n.e. nil Little Baguio Mine above 100 n.e. nil Malangas Mine above 100 n.e. nil
Part C: Shipping Four Tanker Company Tankers above 90 n.e. n.a.
n,a. - not applicable. n.e. - not calcuLated.
a The Projectwas substantially completed by thisdate. Miscellaneous improvements were undertaken up to March iv
BOA ROWER: Philippine National Oil Company (PNOC)
GUARANTOR Republic of the Philippines
EXECUTING AGENCY: Under the overall supervision of PNOC, the Project will be executed, as appropriate, by PNOC subsidiaries concerned:
Part A: Petron Corporation (PC), formerly Bataan Refining Corp. Part Bi: PNOC Coal Corporation (PCC) Part B2: Malangas Coal Corporation (MCC) Part C: PNOC-Shipping and Transport Corporation (PSTC)
MISSION DATA:
Type of Mission No. of Missions Parson-days
Appraisal 1 280 Project Review 4 99 Project Completion 1 11 Fostevaluation 1 37 V
EXECUTiVE SUMMARY
The Government requested Bank assistance to the Philippine National Oil Company (PNOC) to implement improvements to its refinery and to meet urgently needed import requirements of its coal mining and marine transport activities in response to the economic arid political difficulties facing the country in 1984. Consequently, on 20 December 1984, the Bank's Board of Directors approved the PNOC Energy Project for $85 million. The main objective of the Project was to strengthen the energy supply and distribution capacity in the country by improving the efficiency and productivity of existing facilities operated by PNOC, to attain a greater degree of self-sufficiency in energy supplies, and to ensure continuity of energy supplies during a time of major economic difficulty. This objective was to be achieved through investment in equipment in PNOC's Bataan Refinery, completion of ongoing development programs at several coal mines operated by PNOC, and provision of spare parts and dry-docking facilities for PNOC's tanker fleet.
The actual cost of the Project ($81.13 million) was 26 percent less than appraised because of the reduction in the scope of the coal mining and shipping components. Disbursements under the Bank's ordinary capital resources loan amounted to $63.5 million compared with the loan amount of $85 million. Implementation of the Project was substantially delayed, resulting in a time of completion of June 1990 compared with the original end of 1987 time frame. The delay was mainly attributable to the refinery component of the loan because of cumbersome Government and PNOC procedures, and political and economic uncertainties in the country at the time.
Most of the components of Part A (refinery) were implemented as originally envisaged at appraisal, but with some modifications and additions. The six additional items cost another $8.19 million. The scope of Part B (coal mining) was scaled down substantially and was not fully implemented because of low coal prices, unexpected geological conditions in a few of the mines, and the Government's privatization plans for PNOC's coal mining operations. Part C (shipping) was largely implemented as appraised. However, PNOC's subsequent rationalization program considerably reduced the size of the fleet. Since the Project was in the Bank's host country, more frequent Bank review missions could have been mounted to heLp resolve some of the implementation problems and mitigate the negative impacts of the delays on the Project.
The Project provided training under the refinery component to improve the efficiency and expertise of refinery personnel. As a result, the refinery was able to establish its own engineering department and project management group. Moreover, most of the trained personnel are still employed with the refinery.
The overall environmental impact of the Project was positive. Investments in the refinery resulted in improved process control and improvements ri product yields, thus reducing effluents. Replacement of the spent monometallic catalyst in the reformer with a bimetallic catalyst reduced the lead content of gasoline. The rehabilitation of the separator unit in the refinery substantially reduced the release of oil into Manila Bay. However, no measures were taken to address the Government's policy of maintaining a low price for diesel fuel, which has had a significant effect on air quality and the health of urban dwellers in the Philippines. The expansion of coal mining operations did not significantly increase the amount of waste rock, and vi chemicals were not used in the washing of coal. The environmental impact of the coal mining and shipping components was essentially neutraL
The benefits from the Projects investments in Part A (refinery) were large and approached the orders of magnitude anticipated at loan appraisal. The economic internal rates of return of Part A components varied from a low of 19 percent to over 100 percent. The financial internal rates of return were of a similar magnitude. However, the benefits from investments in Part B (coal mining) were negligible. Part C (shipping) achieved its objective in continuing the operation of the fleet of the PNOC Shipping and Transport Corporation.
Given the estimate of the economic internal rate of return of Part A, the positive long-term sustainability of the benefits of the investments made in the refinery, and the achievement of the objectives of Parts A and C and the reduction in scope of Part B, the Project is considered generally successful.
The Project illustrated the need for thorough project preparation to ensure that subproject components are appropriate for financing by Bank loans. Furthermore, the Project illustrated the need for a thorough assessment to determine the sustainability of the Government's energy self-sufficiency policy, particularly in terms of the sector's comparative advantage. The Government's subsequent success in privatizing the Petron Corporation and several other parts of PNOC's operations demonstrated the benefits of private sector participation in the energy sector, However, this led to questions on the future roLe of PNOC in the economy. vii Map 1
I 18E - - - 126°E
P H I L I P P I N E S PHILIPPINE NATIONAL OIL COMPANY 7 \parrt ENERGY PROJECT / PET1RON REFINERY SITE / AND PETROLEUM PRODUCTS / DISTRIBUTION NE1'ORK OF PSTC / (as completed)
San Fernando
I I5OO'N
2c!ric OcE
PETRON REFINERY CALIEX REFINERY Batangas SHEU. REFINERY Pili Boac Legazpu / P!tiippiues 5eo
South Chzua Se Tables Is. ) ' ,0Calbayog
Roxas aclbano Oormoc L1e I,if bib City Cadiz
Puerto P 5a77 Finoba-an / pO Baia
__*° Bayawan \ Tagbilaran
'Butuan Sir J. Brooks Point Gingoog
I B°OON Mabangas 0 -N- lDavao 0 50 100 150 200 Cotabato City Kilometers
Gen. Santos o City/Town
Ci Refinery
-' Shipping Route
- Pipeline C!'z Sca
1 I8kIOE l26E
i
viii Map 2
26°0O'E 1180O0E
u1Ia ,'a,incE P H I L I P P I N E S PHILIPPINE NATiONAL OIL COMPANY ENERGY PROJECT COAL MINES AND MAJOR COAL CONSUMERS (as completed)
BaguioCily
16°O0N I 16D0N o 50 100 150 200 -I - - Ki'ometers
I I I I Manila0 I
CALACA (NPC) I Batangas City SEMIRARA MINE
Philivpwes Sea
South China Sea
A
0 Bago
• 0Cebü City
01 I NAGA POWER PLANT (NPC) I
CENTRAL CEBU MINES
BISIJG MINES (1,2, 2A
LITTLE BAGLIIO & KAUSWAGAN MINES
MALANGAS MINES I UlIlgan 8°O0'N I- 8°00N LALAT MINE OEVELOPMENT I
A
Oavao City 0 0Zamboanga City U O City
o Power Plant
• Cement Plant
A Mine
• Othe Major Industrial Consumer
Cclebe5 Sert 1 18°OOE 12e°O0E 1. BACKGROUND
A. Rationale
1. The Philippines, like many other countries, was nearly whoUy dependent on imported oil to meet the commercial energy needs of its economy. The high level of dependence on foreign sources of energy supplies became a major concern in 1984 when economic and political difficulties resulted in a crisis of confidence in the country and in declining foreign exchange reserves with which the importation of energy supplies were financed. 1 Moreover, the lack of foreign exchange seriously constrained economic activity through its adverse effect on the availability of imported equipment and materials needed to operate and maintain energy- related 'facilities in a normal manner. Events at the time demonstrated an urgent need for the country to increase efficiency in the energy sector, to develop a framework for more effective management of energy supply and demand, and to improve its energy self-sufficiency.
B. Formulation
2. During the 1984 country programming mission to the Philippines in November 1983, the Government requested the Bank 'for assistance to the Philippine National Oil Company (PNOC) to implement improvements to its refinery, and to meet urgently needed import requirements of its coal mining operations as well as those of its marine transport activities. A proposal for Bank assistance was formuLated based on a Bank examination of the priority requirements of PNOC in these activities, the work done by a consultant under a Bank-financed technical assistance (TA), 2 and taking into account the prevailing economic condition of the country. The proposed loan was appraised from 13 August to 21 September 1984, and subsequently approved soon thereafter on 20 December 1984 by the Bank's Board of Directors.
C. Objective and Scope at Appraisal
3. The main objective of the Project was to strengthen energy supply and distribution capabilities in the Philippines by upgrading the operating efficiency and productivity of existing PNOC facilities. This objective was to be achieved through support for (i) modifications to PNOC's refinery in Bataan to produce an improved output mix, and for a technical capacity to handle the refining of heavier, less expensive crude oil; (ii) energy conservation and the reduction of energy and material costs in the Bataan refinery; (iii) completion of ongoing development programs for seven coal mines in Mtndanao and Cebu; (iv) maintenance of normal operating and production activities of PNOC's Bataan refinery, coal mines, and shipping fleet during the 19851986 period; and (v) consulting services to help implement the Project and strengthen the operational and planning capabilities of PNOC and its subsidiaries responsible for the day-to-day execution of the Project.
On 17 October 1983, the Government declared a moratorium on certain categories of external debt repayments TA No. 595-PHI: Bataan Refinety Corporation Subproject, for $70,000, approved on 23 March 1984, This small-scale TA identified possible components at the Bataan refinery for financing by the Bank loan, D. Financing Arrangements
4. The total cost of the Project was estimated at $109 million, $85 million of which was the foreign currency cost financed by the Bank. PNOC was the borrower of the loan and the Republic of the Philippines was the loan's guarantor. The loan was made from the ordinary capital resources of the Bank at an interest rate of 10.25 percent per annum and a repayment period of 15 years including a grace period of 3 years. Local currency costs were to be financed out of PNOC's internally generated funds.
E. Completion
5. The Project was substantially completed in June 1990 compared with the completion date of December 1987, which was envisaged at the time of appraisal. A Project completion report (PCR), prepared by the Bank's Energy Division (East) in October 1992. discusses the design, scope, implementation, and operational aspects of the Project, and provides detailed Project information. The PCR identifies the additions and modificztions 'to Fart A, the reduction in scope of Parts B and C, and estimated cost savings in each Project component. it also provides a thorough discussion of the implementation delays, which were due mainly to the Government's cumbersome procedures and political unrest in the country. Although Project benefits in the PCR were identified and quantified, no economic or financial internal rate of returns were calculated.
F. Postevaluation
6. This Project performance audit report (PPAR) focuses on pertinent aspects of the Project and presents the findings of the Postevaluation Mission from 26 November to 17 December 1996. The PPAR presents an assessment of the Project's effectiveness in terms of achieving its objectives and generating benefits, and of the sustainability of the Project's operations.
7. The PPAR is based on a review of the PCR, the appraisal report, material in Bank files, a consultant's report, and discussions with staff members of the Bank, the Executing Agency and other agencies of the Borrower. Copies of the draft PPAR were provided to the Government, the Borrower, and Bank staff concerned for review and comments. Comments received were taken into consideration in finalizing the Report.
II. IMPLEMENTATION PERFORMANCE
A. Design
8. PNCC was the Government's primary institution involved in the nonpower energy subsector for the importation, refining, and distribution of oil and petroleum products, and for the promotion of the development of indigenous energy resources. It was within PNOC where much of the subsectors greatest inefficiencies and bottlenecks were found in the early 1980s. Thus, the Project was designed in three parts to address the critical issues in each of the main operations of PNOC: Part A, for improvement of the process capability of the Bataan refinery; Part B, for development and improvement of coal production from PNOC's coal mines; and Part C, for improvement in the efficiency of transporting crude oil and petroleum products by PNOC's international and domestic shipping vessels. 3
9. Most of the components of Part A were implemented as originally envisaged, but with some modifications and additions. See Appendix 1 for a schematic diagram before and after the Project. The component Addition of Merox Unit was modified from a 10,000 barrels per stream day (bpsd) light naphtha Merox unit and a 15,300 bpsd kerosene unit to a 16,000 bpsd kerosene unit because the existing hydrotreater for kerosene had more than sufficient capacity to treat light riaphtha efficiently. Six additional items were included under the Miscellaneous Improvements and Rehabilitation Schemes component: (i) upgrading of facilities to produce a full range of naphtha and reformed naphtha; (ii) upgrading of the off-line blending facilities to blend products for the production of kerosene, jet fuel, diesel oil, and industrial fuel oil; (iii) provision of eight marine loading arms to facilitate the loading of tanker ships by allowing the loading of specific petroleum products for each loading arm; (iv) conversion of the control system for the Atmospheric Pipestill No. 3 to a digital control system; (v) installation of a 5 megawatt (MW) power plant to reduce dependency of the refinery on power supply from the national grid: and (vi) a Real Time Production Management Lntegrated System, a computer- assisted refinery management system. Under the Training and Technical Services component, selected managerial and technical staff of the refinery underwent 260 weeks of various training courses, compared with the 285 weeks originally provided under the loan. The 36 person-months of advisory services, primarily for troubleshooting, were not pursued but were instead provided by Universal Oil Products, Inc. of the United States under a three-year bilateral technical services agreement. Notwithstanding these modifications, the design of the Project's Part A seems overall to have been well thought-out, comprehensive, and appropriate. The scope of work and technology adopted in Part A resulted in significant energy savings, higher throughputs, higher product yields, increased production of middle distillates, greater operating efficiency and safety, improved environmental control, a capacity to process heavier grades of crude oil, and a reduction of losses.
10. The scope of Part B was scaled down and was not fully implemented because of low coal prices, unexpected geological conditions in a few of the mines, and the Government's privatization plans for PNOC's coal mining operations. The development of the Little Baguio mine was curtailed because of the disruption of the coal seam by intrusive rocks, which drastically lessened the volume of minable coal. The mine was consequently closed in 1989. In the Central Cebu mine, the marginal thinning of the coal seams together with increasing production costs with depth strained the profitability of operation. The coal, when temporarily stored underground, also exhibited spontaneous combustion. Because of these factors, the Central Cebu mine operation ceased in November 1990. The BisIig 1, 2, and 2A mining rights and assets were transferred to the private sector in October 1987 after about two years of operation. The new operators increased coal production by as much as six-foLd over peak production in 1986. The Kauswagan mine was closed in November 1987 because of its small production volume. Because of PNOC's privatization policy, exploration of the Lalat coalfield was not fully carried out and only the consulting services were provided. In the Malangas mine, the coal seams became thinner and did not continue in the anticipated direction as mining operations progressed. As a result, the mine had to fall back on the less productive retreat mining method, which requires the construction of more shafts surrounding the area to be mined. It was also found that due to changes in geology of the adjacent noncoal-bearing layers, the fixed-type steel arches bought under the loan were not suitable for shaft support in the coal-bearing strata mined after 1991; and there was a need for stronger shaft support. In 1994, the Malangas mine suffered a serious methane gas explosion in which 84 persons were killed. Malangas Coal Corporation (MCC) subsequently ceased all operations at the mine after this tragic accident, but resumed operations 4 again on 18 April 1995 after assigning the mining rights to the Coal Miners Multipurpose Cooperative. The Cooperative mined the concession for about 17 months before terminating operations because of geoLogical problems and excessive water seepage. ii. Inclusion of the coal mining component of the Project should be questioned. Para. 24 of the Project's appraisal report states that the rapid increase in coal production in the late 1 970s was "partly due to the incentives offered by the Government such as import and ad valorem tax exemptions on the importation of coal mining machinery and income tax benefits for coal investments," thus indicating that there was a need for some form of subsidization. This need brings into question whether the Philippines has a comparative advantage in coal production, and whether the coal industry has any long-term economic viability. Moreover, there seems to have been insufficient investigation into the geological aspects of the coal mines, even though an ongoing project financed by the Bank 1 was experiencing similar problems at the Malangas mine.
12. Although there were no changes in the components of Part C, there was a slight adjustment in the scope of work. Depressed tanker charter prices and the generally unfavorable economic conditions prevailing in 1985-1987 prompted PNOC to rationalize PNOC Shipping and Transport Corporation's (PSTC) tanker operations by reducing the number of shipping vessels from 46 to 17. This was accomplished over an eight-year period and the last tanker, along with any dedicated spare parts for the vessel, some of which were financed by the Bank's loan, was sold in 1995. As with Part B, Part C seems to be a weaker component of the Project. A more thorough investigation of the operations of PSTC, its financial position, profitability, and competitiveness in the market would most likely have concluded that PSTC should not be a component of the Project until a rationalization of operations was undertaken.
13. The coal mining and shipping components were not based on a project preparatory technical assistance, the usual practice of the Bank, but rather on discussions with PNOC, the Government, and the Appraisal Mission's own perceptions. A project preparatory technical assistance could have placed both Parts B and C of the Project on a sounder footing.
B. Contracting, Construction, and Commissioning
14. Apart from delays, no major problems were encountered in the recruitment of consultants and the procurement of equipment and materials. Consultancy services for Mine Engineering and Operational Planning originally envisaged under the loan were not utilized by PNOC, which instead engaged consultants from Canada and Germany under bilateral programs of these countries. Procurement of equipment, materials, and services that were financed by the Bank were undertaken in accordance with the Bank's Guidelines for Procurement. Performance of consultants, contractors, and suppliers was generally satisfactory. All components of the Project or those subsequently modified were commissioned as designed.
Loan No. 421-PHI:Malangas Coal Development, for $14 mI1ion, approved on 19 November 1979. 5
C. Organization and Management
15. Petron Corporation (PC); PNOC Coal Corporation (FCC); MCC; and PSTC undertook the implementation of Parts A, B, and C under the overall supervision of PNOC, the borrower of the loan. PC recruited a Project consultant and established an in-house Project management team consisting of engineers and senior refinery experts. The Project management team was effective in supervising the contracting, construction, and commissioning of the Part A components. Although scaled-down substantially, implementation of Part B components were undertaken satisfactorily by FCC and MCC staff who closely followed arrangements prescribed in the Project's appraisal report. Part C components were implemented by PSTC staff satisfactorily and according to appraisal report arrangements as well. However, major delays were experienced in the engagement of the consultants under Part A. These delays were mainly due to (i) the Government's cumbersome procedures; (ii) PNOC's internal approval procedures; (iii) political unrest in the country, which led to a change of Government in 1986; and (iv) prolonged discussions between the Bank and PNOC on the scope of the Project consultant's work. Only minor delays were experienced in Parts B and C.
16. Although the location of the Project sites was in the Bank's host country, only 'four review missions were fielded during the whole Project implementation period, and no inception mission was mounted. Considering that implementation of the Project took about five years, or one review mission almost every 15 months, the Bank's administration of the Project seems to have been lacking. More frequent Bank review missions would have undoubtedly helped to expedite implementation.
D. Actual Cost and Financing
17. Actual total Project costwas $81 .130 million equivalent, comprising $63.500 million in foreign currency costs and $1 7.630 million equivalent in local costs. Counterpart funds for the local cost components were provided in a timely manner. Because of the reduction in the scope of work, mainly under Parts B and C, savings of $27.870 million equivalent (consisting of $21 .500 million in foreign currency costs and $6370 million equivalent in local costs) were realized. Under Part A, there was a cost saving of $0.91 1 miflion equivalent, consisting of an underrun of $3.1 65 million in foreign currency costs and an overrun of $2.254 million equivalent in local costs. In the foreign currency costs, there were overruns of about $7.0 million in the Process Control Upgrading component because of the additional requirement for hardware, analyzers, instruments, engineering services, and software development, and there were also overruns of about $5.4 million in the Miscellaneous Improvements component because of the additional items discussed in para. 9. These foreign cost overruns were compensated by savings of $7.5 million incurred in the Vacuum Tower Debottteriecking, Merox unit, Operating Equipment and Materials, Training and Technical Services and Consulting Services, and about $8.1 million from the category of contingencies. On the other hand, the cost overrun in local costs was mainly due to the extra local currency costs associated with the additional facilities.
18. The cost of Part B at the time of appraisal was estimated at $25.379 million equivalent, consisting of $19368 million in foreign exchange costs and $6.01 I million equivalent in local currency costs. The actual cost of Part B was onLy $5.899 million equivalent resulting in savings of $19.480 million equivalent ($13.634 million in foreign currency costs and $5.846 million equivaLent in local costs). The savings were due mainly to the reduced development 6 programs of the coal mines following the privatization policy of the Government, and to technical problems encountered in a few mines. The contingency allocations were also not utilized. Savings of about $0.7 million were made in the consultancy services for Mine Engineering and Operational Planning, which were available under a bilateral program. On 24 February 1988, PNOC requested cancellation of loan savings amounting to $10873 million.
19. The cost for Part C was estimated at $1 5.520 million equivalent at appraisal, which consisted of $10.092 million in foreign currency costs and $5.428 million equivalent in local costs. The actual cost was $9.641 million equivalent with a saving of $5879 million equivalent ($3.101 million in foreign currency costs and $2.778 million equivalent in local costs). A large part of the savings came from dry-docking, maintenance, and the unutilized contingency allocation brought about by the rationalization program of PSTC's fleet of vessels and consequent improvement in its operating performance.
E. Implementation Schedule
20. At appraisal, implementation of the Project as a whole was expected to be substantiafly completed by the end of 1987 or within a period of 33 months from the start of the Project. However, all components of the Project suffered delays, the reasons for which are given in para. 15 (also, see Appendix 2). Delays in the initial stages of implementation of Part A were attributable to delays in engaging consultants for two studies, defining the scope of work, and preparing detailed specifications and bid documents. However, once contracts were awarded, work proceeded rapidly and was completed by November 1989, 41 months after the start of implementation. By that time, the political and economic situation in the country had stabilized and demand for the refinery's output, particularly diesel oil and jet fuel, was accelerating. This led to the realization of several shortcomings that had to be corrected to accommodate higher sates of diesel oil and jet fuel. Thus, the implementation of the six additional items under Miscellaneous Improvements and Rehabilitation Schemes of the Project was approved by the Bank and were subsequently completed by March 1992.
21. Implementation of Part B closely followed the schedule established in the appraisal report. There was only a three-month delay and Part B was completed by the end of 1987. However, some additional procurement of safety equipment and tunnel support materials was done in 1991. Part C was completed in September 1988 with a ten-month delay. The dry-docking of the four large tankers, mostly overseas, took longer than estimated due to the unavailability of dockyards and the rescheduling of dry-docking to optimize shipping engagements.
22. The delays in the implementation of the Project seem to have been unavoidable given the economic and political uncertainties at the time. However, past experience in the Philippines indicates that the implementation period of 33 months estimated at appraisal may also have been unrealistic. Nevertheless, delays could have been mitigated with closer consultation between the Bank, the Government, and PNOC. Better administration of the Project through more frequent review missions to circumvent the Government's and PNOC's cumbersome procedures and to resolve difficulties in the recruitment of consultants could have hastened actual implementation of the Project. F. Technical Assistance
23. Two other TAs were provided under the PNOC Energy Project in addition to the pro;ect preparatory technical assistance for the Bataan refinery (see para. 2): the Refinery Sector Rationalization Study (RSRS) and the Institutional Strategy Study (ISS). The objectives of the RSRS were to formulate appropriate action plans to minimize supply costs of petroleum products and to outline alternative restructuring programs for the refineries consistent with the action plans. The RSRS does not seem to have completely met these objectives of the TA. The RSRS discussed extensively the market for petroleum products in the PhiLippines and the world, and prepared forecasts for the demand for petroleum products and their prices, but there was no evidence of discussions of restructuring and rationalizing capacity configurations to meet product demand or managing product demand to alter the demand for surplus products, the core of the study. The terms of reference for the study were comprehensive and clear, thus it may only be concluded that insufficient supervision of the consultants is the reason for the incompleteness of this study.
24. The ISS was better prepared. The objectives of ISS were to carry out an irtdepth study of the basic objectives and energy policy goals underlying the operations of PNOC as a public sector enterprise and to formulate appropriate strategies for structuring its future activities. Many of the report's recommendations were implemented including those dealing with privatization of the refinery operations, coal mines, and shipping operations. Although brief, the terms of reference seem to have been adequate and resulted in a comprehensive report. Nevertheless, the study does not seem to have been well timed. Had the ISS been undertaken during the preparation of the Project, Parts B and C would have been most likely designed differently, if included at all.
G. Compliance with Loan Covenants
25. PNOC's obligations with respect to the covenants of the loan expired in 1995 when the final installment of the loan was repaid by PNOC to the Bank. The loan was repaid from funds transferred from the Petron Corporation 'to PNOC soon after its privatization in '1994. Nevertheless, PNOC generally complied with the conditions and covenants stipulated in the Loan Agreement and Project Agreement except for a few financial ratios (see Appendix 3). The conditions and covenants of the loan were reasonable and did not seem to impede the implementation of the Project. However, the loan's covenants contained no requirements regarding policy or institutional reforms.
26. The financial ratio covenants not complied with were the debt/equity ratio of PC, which exceeded the covenanted 60:40 and peaked in 1990 at 84:16. However, by 1995, this ratio was brought down to 50:50, PC complied with the debt-service and current ratio covenants. The debt/equity ratio of PCC in 1990 exceeded the covenanted level of 60:40, but essentially complied thereafter. The debt-service covenant was complied with except for the years 1992 and 1993. The current ratio covenant was also complied with. The debt/equity and debt-service ratios of MCC were not complied with because of lower than expected coal production, followed by the closure of the Malangas mine in 1994 as a result of a major explosion (see para. 10). The current ratio was also not complied with. PSTC complied with all financial covenants. 8
III. PROJECT RESULTS
A. Operational Performance
27. With some minor exceptions, the new facilities and rehabilitated systems under Part A have performed and continue to pertorm well. Savings in fuel cost and higher product yields have met or exceeded expectations, and substantial benefits have been realized from the new instrumentation and other systems provided. The diagrams in Appendix 1 show the increase in feed rates into the atmospheric distillation columns (APS 1, APS 2, and APS 3) and the resultant higher product yields. Appendix 4 provides a comparison of before and after Project results, which shows the volume of total output in barrels per calendar day (bpcd) increasing by about 29 percent between 1983 and 1993, and a reduction of residual products (pitch/asphalt, refinery fuel, and losses) as a proportion of total output from about 13 percent to 9 percent and an increase in marketable products such as liquified petroleum gas (LPG), kerosene, naphtha, diesel oil, and solvents from 86 percent to 91 percent. The refinery now has the capacity to process up to 165,000 bpsd of crude oil, and ran at this rate during 1996, com pared with a capacity of 155,000 bpsd in 1984, running at a 85-93 percent utilization factor. The number, and particularly the duration, of unscheduled shutdowns from electrical faults fell from seven in 1983 to one in 1993 and two in 1994. Although the frequency of fires has not been reduced (see Appendix 5), fires that did occur were less severe, and the acquisition and use of a truck with foam-producing equipment has reduced damage from these fires.
28. The facilities provided under the Project reflect the state of the art as of 1986 and are of adequate quality. These facilities were superimposed on the existing plant, which dates from 1960 to 1972. However, these new facilities introduce a disparity into the life cycle of the equipment. With normal refinery life cycles of 25 to 30 years before complete depreciation or obsolescence, it must be anticipated that in the not too distant future some of the new equipment financed under the loan will be replaced.
29. Operational performance of the coal mines under Part B did not achieve the expected results because of low coal prices, unexpected geological conditions, and the Government's privatization plans for the coal mines (see para. 10). Little Baguio, Central Cebu, and Kauswagan mines were closed, and the Bislig 1, 2, and 2A mining rights and assets were transferred to the private sector. Only under the new operators did coal production achieve its full potential. Exploratory work on the Lalat coalfield was not completed. The Malarigas mine produced coal continuously, but production volumes were below target until the mine was closed in 1994 after the serious methane gas explosion.
30. The dry-docking facilities, maintenance, and spare parts provided under Part C (shipping) of the Project were instrumental in ensuring the continued operation of PSTC's fleet of vessels. Although the subsequent rationalization program significantly reduced the number of vessels, the smaller number of vessels reduced costs and improved profitability of the company. Moreover, the improved profitability enabled PSTC to utilize internally generated funds to procure equipment and spare parts or-i its own account instead of borrowing from the Bank's loan, 9
B. Institutional Development
31. As originally appraised and subsequently implemented, the Project provided few components for the institutional improvement of PNOC or its subsidiaries. Under Part A, training and technical services were provided to improve the efticiency and expertise of refinery personnel. This component seems to have been successfully implemented because the refinery was consequently able to establish its own engineering department and project management group. Moreover, most of the trained personnel are still employed at the refinery today.
C. Financial Performance
32. PC, PCC, MCC, and PSTC comprise the major operating entities of PNOC and determine PNOC's overaLl financial performance. PC has been consistently profitable over the years and its balance sheet has been considerably strengthened recently (see Appendix 6) as a result of the reduction in its debt/equity ratio. This was caused by both a reduction in PC's longterm debt obligations and a rapid growth in shareholders equity following PC's privatization. PCC returned to profitability in 1994 and 1995 after a period of low profits and losses associated with the lower than expected production of coal, weak prices, and the costs of the subsequent closure of several mines. The improved financial performance of PCC is mainly attributable to improvement in the volume of coal sold. MCC has accumulated substantial losses over the past several years because of low coal output and weak prices. However, with the closure of the Malangas mine in 1994, MCC has ceased operations. PSTC returned to profitability in 1991 and is competing effectively in the market for the provision of shipping services. Lts financial position is sound and is expected to contribute to PNOC's overall profitability in the future.
33. Overall, as a public entity, PNOC is in a good financial position after undergoing major restructuring, including debt reduction, privatization of PC, closure of several coal mines, and disposal of some shipping assets. PC, PNOC's major asset, is managed independently of PNOC, while PNOC's other main subsidiaries, PCC and PSTC, are still operated by PNOC, with the collaboration of the private sector in the case of P00. PNOC's future profitability should be assured because of its minority ownership of PC, however, PNOC's coal mining and shipping functions operate in a more competitive market and may experience greater variations in profitability over the Longer term.
0. Economic and Financial Reevaluation
1. PartA(Refinery)
34. The main objective of the Vacuum Tower Debottlenecking component was to double the capacity of the vacuum distillation column from 16,000 to 32,000 bpsd so that the unused capacity of the thermal cracker could be reduced. As a result, less of the atmospheric pipestill bottoms would be diverted to lower value industrial fuel oil, and more would be processed in the vacuum column and cracker producing higher value diesel fuel oil, liquid propane gas, and naphtha. The EIRR is estimated at more than 100 percent. The corresponding FIRR is also in excess of 100 percent. The high rates of return are the result of large incremental benefits compared to the relatively small investment. See Appendix 7 for details. Implementation of the Vacuum Tower Debottlenecking component was delayed by about two years. This is estimated to have resulted in a loss of about $9 million to the economy. 10
35. Before the upgrading, the refinery control system consisted of 1970s vintage conventional analog instrumentation, as well as some pneumatic instrumentation of even older vintage. This type of control relied to a great extent on operator intervention, measurements were not very accurate, and response time was slow. The Process Control Upgrading component provided digital instrumentation, advanced analyzers, and a computational capability for the rapid collection and processing of data with automatic adjustments to maximize product yield and quality, reduce losses, and minimize energy consumption. The EIRR was calculated at 42.7 percent and the corresponding FIRR at 41 .2 percent (see Appendix 8). Implementation of the Process Control Upgrading component was also delayed by about two years. Based on the net economic benefits of this component, the cost of the delay was in the order of $11 mUllen.
36. The addition of the Merox unit1 also resulted in energy savings, product upgrading, and increases in product yields. The EIRR on the investment is estimated at 18.6 percent and the FIRR at 15.8 percent (see Appendix 9). Implementation was delayed by about two years, resulting in an economic loss of about $2 million.
37. The installation of the 5 MW steam turbine generator added power-generating capacity to the refinery, improved the reliability of the power supply, and lowered the cost of power. An EIRR of 32.0 percent was estimated based on the capital and associated operating and maintenance costs, and the avoided cost of purchasing power (valued at the long run marginal cost of power) from the National Power Corporation (NPC) (see Appendix 10). The F1RR, based on NPC's average tariff to the refinery, was 30.2 percent.
2. Part B (Coal Mining)
38. Investments made in the Bislig 1, 2, and 2A mines; Kauswagan; Central Cebu; and Little Baguio mines were primarily for the completion of ongoing development to raise output from 221,500 tons per year, in 1983, to 306,000 tons per year. However, by 1987 coal output from these mines fell to 70,000 tons per year, and by 1991 production had ceased altogether except in the Bislig mines (see para. 10). Because of the absence of any incremental benefit from the investment made under the Project, the EIRR and FIRR would be well below acceptable levels.
39. The Malangas mine began production in May 1982, and by 1983 coal output was 136,000 tons per year. Investment under the Project in the Malangas mine aimed at increasing output to 240,000 tons per year. However, output exceeded the 1983 level ordy during the 1987- 1990 period when output ranged from 148,000-188,000 tons per year. In the other years, output was below the 1983 level until the closure of the mine in 1994. Thus, it may be concluded that the net benefit from the investment in the Malangas mine was negligible relative to the investment made.
The Merox unit converts monosuiphides (mercaptans) to disuiphides to remove the foul odor present in kerosene at distillation. The disulphdes may subsequently be removed by decanting. 11
3. Part C (Shipping)
40. Part C of the Project was not designed as a specific investment in PSTC, but rather as a stopgap measure to ensure the continued operation of the fleet through the provision of financing of recurrent foreign costs, such as dry-docking, maintenance, and spare parts for PSTC's fleet at a time when foreign exchange was in short supply. The financing of these costs facilitated keeping the fleet in seaworthy condition, and meeting national and international maritime regulations, without which operations would be virtually impossible. Therefore, the main benefit of Part C was the continued operation of the fleet, and the calculation of an EIRR and FIRR is thus not appropriate in this circumstance.
E. Socioeconomic and Sociocultural Results
41. The main objective of the Project was to strengthen the energy suppiy and distribution capacity in the country. Thus, the Project had few if any direct socioeconomic or sociocultural impacts on the population as a whole.
F. Women in Development
42. There were no provisions in the Project to address women's issues in the Philippines.
G. environmental Impacts and Control
43. The Project did not involve the creation of new facilities, but rather the more efficient use of existing refinery facilities, coal mines, and shipping vessels. Investments in the refinery resulted in improved process control, product yields, and energy conservation which led to a decrease in effluents. Replacement of the spent monometallic cataLyst in the reformer with a bimetallic catalyst helped to reduce the lead content of gasoline and comply with new environmental regulations. The separator unit in the refinery, used to collect untreated effluent to separate oil from water, was rehabilitated. This resulted in a 50 percent reduction of oil released into Manila Bay and a reduction in chemical and biological oxygen demand.
44. The rationale of the debottlenecking and process control upgrading components was to convert low value fuel oil to high value distillates because of the supply-demand imbalance in marketable petroleum products at the time. However, the reasons for this imbalance were rooted in the Government's pricing policy. In 1980, the price ratio of diesel to gasoline was 0.53, thus making diesel more competitive in the market vis-a-vis gasoline, and resulting in a large segment of the transport sector switching to diesel as a fuel source. Although this ratio rose to 0.79 by 1984, today this price differential is 0.70 for unleaded gasoline and 0.65 for regular gasoline. The upshot of this is the very poor air quality in Metro Manila and other urban centers, caused by the sociaLly inefficient use of diesel, and the high incidence of respiratory problems, such as bronchitis and asthma: eye irritation; and increase in mortality from cancers and cardiopulmonary disease. Bank studies show that 34.5 percent of inhalable particulates in Manila, which cause these respiratory and cardiopulmonary diseases, comes from 12 diesel vehicle emissions alone. 1 Although air quality in Manila has been a serious concern for some time, the Project provided no remedial measures to address the issues of petroleum product pricing and the environment as affected by the consumption of petroleum products.
45. Coal mining did not involve any substantial physical changes in the surface or in the vegetation. No significant amounts of waste rock are excavated during mining operations and therefore solid waste was minimized. At the Malangas mine, chemicals were not used for the washing of coal, and suspended solids were removed from the water effluent in a settling pond. Thus, the environmental impact was minimal.
H. Gestation and Sustainability
46. Project benefits under Part A (refinery) were immediately realized after completion of the components and met or exceeded expectations. In 1994, 60 percent of PC, which owns the Bataan refinery, was sold by PNOC to the private sector, and today it is a viable and profitable firm. Moreover, the private sector interests have plans for the expansion at the refinery in the near future, thus ensuring that most benefits under Part A will be realized well into the future. Benefits under Part B (coal mining) never reached target levels because of law coal orices and changes in geological conditions at the mines. Except for the Bislig mines, all coal mines included in the Project were eventually closed, thus nullifying any future benefits from the Projects investments. No benefits arising from the subsequent investments in the BisLig mines by the private sector are attributable to the Project's small contribution. The Project provided much needed foreign exchange under Part C (shipping) to maintain the operation of the fleet of vessels at a time when foreign exchange was scarce. As a result, PSTC was eventually able to rationalize its fleet through the saLe of a number of ships and continue operations in a more efficient manner.
IV. KEY ISSUES FOR THE FUTURE
47. PNOC was established by the Government in 1973 essentially as an instrument for coping with the energy crisis. It main functions were (I) to deal with oil exporters who preferred to do business on a government-to-government basis: (ii) to participate in the import, refining, and distribution of oil and petroleum products to ensure a dependable energy supply to the economy; and (iii) to promote rapid development of indigenous energy resources. However, the international oil market has stabilized since the 1970s when importing countries like the Philippines faced rapid oil price increases and a decreased security of supply. Moreover, with the privatization of PC in 1994, the scaling down of coal mining operations, and the substantial reduction of PSTC's fleet of ships, PNOC has removed itself to a great extent from the direct involvement in the production and distribution activities of the nonDower energy subsecto r.
It is the view of the Infrastructure, Energy and Financial Sectors Department East that the major cause of air poflution in Metro Manila is the poor maintenance of the diesel engines rather than the use of diesel fueL However, the Post-Evaluation Office maintains that adjustments to the diesel fuel price will be the most effective way of incorporating the social costs of using diesel fuel. 13
48. The role of PNOC in the economy and as an instrument of Government policy has diminished substantially over the past number of years, particularly since the Government's directive to privatize several of its operations in 1986. Its current role is primarily in the development of the country's coal and geothermal resources, and as a holding company for its minority ownership of PC. PNOC management has recognized the limited role PNOC now plays and recently has begun to map out new directions for itself. However, the options available to PNOC are few because of the Government's market-oriented policies in the energy sector and the evolution of a conducive environment for private sector involvement in the development of indigenous energy resources. Future Bank involvement with PNOC, if any, will need to be based on a clear and thoroughly thought-out rationale for such involvement.
49. The goal of energy sell-sufficiency is a laudable one if it can be sustained over the long term. To date, few countries have achieved energy self-sufficiency or can afford to support this objective without incurring a considerable economic cost. Therefore, the Bank should carefully investigate the implications of any energy self-sufficiency policy, particularly in energy subsectors in which the country does not seem to have a comparative advantage. In the Philippines, the Government's current position on the coal mining industry is to promote mine- mouth coal power plant operation for low-grade coal deposits. This is in line with its OiIC to promote the utilization of indigenous resources. However, the commercial viability of such power plant operation has not yet been firmly established. A thorough investigation of the coal subsector would need to be undertaken to determine whether the Philippines has a comparative advantage in coal, and whether coal production is able to compete with other energy forms without subsidies. Future Bank involvement in the coal subsector in the Philippines needs to be carefully considered in light of past experience.
50. The Government's policy for energy pricing has had a serious negative effect on the environment and the health of the population in urban areas. These social costs have not been reflected in the pricing of diesel fuel, and there is an urgent need to engage in a dialogue with the Government to address this issue. Future Bank assistance to the Philippines should be contingent on the Government taking the necessary steps that will resolve the issue in a timely manner.
VI. CONCLUSIONS
A. Overall Assessment
51. The PNOC Energy Project consisted of three components: refinery, coal mining, and shipping. The refinery component, the largest of the three, was well designed; successfully implemented, although with substantial delays; and achieved the expected benefits originally envisaged. The shipping component ensured the continued operation of the fleet, also achieving the objective envisaged under the Project. On the other hand, the outcome regarding the coal mining component was less than satisfactory. Preparatory work for this component was not adequate, and the benefits expected were not realized. In retrospect, a more appropriate intervention with respect to these operations would have been divestiture and closure of mines rather than further investment. However, the lack of success of this component was mitigated by the substantial reduction in scope of Part B. On this basis, therefore, it can be concluded that the Project as a whole was generally successful. 14
B. Lessons Learned
52. Experience with the PNOC Energy Project has highlighted two issues with broader implications on Bank operations in the energy sector. Although the Philippines was nearly wholly dependent on imported oil for its commercial energy needs, and the political and economic difficulties and foreign exchange shortages at the time threatened to restrict the Government's access to the oil market, there does not seem to have been sufficient justification to dispense with proper project preparation in order to expedite the processing of this loan. Parts B and C of the Project were not well conceived and, in hindsight, probably should not have been included in the Project. More thorough and careful project preparation would have uncovered important aspects of PNOC's coal mining and shipping operations that would likely have excluded these components. Sufficient time for proper project preparation should therefore be mandator?, whether a country is in economic difficulties or not.
53. The Government benefited greatly from the privatization of PC, Proceeds from the sale of a 60 percent equity stake helped to reduce its budget deficit, secured a reliab'e and steady source of crude oil suppLy, and ensured private sector financing of PC's future rehabilitation and expansion plans. The transfer of mining rights of some of FNCC's coal mines to the private sector, the closure of others, and the disposal of a large number of shiping vessels also contributed to the financial health of PNOC directly, and to the Government indirectly. Although not part of the Project, the experience with privatization has been a positive one and indicates that expanding the private sectors involvement, at least in the nonpower energy subsector, should be seriously considered as part of any future loans in this subsector in other DMCs.
C Follow-up Actions
54. The PPAR has identified two issues that will need followup by the Government and the Bank to further improve the efficiency of the energy sector in the Philippines. These are: (I) the role of PNOC as an institution; and (ii) the impact of energy pricing on environment.
55. Although PNOC's management is attempting to define PNOC's role in the economy, few options are avaiLable at this time and the windup of PNOC operations may need 'to be considered. A comprehensive study would need to be undertaken to review PNOC's role from a broader public policy perspective, as well as, proposing options for the rationalization of its operations including the divestiture of some operations that could be better undertaken by the private sector. If privatization is recommended, such a study would need to look at PNOC's coal mining operations in depth, particularly from geological and technical points of view, to assess the feasibility of either the sale of the mining concession and its assets, or the outright closure of the mines if the longer term outlook for coal mining is not favorable.
56. The Bank is already actively involved in discussing environmental issues with the Government as part of its technical assistance program to the Philippines. The scope of these discussions should be broadened to address the issue of energy pricing and the environment, particularly as it relates to the pricing of diesel fuel in the Philippines. This dialogue could be supported by one or more advisory technical assistance grants, followed by an appropriate lending strategy that will encourage the Government to take the necessary steps. 15
APPENDIXES
Number Title Page Cited on (page, para.)
I Refinery Material Balance, 1987 and 1993 16 3,9
2 Comparison of Projected and Actual Implementation Schedule 18 6,20
3 Status of Compliance with Loan Covenants 20 7,25
4 Refinery Product Yields for 1983 and 1993 25 8,27
5 Incidences of Fire in the Bataan Fefinery (1984-1995) 26 8.27
6 Key Financial Indicators of Subsidiaries of the Philippine National Oil Company 27 9,32
7 Economic and Financial Analysis of the Vacuum Tower Debottlenecking Component 28 9,34
8 Economic and Financial Analysis of the Process Control Upgrading Component 30 10,35
9 Economic and Financial Analysis of the Addition o the Merox Unit 32 10,36
10 Economic and Financial Analysis of the Five Megawatt Steam Turbine Plant 34 10,37 REFINERY MATERIAL Fuel Gas, 2.3 MBSD
LPG, 4.3 MBSD MRJMS/Naphtha, 18.4 MBSD
Kero/Jet Fuel/Solvents, 9.8 MBSD
Diesel, 25.2 MBSD
-a -a (D
0 x. -S IFO, 29.9 MBSD -o Asphalt/Pitch, 7.7 MBSD CO CD
REFINERY MATERIAL BALANCE Fuel Gas, 2.0 MBSD 1993 MBSD LPG, 3.9 MBSD I Crude LPG 15 MBSD [!1-Trealar MRJlvlSlNaphtha, 28.2 MBSD
MBSD Feed- Gas 0.8 MBSD NpFdha 7.1 MBSD I 12.5 MOSO Ill HVN I43MBSD F.ada2M[_ 2.tMBSDI PWF 2 RakernatalO3MBSD
Keroa2M0SD i ______Solvents, 2.0 MBSD Feed 32.3 MBSD I LDO 42 MBStI I Feed = 2.0 MBSD s-i I I IHDO=3.3MBSD i A Feed 13.9 I 51880 Kero Kero/Jet Fuel, 10.9 MBSD L9ottornu 14.5 MBSD I Merox
Nahtha 161 MOSO
-S
Feed r 751 MOSD I Kern 2 7.4 MBSD I APS-2 I DFO=174M880 DFOIoRiIJ=117MBSD Diesel, 34.8 MBSD
Botluma 338 51080
3.S ME3SO Haptitha = 4.8 MBSD
Kero=2OMBSO 22.2MDAp3 DFO;48M050 LVGO 26 51880 OMOSO TCCLPS= 1.5 51830
Feed 269 MBSO HVCO 10.1 SIBSD ccu CN =4,0 MBSO Bottnis= 10.0 M030 -o -o LFO = 2.3 'IBSO (0 141 MOSO FO 14 MOSO 'Jr ______IFO, 39.4 MBSD Burn to IFO 27.4 jTS VIB t IFO 7.551030 x. —s Asphalt/Pictti, 6.6 MBSD PITCH tO MOSO -o 0)
(0
COMPARISON OF PROJECTED AND ACTUAL IMPLEMENTATION SCHEDULE
19a5 ia 19e7 Proje,iCGmponent M[.J1JiA '' . . . . F
p..-, A: Prtum I:vlj!1wy 1 Vurn lowe! Dboffleneckuiig I •1 I p. •I* w . • 1 S " I fl !r 'C -r n .i P • • t 0 1m ImIjd llMl
Merox Un4 ; ..::?. ::. < : :, V -:: •: : :1 : .< : : : : p. . I V IN • • I! ! I • P Wt W Y U ! I Il.Ia
:: : ; . : : : : F • • • I'I*! l • " •' ,1 • • j ------.- - - - — - --- ..---u r i I I
MiscIianeou rnproemen1 :) . • T• .. .- ;:; -:- • -••• i't !J.PY '.S)iIJI .a'.p • a — — — — - — — —
Oa1inEqupmtandMutrS iJ L Ia , ,._ . U P(. .M. . • a,M.0 •. .a.I! .. ttie
Tranung dTecfln$l Sele a a U U P . ------NNdNI U iaaN co,Liltingser'ieu.Projctconnuttur* • P UU N tU flLU- • - it U N •M I U" ------N a N N UI UI I a UI 4 • U • a N • N I U I UI I a a I I at I Consulting Semicea Energy Coneervation Study
PalS: CoalUining a) - - I — - - Dc elopmentot Siulg Minee 1 2 2A Kauegan - - - ______- —- Biclg 1 2 2A prrvatiued In OcSber hitS? andCentralCebu Minea : : — — - - — Kauawagan Mi cloae.d m Nonember 1957, ..... I...... L. CentraCebu Mue csad in November 1990 SapailaKin ot Little Baguin ______1 itSe Ba lo Kiosed in Janua 1589
OpCting Equipment tot Above Mines 4
In estlgatKin at Lalal TJ T I I Operating Equipment and Malariala tor Mangaa Mine ______:
Cunsuting Services for ln5litutnsl ptt br I J ______Luun1nefled . Mining and Planning T Patt C: Snipping — — I I I '1 __ Dry-doclang Ma ntena end Ope atlons of PS1C a Fleet L I I r — ______-o D-docking MaintenanandOperaIlenaolFourTankers • . *'?91 ;Fu.itrirwTy ...... rt4... CD I flFTTLLJ J_LL Lull J_II IIJ LIll llLrL - - j__L- x tugand: N) Actual______-D Original CO CD —4
I gag Iggo Iggi 1g92 Pesl ectCo mpo nent s J F MJ J A S 0 t D J M j J AT óT .T 1TA U . Ô •j .1 .1
Pafi A: Pelesleum ReIiney
Vecuttn Tower Dotltenectang •.. .: : :.: .
MIru.oUn : ::::::
Process Control Upgrading j:
Miscellaneous Improvements ------Addt iTini PrcLurprneni - - - - -
Operating Equipment and Materials
Training and Technical Se,vices :......
Consulting Saiices ProieclConnuttert :
Consufling Sruic.s: Energy Consorvation Study
Part B: Coat Mining (0
Development at Bislig Mines 1. 2, 2A. Kauswagan endCentralCebu Mines
Eupanuionot Little Bagulo -
Operating Equipment for Above Mines
Investigabon at Lalat
______I AdditiiaI PrrCuremcni ______Operating Equiprrianl and Materials for Malarigas MinO -:: :: - : :::..
Consulting SeMca$ for tnatitutbnel SupN tar kliningandPlanning
I Part C: Shipping
D-dochiuig, Maintenance and Operations at PETCa Fleet > 13 DIy-docklng Maintenance and Operationl 01 Four Tankets -o CD
1 ._.L_...... _L. I 0 x Legend. ______Actual______
-D Oligiflal
CD Appendix 3, page 1
STATUS O COMPLIANCE WITH LOAN COVENANTS
Covenants Reference Compliance
1. Carry out the Project with diligence and LA, Sec. 4.01(a) Complied with. efficiency. PA, Sec. 2.01 (a)
2. Overall monitoring and coordination of LA, Schedule 6.2(b) Complied with. Project implementation will be undertaken by the Project Coordination Committee, which shall be the Management Executive Committee of PNOC, consisting of its Executive \/ice Presidents.
3. The Project Coordination Committee shall LA, Schedule 6.2(c) Complied with. review the progress and problems of Project implementation coordination among the Project Executing Agencies and other agencies concerned, and recommend suitable measures for effective Project implementation.
4. Furnish to the Bank financial reports LA, Schedule 6.3 Complied with. including projected financial statements.
5. Effective 1 January 1985, revalue the fixed LA, Schedule 6.4(a) Complied with. assets of its consolidated corporate group in operation at the end of each fiscal year, including the assets of PC, PCC, MCC, PSTC. PCOT, POC, PNOC-TC, and PTC using appropriate indices satisfactory to the Bank.
6. Submit within six months after the end of LA, Schedule 6.4(b) Complied with. each fiscal year, unaudited accounts reflecting such revaluation of assets.
7. PNOC and the Project Executing Agencies LA, Schedule 6.5 Complied with. shall not, during Project implementation, effect any material change to existing contractual arrangements between PNOC and its subsidiaries concerned with Project implementation, relative to equity ownership, corporate control, transfer pricing, and corporate fees.
a LA = Loan Agreement: PA = Project Agreement; PNOC = Philippine National Oil Company; PC = Petron Corporalon; PCC = PNOC Coal Corporation; MCC = Malangas Coal Corporation; PSTC = PNOC Shipping and Transport Corporation: PCOT = PNOC Crude Oil Tankers; POC = PNOC Oil Carriers. Inc.; PNOC-TC = PNOC Tankers Corporation; PTC = Petrophil Tankers Corporation. 21 Appendix 3, page 2
Covenants Reference Compliance
8. Ensure that the Bank is informed and its LA, Schedule 6.6 Complied with. views duly taken into account prior to the implementation of any plan for the rationalization of the fleet owned or operated by PSTC and/or Four Tankers Company.
9. Inform the Bank and take into account LA, Schedule 6.7 Complied with. Bank's views prior to undertaking any activity involving substantial commitment of its resources for any significant deviation from its existing energy activities.
10. Ensure environmental protection controls LA, Schedule 6.10 Complied with. and safety devices in the design of Project facilities.
11. The Government shall give due LA, Schedule 6.11 Complied with. consideration to the financial viability of PNOC and its subsidiaries in determining prices of energy products.
12. Consult the Bank regarding any proposal to LA, Schedule 6.12 Complied with. privatize PNCC or its subsidiaries, taking as well into account the findings of the Institutional Strategy Study.
13. Make available funds, facilities, services, LA, Sec. 4.02 Complied with. land, and other resources required in PA, Sec. 2.02 carrying out the Project.
14. Employ competent and qualified consultants PA, Sec. 2.03(a) Complied with. and contractors.
15. All goods and services to be financed by the PA, Sec. 2.03(b) Complied with. loan shall be procured in accordance with Schedules 4 and 5 to the LA.
16. Carry out the Project in accordance with PA, Sec. 2.04 Complied with. plans, design standards, specifications, work schedules, and construction methods acceptable to the Bank.
17. Insure the goods to be imported for the PA, Sec. 2.05 Complied with. Project. Appendix 3, page 3
Covenants Reference Compliance
18. Maintain records and accounts adequate to PA, Sec. 2.06 Complied with. identify the goods and services financed by the loan.
19. Furnish to the Bank all reports and LA, Sec. 4.03(a) Complied with. information the Bank shall request PA, Sec. 2.08(a) concerning the Loan.
20. Submit to the Bank quarterly progress LA, Sec. 4.03(b) Complied with. reports. PA, Sec. 2.08(b)
21. After physical completion of the Project but LA, Sec. 4.03(c) Complied with. not later than six months thereafter, submit PA, Sec. 2.08(c) to the Bank a report on the execution and initial operation of the Project.
22. Submit to the Bank audited financial LA, Sec. 4.04 Complied with. statements not later than six months after PA, Sec. 2.09 each related fiscal year.
23. Enable the Bank's representatives to inspect LA, Sec. 4.05 Complied with. the Project. PA, Sec. 2.10
24. PNOC shall enable the Project Execunng LA, Sec. 4.06 Complied with. Agencies to perform their respective obligations under the respective PAs.
25. PNOC shall exercise its rights under the LA, Sec. 4.07(a) Complied with. respective Subsidiary LAs in such a manner as to protect its interests and that of the Bank and to accomplish the purposes of the Loan.
26. The Project Executing Agencies shall PA, Sec. 2.14 Complied with. perform all its obligations under the Subsidiary LA.
27. No rights or obligations under any LA, Sec. 4.07(b) Complied with. Subsidiary LA shall be assigned, amended, abrogated or waived without prior concurrence of the Bank.
23
Appendix 3, page 4
Covenants Reference Compliance
28. Promptly take all action to maintain its LA, Sec. 4.08(a) Complied with. corporate existence, to carry on its PA, Sec. 2.11(a) operations and to acquire, maintain and renew all rights, properties, powers privileges and franchises necessary in carrying out the Project.
29. Conduct its business in accordance with LA, Sec. 4.08(b) Complied with. sound administrative, financial, and energy PA, Sec. 2.11(b) industry practices, and under the supervision of competent and experienced management and personnel.
30. Operate and maintain its plant, equipment LA, Sec. 4.08(c) Complied with. and other property, and make necessary PA, Sec. 2.11(c) repairs thereof.
31. The Borrower shall not sell, lease or dispose LA, Sec. 4.09 Complied with. any of its assets, except in the ordinary PA, Sec. 2.12 The Bank was course of business. advised in this regard.
32. If the Borrower shall create any lien on any LA, Sec. 4.10(a) Complied with. of its assets as security for any debt, such lien will ipso facto equally and ratably secure the payment of the principal of, and interest and other charges on, the Loan and the Borrower; if any statutory lien shall be created on the assets of the Borrower, the Borrower shall grant to the Bank an equivalent lien.
33. Apply the proceeds of the Loan to the PA, Sec. 2.13 Complied with. financing of the expenditures on the Project.
34. Notify the Sank of any proposal to amend, PA, Sec. 2.15 Complied with. suspend or repeal any provision of its Articles of Incorporation. 24 Appendix 3, page 5
Covenants Reference Compliance
35. PC shall maintain
a) a debt-equity ratio of not more than PA, Sec. 2.16 Not complied 60:40 with.
b) a debt-service ratio of not less than PA, Sec. 2.17 Complied with. 1.25:1
C) a current ratio of not less than 1:1 PA, Sec. 2.18 Complied with.
36. PCC shall maintain
a) a debt-equity ratio of not more than PA, Sec. 2.16 Complied with. 60:40
b) a debt-service ratio of not less than PA, Sec. 2.17 Complied with 1.25:1 except far 1992 and 1993.
c) a current ratio of not less than 1.1:1 PA, Sec. 2.18 Complied with.
37. MCC shall maintain
a) a debt-equity ratio of not more than PA, Sec. 2.16 Not complied 70:30 with.
b) a debt-service ratio of not less than PA, Sec. 2.17 Not complied 1.25:1 with,
a) a current ratio of not less than 1.1:1 PA, Sec. 2.18 Not complied with from 1992 onward. 38. PSTC shall maintain
a) a debt-equity ratio of not more than PA, Sec. 2.16 Complied with. 60:40
b) a debt-service ratio of not less than PA, Sec. 2.17 Complied with. 1.25:1
c) a current ratio of not less than 1.1:1 PA, Sec. 2.18 Complied with. 25 Appendix 4
REFINERY PRODUCT YIELDS FOR 1983 and 1993
1983 Actual 1993 Actual
Products bpcd Volume (%) bpcd Volume (%)
LPG/C3/C4 850 2.59 1,370 3.24
Mogas/Napthta 5,733 17.43 7,855 18.58
Kero/JP— 1 3,533 10.74 3,918 9.27
Solvents 100 0.30 112 0.27
DFO/LSD 8,749 26.74 11,976 28.32
Resid. Fuel Oils (IFO) 9,407 28.60 13,218 31.26
Pitch/Asphalt 2,544 7:73 2,145 5.07
Refinery Fuel and Loss 1,952 5.33 1,688 3.99
Total 32,868 42,282
LPG = liquefied petroleum gas; bpcd = barrels per calender day; kero/JP-1 = kerosene, jet fuel; DFO = diesel fuel oil; LSD = low sulphur diesel oil; IFO = industnal fuel oil. 26
Appendix 5
INCIDENCES OF FIRE IN BATAAN REFINERY (1984-1995)
Other
Year Major Minor (flash) (Giass fires, etc.)
1984 0 13 6
1986 0 8 3
1986 1 4 3
1987 0 8 6
1988 0 I 5
1989 1 10 I
1990 0 4 1
1991 0 1 6
1992 1 2 12
1993 3 0 5
1994 0 9 14
1995 1 4 0
27 Appendix 6
KEY FINANCIAL INDICATORS OF SUBSIDIARIES OF THE PHILIPPINE NATIONAL OIL COMPANY
Corporation 1990 1991 1992 1993 1994 1995
A. Petron Corporation a Net Income before tax (P million) 1,160.6 1,641.3 1,930.4 4,103.6 5,205.5 5,748.0 Current Ratio 1.08 1.18 1.38 1.33 1.43 1 68 Debt/Equity Ratio 5.29 3.30 2.10 2.14 1,76 0,99 Debt-Service Coverage 18.77 10.73 12.06 10.34 15.43 453
B. PNOC Coal Corporation b Net Income before tax (P million) 8.22 0.75 -35.48 -30.90 24.31 85.41 1.97Current Ratio 1.86 1.07 1.04 1.17 1.13 Debt/Equity Ratio 2.57 1.55 1.54 1,46 1.18 1.63 Debt-Service Coverage 5.12 2.70 0.00 0.23 2.46 1.49
C. Malangas Coal Corporation
Net Income before tax (P million) -6.66 -80.87 -126.59 -97.10 -263.69
Current Ratio 2.03 1.36 0.48 0.58 0.40 0.47
DebtiEquity Ratio 2.48 3.97 29.77 -39.51 -2.40 -23,50
Debt-Service Coverage 1.19 0.75 -0.16 -0.38 -0.99 -3.83
D. PNOC Shipping and Transport Corporation Netincome beforetax(Pmillion) -20.32 32.53 61.04 2.20 86.59 1.90 CurrentRatio 1.75 1.87 1,82 1,84 2.05 2.80 Debt/Equity Ratio 0.94 0.92 0.75 0.71 0.71 0.41 Debt-Service Coverage 3.97 7.71 8.84 2.29 3.39 0.82
PNOC = Philippine National Oil Company. a Petron Corporation was privatized in September 1994. Data from 1993-1995 refer to the parent company Losses before an operating subsidy of about P 24 million. Losses before an operating subsidy of about P 22 million. Losses before an operating subsidy of about P 333 million.
Source: Philippine National Oil Company.
28
Appendix 7, page 1
ECONOMIC AND FINANCIAL ANALYSIS OF THE VACUUM TOWER DEBOTLENECK1NG COMPONENT
1. The Vacuum Tower Debottlenecking component comprises interventions in both the vacuum distillation column and the thermal cracker to double the feed rate to the vacuum column and the production of heavy vacuum gas oil and light vacuum gas oil. The greater production of heavy vacuum gas oil reduces the unused capacity of the thermal cracker to produce more diesel fuel oil, liquid propane gas, and naphtha. Benefits are primarily in terms of product yield increases valued at the difference in the economic value of diesel, liquid propane gas, naphtha and the economic value of fuel oil, exclusive of taxes and duties. Data is not compiled or collected on volumes of product at each stage of the refining process, and it is not possible to distinguish the benefits of investments made by the Bank from those of others, for example, the World Bank and Petron Corporation, made after completion of the Project. Thus, estimates based on actual refinery parameters, before and after the Project, are used. Since the refinery runs on a more or less continuous basis at a steady rate, it is believed that these estimates are an accurate reflection of actual output levels. Operating and maintenance costs are similarly estimated. The economic and financial evaluations follow closely those in the Project's appraisal report. A standard conversion factor of 0.9 for nontraded costs and benefits is used in the economic evaluation.
Economic Evaluation (In P millIon, 1996 prices)
Net
Capital O&M Total Economic Economic
Year Cost Cost Cost Benefit Benefits
1988 25.67 - 25.67 (25.67)
1989 45.00 - 45.00 (45.00)
1990 46.16 - 46.16 (46.16)
1991 13.83 4.55 18.38 467.00 448.62
1992 - 4.55 4.55 467.00 462.45
1993 - 4.55 4.55 467.00 462.45
1994 - 4.55 4.55 487.00 462.45
1995 - 4.55 4.55 467.00 462.45
1996 4.55 4.55 467.00 462,45
1997 - 4.55 4.55 467.00 462.45
1998 - 4.55 4.55 467.00 462.45
1999 - 4.55 4.55 467.00 462.45
2000 - 4.55 4.55 467.00 462.45
EIAH = 145.7% 29 Appendix 7, page 2
2. The financial evaluation is based on the same costs and benefits as the economic evaluation but valued at market prices.
Financial Evaluation (In P miUlon, 1996 prices)
Net
Capital O&M Total Financial Financial
Year Cost Cost Cost Benefit Benefits
1988 29.40 . 29.40 (29.40) 1989 50.15 50.15 - (50.15) 1990 49.89 . 49.89 . (49.89) 1991 14.49 5.06 19.55 467.00 447.45 1992 - 5.06 5.06 467.00 461.94 1993 - 5.06 5.06 467.00 461.94 1994 - 5.06 5.06 467.00 461.94 1995 - 5.06 5.06 487.00 461.94 1996 - 5.06 5.06 467.00 461.94 1997 - 5.06 5.06 467.00 461.94 1998 - 5.06 5.06 487.00 461.94 1999 - 5.06 5.06 467.00 461.94 2000 - 5.06 5,06 467.00 461.94 FIRR 136.3% 30 Appendix 8, page 1
ECONOMIC AND FINANCIAL ANALYSIS OF THE PROCESS CONTROL UPGRADING COMPONENT
1. Process Control Upgrading consisted of a capital investment in instrumentation, analyzers, and computer-assisted controls. There were no incremental operating and maintenance costs associated with this component, since this equipment replaces other older equipment already in place. Benefits are primarily in terms of product yield increases or upgrades and in energy savings. These benefits are valued on the basis of differences in the economic value of fuel oil and the upgraded products in the case of upgrades, the economic cost of imported products in the case of increased yields, and the economic cost of imported fuel oil in the case of energy savings. As in the Vacuum Tower Debottlenecking analysis, data on the higher yields and amounts upgraded are not available, thus estimates based on actual refinery parameters were made. The economic and financial evaluations follow those in the Project's appraisal report. A standard conversion factor of 0.9 is used in the economic evaluation to convert nontraded benefits and costs to border prices.
Economic Evaluation (in P million, 1996 prices)
Net
capital O&M Total Economic Economic
Year Cost Cost Cost Benefit Benefits
1986 0.58 0.58 (0.58) 1987 1988 38.11 36.11 (36.11) 1989 65.76 65.76 (65.76) 1990 237.41 237.41 (237.41) 1991 45.98 45.98 113.00 67.02 1992 226.00 226.00 1993 226.00 226.00 1994 226,00 226.00 1995 226.00 226.00 1996 226.00 226.00 1997 226.00 226.00 1998 226.00 226.00 1999 226.00 226.00 2000 226.00 226.00 2001 226.00 226.00 EIRR 42.7%
O&M = operation and maintenance. 31
Appendix 8, page 2
2. The financial evaluation is based on the same costs and benefits as the economic evaluation but valued at market prices.
Financial Evaluation (in P millIon, 1996 prices)
Net
Capital O&M Total Financial Financial
Year Cost Cost Cost Benefit Benef its
1986 0.95 - 0.95 - (0.95 1987 - - - -
1988 51.90 - 51,90 - (51.90) 1989 90.22 - 40.22 - (90.22) 1990 311.40 - 311.40 (311.40) 1991 49.64 49.64 144.00 94.36 1992 - - - 288.00 288.00 1993 - - - 288.00 288.00 1994 - - - 258.00 288.00 1995 - - - 288.00 288.00 1998 - - - 288.00 288.00 1997 - - - 288.00 288.00 1998 - - - 288.00 288.00 1999 - - - 288.00 288.00 2000 - - - 288.00 288.00 2001 - - - 288.00 288.00 FIRR = 41.2%
32 Appendix 9, page 1
ECONOMIC AND FINANCiAL ANALYSIS OF THE ADDITION OF THE MEROX UNIT
1. As in the Process Control Upgrading component, the Addition of the Merox Unit also achieved product yield increases and upgrading, and energy savings. The benefits of these were similarly valued. The increase in product yield was the result of using the bimetallic catalyst that increased the reformate product yield volume by 2.6 percent. This economic and financiaj evaluation differs from that in the Project's appraisal report in that the appraisal report assumes that the benefits of the addition of the Merox unit were only from energy savings. Again, data is not compiled or collected on the higher yields and amounts upgraded by the Merox unit, thus estimates based on actual refinery parameters are used. The value of the standard conversion factor is 0.9 for nontraded benefits and costs.
Economic Evaluation (in P million, 1996 prices)
Nt
Capital O&M Total Economic Economc
Year Cost Cost Cost Benefit Benefits
1987 1.74 - 1.74 - (1.74) 1988 43.23 - 43.23 - (43.23) 1989 81.28 - 81.28 - (81.28) 1990 91.54 - 91.54 - (91.54) 1991 19.60 4.99 24.59 64.00 39.41 1992 - 4.99 - 64.00 59.01 1993 - 4.99 - 64.00 59.01 1994 4.99 - 64.00 59.01 1995 - 4.99 - 64.00 59.01 1996 - 4.99 - 64.00 59.01 1997 - 4.99 - 64.00 59.01 1998 4.99 - 64.00 59.01 1999 - 4.99 - 64.00 59.01 - 4.99 - 64.00 59.01 2001 4.99 - 64.00 59.01 EJAR = 18.6% 33 Appendix 9, page 2
2. The financial evaluation is based on the same costs and benefits as the economic evaluation but valued at market prices.
Financial Evaluation (In P million, 1996 prices)
Net
Capital O&M Total Financial Financial
Year Cost Cost Cost Benefit Benefits
1987 2.07 - 2.07 - (2.07) 1988 50.95 - 50.95 - (50.95) 1989 86.49 - 86.49 - (86.49) 1990 105.13 - 105.13 - (105.13) 1991 22.13 5.55 27.68 64.00 36.32 1992 - 5.55 5.55 64.00 58.45 1993 - 5.55 5.55 64.00 58.45 1994 - 5.55 5.55 64.00 58.45 1995 - 5.55 5.55 64.00 58.45 1996 - 5,55 5.55 6400 58.45 1997 - 5.55 5.55 64.00 58.45 1998 - 5.55 5.55 64.00 58.45 1999 - 5.55 5.55 64.00 58.45 2000 - 5.55 5.55 64.00 58.45 2001 - 5.55 5.55 64.00 58.45 FIRR = 15.8%
34 Appendix 10, page 1
ECONOMiC AND FINANCIAL ANALYSIS OF THE FIVE MEGAWATT STEAM TURBINE PLANT
1. Inclusion of the five megawatt (MW) steam turbine plant in Part A of the Project made a major contribution to meeting the refinery's power demands, which have been in the order of 13.6 MW in recent years. The economic evaluation assumes that the benefits of this subproject are derived from the avoided cost of purchasing power, valued at the long run marginal cost (LRMC) of power, from the National Power Corporation (NPC). The most recent estimate of the LRMC of power of R2.41 per kilowatt-hour was estimated by the Bank in 1994. However, this is an average incremental cost and no estimate at 69 kilovolts is available. It was thus assumed that the LRMC of power at 69 kilovolts is 90 percent of the average LIRMC. Capital costs were based on actual costs incurred less any taxes or duties, and operating and maintenance (O&M) costs comprised the steam cost and the cost of spare parts, also without taxes or duties. These were converted to 1996 constant prices using appropriate inflation data. There was no incremental labor cost, and the standard conversion factor used for nontraded costs and benefits is 0.9. Technical parameters of the plant estimate that each pound of steam generates about 0.3 kilowatt-hours of electricity. The economic life of the generator is assumed to be 20 years with a major overhaul every 6-10 years. No economic or financial evaluation of the steam turbine plant was undertaken at appraisal because this subproject was included later when the scope of Part A was modified, arid thus no comparison is possible.
Economic Evaluation (in million, 1996 prices)
Energy LRMC Net
Generated Capital O&M Costs Total of NPC Economic
Year (MWh) Cost Steam Spares Cost Power Benefits
1991 132.66 132.66 (132.66)
1992 24,637 14.78 0.20 14.98 45.57 30.59
1993 29.236 17.17 0.40 17.57 5818 40.6 1
1994 30.222 16.13 0.43 16.56 59.00 42.44
1995 30,879 16.52 0.47 16.99 65.16 48.17
1996 29,893 15.60 0.50 16.10 68.25 52.18
1997 29.500 15.40 0.50 15.90 67.38 51.48
1998 29,500 15.40 0.50 15.90 67.38 51.48
1999 29, 500 15.40 0.50 15.90 67.38 51.48
2000 29,500 15.40 0.50 15.90 67.38 51.48
2001 27,000 2.60 14.10 0.50 17.20 61.67 44.47
2002 29,500 15.40 0.50 15.90 67.38 51.48
2003 29,500 15.40 0.50 15,90 67.38 51.48
2004 29,500 15.40 0.50 15.90 67.38 51.48
2005 29.500 15.40 0.50 15.90 67.38 51.48
2006 29,500 15.40 0.50 15.90 61.67 51.48
2007 29,500 15.40 0.50 15.90 67,38 51.48
35 Appendix 10, page 2
17.202008 27,000 2.60 14.10 0.50 61.67 44.47
2009 29,500 15.40 0.50 15.90 67.38 51.48
2010 29,500 - 15.40 0.50 15.90 67.38 51.48
2011 29.500 - 15,40 0.50 15.90 67.38 51.48
EIRR = 32.0%
MWh = megawatt-hour; NPC = National Power Corporation.
2. The financial evaluation is based on costs at market prices inclusive of taxes and duties. The financial benefit is valued at the avoided cost of purchasing power from NPC at the current tariff.
Financial Evaluation (in miHion, 1996 prices)
Energy Net Generated Capital O&M Costs Total NPC Tariff Financial Year (MWh) Cost Steam Spares Cost at 69 kV Benefits
1991 - 152.12 - - 152.12 . (152.12) 1992 24,637 - 16.42 0.22 16.64 55.43 38.79 1993 29,236 - 19.08 0.44 19.52 65.78 46.26 1994 30.222 - 17.92 0.48 18.40 68.00 49.60 1995 30,879 - 18.36 0.52 18.88 69.48 50.60 1996 29,893 - 17.33 0.66 17.99 67.26 49.27 1997 29500 - 17.11 0.66 17.77 66.37 48.60 1998 29,500 17.11 0.66 17.77 66.37 48.60 1999 29,500 17.11 0.66 17.77 66.37 48.60 2000 29,500 - 17.11 0.66 17.77 66.37 48,60 2001 27,000 2.90 15.66 0.66 19.22 60.75 41.53 2002 29.500 - 17.11 0.66 17.77 66.37 48.50 2003 29,500 - 17.11 0.66 17.77 66.37 48.60 2004 29,500 17.11 0.66 17.77 66.37 48.60 2005 29,500 - 17.11 0.66 17.77 66.37 48.60 2006 29,500 - 17.11 0.66 17.77 66.37 48.60 2007 29,500 - 17.11 0.66 17.77 66.37 48.60 2008 27.000 2.90 15.66 0.66 19.22 60.75 41.53 2009 29,500 - 17.11 0.66 17.77 66.37 48.60 2010 29,500 - 17.11 0.66 17.77 66.37 48.60 2011 29,500 17.11 0.66 17.77 66.37 48.60 FIIRR = 30.2%