ReportNo. 7408-ANG Angola: Issues and Options in the Energy Sector Public Disclosure Authorized May 1989 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Report61 the Joint UNDPAVorld Bank Energy S6ctor Assessment Program ~'Thisdocumen4 has a restricteddistribution. Its contents may not be disclosed withoutauthorization from the (,-qvernmient, the UNDPor thd World,3ank., 9 'I~~ JOINT UNDP/WORLD BANK ENERGYSECTOR ASSESSMENT PROGRAM Reports Already Issued Country Date Number Indonesia November 1981 3543-IND Mauritius December 1981 3510-MAS Kenya May 1982 3800-KE Sri Lanka May 1982 8792-CE Zimbabwe June 1982 3765-ZIM Haiti June 1982 3672-HA Papua New Guinea June 1982 3882-PNG Burundi June 1982 3778-BU Rwanda June 1982 3779-RW Malawi August 1982 3903-MAL Bangladesh October 1982 3873-BD Zambia January 1983 4110-ZA Turkey March 1983 3877-TU Bolivia April 1983 4213-BO Fiji June 1983 4462-FIJ Solomon Islands June 1983 4404-SOL Senegal July 1983 4182-SE Sudan July 1983 4511-SU Uganda July 1983 4453-UG Nigeria August 1983 4440-UNI Nepal August 1983 4474-NEP The Gambia November 1983 4743-GM Peru January 1984 4677-PE Costa Rica January 1984 4655-CR Lesotho January 1984 4676-LSO Seychelles January 1984 4693-SEY Morocco March 1984 4157-MOR Portugal April 1984 4824-PO Niger May 1984 4642-NIR Ethiopia July 1984 4741-ET Cape Verde August 1984 5073-CV Guinea Bissau August 1984 5083-CUB Botswana September 1984 4998-BT St. Vincent and the Grenadines September 1984 5103-STV St. Lucia September 1984 5111-SLU Paraguay October 1984 5145-PA Tanzania November 1984 4969-TA Yemen Arab Republic December 1984 4892-YAR Liberia December 1984 5279-LBR Islamic Republic of Mauritania April 1985 5224-MAU Jamaica April 1985 5466-JM C6te d'Ivoire April 1985 5250-IVC Benin June 1985 5222-BEN Continued on inside back cover ANGOLA ISSUES AND OPTIONS IN THE ENERGY SECTOR MAY 1989 This is one of a series of reports of the Joint UNDP/World Bank Energy Sector Assessment Program. Finance for this work has been provided, in part, by the Government of Sweden, the UNDP and the World Bank, and the work has been carried out by the World Bank. This report has a restricted distribution. Its contents may not be disclosed without authorization from the Government of Angola, the UNDP or the World Bank. This Report was based in part on the findings of a mission which visited Angola in April/May 1987. The mission was led by Michel Del Buono (Senior Economist) and comprised of Messrs. W. Teplitz-Sembitsky (Consultant, Energy Economist and Deputy Mission Leader), J. Baptista (Power Engineer/Economist), S. Dalin (Power Engineer), M. Grimaud (Natural Gas Specialist), J. Lopes (Power Engineer/Household Energy Specialist), W. Matthews (Petroleum Specialist - Refining and Distribution), M. Paues (Researcher), R. Sergio (Utility/Financial Analyst), R. Soto (Petroleum Specialist - Expioration and Contracts), H. Warfvinge (Forestry Economist). Mr. R. Bates (Deputy Division Chief) joined the mission in its final stage and participated in the round-up meetings. Mr. Pedro V. Pinheiro reviewed the sections dealing with petroleum and product marketing procurement. The main authors of this Report are Messrs. Michel Del Buono and Witold Teplitz-Sembitsky. A preliminary version of this report was discussed with the Angolan Government in late September 1988 and in early February 1989 and was issued simultaneouslyin Portuguese and English. ABSTRACT Angola has sizeable hydrocarbon reserves, a large hydro potential and ample woodfuel resources. Its ability to export annually 12-14 million tons of crude oil has sustained the economy over the past dozen years of civil war. However, the war has significantly affected the energy sector. While the State oil company, SONANGOL, and the oil refinery in Luanda run well, the power sector has steadily deteriorated over the last decade, and the utilities have run into ever increasing cash deficits. Artificially low prices for both electricity and oil products are encouraging wasteful consumption, and not permiczing recovery of costs, particularly for electric power. Some investment in natural gas is justifiable,to increase the supplies of LPG. With regard to traditional fuels, the Government's "hands off" policy should be continued in the current situation until a more active policy becomes possible with the return of security in the supply areas. The proposals made in this report are designed to increase the efficiency of the energy sector, through a number of moderate investments in infrastructure, but also through changes in pricing policy, and overall improvements in sector management. The mission recommends that the focus for the electric power subsector should be on maintaining and upgrading the existing electric power infrastructure and improving the reliability of supply. The expensive Capanda project should be postponed. A power consulting firm has reevaluated the Capanda project and the Bank has agreed to review the resulting report. To keep the oil sector prospering and avert a precipitous drop in petroleum reserves and production, it is recommended that the Government continue strengtheningSONANCOL and maintaining the competitivenessof contractual terms for foreign oil companies. SONANGOL should resume full responsibility for petroleum product trading to reduce the foreign exchange costs involved. Angola's LPG imports could be replaced by refractionating LPG obtained through the LPG recovery scheme in Cabinda. Domestic distribution of oil products should be assigned to an autonomous or semi-autonomous division of SONANGOL, which could, possibly, include private, foreign or domestic capital. In household energy, a return to peace would require the development of new strategies to ensure a less wasteful utilization and more competitive trading of the country's woodfuel resources, the demand for which is bound to increase if and when more reasonable prices are are set for petroleum derivatives. ABBREVIATIONSAND ACRONYMS AGIP Italian State Oil Company (Part of ENI Group) BEP Belgian Engineering Promotion BNA Banco Nacional de Angola (the Central Bank) BRASPETRO InternationalAffiliate of Petrobras, (State Oil Company of Brazil) CABGOC Cabinda Gulf Oil Company (Joint Venture between SONANGOL and Gulf-Chevron) CELB Companhia Eletrica do Lobito e Benguela CEPSA Oil refining company CHEVRON U.S. oil company CIDA Canadian International DevelopmentAgency COMERINT A consulting firm belonging to the ENI Croup (Italy's State HydrocarbonsHolding Company) CONOCO U.S. oil company (ContinentalOil Company) DNACO National Directorate for the Conservationof Nature DNERFE Department of New and Renewable Sources of Energy EEC European Economic Commission EDEL Empresa de Eletricidadede Luanda ELF French oil company ENDIAMA Empresa Nacional de Diamantes de Angola ENE Empresa Nacional de Eletricidade ERR Economic Rate of Return ESMAF Joint UNDP/World Bank Energy Sector Management Assistance Program ESPA Empresa de Servicios Petroliferosde Angola E.T.C. Dutch Foundation for Economic Research FPA Fina ?etroleos de Angola FURNAS Furnas Centrais Eletricas, a Brazilian utility GAMEK Gabinete de Aproveitamentodo Medio Kwanza (Office for the Harnessing of the Middle Kwanza) GDI Gross Domestic Investment CDP Gross Domestic Product HEAC Hidro Eletrica do Alto Catumbela HFO Heavy Fuel Oil IBRD InternationalBank for Reconstructionand Development INP Instituto Nacional de Petroleo JPEA Junta Provincial de Eletrificacaode Angola (utility of Southern Angola) LFO Light Fuel Oil LPG Liquefied Petroleum Gas f LRMC Long Run Marginal Costs LSFO Low Sulfur Fuel Oil ABBREVIATIONSAND ACRONYMS (continued) MEP Ministerio dtiEnergia e Petroleo (Ministry of Energy and Petroleum) MPLA PT Movimento Popular de Libertacao de Angola - Partido do Trabalho (the ruling party) OGE Orcamento Geral do Estado (General Budget) PSA Production Sharing Agreement SADCC Southern African Development Coordination Conference SEF Saneamento Economico e Financeiro (Program for Economic and Financial Restructuring) SOFRELEC French engineering firm SONANCOL Sociedade Nacional de Combustiveisde Angola (State oil company) SONEFE Sociedade Nacional de Estudo e Financiamentode EmpreendimentosUltramarinos (northern Angola utility) TAU Technical and Adm.nistrativeUnit (Energy) of the SADCC TEXACO Texas Oil Corporation TOTAL French oil company TPE Technopromexport(Soviet engineering company) UINDP United Nations Development Program UNIDO United Nations Industrial Development Organization CURRENCYEQUIVALENTS US$1 = 29.62 Kz (Kwanza) 1/ 1 Kz = 3.38 US cents ENERGY TERMS AND MEASUREMENTS BCF billion cubic feet CIF cost + insurance + freight DWT deadweight tons FOB free on board ft/y feet a year GWh Gigawatt hours HV high voltage kcal kilocalories kcal/kg kilocalories per kilogramme kgoe kilogram of oil equivalent km kilometer km' square kilometers kWh kilowatt hours kV kilovolts LY low voltage MN cubic meters MAI mean annual increment MCF thousand cubic feet mcwb moisture content, wet basis MMBTU millions of British Thermal Units MMCF millions of cubic feet MMCFD millions of cubic feet per day MV medium voltage MW megawatts TCF trillion cubic feet t/d tons a day t/y tons a year toe tons of oil equivalent 1/ Official exchange rate prevailing in Angola since 1975. TABLEOF CONTENTS Page SUMMARY, CONCLUSIONS,AND RECOMMENDATIONS........................... i I. ENERGY IN THE ECONOMY ........................................ 1 General Economic Framework.. .. .... *. ..... ...e. ... .ooo... .. .. 1 Petroleum