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Documentof The World Bank fOR OFFI(IAL. l SE ONLY Public Disclosure Authorized ReportNo. 12943-RU STAFF APPRAISAL REPORT RUSSIAN FEDERATION Public Disclosure Authorized SECOND OIL REHABILITATION PROJECT JUNE 13, 1994 Public Disclosure Authorized *2;4 k? lLer~~rt !.c i V A :- . Infrastructure, Energy and Environment Division Public Disclosure Authorized Country Department III Europe and Central Asia Region This documenthas 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 Bsnk authorzation. CURRENCY EQUIVALENTS Unit of Currency = Ruble Rubles per US Dollar Moscow Inter-Bank Foreign Currencv Exchange/Foreign Exchange Auction Market (VEB) rate Period Average End of Period 1990 19 23 1991 62 169 1992 I Quarter 177 160 11 Quarter 134 144 III Quarter 178 254 IV Quarter 396 415 1993 I Quarter 580 684 II Quarter 801 934 III Quarter 1000 1000 IV Quarter 1200 1200 1994 I Quarter 1591 1753 II Quarter 1843 1928 (as of June 6,1994) WEIGHTS AND MEASURES bbl = US barrel (42 US gallons) mmbbl = million barrels bcm = billion cubic meters MMSCFD = million standard cubic feet per day bpd = barrels per day ton = metric ton (1,000 kilogram) mbbl = thousand barrels tpd = tons per day ACRONYMS AND ABBREVIATIONS API American Petroleum Institute CIS Commonwealth of Independent States CPI Consumer Price Index EBRD European Bank for Reconstruction and Development EIA Enviromnental Impact Assessment FSU Former Soviet Union GAAP Generally Accepted Accounting Principles GAAS Generally Accepted Auditing Standards ICB International Competitive Bidding LIB Limited Internati nal Bidding MNG Megionneftegas Joint Stock Company (Producer Association) NGDU Oil and Gas Production Unit within Producer Associations NGL Natural Gas Liquids NGO Nongovernmental organization OVOS Russian acronym for Industrial Activity Environmental Impact Assessment PA Producer Association PIU Project Implementation Unit PPF Project Preparation Facility SCL Single Currency Loan (IBRD) TN Tomskneft Joint Stock Company (Producer Association) YNG YuganskneftegasJoint Stock Company(Producer Association) FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY RUSSIAN FEDERATION SECOND OIl REHABILITATION PROJECT fable of Contents Page No. LOAN AND PROJECT SUMMARY .............. .. .............. v I. THE MACROECONOMIC SETTING. I II. THE ENERGY SECTOR .............. ......... ....... I A. Energy Consumption .1 B. Energy Resources, Production and Exports . .2 C. Energy and the Environment .... ..... 3 D. Energy Prices, Taxes and Subsidies .... ...... 3 E. Organization of the Energy Sector and Strdctural Reform. 3 F. Foreign Direct Investment . ................................. 5 G. Bank's Role in the Energy Sector ............................. 5 III. THE OIL SUBSECTOR .. 6 A. Oil Consumption, Refming and Distribution .. 6 B. Oil Resources, Production, and Exports .. 7 C. Oil and the Environment ................. 9 D. Crude Oil and Petroleum Product Pricing .. 9 E. Oil Taxation l.. F. Legal Framework for Oil Operations .......................... 13 G. Organization of the Oil Sector .. 14 H. Foreign Direct Investment in the Oil Sector .. 16 I. Russian Oil Sector Reform Program .......................... 18 IV. THE BANK'S PETROLEUM LENDING EXPERIENCE ................ 19 A. Petroleum Lending Experience Outside Russia ................... 19 B. First Oil Rehabilitation Project .............................. 19 C. The Bank's Future Lending Strategy in the Russian Oil Sector ... ...... 20 This report is based on the findings of Preappraisal (Oct/Dec 1993) and Appraisal (March 1994) Missions led by Task Manager Charles McPherson and Deputy Task Manager Douglas McKay. The report was prepared by Charles McPherson and Douglas McKay (EC3IV), with contributions from Suzanne Barnes (EC31V); Peter Pease (OPRPR); Ahmed Jehani (LEGEC); Viren Sirohi and Stan Peabody (EMTEN); Christopher Brierley, Vince Connelly and Miguel Montes (Consultants). Marc Blanc (EC3DR) provided operational guidance. The Division Chief and Department Director are Jonathan C. Brown and Russell J. Cheetham. i doument has a nsticted distrbution and may be usedby recipientsonly in the perfman f heir ocia duie Its contentm nototberMw bedislosed withoutWorld Ban auhoizaon | Page No. V. BORROWERS AND BENEFICLARIES ............................ 21 A. Organization and Management ........... .. ................ 21 B. Legal Status ....... .............. ..................... 22 C. Mineral and Land Rights ............. .. .................. 22 D. Relationship with Subunits ............. .. ................. 23 E. Accounting Systems ...... ............ ................... 23 F. External and Internal Audits ..... ............ 25 G. Financial Situation and Prospects ............................ 26 VI. THE PROJECT .... ............... ....................... 28 A. Project Objectives ...... ............ .................... 28 B. Project Description ................. .................... 28 C. Project Cost Estimates ...... ........... .................. 31 D. Financing Plan ..................... 34 E. Inurance .................. .................... 35 F. Implementation Arrangements ............ .................. 35 G. Reporting Arrangements ................................. 37 H. Procurement ...................................... 37 1. Disbursement ...................................... 40 J. Technical Assistance ..................................... 41 K. Environment ..................................... 41 VII. ECONOMIC JUSTICATION AND RISKS .. 44 A. Project Justification and Benefits ............................ 44 B. Economic Sensitivity Analyses and Project Risks .................. 46 VIII. FINANCIAL EVALUATION ............... .................. 46 A. Projected Profitability and Risks ............................ 46 B. Financial Covenants ..................................... 48 IX. AGREEMENTS REACHED AND RECOMMENDATIONS ............... 48 ANNXES Annex 2-1 Russia: Primary Energy Supply Annex 3-1 Organization of the Russian Upsream Oil Sector Annex 3-2 Russian Federation Oil Sector Reform Annex 5-1 Legal Characteristics of the Participating Producer Associations Annex 5-2 Organizational Structures of the Producer Associations Annex 5-3 Financial Status of the Producer Associations Annex 6-1 Technical Overview of the Producer Associations Annex 6-2 Technical Recommendations Annex 6-3 Field Opfimization Study: Recommended Scope of Work Annex 6-4 ImplementationSchedule and Project Expenditures Annex 6-5 LendingArrangements, Tegal Documents and Flow of Funds Annex 6-6 Project Implementation Unit: Organization Chart Annex 6-7 Draft Terms of Reference for the PIU Specialists Annex 6-8 Project Supervision Plan Annex 6-9 Procurement Arrangements Annex 6-10 Environmental Assessment Summary Annex 7-1 Economic Analysis Annex 8-1 Financial Analysis Annex 9-1 Russian GovernmenitLetter of Policy Intent Annex 9-2 Selected Documents and Data Available in the Project File MAPS IBRD 24146R1 Russia: Main Petroleum Basins and Crude Oil Trunk Lines IBRD 24145R1 Main Petroleum Producer Associationsof Western Siberia RUSSIAN FEDERATION SECOND OIL REHABILITATIONPROJECT LOAN AND PROJECT SUMMARY Borrower Thz Russian Federation Guarantor The Russian Federation Beneficiaries Three Oil Producer Associations in Western Siberia: - MegionneftegasOTJSC - Tomskneft OTJSC - YuganskneftegasOTJSC Note: OTJSC = Open Type Joint Stock Company. Amount US$500 million equivalent Terms Currency Pool Loan for 17 years, including 5 years grace, at the Bank's stndard variable interest rate. Onlending The proceeds of the loan would be on-lent to the Beneficiaries. Maximum maturity periods under the on-lending arrangements are 10 years including 2 years grace. Funds on-lent would carry an interest rate equal to the Bank's lending rate plus a premium of 75 basis points. Project The proposed Project's principal objectives are to: (i) slow the rate of oil Objectives production decline in Western Siberia and thus strengthen the Russian Federation's ability to earn foreign exchange in the near term; (ii) transfer international technical, environmentaland managerial practice to the operation of oil fields in Western Siberia; (iii) promote a more efficient and environmentallysustainable use of Russia's petroleum resources; and (iv) through policy consultations, continue past support to sector reforms conducive to attiacting the equity and loan finance and international participation necessary to reverse the oil production decline. Project The most effective investment in the petroleum sector, in terms of early economic Description benefits, is the provision of essential inputs to support existing oil production operations. Russian oil production is concentrated largely in the region of Western Siberia and the proposed Project focuses on three Producer Associations in this region. The Project would contain the following broad categories of components: (i) rehabilitation of idle wells and facilities where warranted; (ii) systematic reconstrucion of existing field infrastructure for a limited number of fields; (iii) in-fill drilling in existing fields; (iv) technical assistance for project implementationand for preparation of field optimizationplans and (v) equipment and services to help mitigate the effects of oil operations on the environment. During Negotiationsfor the First Oil RehabilitationLoan, the Bank established a procedure of regular consultation with the Government on all