Document of

The World Bank

FOR OFFICIAL USE ONLY

6c/AJ 3o ,L-A/Report No. 7588-IN

STAFF APPRAISAL REPORT

INDIA

PETROLEUM TRANSPORT PROJECT

APRIL 6, 1989

Transport and Energy Operations DivisionCountry Department IVAsia Regional Office

This document has a restricted distribution and may be used by recipients only in the performance of

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CURRENCY EOUIVALENTS

Currency Unit - Rapee (Rs)Rs 1 - 100 P'isaUS$ 1 - Rs 14.6Rs 1 US$0.0685Rs 1 million US$68,493

FISCAL YEAR

April 1 - March 31

MEASURES AND EQUIVALENTS

1 Metric Ton (mt) - 1,000 kilograms (kg).1 Metric Ton (mt) - 2,204 Pounds (lb)1 Meter - 3.28 Feet1 Kilometer (km) - 0.62 Miles1 Cubic Meter (m3 ) - 35.3 Cubic Feet (cft)1 Barrel (Bbl) - 0.159 Cubic Meter, 42 gallons1 Metric Ton of Oil (330 API) - 7.3 Barrels1 Normal Cubic Meter (Nm3 )

of Natural Gas - 37.32 Standard Cubic Feet (SCF)1 Kilocalorie (kcal) - 3.97 British Thermal Units (Btu)1 Bbl/d - 1 Barrel per day

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

BCM (BCF) - Billion cubic meters (feet)DEA - Department of Economic Affairs, Government of IndiaEIL - Engineers India LimitedERR - Economic rate of returnGOI - Government of IndiaIDC - Interest during constructionIRR - Internal rate of returnIOB - Indian Oil Blending Ltd.IOC - Indian Oil Corporation Ltd.LPG - Liquefied petroleum gasMCM - Million cubic metersMCM (MCFD) - Million cubic meters (feet per day)MMCMD (MMCFD) - Million cubic meters (feet) per dayMMtoe - Million metric tons of oil equivalentMMTPA - Millions of metric tons per annumNGL - Natural gas liquidsNPV - Net present valueOIL - Oil India LimitedONGC - Oil and Natural Gas ComamissionSBM - Single Buoy Mooring Systemtoe - (Metric) ton of oil equivaleniTCF - Trillion cubic feet

FOR OMCIL USE ONLY

INDIA

PE:ROLEUM TRANSPORT PROJECT

Table of Contents

Page No.

I. THE SECTOR................................................... A. The Overview .1B. Energy Demand ................ 1..... .. 1C. Energy Supply. 3D. Energy Balances. 6E. The Government's Energy Strategy .8F. Pricing Policies for Oil Products. 9G. Investment Strategy: Increased Reliance on Oil Product

Imorts .11H. Transport of Petroleum Products in India .12T. Involvement of the Private Sector .14J. Management of the Sector .15K. Bank's Role in the Sector .15

II. THE BORROWER .................................................. 17A. Introduction .17B. Organization and Mangement .17C. Operating Performance .18D. Accounts .18E. Audit .19F. Insurance Practices .19G. Remuneration and Pricing System .20H. Investment Program .20

III. THE PROJECT .22A. Background and Objectives .22B. Project Description .22C. Status of Project Preparation... .......................... 24D. Capital Cost Estimate .25E. Project Financing .26F. Project Iplementation .27G. Procurement .28H. Disbursements .31I. Ecology and Safety .31J. Project Reporting Requirements .32K. Project Risks: .33

This report was prepared by Messrs. L. Wijetilleke (Sr. Chemical Engineer),P. Blackshaw (Principal Transport Economist), A.S. El-Mekkawy (PrincipalPetroleum Engineer), P. Pollak (Sr. Economist), M. Sergo (Sr. FinancialAnalyst) and H. Schober (Consultant) on the basis of an appraisal mission thatvisited India in October 1988.

This document has arestricted distribution and may be used by recipients only in the performanceof their official duties.lIts contents may not otherwise be disclosed without World Bank authorization.

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Page No.

IV. FINANCIAL ANALYSIS .. . 34A. Introduction .. 34B. Pricing System .. 34C. IOC's Finances .. 35D. Financial Covenants .. 39E. Project Financial Evaluation .. 39

V. ECONOMIC EVALUATION ....................... 41A. Introduction ....................... 41B. Economic Evaluation of Khandla-Bhatinda Product Pipeline.. 41C. Economic Evaluation of Single Buoy Mooring System ......... 43D. Economic Evaluation of Refinery Components ................ 45E. Overall Resultr of the Economic Evaluation ................ 46

VI. AGREEMEN,S AND RECOMMENDATIONS ................................ 47

ANNEXES

2.1 Organization Chart2.2 Performance Indicators2.3 Pricing and Margins

3.1 Project Cost Estimates3.2 Project Implementation Schedules3.3 Disbursem--nts3.4 Pollution Control3.5 Progress Reporting Requirements

4.1 Notes and Assumptions for Financial Statements4.2 Income Statements, Balance Sheets & Funds Flow Statements4.3 Financial Rate of Return Calculations for Pipeline4.4 Financial Rate of Return Calculations for SBM4.5 Financial Rate of Return Calculations for Catalytic Reformers4.6 Financial Rate of Return Calculations for DDCS4.7 Financial Rate of Return Calculations for Haldia Lube Block

5.1 Supply-Demand Balance of Products in North-West5.2 Economic Cost Rail Transport Alternative: Kandla-Karnal5.3 Product Loss Avoided: Kandla-Karnal5.4 Economic Cost Rail Transport Alternative: Karnal-Bhatinda5.5 Economic Evaluation Product Pipeline - Kandla-Karnal5.6 Economic Evaluation Product Pipeline - Karnal-Bhatinda5.7 Economic Evaluation Product Pipeline - Kandla-Bhatinda5.8 Estimation of Economic Benefits for SBM5.9 Economic Evaluation of SBM5.10 Economic Evaluation of Catalytic ReformersS.l1 Economic Evaluation of Distributed Digital Control Systems5.12 Economic Evaluation of Haldia Lube Block

MAP No. IBRD 21079 - Showing Proposed Petroleum Products and Crude OilSupply System.

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INDIA

P TROLEUM TRANSPORT PROJECT

Loan and Project Summary

Borrower: Indian Oil Corporation Ltd. (IOC)

Gua-rantor: India, acting by its President

ha=m t: US$340.0 million equivalent

Lending TeDms: Twenty years, including five years grace, at the standardvariable interest rate.

Guarantee Fee: Consistent with the Government's terms for loanguarantees to public sector enterprises.

Proliect Des ription: The objectives of the Petroleum Transport project are to:(i) improve the efficiency and flexibility of petroleumtransport; (ii) facilitate import of petroleum productsand crude; and (iii) modernize IOC's pipeline andrefinery operations. In particular, the project willprovide financial support for:

- a 1,450 km products pipeline from the port of Kandlato Bhatinda;

- a Single Buoy Mooring (SBM) system at Salaya;

- facilities to reduce the lead content of gasoline intwo IOC refineries;

- distributed digital control systems (DDCS) in IOC'srefineries;

- two 15 MW gas turbine power generators for the DigboiRefinery;

- equipment and services required to improve productyield and energy conservation in refineries;

- expansion of the lubricating oil complex and provisionof a sulphur plant at the Haldia Refinery; and

- consulting services for pipeline inspection, energyconservativn and yield optimization studies andtraining.

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Proiect Benefits: The pipeline offers substantial savings in transportcosts compa-'d to the next best alternative, railtransport. The SBM will improve the security ofpetroleum products supply to the nortnwest of India;other project components will improve refinery efficiencyand have a beneficial environr.ental impact through energyconservation and reduced lead content in gasoline. As areoult of the project, IOC will also get access to modernpetroleum industry technology and management practices,particularly in key operational areas such ascomputerization, process corntrol and simulation, andproduction optimization.

Proiect Risks: Cost over-runs and delays in project completionconstitute the major project risks. The economic impactof the project is relatively insensitive to cost over-runs. A 10% cost over-run would lower the overallproject rate of return from 26% to 23%. The project ismore sensitive to implementation delays but the economicrationale remains robust to the likely range of risk: atwo year delay would reduce the overall rate of return to21%. Errors in demand projections are another source ofrisk. As product imports are the balancing item inmeeting the demand-supply gap, only the Kandla-Bhatindapipeline, which is intended for products would beaffected. If the rate of growth in demand is 25% lessthan projected the rate of return will fall from 22% to18%. The project reduces environmental risks; remainin.are minimized as strict environmental standards areenforced.

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Estimated Costs:Local Foreign Total

-(US$ million) -----

Transport Facilities

Khandla-Bhatinda PIL 269 179 448

Second SBM 5 7 12

Cat. Reformer at Barauni 38 9 47

Cat. Reformer at Digboi 15 3 18

Dist. Digital Control System 61 35 96

Power Plant at Digboi 2 16 18

Yield Optimization & Energy Conservation 20 14 34

Haldia: Lube Block & Sulphur Plant 10 6 16

Sulphur Plant 6 - 6

Techn. Assist. & Training 7 7 14

Base Cost 433 276 709

Physical contingency /a 43 28 71

Price contingency Lb 100 64 164

Total Project Cost 576/c 368 944

Interest During Construction:

Bank loan - 46 46

Other loans 7 12 19

Total Finakicing Required 583 426 1,009

/a 102 of base cost.

lb 212 of base cost and physical contingencies.

ic Includes US$185.0 million or taxes and duties.

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Financing Plan:

I ~~~~~~~~~~~~~~Lgcal Fo-reig Total----- (US$ million) -----

IBRD 47 293 340Export and Suppliers Credits -- 75 75IOc 536 58 594

Total financing Reauired 426 l

Estimated Disbursements:

IBRD Fiscal Year FY90 FY91 EY 9 M4

Annual 35 110 130 50 15Cumulative 35 145 275 325 34b

Economic Rateof Return: Kandla-Bhatinda Pipeline 22%

SBM 29%Distributed Digital Control System 42%Catalytic Reformers 20%Haldia Lube Oil Block 48%Overall Project (weighted average) 26%

T. THE SECTOR

A. Overview

1.1 Energy is critical for accelerating the growth of the Indian economy.As part of its efforts to reduce poverty and provide employment to a rapidlygrowing labor force, the Government decided to step up the growth of theeconomy from its currpnt average rate of about 4.5Z to 6Z during the EighthFive Year Plan (1990-95). One of the major obstacles to accelerating economicgrowth will be the widening gap between the demand for energy and indigenousenergy production. This poses a serious dilemma for the Government's economicplanners. Closing the gap through energy imports would result in a heavydrain on foreign exchange. Allocating a larg!r share of domestic resources toincreasing indigenous energy supplies would deprive other sectors, particu-larly the social sectors, of increasingly scarce resources. Rationing ofenergy supplies, or the other hand, would lead to serious disruptions in theeconomy.

1.2 There is currently a lively debate within the Government about thestrategy India should adopt in dealing with this widening energy gap.Increasingly, the wisdom of the Government's current energy strategy, whichhad evolved in response to the sharp increase of internaticnal oil pricesduring the 1970s, is being questioned. The main thrust of this strategycontinues to aim at reducing the use of oil products through energy conserva-tion, and substitution of domestic coal for oil products where this is techni-cally and economically feasible. Initially this strategy was quite success-ful. Despite the efforts to slow the growth of energy demand through variousconservation measures and pricing, demand for energy outpaced economic growth.The availability of vast, albeit low-quality, coal reserves and the discoveryof the Bombay High oilfield, however, made it possible to meet the growingdomestic demand for energy, and at the same time reduce the dependence on oilimports.

1.3 In the years ahead, India may again face the possibility of a majorincrease of oil imports for two reasons. First, output from the Bombay Highoilfield, which represents about 70? of domestic oil production, has nowreached a plateau. Second, continued investments in oil and gas explorationby India's two national oil production companies, the Oil and Natural GasCommission (ONGC) and Oil India Ltd. (OIL) have not led to any major new oildiscoveries. The proposed project would, through the construction ofinfrastructure facilities for the transport of oil products, assist India inmeeting its oil product requirements increasingly through purchases ininternational markets.

B. Energy Demand

1.4 Demand for energy in India is closely linked to the pace of economicgrowth. The acceleratioh of economic growth that has taken place since theearly 1980s has led to a sharp increase in the demand for energy, in particu-lar commercial fuels (i.e. oil products, coal, natural gas and electricpower). Since the beginning of the Sixth Five-Year Plan (1980-85) the economygrew at an average annual rate of about 4.9 2 while the consumption of commer-cial fuels has grown at 7.32 per annum. This increase in the rate of energyconsumption has been associated with a greater reliance on the use of oil

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products: while coal continues to account for more than 502 of energyconsumption, oil products now make up about one-third of all commercial energyconsumed, and hydro-electric power and natural gas account current.y for 11.72and 5.92 of commercial energy consumption, respectively.

1.5 The factors that contribute to the rapid growth of India's energydemand fall into two broad categories,--those leading to the comparativelyhigh energy intensity of its industrial, transport and agriculture sectors,and tho!e resulting in a shift from traditional fuels to commercial fuels.

1.6 High Energy Intensity. India's industrial sector, its transportsector, and increasingly also its agricultural sector are highly energy inten-sive. Several factors have contributed to the high energy intensity. Onesuch factor has been the Government's policy of economic self-sufficiency. Asa result of this policy, India has developed a wide industrial base. Highlyenergy intensive industries, such as steel, aluminum, copper, cement, petro-chemicals and fertilizer were set up when energy was comparatively inexpen-sive. Scarcity of capital has restrained these industries from replacingtheir energy intensive equipment, in spite of the steep rise of domesticenergy prices since the early 1970s. In terms of energy intensity, India'sindustrial sector ranks now near the top among developing countries, and wellabove the average among industrial countries.

1.7 A second factor has been the Government's policy to ensure that allregions participate evenly in the benefits of economic growth, in particularemployment opportunities. This policy continues to play an important role indecisions about the location of new industrial plants. As a result of thispolicy, industrial plants are widely dispersed all over the country. Sincetheir access to the rail and road network is usually poor, they have to relymostly on electric power to meet their energy needs. Partly as a result ofthis policy, India has developed an energy supply system that relies heavilyon coal-based thermal power generation. Considering India's generally inade-quate transport systent, it is the only way to provide widely dispersedconsumers with access to the country's abundant coal resources. Because of thehigh losses that occur in thermal power generation as well as in the transmis-sion and distribution of power, this policy contributes significantly to thehigh energy intensity of the economy.

1.8 A third factor has been the Government's efforts to shield theeconomy from the variations in rainfall caused by the monsoon. Massiveinvestments in irrigation and widespread use of electric- and diesel-drivenpumps, together with the increased mechanization of agriculture, have contri-buted to the growing energy intensity of India's agriculture.

1.9 Shift from Traditional to Commercial Fuels. While the share ofi commercial fuels in India's energy c,asumption has increased sharply, tradi-

tional fuels, such as fuel wocd, cow dung and vegetable wastes remain India'smost important energy resources. In 1986/87, non-commercial fuels accounted

! for more than 502 of India's total energy consumption. Consumption of thesefuels was equivalent to about 110 million tons of oil or about five timesIndia's domestic oil production. Fuelwood accounts for roughly two-thirds ofthe consumption of traditional fuels. The remaining third consists of vege-table wastes and cow dung. In rural areas, fuelwood remains the main cookingfuel, while kerosene is mainly used for lighting. In urban areas, fuelwood is

increasingly being replaced by kerosene, electricity and LPG (liquified petro-leum gas) as a cooking fuel. Still, its comparatively low price makes fuel-wood an attractive fuel for the urban poor.

1.10 Since the steep increase in domestic oil prices during the 1970s, thtedemand for fuelwood has increased sharply. Forest recerves have declined, andmany regions in India experience severe shortages of fuelwood. In manyregions, these shortages accelerate the depletion of forest reserves; theyalso force large segments of the rural population to spend more and more oftheir time in collecting fuel wood; and they reduce crop yields as poorerfarmers have to divert an increasing share of animal wastes from use as ferti-lizer to serve as cooking fuel. To slow the process of deforestation, theGovernment is subsidizing the use of kerosene, which, in turn, results in highdemand for this product.

C. Energy Supply

1.11 Considering the size of the Indian economy and its population, Indiais relatively modestly endowed with energy resources. Its per capita use ofenergy is among the lowest in the world. and, in spite of allocating almostone-third of its public investment resources to the development of itsindigenous energy resources, India remains dependent on imports to meet mostof its domestic energy needs.

1.12 Ene.gy Resource Base. Although India has a wide range of commercialenergy resources, including oil, natural gas, coal, hydro-electric potential,and uranium, the currently known reserves of these resources do not match thestructure of its energy demand. India's (proven and probable) petroleumreserves are estimated at 581 million tons. At current consumption levelsthese reserves would be exhausted in 19 years. Thus, unless explorationefforts by ONGC and OIL succeed in raising production, India will need to meetits demand for petroleum products increasingly through imports of crude oiland products. Natural gas, which India is just beginning to utilize, mayoffer some respite. Natural gas, the reserves of which are estimated at 540billion cubic meters (BCM), could replice some oil products. So could thedevelopment of additional hydro-electric capacity. Up to now, India hasdeveloped only about 13,000 MW of its hydro-Alectric potential, which isestimated at 100,000 MW. Coal will remain the mainstay of India's energysupply. India's coal reserves, which are estimated at more than 170 billiontons, by far exceed those of all other commercial fuels. Unfortunately, mostof these reserves consist of low-quality coal. In its efforts to contain thegrowth of oil product imports, the Government allocates a large share of itsinvestments to the development of coal reserves and the expansion of thermalpower capacity. India has also modest reserves of uranium which coulc supporta nuclear power program of about 8000 MW to 10 000 MW.

1.13 Crude Oil and Natural Gas Production. Oil production has increaseddramatically over the past ten years, mainly as a result of the discovery anddevelopment of the Bombay High oilfield, which contributes about 66Z tocurrent domestic production. In 1986/87, however, production from the BombayHigh oil fields started to decline. Produztion from the two onshore regions,Assam and Gujarat, is being sustained by improved recovery levels fromexisting fields, augmented by production from several smaller discoveries.The steep increase in indigenous oil production provided India with a tempo-rary buffer against the economic impact of the increase in international oil

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prices. The Government recognizes that this reprieve may be short-lived, andthat there is a need to prepare for potentially serious energy shortfalls inthe 1990s. Li its Seventh Five-Year Plan, the Government has therefore:

(a) Almost doubled the public investment program for exploration anddevelopment of oil and gas resources;

(b) Actively encouraged the involvement of the Indian private sector incontracting and services (drilling, data acquisition and processing)and international oil companies in oil and gas exploration;

(c) Approved investments to accelerate and enhance the use of gas, whichwould replace some of the demand for oil products; and

(d) Decided to expand the infrastructure for imports of crude oil and oilproducts.

1.14 India probably has more undiscovered gas than oil resources. Gascould play an important role in meeting India's energy demand in the future.While small amounts of associated gas have been produced in the Gujarat andAssam regions fot many -ears, and large quantities of associated gas have beenproduced since 1981 from the Bombay High oilfield, only small amounts ofavailable gas were used commercially. Until recently, the bulk of associatedgab had been flared, mainly because the necessary infrastructure for process-ing and transporting of gas had been lacking. Utilization of gas has to someextent been restricted by the absence of adequate processing, transmission anddistribution facilities, and by delays in developing markets for gas. Atpresent, natural gas accounts for only 12 of India's commercial energyconsumption.

1.15 This situation is now changing as the magnitude of India's proven gasreserves becomes apparent. With the discovery of large reserves of non-associated gas in the South Bassein area offshore, in the vicinity of theBombay High oilfield, as well as onshore in Gujarat, the Government has nowdrawn up plans for the utilization of these gas resources. Initially, theGovernment restricted the use of gas to fertilizer and petrochemical indus-tries, on the assumption that the availability of gas was quite limited.After the discovery of substantial resources of free gas, the Government hasrelaxed this policy, and is now seeking to expand the market to power plantsand industrial users. To facilitate the marketing of gas, the Government hasjust completed construction of the 1700 km Hazira-Bijaipur-Jagdishpur (HBJ)gas pipeline, which will take gas from the South Bassein gas field on India'swest coast to fertilizer and power plants in the interior.

1.16 There is substantial scope fcr increasing the production of oil andgas in India, both through the discovery of new reserves as well as throughincreasing the rate of recovery from existing fields. Estimates prepared bythe Government indicate that many areas with considerable potential for dis-covering petroleum are still unexplored, and that only a fraction of thecountry's prognosticated oil and gas resources may have been found up to now.Bank staff estimates that about 50X of the expected oil and 75X to 80X of theexpected gas resources still remain to be found. Current progniosticatedpetroleum reserves in India are about 17 billion tons of oil and oil equiva-lent of gas. About two-thirds of these reserves are expected to be located

offshore. Based on average global recovery factors, this would point tocommercially recoverable petroleum reserves in the order of 4.5 to 5.5 billiontons. Up to now, only a quarter of these potential reserves has been proven.In view of these large potential reserves, India is justified in maintaining alarge oil and gas exploration program. However, considering the large invest-ments and risks involved India will need to rely increasingly on private riskcapital in its oil and gas exploration efforts and, because of the possibletime lags involved in developing discoveries, expand its capabilities toimport crude oil and products in order to be able to meet the growing domesticdemand.

1.17 Coal Production. Because of its abundant reserves, coal remains thecornerstone of India's energy strategy. The demand for coal increased sharplywhen fuel oil in power and industrial steam generation was phased out andreplaced by coal, in response to the increase of international oil pricesduring the 1970s. Power generation and industry account now for almost 802 ofcoal demand. To meet the rapidly growing demand of these sectors, theGovernment embarked on a massive investment program that favored highly mecha-nized open cast mines. Production from these mines, whira have a compara-tively short gestation period, increased steeply and accounts now for about602 of coal production. Because these mines can only tap reserves that arec.loser to the surface, the quality of coal tends to be lower compared to thatmined underground. Thus, over the years the average quality of India's coalproduction has been declining steadily. Although India's coal is compara-tively inexpensive (coal prices average Rs 220, equivalent to US$15, per tonat the mine), the steady deterioration of coal quality and rising transportcosts have reduced it- eccaomic attraction.

1.18 Power Supply. The Government's twin objectives of: (a) achievingeconomic self-sufficiency; and (b) spreading economic growth as evenly aspossible among regions, has accorded electric power a unique role in India.The objective of economic self-sufficiency led to investments in highlyenergy-intensive industries, such as aluminum smelters, steel and chemicals,and subsidized power tariffs. The objective of 'equitable economic growth'played a crucial role in locating industries in areas where unemployment wascomparatively high. Electric power remains often the only means to providethese 'green field' industries with the energy they need. Mainly as a resultof these policies, the demand for power continues to grow at a rate of 8-9Zper year. I- spite of lrrge investments in the expansion of generatingcapacity, power utilities have not been able to close the power gap.

1.19 The Government as well as consumers have taken steps to close the'power gap' and to reduce the impact of power shortages. The Government hasstepped up investments in thermal power generating capacity, since it takes onaverage less than half the time to build thermal power plants than hydroelectric plants. By having less hydro-electric power available in the supplysystem, thermal power plants have to be used increasingly to meet peak loaddemand. The 'firing up' and 'idling' of boilers is mostly done with fuel oil.Power users have also resorted to the acquisition of 'captive power plants'that use diesel, diesel driven pumps for irrigation, and kerosene stoves inurban households. Thus, most of these measures contribute to the demand foroil products.

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D. Energy Balances

1.20 Table 1.1 summarizes the Government's projections of energy demandand supplies in India up to the year 2000. According to these projections,the gap between energy requirements and indigenous energy production isexpected to increase,--about 17.6 million tons in 1986/87 to about 50 milliontons in the year 2000. To close this gap, the Government will primarily relyon the imports of crude oil and oil products. These projections assume thatindigenous oil production would increase by almost 502 over the next twelveyears. The Bank's staff estimates that, without further discoveries, oilproduction from existing fields and fields under development could reach 38million tons. To attain the oil production projected by the Government, ONGCand OIL would need to discover an additional 275 million tons of oil, assumingno decline in the reserves-to-production ratio. As indicated in para 1.16only about one-fourth of India's potential of 5 billion tons of oil reserveshave been proven thus far. While the addition of 275 million tons isfeasible, there remains a considerable risk that oil output will fall short ofthis target. Oil import requirements could therefore increase to over 50million tons by the year 2000, if exploration efforts result in no netadditions to oil reserves.

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Table 1.1: ENERGY SUPPLIES AND THEIR USE IN INDIA, 1970 TO 2000(Million tons of oil equivalent)

1970/71 1980/81 1986/87 1989/90 1999/2000

Energy Productioan 136.62 182.84 234.20 271.28 415.00

Oil 6.82 10.51 30.48 35.43 45.00Gas 1.25 2.06 8.81 14.90 30.00Coal 36.17 56.51 74.50 90.55 162.00Electricity 8.16 10.76 17.41 19.20 47.00Traditional Fuels 84.22 103.00 103.00 111.20 131.00Net Imports 12.20 23.28 17.61 32.50 49.00

Oil 12.43 23.50 16.07 29.00 45.00Coal -0.23 -0.22 1.54 3.50 4.00Energy Requirements 148.82 206.12 251.81 303.78 464.00

Conversion andDistribution losses 16.90 36.40 55.46 60.70 73.40Stock Changes 2.41 3.43 0.30 2.23 0.00

Energy Consumption 129.51 173.15 196.65 245.31 390.60

Industry 22.05 36.96 45.27 52.00 100.20Transport 12.45 15.03 19.97 29.00 52.00Agriculture 1.62 3.92 6.80 9.40 18.90Residential/Commercial 90.67 111.53 115.34 132.00 180.00Non energy uses 2.71 5.70 6.72 22.22 38.00Other uses 0.01 0.01 z.55 0.69 1.50

Source: Power and Energy Division, Planning Commission, India.

1.21 The growing import requirements for oil products constitute one ofthe high priority issues the Indian economy will face in the years ahead.Apart from posing a potentially heavy burden on the balance of payments, heavyinvestments in additional refinery (and conversion) capacity may also berequired. As the following discussion of the Government's energy strategyshows, Tndia has basically three options to meet this demand. One it couldincrease the domestic production of fuels, such as natural gas, that wouldreplace at least part of the demand for oil products. Two, it could importoil products, and three, it could expand its domestic refinery capacity andimport crude oil. The reluctance of the Government to increase its dependenceon imports of crude oil and oil products stems from the concern that it wouldincrease India's vulnerability to large price fluctuations in internationalmarkets.

E. The Government's Energy Strategy

1.22 India's energy strategy was designed during the early 1980s inresponse to the sharp increase of the import bill for crude oil and petroleumproducts. To ease the leavy burden of oil imports the Government adopted atwo pronged strategy. First, the Government allocated a larger share of itsresources to the development and production cf indigenous energy resources, inparticular the exploration for oil and gas, the expansion of coal and gas-based thermal power plants and the development of highly mechanized open castcoal mines. In parallel, the Government raised the prices of oil productsrelative to those of indigenous fuels (mainly coal and power), and rationedaccess to oil products where pricing policies were ineffective to slow thedemand for energy and to encourage the substitution of oil products in as manyend uses as were economically and technically feasible.

1.23 The Seventh Five Year Plan contains the only formal stateme~nt of theGovernment's energy strategy. It provides an indication of the Government'sstrategy objectives and thus its investment priorities. According to thisstatement the Government gives priority to:

(a) The accelerated exploitation of coal, hydro and nuclear power;

(b) Intensified exploration for oil and gas, and exploitation of oil withregard to available recoverable reserves and reasonable expectationsof adding to them in the foreseeable future;

(c) Advance policy planning for the large emerging gas potential;

(d) Management of oil demand including formulation of a nationaltransport fuel policy;

(e) Energy conservation including interfuel substitution;

(f) Increasing the productive efficiency of capacities already createdand of equipment used;

(g) Exploitation -f renewable energy resources, such as energy forestry,biogas, biomass, wind and solar energy, to meet especially the energyrequirements of rural communities;

(h) Intensification of research and development of all energy resources,particularly with regard to emerging energy technologies;

(i) Design and implementation of area-based integrated rural developmentprograms; and

(j) Campaigns to educate the public about the objectives of theGovernment's energy strategy in order to ensure its acceptance andsuccessful implementation.

This strategy is rather comprehensive. The large number of its objectivesreflects the diverse energy needs of the Indian economy, which span thegrowing demand for commercial fuels as well an the energy needs of India's

vast, and mostly poor rural population. Implementation of this strategyrequires not only sizeable resources, but also far-reaching changes inexisting policies.

1.24 The scope for allocating large additional investment resources to theenergy sector is becoming increasingly limited. This reflects, in part, thefact that the energy sector is already receiving almost 30Z of planned outlaysunder the Seventh Five-Year Plan; in part, it is an indication of the growingdemand on public resources from other sectors, in particular the socialsectors. The Mid-Term Review of the Seventh elan shows that, while India ismaking progress towards achieving its ambitious objectives in the energysector, the allocated resources are insufficient to provide the economy withthe energy it needs. The investment requirements are particularly large inthe oil, gas and refinery sectors. Major investment priorities of thesesectors include:

(a) The accelerated exploration for oil and gas, faster development ofdiscoveries and greater efforts to enhance the output from maturefields;

(b) The construction of infrastructure facilities for the transport ofcrude oil, oil products and gas (para 1.33); and

(c) Modifications of existing refineries in line with the changingpattern of oil product demand and the need for greater energyconservation

1.25 Implementation of the Government's energy strategy requires changesin established policies with regard to investment, organization, institutionalarrangements, financing and operational efficiency of these sectors. Thesepolicy changes will need to aim at further gains in improving the efficiencyof public sector enterprises and reducing dependence on public resources. Thefollowing issues, which are critical for meeting the country's growing energyrequirements in line with the twin objectives of greater operationalefficiency and less dependen^e on public resources, will need to be addressedby the government:

(a) Improved management of energy demand, in particular energy conserva-tion and pricing policies for oil products (para. 1.26);

(b) Investment strategy: Increased reliance on oil product imports(para. 1.30);

(c) Increased involvement of the private sector (para. 1.36).

These issues are briefly discussed in the following paragraphs.

F. Pricing Policies for Oil Products

1.26 Energy pricing policies play a key role in attaining the objectivesof the Government's energy strategy. Although they are designed to achieve amultiplicity of sometimes conflicting goals, their primary objectives are toencourage energy conservation and the substitution of indigenous energy

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resources--in particular (hydro-electric) power and coal--for oil products aswell as to mobilize resources for the development of indigenous energyresources.

1.27 Pricing of Oil Products. Petroleum product prices are set by theGovernment. In determining the price levels for the various oil products theGovernment aims to achieve not only the broader objectives of its energypricing policy, but in addition wants to: (i) ensure that refineries recovertheir full costs; (ii) minimize regional price differences of the variousproducts; (iii) insulate domestic consumers to the extent possible from pricefluctuations in international crude oil and oil product markets; and (iv) meetat least part of the demand of poorer segm.ents of the population. To accommo-date all these objectives, the Pricing Committee, which is ultimately respon-sible for determining the prices of oil products at various points in theproduction and marketing chain, has devised a rather complex pricing regime.It consists essentially of three stages, the determination of ex-refineryprices. ex-storage prices, and prices to retailers/consumers.

1.28 To achieve these objectives, the Government has appointed an Oil CostReview Committee, which determines the (ex-refinery) prices at which each ofIndia's twelve refineries may sell their products. In setting these prices,the Committee makes sure that each refinery can fully recover its costs andachieve in addition a 12Z post tax return on investment. To insulate domesticconsumers from fluctuations in the cost of imported crude oil, the Committeefixes the price of crude oil to refineries. This so-called pooled crude oilprice, which is currently set at Rs 1700 per ton (equivalent to about US$15per barrel), represents the weighted average of the cost of imported andindigenous crude oil. To arrive at uniform wholesale prices for the variousoil products, regional variations in marketing and transport costs areequalized through a series of pool accounts. In addition, the marketingcompanies levy excise duties, which are equivalent to the customs duties forimported products and a 'product price adjustment', which represents a pricepremium for some products, such as gasoline, or price discounts, such as, forexample, in the case of kerosine. The resulting ex-storage prices are theprices at which the marketing companies sell oil products to retailers.

1.29 Following the drop of oil prices in international markets in 1986,the Government decided not to realign prices immediately in order to (a)continue to encourage conservation, (b) discourage investment in oil-intensivetechnologies; and (c) take advantage of the opportunity to mobilize additionalresources from the widening difference between domestic and international oilprices (Table 1.2). As a result, India's oil pricing policy has emerged as aneffective vehicle for generating public revenues. In 1986/87 the industrycontributed almost US$5 billion to the exchequers of the central and stateGovernments in the form of excise and customs duties, royalty and cess oncrude and sales and corporate taxes. On the other hand, comparatively highdomestic prices for oil products and industrial feedstocks add considerably tothe cost of production of energy-intensive industries, such as thepetrochemical industry, and therefore reduce the competitiveness of Indianindustrial products in international markets. However, if prices for oilproducts continue to remain low in international markets, the Government willneed to review the rationale for maintaining domestic prices of these productsabove their border equivalents, in particular with respect to prices offeedstocks, in order to ensure that intermediate inputs are priced atreasonable levels to avoid distortions among the prices of various feedstocks.

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1.30 In addition to resulting in comparatively high product prices, thepresent oil product pricing policy leads also to other distortions. It ischaracterized by: (i) the setting up of differential product prices fordifferent category of users--such as naphtha for fertilizers vs petrochemicalsproduction; (ii) the charging of virtually uniform product prices (at all exstorage points) throughout India irrespective of the transport cost from thesupplying refineries through a system of freight equalization charges; and(iii) -nomalies in the relationship between product prices and their closesubstitutes for various uses--such as the price oi gas and naphtha for theproduction -f fertilizer. These distortions could have serious implicationson the choice of feedstocks and industrial locations. A successful long-termtransformation of Indian industry towards competitiveness and an increaseorientation towards exports, a major objective of the Bank in its policydialogue with the Government, requires feedstock and energy product pricesalso to be competitive with and at levels comparable to, international prices.These issues are under active discussion with the Government in the context ofthe Bank's energy and industry work.

Table 1.2: COMPARISON OF DOMESTIC AND INTERNATIONAL PRICES FORSELECTED COMMERCIAL ENERGY RESOURCES

(US Dollars per Metric Ton)

Ratio ofDomestic to

Energy Ex-Refinery Domestic International InternationalResource Price Price /a Price /b Price

Gasoline 163.80 743.58 161.87 4.59Kerosene 172.19 172.24 207.05 0.83Diesel Oil 164.17 256.55 172.64 1.49Fuel Cil 111.05 212.96 75.48 2.82Crude Oil N.A. 133.53 111.77 1.19Natural Gas /c N.A. 154.11 N.A. N.A.Coal /d N.A. 35.44 53.00 0.67 /e

/a Ex-storage prices at primary pricing points (including Bombay), November1988

/b Estimated c.i.f. prices, Bombay, January 1989/c Price in U.S. Dollars per 1,000 cubic meters./d Estimated landed-price of coal (including freight from North Karanpura)

in Bombay./e If the difference in the calorific values of coal is taken into account,

this ratio would be 1.06.

G. Investment Strategy: Increased Reliance on Oil Product Imports

i.31 Over the past forty years, India has built-up a refinery industrythat is capable of meeting about 782 of the country's demand for oil products.It required huge investments, which the Government justified with: (a)India's need to have access to critically needed oil products; (b) its abilityto take advantage of declines of crude oil prices in international markets;

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and (c) India's need to refine its indigenous production of crude oil. TheGovernment is currently reviewing this policy of self-sufficiency in refining.Comparatively low prices of oil products in international markets, partlybecause of major expansions of refinery capacities in the Middle East andSingapore, and the huge investments required for expanding indigenous refiningcapacity provide strong incentives for a greater reliance on imports of oilproducts. The Government is currently considering importing about 15% of itsoil product requirements. As an initial step, this policy is sound. In theyears ahead, the Go,rernment will need to explore whether India can furtherincrease its share of oil product imports without affecting price levels ininternational markets.

1.32 According to the Government's estimates, a policy of 852 self-suffi-ciency in refining would require an additional refining capacity of about 15million tons of crude oil throughput by 1995, and a further capacity expansionof almost 20 million tons before the year 2000. At current prices, the costof this investment program would be about US$9 billion. Even if these capa-city expansions are implemented on time, the Government projects that Indiawould still need to import 11.5 million tons of oil products a year by 1995and 14.3 million tons by the year 2000.

1.33 While the Government has yet to decide on the degree of self-suffi-ciency in refining it would like to maintain in the future, a decision hasbeen made to delay expansion of refinery capacity in favor of investment ininfrastructure facilities that would enhance India's access to internationalproduct markets.

H. The Transport of Petroleum Products in India

1.34 Experience with various transport modes has shown that transportationof crude oil and petroleum products through pipelines is generally more effi-cient compared to rail and road transport. Pipelires offer several advan-tages. They eliminate the return movement of empty tankers and wagons.Delivery is faster and more reliable than with any other mode of transport.Pipeline transport is more energy efficient, and lowers the risk ofenvironmental pollution as well as product loss during transit. In view ofthe congested conditions on most arterial rail and road routes the Governmenthas adopted a transport policy which gives priority to the continued expansionof the pipeline network, particularly in corridors where the transportrequirements for oil products exceed 1.25 million tons a year and where theconstruction of pipelines is technically feasible. This policy, which iseconomically sound, has led to a rapid expansion of the domestic network forcrude oil, natural gas and oil products and a gradual shift in the shipment ofoil products away from rail and road transport to pipelines.

1.35 The changes in the modes of transport for crude oil, gas and oilproducts are illustrated in Table 1.3.

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Table 1.3: PETROLEUM TRANSPORT BY MODE, 1982/83 TO 1987/88(Million tons)

TransportMode 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88

Crude Oil:

Coastal Shipping 7.3 11.9 14.6 12.4 13.6 12.4Pipeline N.A. N.A. 33.7 33.5 34.9 37.6

Products:

Coastal Shipping 2.6 3.6 3.3 4.6 5.1 5.8Rail 17.3 18.0 18.2 18.6 19.9 21.6Road N.A. N.A. N.A. N.A. 9.7 N.A.Pipelines 6.1 7.1 7.7 8.6 9.5 9.4

Although there is a perceptible shift towards the use of pipelines for theshipment of bulk oil products, only a small portion of India's total consump-tion of these products moves actually through pipelines. Although pipelinetransport would be in many cases more economical than rail and road transport,the heavy capital intensity of pipeline investments and the long time it takesto build them have been major constraints to a faster expansion. Almost alloff-shore transport of crude is carried out by coastal shipping. Only a smallshare of the off-shore crude production is moved through 275 kilometers ofoff-shore pipelines. Refined products are moved by rail and tankers. Ofcourse, all the gas production is moved through pipelines.

1.36 Table 1.4 shows the growth of India's pipeline network for crude oil,gas and oil products. About 402 of the network, which has more than doubledsince 1970, is devoted to the transport of oil products. About 48X of thenetwork is used to transport crude oil and the remaining 12? are designed forthe transport of gas. Since the marketing of crude, gas and products is inthe hands of the companies that produce or refine the various products, theexpansion of the pipeline network is part of the overall investment program ofthese companies. The Indian Oil Corporation owns and operates about 55Z ofthe pipeline network, ONGC about 242 and Oil India Ltd. (OIL) the remaining21Z.

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Table 1.4: GROWTH OF PETROLEUM PIPELINE NETWORK, 1971 TO 1987(Kilometers)

Type of Pipeline 1971 1975 1981 1986 1987

Crude Oil 1,437 1,525 3,365 3,416 3,435

On-shore 1,437 1,525 3,140 3,141 3,159Off-shore 0 0 225 275 276

Petroleum Proeucts 1,789 2,917 2,111 2,713 2,749

Natural Gas 165 208 450 822 944

On-shore 165 208 224 352 468Off-shore 0 0 226 470 476

LPG 0 0 0 0 24NGL ( U 0 0 24

Total 3,391 3,840 5,926 6,951 7,176

The rapid growth of oil product demand will require continued large invest-ments in pipelines for crude and oil products. Over the next five years IOCplans to invest about US$1.3 billion for the construction of about 2,785kilometers of crude and product pipelines.

I. Involvement of the Private Sector

1.37 While the shift towards greater reliance on imports of oil productsfrom international markets reduces the demand on public investment resources,construction of the necessary infrastructure facilities requires stillsubstantial investments. The Government, which faces growing demands forresources from other sectors, is increasingly looking towards a greater parti-cipation of the private sector, particularly in oil exploration and therefinery industry. In line with its established policy to expand indigenousrefinery capacity to meet about 90Z of domestic oil product needs, theGovernment is finding it increasingly difficult to mobilize the necessaryinvestment resources. The Government has therefore decided to seek financialsupport from companies in the private sector.

1.38 Current plans for the expansion of refinery capacity include arefinery at Karnal, a refinery at Mangalore and an additional refinery inAssam. Joint venture arrangements are being considered for the plannedrefineries at Karnal and Mangalore. For the construction of the refinery atKarnal, Tata Chemical Company and the Indian Oil Corporation have entered intoa joint venture, in which each of these companies will hold 26Z of the equity.The remaining equity will be offered to non-resident Indians (NRIs). For theconstruction of the refinery and petrochemical complex at Mangalore the IndianRayon Company has entered into a joint venture with the Hindustan PetroleumCorporation. Again, each of these companies will hold 26Z of the equity,while the remaining 482 will be offered to NRIs.

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J. Management of the Sector

1.39 Although there is a gradually increasing share of private sectorinvolvement in the oil, gas and refinery sector, the management of thesesectors still rests predominantly in the hands of government agencies and afew public sector enterprises. The Ministry of Petroleum and Natural Gasprovides the policy framework within which the various companies of thesesectors operate. It approves the programs and budgets of these companies andmonitors their performance. To carry out these tasks, the Ministry relies onthe recommendations of several committees, boards and task forces. The mostimportant body is the Oil Coordination Committee (OCC), which preparesdetailed recommendations on a wide range of activities of the oilindustry,--from the planning of facilities, the imports and exports of crudeoil and petroleum products, allocations of crude oil to refineries in linewith processing requirements, to the overall distribution of petroleumproducts.

1.40 Domestic oil and gas production is in the hands of the Oil andNatural Gas Commission (ONGC) and Oil India Ltd. (OIL). ONGC has the largestinvolvement in the petroleum sector. At present the company accounts forabout 902 of domestic oil and gas exploration and production activities. OILaccounts for the remaining 10Z. The Gas Authority of India Ltd. (GAIL) is incharge of the transmission and distribution of natural gas. The Indian OilCorporation Ltd. (IOC), is responsible for imports of crude oil and oilproducts. With a market share of 582, IOC is also India's largest refineryand oil product distribution company. The remaining 422 are shared by sixcompanies. While the production, refining and distribution of oil and gasproducts continue to be dominated by public sector companies, the Governmenthas in recent years encouraged direct investments and joint ventures with theprivate sector. As a result of these efforts, a growing portion of off-shoreexploration, refining and specialized oil industry services are now carriedout by private sector companies.

1.41 In addition to the Ministry of Petroleum and Natural gas, severalother government agencies are involved in making decisions that affect the oiland gas industry. The Planning Commission is responsible f r the screening ofinvestment plans, and the overall coordination of the allocation of expendi-tures under the five-year plans. The Ministry of Finance is responsible forthe use of budget resources, approvals of requests involving foreign exchangeexpenditures, the mobilization of foreign exchange resources and taxation.The Ministry of Finance and the Planning Commission jointly review and approvethe budget and investment proposals of all public sector companies.

K. The Bank's Role in the Sector

1.42 Although the Bank's financial contribution to investments in the oiland transport sectors remains comparatively small, its involvement in thesesectors has contributed significantly to the Government's success in reducingits dependence on oil imports, improving the efficiency of the companies inthe oil and transport sectors, and attracting foreign risk capital to financean increasing share of its petroleum exploration efforts.

1.43 While the basic objectives of the Bank's involvement in the energysector have changed little over the years, the Bank's strategy in achievingthese objectives has evolved along with the aevelopment of the sector. The

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Bank's primary objectives remain: (a) to assist the Government's efforts todevelop indigenous energy resources to reduce energy shortages and lower thedependence on oil imports; (b) to improve the operational and managerialefficiency of the enterprises involved in exploration, energy production.transport and distribution; (c) to assist in efforts promoting the efficientuse of energy; and (d) to reduce the dependence of public sector enterpriseson public resources by improving internal resource mobilization throughefficient pricing policies and cost reduction as well as by attractingadditional external finance, including private risk capital.

1.44 In line with these objectives, the Bank's involvement has shiftedfrom assistance in the development of oil resources to support for theGovernment's more recent efforts to bring its resources of natural gas onstream. Almost all of the projects in the oil and gas sectors includedtransport infrastructure facilities aimed at ensuring the efficient marketingand utilization of crude oil and gas produced under these projects. Toimprove the efficiency of operations in the oil, gas and refinery industries,the Bank approved in April 1982 a lending operation in the refinery sector,the Refinery rationalization Project (Ln. 2123-IN). The objective of thisloan was to assist several refinery companies in modernizing their refineries,in particular in view of the rapidly growing demand for middle distillates.

1.45 Overall, the Bank's efforts have been quite successful. India'sgrowing population and the need to accelerate economic growth in order toachieve even minimal improvements in the standards of living will requirelarge increases in energy supplies, which will not be possible without adrastic increase in investments. In view of the widening budget deficit andthe persistent scarcity of foreign exchange, the Government will need to findways to improve internal resource mobilization, in particular in the power andcoal subsectors, and attract foreign investment. In the years ahead, theBank's involvement in the energy sector will focus on assisting the Governmentin:

(a) implementing institut3'nal changes that would increase indigenousenergy supplies, improve the use of energy, mobilize additionalresources and raise the managerial and operational efficiency ofpublic sector enterprises in the energy sector; and

(b) mobilizing external finance in the form of co-financing, borrowing ininternational capital markets and direct foreign investment.

1.46 The proposed project fits well into this; strategy. The pipeline,which will be financed under this project gives the Indian Oil Corporationincreased flexibility in supplying the domestic market with oil products. Itsaves the cost of expanding domestic refining capacity, and permits IOC totake advantage of favorable conditions in international oil product markets.The other components contribute mainly to improving the overall efficiency ofIOC's refinery operations. However, IOC sought the Bank's assistanceprimarily as part of its efforts to improve its organization and managerialefficiency. Technical assistance during project implementation willcontribute to IOC's own efforts to become more efficient. Most importantly,the association with the Bank through this project will ease IOC's access tointernational capital markets. To enhance this aspect, the Government hasagreed that the loan be made directly to IOC, which would be the first timie anIndian fully publicly owned company borrows directly from the Bank.

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II. THE BORROWER

A. Introduction

2.1 Indian Refineries Limited was set up in 1958 and Indian Oil CompanyLimited was established in 1959 to market petroleum products. The Indian OilCorporation (IOC) was formed subsequently by merging the refining company withthe marketing company. Several acquisitions followed soon after: three majoroil companies that were operating in India,--Shell, Standard Vacuum andCaltex--were taken over in the 1970s; the Assam Oil Company in 1981; and 50Zof the shares in Oil India Limited in 1981. New refineries were als: builtand the marketing network expanded. Today IOC operates six refineries with atotal refining capacity of about 21 tiillion tons per annum at: Koyali,Mathura, Barauni, Haldia, Digboi and Guwahati. Crude oil and products aremoved through a 3,850 km pipeline network: from the port of Salaya to Koyali.Mathura and Jalandhar in the northwest of India; and from the Assam oil fieldsin the northeast to Barauni, Haldia, and Kanpur. IOC's extensive marketingfacilities include 15 LPG bottling plants, and 150 petroleum products storageand distribution terminals serving 13,500 service and retail outlets and 75aviation refueling st'tions. In addition, direct supplies are made fordefense purposes, as well as to the railway, power, fertilizer, steel and coalsectors. In 1988, IOC's volume sale of 25 million tonnes constituted 58Zshare of the all-Indian market.

2.2 IOC is the largest commercial organization in India with a turnoverexceeding Rs 140 billion and employing over 32,000 people. In 1986, IOC wasranked number 51 in the Fortune Magazine's list of the 500 largest industrialcorporations worldwide and IOC is also one of the most efficient companies inIndia. During recent years, the capacity utilization of its refineries hasexceeded designed throughput and its pipeline throughput in FY88 averaged 96%of design capacity, matching or exceeding standard utilization rates inindustrialized countries.

B. Organization and Management

2.3 IOC is a fully state-owned autonomous organization incorporated underthe Indian Companies Act of 1956 with the main object of refining, transport-ing and marketing of petroleum products. The corporation has three Divisions:Refineries and Pipelines Division; Marketing Division; and Assam Oil Division(formed after taking over Assam Oil Company Ltd. in October 1981). IOC also

! has a fully equipped Research and Development Center and a fully owned subsi-diary, Indian Oil Blend4.ng Ltd. (IOB), for blending of lube oils and greases.The organization is managed by a Board of Directors appointed by theGovernment of India. The Board includes the Chairman, a secretary, sixdirectors representing the Ministry of Energy and Petroleum and other GOIinstitutions, and five full-time functional Diroctors, namely: Director forRefineries and Pipelines, who is also in charge 3f the Assam Oil Division;Director Marketing; Director Finance; Director Personnel; and, Director R&D.The Chairman of the Board is also the CEO for the company. An organizationchart is given in Annex 2.1.

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2.4 IOC's staff is well-trained and experienced in implementing majorpipeline and refinery projects, operations of pipelines and refineries, and inthe distribution and marketing of petroleum products. Key senior managers andstaff are familiar with internationally accepted practices in the petroleumindustry, partly due to IOC's past business relations with reputedinternational companies, like Technip, UOP, ENI, Chevron, Shell and Bechtel.Some further training would be required, however, to bring IOC up to par withthe latest technological advances in the industry.

C. Operating Performance

2.5 Except for the Guwahati and Digboi refineries, which are below opti-mal size and the oldest of IOC's six refineries, the refinery operations areefficient, with throughputs generally exceeding design capacity (except whenlimited by lack of crude). Fuel consumption and losses are well withinestablished standards and refining costs per ton in line with those ofefficiently run refineries of similar configuration in industrializedcountries. IOC's pipeline and distribution operations are also efficient;operating costs as well as energy consumption and transport losses are wellwithin international standards for comparable pipelines. IOC's financialresults have been very satisfactory, allowing IOC to fund the majority of pastinvestments out of internally generated funds. Some relevant indicators ofrecent operating performance for IOC's refineries and pipelines are given inAnnex 2.2.

D. Accounts

2.6 The accounts are maintained on a commercial basis in accordance withthe requirements of the Companies Act of 1956. Each refinery and pipelineunit constitutes a major cost center. The ex-refinery prices for each refin-ery and transportation charges for crude oil and products for each pipelineare set by GOI. The accounts for each major cost center (para. 2.7) areprepared in line with corporate guidelines to maintain uniformity.

2.7 The accounting system is designed to meet the requirements for finan-cial accounting, budgetary control, cost accounting as well as managementinformation. For this purpose, expenditures are classified according to typeand charged to cost centers, such as processing plants, utility centers, ser-vice departments, administration, overheads etc. Key performance data arecompiled monthly and financial accounts quarterly for each major cost centerto provide adequate information for IOC's management. Annual accounts areroutinely completed, audited and published within six months of the end ofIOC's fiscal year. On the whole, IOC's MIS and accounting procedures meet orsurpass acceptable standards.

2.8 IOB's accounts are published separately along with those of IOC; thisis a statutory requirement. Only the nominal value of IOB's shares appears asan investment in IOC's accounts and ro consolidation of the IOC/IOB accountsis undertaken. As of March 1988, IOB's equity was Rs 34.0 million, of whichRs 4.0 million was paid-up share capital. The value of IOB is thereforeunderstated in IOC's books, but the amounts involv3d are minor compared withIOC's total assets.

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2.9 During appraisal, IOC agreed to open a Special Account for the proj-ect, most likely with the State Bank of India. This account, including SOEsif any, will be audited annually by IOC's exteraal auditors. The quarterlyproject progress reports will include extracts of transactions booked in theSpecial Account. The amount of initial deposit on the Special Account will beUS$35 million; reimbursement will be made quarterly, or whenever the accountis drawn down to below 502 of the initial deposit, after IOC's fullydocumented application for replenishment (para. 3.18).

E. Audit

2.10 IOC's annual accounts are audited by independent chartered account-ants appointed by GOI on the advice of the Comptroller and Auditor General ofIndia to ensure that the accounts provide a true and fair view of IOC'saffairs and that they are in line with the requirements of the Companies Actof 1956. Auditors are appointed for periods of three years, after which theyare changed. IOC's operations are also audited by the Comptroller and AuditorGeneral of India. This audit is a performance audit to ensure that theprocedures, decisions taken and commitments made by IOC are in compliance withgovernment regulations and are in the best interest of the Company as well asverifying the quality of the accounts. The observations of GovernmentAuditors are placed before the Government of India for appropriate action andpublished in the Annual Report, which is placed before the Parliament. Duringnegotiations assurances were obtained that IOC's audited accounts, includingthe special account, will be made available to the Bank within six months ofthe end of IOC's financial year.

2.11 IOC's operations are also audited by internal auditors on a continu-ous basis throughout the year. A General Manager for internal audit isattached to the Chairman's office. Further, an Internal Audit Department,with about 125 employees headed by an Executive Director, reports directly toDirector Finance and observations are reported to the Board of Directors.Physical inventories are undertaken by IOC's Production and MaterialsDepartments and are also checked in a revolving manner by independent physicalverification teams. The Internal Audit Department and the independentauditors also verify inventories at rxndom. These audit procedures aresatisfactory.

F. Insurance Practices

2.12 IOC has taken insurance coverage against the following risks: lossor damage of equipment and material in transit; erection and storage damagesfor material and equipment used in major projects; fire and explosion inrefineries and pipelines; transit damages and losses for crude, products,chemicals, spares, consumables, etc.; and, third-party personal injury/deathand property damages. IOC assets are insured at replacement cost. Theseinsurance practices are adequate and in line with the practices of theindustry. During negotiations assurances were obtained that IOC will continueto maintain insurance against risks and in amounts that are consistent withindustry practice.

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G. Remuneration and Pricing System

2.13 The Government has established a refinery pricing system thatprovides a 122 after-tax re.urn on capital employed (the sum of net fixedassets in operation and normal working capital) to the extent that these arefunded by equity; interest on debt to finance such capital employ-.d is alsocovered by retention prices. This pricing system is based on standard normsfor crude throughput, product patterns, fuel and loss and other operatingcosts; it provides for incentives in the form of higher returns than the basic12Z for operating performances exceeding established norms. A more detaileddescription of the pricing system and an example of the calculation ofrefinery remunerations are given in Annex 2.3.

2.14 IOC's refineries generally process more crude oil than required oythe GOI-established standards. The actual yield patterns are also superior tothe standard norms, thus providing the refineries higher returns than thestandard 12Z. To ensure continued efficient operations, IOC introduced aprodu^tivity linked bonus payment scheme under which employees can earn addi-tional remunerations of up to about 12Z of base wages. These bonus earningsare linked to crude throughput and throughput of major secondary processingunits, reduction in fuel consumption and loss levels and reduction in over-time. IOC's employees have been able to earn bonuses of around 11Z of basewages by productivity improvements in these areas. As a result, IOC's refin-eries, during recent years, earned incentives for improvements in crudethroughput and yield pattern and for reductions in fuel consumption and losslevels as compared with GOI's standards for these refineries. Based on IOC'sperformance, the refinery pricing system combined with the productivity-rela-ted bonuses to staff appear to provide adequate incentives for efficient oper-ations.

H. Investment Progra

2.15 Since the oil crisis in the early 1970s, IOC has made investments torehabilitate its refineries to increase throughput, improve efficiency andincrease the output of high value products. The most clearly justifiedinvestments to rehabilitate IOC's existing refineries have already been under-taken and the remaining scope for further increase in throughput in theserefineries is limited. To satisfy projected growth in demand for refinedproducts in a cost-efficient manner, IOC's longer-term strategy therefore isto: (i) increase the import of products; (ii) participate in establishing newrefineries as well as improve the efficiency of existing refineries;(iii) expand the capacity of existing refineries when justified; and finally,(iv) expand pipeline and distribution systems to handle the larger volumes ofcrude oil and products. IOC's FY90/94 investment program is designed to fitinto this longer-term strategy.

2.16 IOC's FY90-94 investment program, including physical and price con-tingencies, amounts to about Rs 91.7 billion (US$6.3 billion equivalent),subject to GOI approval of all planned projects. In addition to the proposed

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project (about US$1.0 billion), IOC plans to expand the Gujarat, Koyali andMathura refineries and add conversion facilities for heavy oil processing(about US$1.4 billion), participate in a new refinery at Karnal (total costabout US$1.5 billion), and expand its pipeline and distribution systems, aswell as improve the efficiency of existing refineries (about US$2.4 billion).This investment program is ambitious compared with past undertakings and willrequire IOC to seek external funding, in addition to the proposed Bank loan,in the order of about US$2.7 billion equivalent; the difference (about US$3.2billion) would be covered by IOC's internal cash generation. Some projects inIOC's FY90-94 investment program may be delayed, however, if adequate fundingis not available.

2.17 In recent years, IOC has funded about 802 of its capital expendituresout of internally generated funds. The extraordinary funding needs for IOC'sF,90-94 investment program will, however, require new financing policies forIOC. The feasibility of suppliers' credits, commercial bank loans, bondissues, etc. were studied and GOI/IOC agreed to make more use of such externalfunding sources. IOC is also likely to reactivate its public deposit scheme,which was suspended in 1986. This scheme could proviae funds amounting toabout US$400 million (a third of IOC's eyaity) according to currentregulations.

2.18 During appraisal, the Bank was given an opportunity to review IOC'sFY90-94 investment plan and tentative funding plan. To ensure that IOC'smanagerial and financial resources will not become overcommitted, the Bankwill be given an opportunity to review any major changes to these plans and toexchange views with IOC before such changes are implemented. Such reviewswould also enable the Bank to assist IOC to finance investments which the Bankand IOC agree are economically and financially justified. Duringnegotiations, assurances were obtained that the Bank will be given anopportunity to review annually any major change to IOC's FY90-94 investmentplan and to exchange views with IOC before the changes are implemented. Anyadditional investment exceeding the equivalent of US$50 million would in anygiven year be considered a major change.

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III. THE PROJECT

A. Background and Objectives

3.1 Petroleum consumption in India was about 43 million metric tons perannum (MMTPA) in 1986/87 and is projected to double by the year 2000.Consumption in the northwest of India is growing considerably faster than inthe rest of the country; its share of the total consumption is expected toincrease from a current 30? to 362. Consistent with the national strategyoutlined in paras 1.30-1.32, IOC, the principal supplier and marketer ofpetroleum products in the region, plans to meet this growing demand by acombination of increased product imports and increased refinery capacity (inturn requiring increased imports of crude oil). Annex 5.1 summarizes IOC'splans for meeting the demand for major products in the northwest; furtherdetails are provided in paras 5.2-5.4. These plans will require a newpetroleum products pipeline and augmentation of the crude oil supply systemfor the existing and new refineries. (See map IBRD 21079.) Petroleumproducts destined for the northwest region are currently imported at theKandla port and distributed to retailers by rail and road. However, theexisting transportation system--road and rail--will not be able to cope withthe projected volumes. A pipeline has been determined to be the least-costand most economic means for transporting the petroleum products from Kandla todistribution points supplying the northwest region. The existing crude oilsupply system is limited to about 10.2 MMTPA, the maximum capacity based onpresent tanker size and traffic handled by the offshore mooring and off-loading facility (SBM) at Salaya. A second SBM is required to accommodate theprojected increased crude oil throughput for the existing Koyali and Mathurarefineries, which are being expanded. A more extensive augmentation of thecrude oil supply system will be required before the Karnal refinery goes on-stream.

3.2 The primary objective of the project is to support the govermnent andIOC in providing the necessary operational flexibility and in improving theoverall efficiency of the petroleum product supply sector by: (i) reducingthe cost of domestic transport of petroleum products; (ii) facilitating importof petroleum products, thus providing IOC with the means to respond quickly toshifts in product demand patterns and foregoing the need for more costly andhigh-risk investments that would be required to change refinery yieldpatterns; (iii) improving the operating efficiency of IOC's refineries; and(iv) upgrading practices used in the operations and maintenance of IOC pipe-line network and distribution facilities. Secondary objectives are: techno-logy transfer in pipeline operations, corrosion control, computerizing refin-ery operations, process optimization and removal of lead from motor-gasoline.

B. Project Description

3.3 The project includes the following components:

(a) 1,454 km product pipeline from the Port of Kandla to Bhatinda: Theinitial pipeline capacity will be 5.0 MMTPA in the Kandla-Karnalsection (22" diameter) and 1.5 MMTPA in the Karnal-Bhatinda(14" diameter) section. There are provisions for expanding the capa-city of the Kandla-Karnal section to 6.0 MMTPA (through mechanicalmodification or the application of chemical drag reducers) and theKarnal-Bhatinda section to 2.5 MMTPA (throagh additional pumpingcapacity).

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(b) A Second Single Buoy Mooring System (SBM):l/ The existing offshoreterminal in the Gulf of Kutch presently handles about 10 MMTPA ofBombay High and imported crudes which is beyond the design capacityof the SBM. The proposed second SBM is required to supply the addi-tional crude to be processed. at the Koyali and Mathura refineries.

(c) Minimizing Lead Content in Motor Gasoline from Eastern Sector Refin-eries: This component provides for the installation of catalyticreforming units with associated facilities at the Barauni and Digboirefineries. IOC will then be able to reduce the lead content in themotor gasoline produced at these refineries from the current level of0.56 to 0.15 grams per liter by September 1992 as mandated by theDepartment of the Environment. Reformate produced by catalyticreforming of naphtha and gasoline from processes similar to fluidcatalytic cracking are of sufficiently high octane number so thatwhen blended with the other gasoline stock in the refinery, withminimal lead addition, a gasoline with the required octane number isproduced. After installation of these two reformers, all IOCrefineries will be able to meet the lead content mandate except theGuwahati refinery, which has too small a capacity for economicreforming. Its gasoline output will be blended into gasoline fromthe Bongaigoan refineries to meet the required octane numberspecification.

(d) Distributed Digital Control System (DDCS) for IOC's Refineries: Thisproject component is designed to modernize instrumentation andenhance process control optimization capabilities of Guwahati,Barauni, Gujarat, Haldia, and Mathura refineries by installation ofDistributed Digital Control Systems (DDCS). Presently, except for afew process units, instrumentation is pneumatic, and response tosystem changes is slower than with the more modern electronic DDCS.The project component will include provision for the required micro-processor and supporting computer facilities. Installation of DDCSwill facilitate optimization of refinery operations and yieldimprovements, reduction in energy consumption, enhance safety, reducetime needed to remedy process changes reported by monitoringinstruments or to change operating conditions, quicker plant shutdownand start-up, and thereby increase on-stream time. The scope of workfor each refinery, including hardware, will be defined byconsultants to be engaged under the project.

(e) Captive Power Plant at the Digboi Refinery: Two gas turbine powergenerators, each generating 15 MW of power, will provide a stablesource of electricity to the refinery. With the rapid growth indemand for electricity from the national grid, power interruptionsand dips have become more frequent resulting in disruption ofoperations. The captive power plant will supply electricity tocritical refinery equipment and will use hydrocarbon gas fromrefinery process units as fuel.

1/ An SBM is a large buoy used to moor, load and unload tankers that couldnot otherwise anchor in coastal waters. In addition to the buoy, thesystem comprises floating hoses, a manifold (PLEM), submarine pipelinesand onshore receiving facilities.

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(f) Yield Optimization and Eneray Conservation: Under the TechnicalAssistance and Training Component (para 3.3, h), project consultantswill carry-out studies to identify equipment modifications andconfiguration changes needed to optimize refinery yields and conserveenergy at Guwahati, Barauni, Koyali, Mathura and Haldia refineries.The yield optimization and energy conservation component vill provideequipment and services necessary to implement recommendations thatwill emerge from the yield optimization and energy conservationstudy.

(g) Haldia Lube Block, This component deals with the expansion of theHaldia Refinery lubricating oil base stock facility by 60,000 metrictons per annum. Along with the expansion of the lubricating oilcomplex, a sulphur plant will be installed to recover the sulphurfrom sulphur containing gas streams, which would otherwise bedischarged to the atmosphere and ultimately form sulphuric andsulphurous acids with detrimental effects on the environment.

(h) Technical Assistance and TraininR: The principal consulting servicesincluded under this project component are: (i) studies to designenergy conservation and yield optimization programs for Guwahati,Barauni, Koyali, Mathura and Haldia refineries; (ii) a pipelinecorrosion survey and assistance in improving operations, maintenanceand inspection of IOC's pipeline network; (iii) studies to identifyand design schemes for modernization of instrumentation at Guwahati,Barauni, Haldia and Mathura refineries by installing distributeddigital control systems; and (iv) design of a stafL training program,including the establishment of a Corporate Management Training Insti-tute and development of training curricula for the center, identifi-cation and provision of training aids for the existing training cen-ters and the identification of training requirements of, and appro-priate training opportunities for, senior level IOC staff in the oilindustry abroad. Approximately 300 man-months (mm) of expatriateconsulting service are estimated to be required for technical assis-tance and studies and 50 mm for training. Also included in thisproject component are process simulators, training aids, computerhardware and software and special equipment and instruments neededfor carrying out the pipeline corrosion surveys and tests.

C. Status of Project Preparation

3.4 IOC has completed a detailed feasibility study establishing that apipeline from Kandli to Bhatinda is the least-cost and most economic transportmode for petroleum products supplied to the northwest region. The study hasdetermined the optimum pipeline size, routing and other essential design para-meters. Bank staff have reviewed the IOC study and are in agreement with theconclusions. IOC will commence detailed project design and engineering oncompletion of financing arrangements and their approval by the government.Similarly, IOC has prepared a detailed project report for the second offshoreterminal at Salaya based on the installation of a second SBM and is in a posi-tion to begin detailed design and engineering. Most preliminary bid packageswere submitted to the Bank for review at the time of project appraisal.

3.5 For the refinery components, IOC has prepared a feasibility study andestablished the design basis for the catalytic reformers to be installed atthe Digboi and Barauni refineries. IOC needs Government approval and finan-cing to proceed with implementation of this component. IOC's preliminary

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studies have shown that conversion of instrumentation in the refineries andoff-site facilities to Distributed Digital Control Systems is justified by theincreased refinery throughput and yield improvements. Consultants to befinanced under the proposed Bank loan will, when appointed, begin an in-depthstudy of the application of the digital control system to each of IOC's -efin-eries except Digboi, which will not be converted because of its age and smallsize.

D. Capital Cost Estimate

3.6 The estimated total project cost including taxes, duties (US$185million equivalent) and contingencies is US$944 million of which US$368million (39Z) is expected to be for foreign exchange expenditures. Theproposed US$340 million Bank loan represents 34Z of the total financingrequired (including interest during construction). The detailed project costestimated in Indian rupees and US dollars appears in Annex 3.1 and issummarized in Table 3.1 below.

Table 3.1: PROJECT COST SUMMARY

In Rupees MIllion In US$ mIllionLocal F .E. Totsl Local F.E. Total

Kandla-Bhatinda P/L 3,925 2,617 6,542 269 179 448Second SBM 77 103 180 S 7 12Barauni Cat. Reformer 560 126 676 3s 9 47Digbol Cat. Reformer 216 46 260 1s 3 18Dist. Digital Control

system. 887 617 1,404 61 35 96Digboi Captive PowerPlant (Gas Turbine) 30 240 270 2 16 18

Energy Conservation AYield Opt. 300 200 500 20 14 84

Mald!a Lube Block 156 83 239 10 6 16Sulphur Plant 86 6 90 6 - 6Techn. Assist. ATraining 100 100 200 7 7 14

Base cost 6,326 4,036 10,360 433 276 709

Contingencies:Physical /a 632 404 1,036 43 28 71Price lb 1.454 929 2.383 100 64 184

Total Project Cost/c 8,411 6,368 13,779 576 ge8 944IDC: Bank Loan - e76 876 - 46 46

Others 100 176 275 7 12 19

Total FinancingRequired 8.611 6,218 14.729 583 426 1.009

/ 10X of base cost.21X of base cost and physical contingency.Includes Rs 2,700 million (US3186.0 million) taxes and duties; estimated costnot of taxes and duties = Rs 11,080 million (USS769 million).

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3.7 The cost estimates are based on average FY89 prices with the majorbase costs estimated by IOC from informal price quotations, costs incurred onprevious and ongoing projects suitably updated, and other in-house cost data.Consulting services financed by the Bank are estimated to total 350 man-monthsat an average cost of US$20,000 per man-month and are broken down as follows:refinery studies (75), pipeline surveys and tests (100), distributed digitalcontrol systems (125) and training (50). A sum of US$0.5 million is includedfor training abroad. Process simulators, training aids, computer hardware andsoftware and special equipment and instruments required for technical assis-tance and training are estimated to cost US$6.5 million. A physical contin-gency of 102 was applied to the base cost; which was considered to be appro-priate given the state of project preparation and preliminary engineeringcarried out for the project components. The price contingency on foreignexchange is calculated according to the Bankwide price contingency rates of5.32 for FY89/90 and 4.12 per annum thereafter, and domestic price contin-gencies are based on annual rates of 8? in 1989/90 and 72 in the yearsthereafter.

E. Project Financing

3.8 The following financing plan has been prepared for the project,including US$65 million equivalent of capitalized IDC:

Table 3.2: PROJECT FINANCING PLAN(US$ million)

Local Foreign Total Percent

IBRD Loan 47 293 340 34

Co-financing e.g.suppliers' credit - 75 75 7

IOC 536 58 594 59

Total 583 426 1,009 100

3.9 In addition to IDC, IOC is expected to finance most local projectcosts from internally generated funds and the Bank would only finance localcosts included in the turnkey contracts for the pipeline and the DDCSs. Theline pipe, estimated to cost about US$75 million, could be financed bysuppliers' credit or bilateral loans, considering the keen competition in thesteel industry worldwide. During appraisal, GOI/IOC agreed that external co-financing for the line pipe component for about US$75 million could bearranged. During negotiations assurances were obtained that cofinancing ofUS$75.0 million equivalent will be arranged for the financing of the Kandla-Bhatinda line pipe. The proposed Bank loan would finance the balance of theforeign exchange requirements of US$293 million and US$47 million equivalentof eligible local costs, which would represent 342 of the total financingrequired. The proposed loan includes also a provision for up to US$20 millionfor retroactive financing for expenditures incurred after December 1, 1988.The Government would bear the foreign exchange and interest rate risks. Forloan conditions see para. 4.12.

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3.10 Proceeds of the proposed Bank loan would be allocated as follows:

Table 3.3: ALLOCATION OF THE LOAN

Amount Allocated(USS million Z of Expenditures

Category equivalent) to be financed

1. Equipment, materials, 295.0engineering and installation

(a) directly imported 100Z of foreign expendi-tures

(b) locally manufactured 100? of local expendi-tures (ex-factory)

(c) imported and procuredlocally 65Z

(d) works 70X

2. Consultant services 15.0 100? of foreign or localand training expenditures

3. Unallocated 30.0

Total 340.0

F. Project Implementation

3.11 IOC has wide experience in carrying out various kinds of petroleumprojects and will undertake full responsibility for implementing this project.The Kandla-Bhatinda petroleum product pipeline and the second SBM system willbe implemented by IOC's pipeline division, assisted during the engineering andconstruction stages by expatriate consultants to supplement expertise notavailable in IOC or in India. Material and equipment inspection will beassigned to a firm specializing in these services. The iine pipe will beprocured separately. The Kandla-Karnal section of the product pipeline aswell as the SBM with its offshore pipeline will be supplied and installedunder separate turnkey contracts. Separate procurement packages suitable forlocal competitive bidding will be prepared for the Karnal-Bhatinda section ofthe products pipeline. Implementation of the refinery project components arethe responsibility of IOC's refinery division whose implementation proceduresand methods will essentially be the same as those of the pipeline division.Engineers India Ltd. (EIL), the major engineering firm in India's petroleumsector, will provide the necessary assistance for detailed design and backupduring implementation of the two catalytic reformers which will be suppliedand installed under a turnkey contract. Off-site facilities not readilyincorporated wit)in the turnkey contract will be contracted locally. The

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Distributed Digital Control System conversions will be contracted on a supply-and-install basis with the assistance of the expatriate consultant retainedfor the study, engineering and project preparation activities.

3.12 Bank staff have reviewed thoroughly IOC's implementation plans andcapabilities and are satisfied that project implementation will be carried outsatisfactorily. Maximum use of turnkey contracting will ease the supervisionload and should help maintain a tight implementation schedule. Implementationschedules appearing in Annex 3.2 show both the pipeline and SBM projects com-pleted within 33 and 30 months respectively of approval to proceed. The cata-lytic reformers are scheduled to be completed within 30 months of award ofcontracts and the DDCS conversions over a three-year period. Theimplementation schedules are considered realistic, barring unforeseen delaysthat may be caused by factors such as problems that could arise duringselection of contractors. There is, however, no basis to extendimplementation schedules to accommodate unpredictable factors. Under normalcircumstances, the project components can be implemented within the timeschedules given.

G. Procurement

3.13 Procurement arrangements for the project are summarized in Table 3.4below.

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Table 3.4: SUMMARY OF PROCUREMENT ARRANGEMENTS(US$ Million)

ICB LCB Other /a Total

Kandla-Bhatinda P/L 325 8 263 596(177) (-) (1) (178)

Second SBM 14 2 - 16(12) (-) (-) (12)

ReformersBarauni Reformer 48 - 13 61

(36) - (2) (38)Digboi Reformer 20 - 4 24

(16) - (2) (18)Captive Power Plant 22 - 3 25

(10) _ (1) (11)Distributed DigitalControl System 128 - - 128

(45) - - (45)Energy ConservationLand Yield Optimiza-tion Program 38 - 8 46

(15) - (2) S17)Haldia Refinery LubeOil Block 18 - 4 22

(8) - (2) (10)Sulphur Plant atHaldia Refinery 7 - 1 8

(1) _ (-) (1)Technical Assistanceand Training - - 18 18

- - (10) 210)

Total 620 10 314 944(320) ( (20) (340)

/a Borrower's own procurement procedures; limited international bidding; andconsulting services under the Bank guidelines.

Note: Figures in parentheses are the prospective amounts financed by the Bankloan.

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3.14 The Bank's Precurement Guidelines will apply to:

(a) the Kandla-Karnal section of the products pipeline and the offshoreportion of the SBM installation under turnkey contracts in accordancewith international competitive bidding (ICB) procedures open to allprequalified contractors;

(b) the equipment, materials and services required for the Barauni andDigboi catalytic reformers, captive power plant, the distributeddigital control systems, and the Haldia lube block (including thesulphur plant) under ICB procedures;

(c) the small value equipment and materials required for the project, andwhich are either needed in emergencies or available only from alimited number of sources, under limited international bidding (LIB)procedures or local or international shopping procedures asappropriate; and

(d) studies and technical services under the Bank's Guidelines for theUse of Consultants.

3.15 IOC will use its own procurement procedures for the supply of linepipe estimated to cost about US$75 million, for which it will requestfinancing terms from the bidders, and for the small diameter Karnal-Bhatindasection of the products pipeline which it plans to finance from its internallygenerated funds. Works of small value and not likely to attract foreignbidders (housing, offices, preliminary works, etc.) will be procured throughlocal competitive bidding (LCB) procedures. Bank staff have reviewed IOC'sprocurement procedures and found them satisfactory.

3.16 The Bank's standard domestic preference provisions will apply for theevaluation and comparison of bids submitt3d under ICB procedures. All procure-ment documents relating to bids valued over US$1.0 million will be subject toBank prior review; those under this value will be submitted for post-awardreview.2/ Goods and services costing less than $100,000 or betweenUS$100,000 and US$200,000 may be purchased directly by IOC using eitherinternational and local shopping or limited international bidding procedures,respectively, limited to an aggregate of US$20.0 million. It is proposed thatretroactive financing in the amount of US$20 million for expenditures incurredafter project appraisal in October 1988 be allowed to cover payments expectedto be made by IOC for services and equipment procured in accotdance with theBank's procurement guidelines before the proposed loan is signed.

2/ It is estimated that the project procurement requirements will becovered by about 20 procurement documents; of these about ten areestimated to have a value in excess of US$1.0 million each and a totalvalue of US$415 million. The Bank has already reviewed and cleared thelargest of these bidding documents, for the Kandla-Bhatinda pipeline.

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H. Disbursements

3.17 The Bank loan is projected to be disbursed as shown in Annex 3.3 and

summarized in Table 3.5 appearing below. The rate of disbursement is based on

the loan becoming effective by mid 1989 and that it will be disbursed over a

period of five years. This is not fully in conformity with the Banks June

1988 standard seven-year disbursement profile for energy projects in India.

However a shorter project duration is justified taking into account the

completion times recorded for similar IOC projects and the fact thaL the use

of turnkey single responsibility contracts for major project components will

facilitate implementation. Projected disbursements are based on the initial

deposit of US$35 million into the special account being made in FY90 and

signing of contracts for the pipeline, SBM and DDCS components in FY91.

There'xre, substantial disbursements are projected over the early years.

Table 3.5: DISBURSEMENT OF THE BANK LOAN(US$ Million)

BANK FY FY90 FY91 FY92 FY93 FY94

Annual 35 110 130 50 15

Cumulative 35 145 275 325 340

3.18 To facilitate disbursement, a Special Account will be opened with an

initial deposit in US$35 million equivalent, the estimated average expendi-

tures for a five-month period. The account will be opened in US dollars in a

bank acceptable to the Bank. Applications for replenishment of the Special

Accouint will be submitted quarterly or whenever the Special Account is drawn

down to 502 of its initial deposit, whichever comes first. Disbursements will

be made against priced contracts for the goods, services and works procured

under the Bank loan, and SOEs--if any. Interim certification of works

completed and costed at unit rates in the contracts will be done by IOC's

construction supervision team and certified by IOC. Disbursements for train-

ing overseas will be made against the actual costs of travel, subsistence and

tuition or training fees. Disbursements against statements of expenditure

will be made for the training component and for goods or services costing less

than US$300,000. Documents supporting the expenditure statements will be

retained by IOC and made available for review by Bank supervision missions.

During negotiations, instructions for the operation of the Special Account

will be provided to IOC and agreement will be sought that IOC will open an

account in a bank satisfactory to the Bank.

I. Ecology and Safety

3.19 As described more fully in Annex 3.4, IOC complies with or exceeds

the standards of India's environmental protection regulations which are as

stringent as those in the developed countries. The net environmental effect

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associated with the refinery project components will be benign and in propor-tion to the reduced atmospheric lead content in urban areas when the lowerlevels of lead in motor gasoline are achieved. Refinery emissions arecurrently measured a minimum of four times a day as well as after processupsets. Supervision missions will compare emission measurements with Bank andWHO standards. Due consideration to environment and energy conservation isbeing taken in the design of the pipeline and SBM components. Under normalcircumstances, any environmental impact will be reversible and should belimited in duration to the construction period. Compared to alternative modesof transport, the pipeline has clear advantages, namely less spillage, lessevaporation and air pollution and less energy consumption.

3.20 Some temporary disturbances of short duration will occur during pipe-line construction while clearing the right-of-way and preparing the pipelineditch. However, once the pipeline has been installed, the trench will becovered and the right-of-way restored to its original condition for the growthof grass, crops and other vegetation except large trees. In forested areas,which are avoided to the extent practical, cutting of trees will be restrictedto the minimum possible by adjusting the pipeline's alignment. During opera-tions, some small leakages can be expected at the pumping stations. Oilywater separators will be installed at these locations to reduce the oil con-tent to permissible levels before any effluent is discharged from the sta-tions. The SBM will also cause some temporary disturbances during construc-tion of the submarine pipeline and fasten4ng of the mooring unit to the seafloor, but the effect will be temporary and of short duration. Judging from11 years experience with the existing SBM, oil spills from the SBM operationshould not cause a pollution problem. Two tugs which assist the crude oiloff-loading operation are equ ?ped with chemical dispersants and manned bycrews trained to apply the chemicals. Overall control of oil spill clean-uprests with the Kandla Port Trust. The Trust and the Indian Coast Guard patrolthe area for oil spills and other pollution by vessels calling at the port.

3.21 IJC's petroleum facilities are designed and constructed in compliancewith the strictest international and Indian safety standards, and the organi-zation is fully prepared to respond to an accident or emergency condition. Atall installations, an accident or emergency condition will activate a disastercontrol plan which will set in motion the particular contingency actionsrequired to deal with the specific emergency which has taken place. For theproducts pipeline, operating variables will be continuously monitored by thesupervising control system which will immediately isolate and limit the emer-gency condition to the smallest practical area. During negotiations,assurances will be sought that IOC will continue to take adequate precautionsin line with industry practices to protect its workers and the environmentduring implementation of the project.

J. Project Reporting Requirements

3.22 IOC will submit to the Bank quarterly progress reports for the proj-ect components in accordance with the contents and format outlined in Annex3.5. Within six months after the closing date of the Bank loan, IOC willprepare and submit to the Bank a project completion report. The report willundertake a retrospective review and analysis of the major activities of theproject, its aims and accomplishments and the performance of the participantsincluding the Bank. An outline and instruction for preparing the c'impletionreport was provided to IOC during negotiations.

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K. Project Risks

3.23 Cost overruns and delays in project completion constitute the majorproject risks. As detailed in para. 5.18, the economic impact of the projectis relatively insensitive to cost overruns: a 102 cost overrun would have theproject's overall economic rate of return reduce from 26Z to 232. The impactof the project is more sensitive to implementation delays but the economicrationale remains robust to the likely range of risk: a two year delay incompleting all components would reduce the overall rate of return to 21%.

3.24 Errors in demand projections are another source of risk that mayaffect the economic rate of return of the Kand'.a-Bhatinda Pipeline, which isintended for products. If the rate of growth in demand is 252 less thanexpected, the rate of return on this component would fall from 222 to 182,which is still satisfactory.

3.25 A further risk is that the margins between products and crude oilmight increase to a level which could make import of crude oil and domesticrefining clearly more economic than importing products. Even under such ascenario, the investment risk is minimal as the pipeline could be readilyconverted to transport of crude oil.

3.26 Environmental risks during construction and operation are consideredminimal given the strict enforcement of environmental -rotection standards bythe Government and IOC's record of compliance with these standards. They arec-rtainly less than the risks which would pertain in the absence of theproject. For example, without the Kandla-Bhatinda pipeline, products would betransported by rail, with a higher probability of accidents and spillage.Similarly, a mishap at the crude oil receiving facility at Salaya is morelikely in the absence of the project, because excessive utilization and occu-pancy of the existing SBM would preclude proper maintenance.

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IV. FINANCIAL ANALYSIS

A. Introduction

4.1 IOC's main financial objectives are: to ensure an adequate return oncapital employed and to maintain a reasonable dividend to GOI, its share-holder; to ensure maximum economy in expenditures; and to generate sufficientinternal resources to fund a substantial portion of capital expenditures.Over the past decade, IOC has been remarkably successful in achieving theseobjectives; dividends were steadily increased from 62 of paid-up capital tothe current 18Z, and IOC has funded about 80X of capital expenditures out ofinteLaal sources. This development has been made possible by an impressivegrowth over the same period; sales increased by a yearly average of 172, fixedassets by 15X and profit-after-tax by 22Z. IOC's FY88 turnover of Rs 144billion was the highest of any commercial company in India. FY88 profit-after-tax of Rs 4.6 billion also makes IOC one of India's most profitablecompanies. In FY88, IOC contributed Rs 26 billion to the central exchequer inincome tax and duties alone; GOI benefited further from dividends, commoditytaxes and excise duties.

4.2 To keep up with projected growth in demand for refined products, IOCplans to grow even faster in the five years to come. The funding of IOC'sambitious FY90-94 investment program will, according to financial projectionsgiven in this chapter, require more use of external funding sources than inthe past. GOI has agreed to IOC increasing its funding from external sourcesand IOC's borrowing directly from the Bank is in line with this policydirective. Once the investment program has been implemented, IOC's internalcash generation will increase substantially permitting the repayment of long-term debt as well as increased dividends to GOI.

B. Pricing System

4.3 The GOI-approved remuneration and pricing system (para. 2.13 andAnnex 2.3) is the main determinant of IOC's financial performance. Thissystem has protected IOC from the volatility of products and crude prices ininternational markets during recent years and has permitted IOC to fund itscapital outlays largely out of internally generated funds as well as maintaina reasonable dividend. The remuneration and pricing system also provides IOCwith adequate incentives for efficiency improvements; IOC's refinery, pipelineand distribution operations compare favorably with those of efficiently runcompanies outside India.

4.4 In the short run, however, this remuneration system may have draw-backs that need some further comment. The 'capital employed," on which IOC isentitled to a return and reimbursement of interes- paid, consists of net fixedassets in operation plus 'normative' working capital (45 days of crudethroughput for refineries processing imported crude and 35 days for otherrefineries). Capital works in progress are not entitled to a return until putinto operation. This means that during periods in which IOC's depreciation of

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fixed assets (averaging 102 p.a) about equals the value of assets put intooperation, IOC's net profits are likely to stagnate; this is expected to occurin FY89-91. On the other hand, when substantial new fixed assets are put intooperation, IOC's net profits rises sharply; this is forecast to occur from1992.

4.5 The pricing and remuneration system is applied to the operation ofeach refinery and major pipeline unit as a whole. The result is that eachdiscrete investment will produce an after-tax return of 122 plus whateverincentives, recognized under the system for efficiency improvements, areattributable to the investment; the total return would be about 152 based onIOC'S past experience. Under these circumstances, it is not very meaningfulto calculate a financial rate of return to IOC on specific investments; thetotal return of IOC investments, without differentiating as to where thebenefits accrue--GOI or IOC--, is a better measure of the financial viabilityof IOC projects. This is the approach used for financial IRR calculations inthis chapter.

C. IOC's Finances

4.6 IOC's financial statements for FY84-88 and projections for FY89-95are given in Annexes 4.2. Projections are based on the Bank's commodityforecasts for crude oil, inflation in India at about 72 p.a., increase inIOC's sales volume of 62 p.a., and increases in wages of about 22 p.a. in realterms (see Annex 4.2). A summary of IOC's income statements for FY86-88 andprojections for FY89-94 are given below:

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Actual ProjectionsFY ending 3/81: 1986 1987 1988 1989 1990 1991 1992 1993 1994

(Rs Billion)

Gross Margin onSales /a 12.2 15.0 17.0 18.4 19.7 21.7 24.5 31.4 35.2

Operating Cost 10.1 11.0 11.8 12.5 13.3 14.8 16.5 19.6 20.3

Operating Income 2.1 4.0 5.2 5.9 6.4 6.9 8.0 11.8 14.9

Net Income 1.3 4.3/b 4.1 4.7 4.8 4.5 5.6 9.1 11.3Operating Ratio(Z) Ic 83 74 69 68 67 63 54 52 50

Rate of Return(2) /d 20 21 48 45 46 44 40 36 29

/a Regulated ex-refinery prices for products less actual cost for crudeoil and purchased products.

lb FY87 net profit was boosted by extraordinary income, due to retroac-tive price adjustments that were accounted for in 1987.

Ic Operating costs as a percentage of gross margin./d Operating income less income tax as a percentage of net fixed assets

in operation valued at cost of acquisition; this rate of returnconcept is different from the regulated one described in Annex 2.3.

4.7 During the project period, the volume of sales is expected to grow 6Zp.a., duo to projected inflation and product price increases, sales revenuesare expected to grow on average 152 per year, gross fixed assets 242 per year,gross margin on sales 12Z per year and operating costs 102 per year. However,due to the GOI regulation of IOC's return, IOC's net profit will stagnate inFY89-91, mainly for reasons given in para. 4.4 above. IOC's operating ratiois expected to decline steadily during the project period due to efficiencyimprovements and higher interest payments.l/ The high rate of return inFY88-92 is mainly due to a relatively low rate base; after the commissioningof major capital investments in FY93-94, IOC's rate of return will decline toa more normal 25-30?.

4.8 IOC's financial position as of March 31, 1988 and projections forMarch 31, 1994, the end of the project period, are given below:

1/ The remuneration system provides for a gross margin on sales that coverinterest payments on loans to finance IOC's capital employed (see Annex2.3).

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FY Ending March 31: 19 3 1994(Rs Billions)

Net Fixed Assets in Op. 7.5 28Z 49.7 47ZCapital Works in Progr. 3.3 12Z 33.6 32ZInvestments 11.9 45Z 0.8 12Working Capital, Net 3.9 152 20.6 202

Total Assets 26.6 1002 104.7 1002

Stockholder's Equity 17.3 652 56.0 532Long-term Debt 9.3 352 48.7 47Z

Total Capitalization 26.6 1002 104.7 1002

Current Ratio (times) 1.2 1.5

4.9 IOC's financial position is strong with long-term debt only about 352of total capitalization. At the end of the project period, long-term debt isexpected to equal about 472 of total capitalization, but this share is likelyto decrease starting in FY95, when new capital expenditures are expected toslow down and major capital works will be commissioned and start to earnrevenues. IOC's current ratio is expected to increase from 1.2 to 1.5 duringthe project period, which would provide for adequate liquidity.

4.10 IOC's fixed assets are at cost of acquisition and may be undervaluedas compared with replacement cost. However, most fixed assets are fairlyyoung; in FY89 about 402 were less than five years old and, in FY94, over 602will be younger than five years. Further, inflation in India has been rela-tively moderate. IOC's valuation of fixed assets is, therefore, not causingany major distortions of its financial statements.

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4.11 IOC's projected funds flow statement for FY90-94 is presented below:

FY 90-94Rs Billions 2

SourcesInternal Cash Generation 68.8 75Less: Debt Service 12.7 14

Tax payments 10.6 12Dividends 1.1 1Increase in WC 14.7 16

Net Internal Cash Generation 29.7 32

Liquidation of Investments 17.2 19

Total Cash from Int. Sources 46.9 51

New Long-Term Debt 44.8 49

Total Sources available for Cap. Exp. 91.7 100

ApplicationCapital Expenditures 91.7 100

4.12 IOC expects to fund about 512 of its FY90-94 investment program outof internal sources. This is satisfactory considering the high level ofcapital expenditures planned for the period. The proposed Bank loan of US$340million (Rs 4,950 billion equivalent) would finance about 5 of IOC's FY90-94investment program. The Bank will lend directly to IOC, on the Bank'sstandard terms for India, with the guarantee of GOI. The foreign exchange andvariable interest rate risks will be borne by IOC. IOC will also pay a fee toGOI for its guarantee. The total cost of the Bank loan to IOC will depend onthe future exchange variations between the Indian rupee and the Bank'scurrency pool. If future exchange variations follow the pattern of 1984-88,the total cost to IOC would not be less than the commercial rate, currentlyabout 142, at which IOC can borrow from local commercial banks.

4.13 In addition to IOC's internal funds and the proposed Bank loan,about Rs 44.0 billion (US$2,700 million equivalent) would be required for theFY90-94 investment program. During appraisal, the feasibility of supplierscredits, commercial bank credits, bond issues, public deposits, etc. was dis-cussed with GOI and IOC and it was agreed that IOC would increase its use of

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such external sources for the funding of its FY90-94 investment program.During loan negotiations, assurances from IOC were obtained that adequatefunds will be allocated to the project to ensure its timely completion.

D. Financial Covenants

4.14 The financial projections for IOC indicate that IOC's financial per-formance will continue to be satisfactory In terms of rate of return on assetsand cash generation under the GOI-established pricing and remuneration system.During negotiations, assurances were obtained from IOC that it will maintain:(i) a current ratio of not less than 1.2; (ii) a debt/equity ratio below60/40; and (iii) a debt service coverage of not less than 2.0 times;assurances were als3 obtained from GOI that the refinery pricing system willnot be changed in a way that would be detrimental to IOC's financialviability. Financial reporting and audit and IOC assurances that necessaryfunds will be allocated to the project to ensure its timely completion havebeen dealt with in paras. 2.10 and 4.13. In this context, GOI/IOC agreed toarrange for US$75 million in co-financing for the line pipe for the proposedproject (para 3.9). The FY9o-94 investment program is the largest everundertaken by IOC and is estimated at US$6.3 billion equivalent; the financingof this program will require that about US$3.0 billion equivalent be raisedfrom external sources. To ensure that IOC's managerial and financialresources are not overcommitted, agreement was reached with GOI/IOC that theBank will be given an opportunity to review and exchange views with IOC on anymajor change in IOC's FY90-94 investment plans (para. 2.18).

E. Project Financial Evaluation

4.15 As stated in para. 4.5 above, it is more meaidngful to analyze thefinancial viability of projects and their components without taking intoconsideration to what extent benefits accrue to IOC or to GOI. The financialIRRs below, therefore, reflect the total financial return on IOC investments.The assumptions and calculations for these IRRs are given in Annexes 4.3 to4.7.

4.16 The Kandla-Bhatinda pipeline is the main project component and con-stitutes 632 of the total project cost; the rationale for its design is givenin paras. 5.3-5.5. The financial IRR calculations are based on the estimatedincremental capital and operating expenditures attributable to the pipelineand include the costs of products required to fill tanks and the pipelineamong capital cost. The benefit of the pipeline is assumed to equal the salesprice of the products (less excise duties and distribution costs from thepipeline terminal to the consumers) minus the CIF cost Kandla f,r products(including normal port charges, taxes and duties). The resulting IRR of thiscomponent is 4422/ (Annex 4.3). A sensitivity analysis indicates that with102 higher capital costs or 102 lower revenues, the IRR would still exceed40Z.

2/ The financial rate of return is not strictly comparable with the ERR,due to different assumptions regarding benefits; for the ERR, pipelinebenefits are assumed to equal the avoided economic cost of the nextbest alternative, railway transport.

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4.17 The second single buoy mooring (SBM) system at Salaya constitutesabout 22 of the total project cost. The SBM is mainly justified on securityof supply grounds; a complete breakdown or the existing SBM would interruptthe supply to the north-west of India of petroleum products equal to 11.2million mtpa of crude oil for about three months. In any one year, theprobability of a complete breakdo-in is assessed at 1.5Z, while the probabilityof less serious damage to the buoy (entailing a supply interruption of 15days) is assessed at 3Z. The benefits of the second SBM are assumed to equalthe sales value of products (less excise duties and distribution costs) minusthe cost of crude (including port charges, taxes, duties, chemIcals and otherdirect refining costs) for the expected volume of products that would notreach the consumers in case of disaster. Another benefit is that ship waitingtimes will be reduced; for more detail, see Annex 4.4. On this basis, the IRRfor the SBM would be 16Z; with 10Z higher costs or 1OZ lower revinues, the IRRwould still exceed 102.

4.18 The catalytic reformers (about 9Z of total project cost) will convertthe naphtha feedstock into higher value reformate (a high octane gasolineblending component) and other products. Valuing the changes in product slateat import parity prices, the IRRs of this project component would be 142 forBarauni and 14Z for Digboi. The IRR would exceed 122 in both cases even with102 higher costs or 1OZ lower benefits (Annex 4.5). The catalytic reformersare also justified by their beneficial impact on the environment and the needto comply with GOI established standards on the maximum lead content ingasoline.

4.19 The distributed digital control system (DDCS), which is about 142 ofthe total project cost, will increase the distillate recovery from IOC'srefineries and reduce fuel consumption and losses. Valuing the increaseddistillate recovery and the fuel savings at import party prices, the IRR ofthis project component would be 272 (Annex 4.6). Even with 102 higher costsand 21! lower benefits, the IRR would be 25Z.

4.20 The revamp of the Haldia Lube Block, including the sulphur unit, isabout 32 of total project cost and will increase the production of high valuelube oils and diesel and decrease fuel oil and kerosene output. Valuing thechanges in product slate at import parity prices (which are close to ex-refinery prices), the IRR of this project component would be 28Z (Annex 4.7).Even with 10Z higher capital costs, or 10Z lower benefits, the IRR wouldexceed 252.

4.21 No IRR has been calculated for the energy conservation and yieldoptimization components; the technical, economic and financial feasibility ofthese components will be reviewed by the Bank once the feasibility studies arecompleted. Neither has an IRR been calculated for the technical assistanceprovided under the project.

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V. ECONOMIC EVALUATION

A. Introduction

5.1 Benefits have been quantified, and economic rates of return computed,for the Kandla-Bhatinda Product Pipeline, the Single Buoy Mooring System atSalaya, the Catalytic Reformers, the Distributed Digital Control Systems andthe Haldia Lube Block. Together, these items account for about 90Z of totalproject costs.

B. Economic Evaluation of Kandla-Bhatinda Product Pipeline

Demand Projections

5.2 In 1985 the Ministry of Petroleum constituted a Committee on SupplyMeasures, comprising representatives from the oil industry, PlanningCommission, and the Ministries of Petroleum & Natural Gas, Railways andSurface Transport, to examine and recommend various measures to ensureadequate supplies of petroleum products throughout India until the year 2005.The Committee reported in January 1988 and the following analysis is based onthe Committee's projections, which seem reasonable.

5.3 The region to be served by the proposed pipeline covers what isreferred to as the northwest and Koyali-Kandla-Okha areas, embracing Deihi,Punjab, Haryana, Jammu and Kashmir, Himachal Pradesh, western Uttar Pradesh,Gujarat, Rajasthan, and a major portion of Madhya Pradesh. The demand formajor products 1/ in this region is projected to grow from 11.3 million tonsper annum (MMTPA) in 1988 to 33 MMTPA by 2005, implying an annual growth rateof about 6.5Z, compared with 7Z per annum since 1980. In 1988, 8.4 MMTAA ofthe 11.3 MMTPA total demand was met by two regional refineries at Koyali andMathura, which are producing at capacity. The balance of 2.9 MMTPA was met byproducts brought in through Kandla (2.2 MMTPA) and by net transfers from otherregions (0.7 MMTPA). Revamping and debottlenecking of the Koyali and Mathurarefineries will increase their combined output of major products by about1 MMTPA by 1993. GOI has also approved construction of a new grass-rootrefinery at Karnal, which is expected to produce 2.7 MMTPA of major productsin its initial commissioning year of 1995 and 4.2 MMTPA thereafter. However,these increases in refinery capacity will be insufficient to keep pace withdemand, and the net regional deficit of major products to be met by importsthrough Kandla is projected to reach 7.1 MMTPA in 1994, decline to 5.1 MMTPAfollowing the commissioning of the Karnal refinery, then progressivelyincrease to 14.7 MMTPA by 2005 (Annex 5.1). Of course, additional refinerycapacity, over and above that already approved, might be developed, and thispossibility has been provided for in designing the pipeline capacity (nextpara.).

5.4 IOC's distribution plans for the region are based on minimumtransport cost as determined by a linear programming model capable of handlingup to 5,400 columns/variables and 1,500 rows/constraints. The modelidentifies the least-cost channel of supplying each major product to each

1/ Motor Spirit (MS), Aviation Turbine Fuel (ATF), Kerosene(SKO), HighSpeed Diesel (HSD), and Light Diesel Oil (LDO).

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major consumption point, including whether that point should be supplied froma regional refinery, a refinery in another region, or by product importedthrough Kandla, and by which mode of transport. The model was also used toidentify the optimum route for the proposed pipeline, and the optimum locationof tap-off points. On the basis of this analysis, the projected throughputs(Annex 5.1) and tap-off volumes for the Kandla-Karnal (Annex 5.2) and Karnal-Bhatinda (Annex 5.4) sections of the pipeline were identified. As shown inAnnex 5.1, in the absence of any further additions to refinery capacity (overand above those identified in the previous para.), the demand for pipelinetransport would reach 6.6 MMTPA in 1994, decline to 4.5 MKTPA following thecommissioning of Karnal, then gradually increase to over 12 MMTPA by 2005.However, it is possible that refinery capacity in the region would be furtherincreased early next century by augmenting Karnal, and by establishing a newgrass-root refinery. For this reason, the initial design capacity of theKandla-Karnal section is limited to 6 MMTPA, and the economic analysis relatesto this maximum throughput. Throughput of the Karnal-B 'tinda section, whichis significantly less than on the Kandla-Karnal section, is the sameregardless of the refining scenario because it is independent of whether theproduct originates from Kandla, from the Karnal refinery, or from a newrefinery.

5.5 On the basis of these projections, and after supplementary analysisof optimum sizing of the pipeline and optimum phasing of expenditure, IOCdecided on an 22" OD pipeline with a capacity 6 MMTPA for Kandla-Karnal and14r OD pipeline with initial capacity of 1.5 MMTPA, expandable to 2.5 MMTPA,for Karnal-Bhatinda.

Methodology of Economic Evaluation

5.6 The Kandla-Karnal and Karnal-Bhatinda sections of the pipeline havebeen analyzed separately, as volumes are much lower on the latter section.The life of the pipeline is estimated at 30 years and this has therefore beenadopted as the analysis period. (The average life of equipment for the nextbest alternative mode, rail, is also about 30 years.) Throughout, costs andbenefits have been converted to economic prices by: (a) expressing theimported content at CIF prices; (b) deducting identifiable indirect taxes andduties from the local component of project capital costs; and (c) applying theestimated standard conversion factor of 0.8 to other local items. The basisfor capital cost estimates is explained in para. 3.7. Pipeline operatingcosts are based on IOC's experience with existing pipelines.

5.7 In the absence of the project, the transport task would be performedby rail, the next best alternative mode. The benefits of the project thuscomprise the avoidance of rail transport costs and the higher product lossesassociated with rail transport. Economic costs of rail transport are based onthose used by the Planning Commission in recent studies. No account is takenof track and yard investments which the railways would need to undertake toaccLmmodate the envisaged traffic. For example, the railyard at Kandla wouldneed to be improved, and sidings would need to be provided at other sites.Furthermore, the principal broad gauge route between Kandla and the northwestconnects with the main Bombay-Delhi line, one of Indian Railways' busiestroutes which is approaching capacity limits on some sections. Indian Railwaysplans to relieve congestion on this route by establishing an alternative routeto the west (largely by converting existing meter gauge lines to broad gauge,

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together with construction of some missing links) at an estimated cost ofRs 4,200 million. This alternative route would also reduce the distance tothe Punjab by some 400 km. The calculation of avoided rail costs (Annex 5.2)is very conservative in that it is based on the shorter distance (which isunlikely to be available before 1995) and does not include any of the capitalcosts of the new route.

5.8 IOC's experience suggests that product loss in pipeline movement is0.152 or less, while the locs on rail is about 0.5? due to loading/decantingoperations and evaporation during transit. For the Kandla-Karnal section, theannual value of reduced product losses reaches Rs 38 million by year 2000 whenthe pipeline capacity of 6 MMTPA is exhausted (Annex 5.3). For the Karnal-Bhatinda section, reduced product losses reach Rs 9.5 million by the time theinitial pipeline capacity of 1.5 MMTPA is attained in 1997 (Annex 5.4).

5.9 Apart from the foregoing quantified benefits, the pipeline offersadvantages of reliability (especially important given the seasonal peaks inpetroleum consumption), safety and reduced environmental pollution. However,it has not been possible to quantify these benefits.

Results

5.10 The results (Annexes 5.5-5.7) can be summarized as follows:

Table 5.1 ECONOMIC ANALYSIS - PIPELINE

Rate of ReturnCompletion With Demand

Central With Capital delayed by Growth 25ZResult Costs +102 two years lower

Kandla-Karnal Section 22.2? 20.6Z 19.52 17.82Karnal-Bhatinda Section 1'.8Z 14.4Z 14.7Z 14.7?Both Sections 21.6Z 20.0Z 19.0? 17.5?

Thus the project is economically viable, and would remain so against the prin-cipal risks, a cost overrun, a delay in completion or a 25? lower rate ofgrowth in demand. These estimates are highly conservative because theanalysis does not take account of some ma,or rail capital costs, nor someunquantifiable benefits of pipelines.

C. Economic Evaluation of Additional Single Buoy Mooring System (SBM)

5.11 At the moment, 10 MMTPA of crude oil--half of which emanates from theBombay High field, with the remainder imported--is delivered through anoffshore single buoy mooring system (SBM) at Salaya near Kandla, from where itis fed by onshore pipeline to the two existing regional refineries at Koyaliand Mathura (see map). These two refineries are currently undergoingrevamping, following which the requirement for crude oil through Salaya willincrease to 11.2 MMTPA. The existing SBM is already operating beyond its

- 44 -

design capacity of 9.5 MMTPA, with the result that tankers frequently have towait to obtain access to the SBM, and essential maintenance schedules aredisrupted. Because the SBM is the sole means of supplying this crude to thetwo refineries, IOC is very concerned that any breakdown in or damage to thefacility would seriously disrupt refinery production and thus product suppliesto the north-west region. After considering several alternatives, it has beendetermined that the most efficient way of reducing this risk is to install anadditional SBM, connected to the same submarine pipeline as used by theexisting SBM. At a later stage, if further crude handling capacity isrequired, it would be possible to provide the second SBM with an independentconnection to the shore, thus in effect doubling capacity. For the moment,however, this is not necessary. Connecting an additional SBM to the existiagsubmarine pipe will provide an alternative facility as a precaution againstthe two principal risks: breakdown/damage of the buoy and/or hoses (with aprobability of 32 in any one year) and breakdown/damage of the plem (theunderwater connection between the SBM and the submarine pipeline), which has aprobability of 1.5Z in any one year. The additional SBM would also augmentcapacity to some degree. Although it would not be possible to pump throughboth SBMs simultaneously (because they share the one connection to shore), it'would be possible to connect a waiting vessel to one SBE while the other SBMI s occupied, thereby reducing vessel waiting time.

Methodology

5.12 Costs and benefits have been converted to economic terms using thesame procedures as for the Kandla-Bhatinda product pipeline (para. 5.6).Capital, maintenance and operating costs are based on IOC's experience withthe existing SBM. It is assumed that the second SBM would be operationa' bythe beginning of Indian FY93, and would have a life of 15 years.

5.13 Annex 5.8 provides details of the computation of benefits. Theessential features are as follows. Three categories of benefits have beenquantified: (a) reduced risk of supply interruptions; (b) savings in shiptime; and (c) savings in cargo time. The additional SBM will virtuallyeliminate the two risks of supply interruption mentioned in paragraph 5.11.(The probability of the two SBMs simultaneously suffering the sameinterruption is so small that it can be ignored.) Without the additional SBM,damage to the existing buoy would disrupt supplies for 15 days, and damage tothe plem would disrupt supplies for 90 days. Inventories provide a buffer of5 days, so the net interruption to product supplies would be 10 days and 85days respectively. The impact of any interruption is related to its duration.It would be impossible to arrange alternative supplies within the first 10days of any interruption (after the buffer stock is exhausted). For thisperiod, the value of product sales foregone may be taken as a conservativemeasure of the disruption suffered by consumers. From the national viewpoint,one needs to deduct the savings from not having consumed the related crude oilthat would have been consumed by the refinery during this period. Theanalysis assumes that for any period beyond this initial 10 days, analternative imported supply of products could be arranged. Thus the cost ofinterruptions from day 11 to day 85 is taken as the cif value of those productimports, from which is deducted the value of crude not consumed because of therefinery closure. This is conservative, as it ignores any problems thatreceiving facilities for product imports might experience in accommodating theemergency supplies, and the additional distribution costs arising from thefact that the import points are further from the markets than the refineries.

- 45 -

5.14 The ability to berth a vessel at the second SBM while the other oneis occupied would save 40 days per annum in ship waiting time, with an annualvalue to India (after allowing for some leakage of benefits to foreign shipowners) of Rs 7.7 million. Savings in cargo time would amount to Rs 1.5million per annum; as contracts for crude are written FOB, these savingswould all accrue to India. Details of these calculations are provided inAnnex 5.8.

Results

5.15 The analysis suggests that the proposed augmentation of crude oilsupply capacity would yield an economic rate of return of 292 (Annex 5.9).The principal risks for this project component are cost overrun and/or delayedimplementation, but sensitivity tests demonstrate that the project is robustto the likely range of risks in these factors. If costs turn out to be 102higher than estimated, the rate of return would still be satisfactory at 262,while if implementation takes 2 years longer than expected the rate of returnwould also still be satisfactory at 25Z.

D. Economic Evaluation of Refinery Components

5.16 The economic evaluation of the refinery components uses essentiai'ythe same methodology as in the financial analysis (paras 4.15-21), except thatcosts have been converted to economic terms throughout by deducting the taxcomponent. All three components increase the net value of refinery output (byincreasing output or the proportion of higher value products in the outputmix, or by reducing fuel consumption and losses); these changes have beenvalued at import parity prices. Details are provided in Annexes 5.10 to 5.12and the results are as follows:

Table 5.2: ECONOMIC ANAI.YSIS - REFINERY COMPONENTS

Rate of ReturnCompletion

Central With Costs Delayed byResult + 10 Two Years

Catalytic Reformers 19.9 17.9 16.1Digital Control Systems 41.8 39.3 31.4Haldia Lube Block 48.0 44.2 36.1

5.17 These results are conservative insofar as they do not incorporate anyvaluation of the environmental benefits, lower maintenance costs and improvedsafety which would accompany these project components.

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E. Overall Results of the Economic Evaluation

5.18 The principal project components, covering 902 of total projectcosts, were subjected to economic evaluation. As summarized below, thesecomponents were found to be economically viable, and robust to the principalproject risks.

Table 5.3: RESULTS OF SENSITIVITY TESTS ON PROJECT ECONOMICS

Rate of Return

Central resultsKandla-Bhatinda Pipeline 22ZSingle Buoy Mooring System 292Catalytic Reformers 202Digital Control Systems 422Haldia Lube Block 482

All Components (weighted average) 262

Sensitivity testsCost increase of 102

Kandla-Bhatinde Pipeline 202Single Buoy Mooring System 262Catalytic Reformers 182Digital Control Systems 392Haldia Lube Block 442All Components (weighted average) 232

Implementation Prolonged 2 yearsKandla-Bhatinda Pipeline 192Single Buoy Mooring System 252Catalytic Reformers 162Digital Control Systems 312Haldia Lube Blockl 362All three components (weighted average) 212

Demand Growth 25? LowerKandla-Bhatinda Pipeline /a 182

/a This sensitivity test is applied only to this component becauseproduct imports are the balancing item in matching supply anddemand. As local production is less than demand, benefits forthe SBM ar,d refinery components are not sensitive to a 252reduction in the rate of growth of total demand.

7 47 -

VI. AGREEMENTS AND RECOMMENDATIONS

6.1 Agreements. During negotiations, assurances and agreements wereobtained from GOI that the existing refinery pricing and remuneration systemwill not be changed in a way that would be detrimental to IOC's financialviability (para. 4.14); and from IOC that it will:

(a) have its financial accounts audited by an independent auditor accep-table to the Bank, and submit to the Bank th_ audited accounts withinsix months of the end of each fiscal year (para. 2.10);

(b) maintain insurance coverage against risks and in amounts that areconsistent with appropriate practices (para. 2.12);

(c) review annually before December 31, its FY90-94 investment programfor its subsequent financial year with the Bank and exchange viewsprior to the implementation, on the economic and financialjustification of any addition to the program that would result in anincrease of over US$50 million in the funding requirements for anygiven year (para. 2.18);

(d) arrange for US$75 million in co-financing for line pipe (para. 3.9);

(e) open a Special Account for the project with a commercial bank onterms and conditions satisfactory to the Bank (para. 3.18);

(f) continue to take adequate precautions in line with industry practicesto protect its workers and the environment during the implementationof the project (para. 3.21);

(g) provide the Bank with quarterly project progress reports detailingimplementation progress, cost, procurement, special account transac-tions and disbursements, in a format satisfactory to the Bank, and toprepare a Project Completion Report within six months of projectcompletion (para 3.22);

(h) allocate necessary funds to the project to ensure its timelycompletion (para. 4.13); and

(i) maintain: (i) a current ratio of not less than 1.2 times; (ii) adebt/equity ratio below 60/40; and (iii) a debt service coverage ofnot less than 2.0 times (para. 4.14.).

6.2 Recommendation. Subject to the above agreements and conditions, theproject is suitable for a Bank loan of US$340 million equivalent, for 20years, including 5 years grace, at the standard variable interest rate.

INDIAPETROLEUM TRANSPORT PROJECT

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- 49 -

ANNEX 2.2Page 1 of 2

INDIA

PETROLEUM TRANSPORT PROJECT

INDIAN OIL CORPORATION LTD. (IOC)

Perfonmance Indicators

1. Refineries Guwahati Barauni Gujarat Haldi Mathura

Design Capacity (MNT) 0.85 3.30 8.10 2.50 6.00Throughput: FY87 0.80 2.86 7.84 2.62 6.35

FY88 0.82 2.64 8.44 2.81 6.54Cap. utilization FY88 (S) 95.90 i 79.90 La 104.20 112.30 108.90

Fuel & Loss (% on T'put):FY87 8.00 9.00 L& 5.80 8.90 5.50FY88 8.60 9.00 Z& 6.10 9.10 5.40Standard 10.10 8.50 7.50 10.10 6.60

Fuel Ref. Cost/MT: (Rs) /b 126.90 78.30 59.20 74.60 89.20(US$) 8.70 5.35 4.05 5.10 6.10

Ref. Cost/Bbl (US$) 1.19 0.73 0.55 0.70 0.83

Net Profit bef. Tax (MN Rs) 78.8 210.40 1,220.60 365.30 965.50

La Due to low crude deliveries from the Assam fields, which impeded optimaloperations.

b Excluding lubes and speciality products. Fuel and Losses not included.

2. Pinelines La GS _BK KA HB HMRB MU SVKM

Capacity (MMT) 0.82 1.80 1.10 1.40 1.25 3.70 10.00Throughput: FY87 0.58 1.76 1.22 0.91 1.22 2.76 9.70

FY88 0.64 1.74 1.23 1.07 1.23 3.00 10.27Cap. utilization (8) 78.00 96.40 111.60 76.10 98.00 81.10 102.70

/a Products pipelines: GS-Guwahati/Siligurits; BK-Barauni/Kanpur; KA-Koyali/Ahmedabad; HB-Haldia/Barauni; HMRB-Haldia/Maur/Rajbandh/Barauni andNJ-Nathura/Jullundurts. Crude oil pipeline: SVKR-Salaya/Viranugani/Koyali/Nathura (see attached map).

- 50- ANNEXh 2.2

Page 2 of 2

3. The profit before interest and income tax was Rs 177.8 million forIOC's pipelines and Rs 3,045.7 million for its refineries (including headoffice). A comparative income statement for FY88 is given below:

Refineries Pigelines Total-------------(Rs million)------------

Value of Proeaction 47,465.1 882.0 48,347.1Cost of Raw Materials 42.514.9 - 42.514.9Gross Margin 4,950.2 882.0 5,832.2

Operating Costs 1,995.9 711.2 2,697.1Operating Income 2.954.3 170.8 3.135.1

Misc. Income 21.4 7.L 2L4Profit before Int. & Tax 3,045.7 177.8 3,223.5

4. If the value of IOC's refinery production and cost of its crude oilfeedstock are recalculated at international prices,L/ gross margin andoperating income would be as given below.

USSMillion US$/BB

Value of production 2,497 16.22Cost of raw material 2.186 14.20

Gross margin 311 2.02Operating costs 137 0.89Operating Income 174 1.13

/ Based on Platt's Oilgram for November 15, 1988, including estimatedfreight charge to Bombay.

- 51 - ANNEX 2.3Page 1 of 4

INDIA

PETROLEUM TRANSPORT PROJECT

PRICING AND MARGINS

Retention Price for Refineries:

1. GOI has established a refinery pricing system that provides for areturn on capital employed, consisting of net fixed assets in operation plusworking capital. A 12% after tax return is recognized on the capital employedfunded by equity and actual interest payments are reimbursed on borrowedcapital used to fund capital employed. This system is based on standard normsin respect of crude throughput, product pattern, fuel and loss and operatingcosts. These norms are reviewed periodically. The procedure for establishingthe retention price for each refinery per metric ton of crude oil throughputis based on the following components:

(a) Delivered Cost of Crude Oil consist of the FOB cost of crude oil,freight, insurance, wharfage, duties, etc.;

(b) Standard Refining Cost: which is set for each refinery taking intoconsideration the actual costs incurred by the refinery in the past,adjustsd for estimated price increases for the period during whichthe price recommendation will remain valid. The standard refiningcosts are specific for each refinery and take into account plantconfiguration and design and magnitude of investment etc;

(c) Return on Investment: which has been provided under the net worthconcept. For this purpose, "capital employed" for a refineryconsists of tne net fixed assets in operation plus the normativeworking capital, and this capital employed is apportioned betweenequity and borrowing.j/ On the equity portion, a 12% after taxreturn is provided for, and on the borrowed portion, interest isreimbursed based on the actual payments by the company.

(d) Standard Throughput. Product Pattern and Fuel and Loss for EachRefinery are set for each refinery based on crude availability,secondary processing facilities, offsite facilities and otherrelevant technical factors. The refinery has to reach the standardlevel of throughput and production to get full compensation for itscosts and to earn a return on its investments;

/ Net fixed assets are defined as the value of gross fixed assets inoperation less accumulated depreciation (as valued under the income taxrules). Normative working capital is defined as the equivalent to 45days of crude throughput for refineries processing imported crude, andas 35 days for refineries processing domestic crude. The sum of netfixed assets in operation and the normative value of working capitalgives the capital employed.

- 52 - ANNEX 2.3Page 2 of 4

(e) Allocation of Total Cost of Production of a Refinery to IndividualProducts - Retention Prices of Products: The total cost ofproduction is allocated to the individual products based on indicesgiven by the Government; and

(f) Free Trade Products: The retention price is applicable to bulkrefined petroleum products, for which prices are controlled by theGovernment. In case of speciality products like benzene, toluene,slack wax, N-heptane, aluminum rolling oils, etc., IOC is free to setthe selling prices according to market conditions. Normally, theprocessing of speciality products are more profitable than regulatedones.

TransRort Cost for Crude/Products through Pipelines

2. The transportation cost is worked out based on the capital employedand standard transportation costs much in the same way as for refineries. Thetransportation cost per tonne of crude/product is given by the normativethroughput, established by GOI's Pricing Committee, availability ofcrude/products, etc.

3. Selling Prices

(a) Ex-Refinery Prices are uniform for all refineries in India and arebased on the weighted average of the retention prices of eachproducts for the various refineries. Difference between ex-refineryand retention prices are settled over Government accounts.

(b) Ex-storage Prices of Marketing Company contain the followingelements:

(i) Ex-refinery prices;

(ii) Applicable freight charges;

(iii) Marketing margins determined in line with those of refineriesand pipelines;

(iv) Excise duty on products; and,

(v) Applicable sales tax/local taxes.

Efficiency Improvements

4. In addition to the retention price for refineries/pipelines, whichprovides for a return on equity and standard operating costs, the pricingsystem rewards efficiency and penalizes inefficiency on the following basis:

(a) higher margins for crude oil throughput exceeding the standard level(at the standard level, entitlement is for operating expenses and a12% return on fixed investments);

- 53 - ANNE 2.3Page 3 of 4

(b) reductions in refinery operating costs to the extent these are lowerthan the standard refining cost accrue to the refinary;

(c) reductions in ocean/pipeline losses benefits for refinery andpipeline operation;

(d) a higher return is earned when the actual working capital is lowerthan the normative working capital; and,

(e) revenue from improvements in product yield pattern over norms andcost savings by reduction of internal fuel consumption and processinglosses to levels below the established levels, accrue to therefinery.

5. A typical case from one of the refineries, where both incentive forhigher throughput and improvement in product pattern have been earned, isgiven below:

Refinery: Mathura Qty. in Million Tonnes

Year: 1986-87 Value in Million Rupees

Design Capacity 6.000 MKTPA

Standard throughput as fixed by Government 5.400 MNTPA

Actual Throughput 6.353 MMTPA

(a) Return on Investment (Up tostandard level of Throughput).

(i) Rate of Return Rs.115.87/MT

(ii) Standard throughput 5.400 MKTPA

(iii) Return (i x ii) 625.70

(Operating costs are also realized]separately in addition to return).

(b) Incentive for additional throughputover standard level.

(i) Standard throughput 5.400 HMTPA

(ii) Actual throughput 6.353 HMTPA

(iii) Additional throughput (ii - i) 0.953 MMTPA

(iv) Standard refining cost Rs.89.17/MT

(v) Return on Investment Rs.11587/MT

- 54 - ANNEX 2.3Page 4 of 4

(vi) Margin available (iv + v) onadditional throughput. Rs.205.04/MT

(vii) Incentive (iii X vi) Rs.195.40

(c) Incentive for improvement inproduct pattern. Rs.173.28

5. In summary the total earnings amount to:

Return on investment based onstandard throughput 5 (a) Rs.625.70

Incentive for increased throughput Rs.195.40

Incentive for improvement in productionpattern Rs.173.28

Total earnings

- 55 - ANNEX 3.1Page 1 of 3

INDI

PETROLEUM TRANSPORT PROJECT

Project Cost Estimate

(In Runees MillionY (In USS Million)

Local FEL Total Loe l P. R. otal

A. Kandla-Ihatlads Pineline

Survey & Fleld Engineering 14 0 14 1 0 1

Land AcqulsLtLon 65 0 65 4 0 4

BuildLngs & Township 137 0 137 7 0 7

EnglneerLng & Project Management 166 163 329 9 11 20

Li-npipe 1922 939 2861 134 64 198

Llne MaterLaLs 251 149 400 17 10 27

Pipeline Construction 303 814 1117 22 56 78

Pump Stations, Tap-Off Ponts

L Terminals 427 277 704 30 19 49

CathodLc ProtectLon 65 34 99 4 2 6

Telecom & Scads System 315 231 546 23 16 39

Branch Line to Jodhpur 2§ 10 270 _18 1 19

subtotal 32S 2617 6542 26 179 44

D. Second 8M

Engineering & Project Management 7 0 7 0.4 0.0 0.4

Land AcquisitLon 1 0 1 0.0 0.0 0.0

Townships S 0 5 0.3 0.0 0.3

SuildLngs 4 0 4 0.3 0.0 0.3

Plant & MachLnery 56 54 110 3.8 3.6 7.4

Navigation & Berthing Alds 3 39 42 0.2 2.7 2.9

Project Expenses I 10 11 0 0 _ P. L0

Subtotal 27Z 103 180 S2 O i 72l0

C. CatalvtLe Reformer at

Baraunl Refinery

Slte Development 5 0 5 0 0 0

EngLneerLng & Project

Management 51 0 51 4 0 4

Royalties and Knowhow 6 7 13 0 1 1

Plant and Machinery 416 108 524 29 7 36

ConstructLon Stte

Requirements 7 0 7 0 0 0

ConstructLon Period Expenses 7 0 7 1 0 1

Start-up & Miscellaneous

Expenses 11 1 12 1 0 1

Townships 3 0 3 0 0 0

Design Allowance 44 9 S3 3 1 4

Subtotal 550 S 12S 2 4

- 56 - 56 - ANNE~Q X 3.1Page 2 of 3

--l Renee Millionl (in S Million)Lausl F E al Leenl F ToSta

D. Catalytic Reformer atDiaboi Refiner=

Site Developmnnt 2 0 2 0 0 0hagin ering & Project

Management 20 0 20 2 0 2Royaltles & Inawhov 1 4 5 0 0 0Plant and Machinery 167 37 204 11 3 14Coenstautiou Period Expenses 6 0 6 1 0 1Start-up & Miscellaneous

Expanses 2 1 3 0 0 0Design Allovanw e t j 20 A Q 1

Subtotal } j5 3jQ 1 I1

E. Distributed DigitalControl Systems

GuvahatL Refinery 48 41 89 3 3 6laraunl Refinery 186 108 294 13 7 20Gujerat Refinery 270 136 406 18 9 27HbldLa Refinery 161 109 270 11 7 18Mathura Refinery maa 121 9i 2 3

Subtotal 887 1l 1404 61 31 21

P. Pover Plant atDiaboi Ref mAry

Engineering 3 24 27 0.2 1.8 2.0Procurement, Installation

S Start-up 31 216 la 1A 8 _a 160

Subtotal 3 LI an2 2.i 16.0 18 5

G. Yleld OntimLsation £Enerav Conservgtlon

Engineering 30 20 50 2 2 4Procurement, Lnstallation

5 Coamissioninrg in 180 45Q 18 30

Subtotal 1 20v 50-0 20 14 34

B. UaldLa Lube Blocktl) Lube Facilltyt

Enaineerlng 16 8 24 1 0.5 1.5Procurement, Installation

& Start-up in 9 A 55 1 5

Subtotal 1in 83 M2 lA LA0 16A0

(t') Sulphur PlantsEngineerlng 9 1 10 0.6 - 0.6Procurement, Installation

& 3tart-up 21 4 8Q 5.4 5_ L4

Subtotal Al j 29 6 0 _6f

- 57 ANNEX 3.1Page 3 of 3

tIn Ruoees tillioi (In US8 Mllton)

Lol F) E him Totalol

I T Sebhnal Assistanee & Trainina

Refinery Yield Optimization & Puel

Conservation 7 15 22 0.5 1.0 1.5

Pip.line Survey 14 14 28 1.0 1.0 2.0

Dlstributed Digital Control System 2. 14 36 1.5 1.0 2.5

Training 14 7 21 1.0 0.5 1.5

Process Simulators TrainingAids, etc. 14 22 36 1.0 1.5 2.5

Pipeline Surveys Inhtrunents &

Equipments 29 28 57 2 28 A Q

Subtotal 122 1La 200 0 7.0 14.0

Project Base Cost 6325 4035 10360 433 276 709

Physical Contingencies 632 404 1036 43 28 71

Prlee Contligency 1454 929 2303 1 164

Total Project Cost , 13779 244

- 58 --

ANNEX 3*2Page 1 of 8

S i

*

"I.

Z} _ II I________ I___ I:___ __I ___________l__ ____ i__

e ___ __ __ ___ __ -- '___--Ii i. U _I __ _ __ 1_ 1_1

!~ i o __ __ __ ___ __ __

e)* _J l l _~ _ _ _- 11j- I r j

_ _i _I = I =77 - T I

_59 _AN~NEX 3.2____ ____ ___ ____ ___ ____ ___ ____ ___Page 2 of 8

l_I

_ __ _____ _

X I

-i _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

INDIAPETROLEUM TRANWSPORT PROJECT

CATALYniC REFORMERS- BARAUNI & DIGBOL RERNERIESImpkmenntaIon Schedule

AC#.2314 52 1 3 |1 7 8 91011 123i4 S5|46117 81 9120 21 2223 24 25 26 27 28 29 30 31 32|33|343s5 36 37 3S 39 40|4142143M -6 47d8 49S0

i. PROCESS UCENS ENGU4EING

dL Suiscitn d~ PwontmUejrwb. RoictEs10nbStbV&J1

a SHECflON OF GENEL

cL FtquacatlOfb. usJ d AU D=wmfuto0

RotcEPd opO2a

- Awo caimflocO

<*417842

G.

OWM r ECTDROUD DGITL COMM INMS IN RENR

b S d dewmkMoegk

A 21 3 14 _ 6 _ a _ l 4121345 i714922t 22 23 2a12526 2: 2931 32 33U3S3 3IOIS3 14 43i"S 4I AS*551 52 83 *5Sh3S7S do

OE E M4 2 1 111119 LI0

4 P8REAiA1R4 OF00G

* X84~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Io O0a

b. evokcnM & AwWd of ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ gq

INDIAPETROLEUM TRANSPORT PROJECT

CaptIve Power Plant at the Digbo RefnnetyImpemendotIon Schedule

OuxIionanbMonhs

I 2 3 4 5 6 7, 9*iOii 14213 14i5 16 1718 19120 24 22 23 2 2526 27 202930 3 3233 3625 36 37 3S39 404i42 43 4 46d4748 9 50

1. SELECilON OF CONSLTAN1S

& PREPARATION OF INB

3. ELECION OF GENEWALCONWACTOR

L SocftfatIon lId Dtb Evdiak=on & Am/b d

4. H5TALLAIIOI& COWA.,SSONING - HU-

414

co17

-63- ANNEX 3.2Page 6 of 8

gEi __

S~~~~~S

A ___

I. I

2

- 64 -

_ Sl , 4 ~~~~~~~~~~ANNEX 3.2S _ __ _ _.___ _ __ _ Page 7 of 8

I __. _ _ _ _ _..__ _

____ __

S __ _

a0 0~a

x I

fl _ I~~11,iii Hit -- X

- 65 - ANNEX 3.2______ _____ ______ _____Page 8 of 8

pil __ _____

II __ _ =_____ili __a__ ______

I - -

Kr __ ______-

CC___ ______

- 66 -

ANNEX 3.3

INDIA

PETROLEUM TRANSPORT PROJECT

Estimated Schedule of Disbursements

IBRD Fiscal Year Cumulative Disbursementsand Quarter at End of Quarter

(US $1,000)

1989/1990December 31, 1989 35,000June 30. 1990 35,000

1990/1991December 31, 1990 80,000June 30, 1991 145,000

199111992December 31, 1991 210,000June 30, 1992 275,000

199211993December 31, 1992 300,000June 30, 1993 325,000

1993/1994December 31, 1993 330,000June 30, 1994 340,000

ANNEX 3.4Page 1

- 67 -

INDIA

PETROLEUM TRANSPORT PROJECT

Pollution Control AsDects

1. The operation industrial plants must have the consent of thePollution Control Board in the state the plant is located as well asenvironmental clearance from the Department of Environment (DOEn), an agencyof the Central Government in the Ministry of Environment and Forests. When anew unit is to be added to an existing plant a *No Objection Certificate, fromthe state board and clearance from the DOEn are required. The state pollutioncontrol boards limits discharge of effluents into the different disposal areas 11at the same level as specified by the Indian Standards Institution (ISI). InNovember 1986 the DOEn proposed more stringent standards for effluentdischarged by oil refineries. Attachment I shows a comparison of theindustrial effluent standards specified under IS-2490 and the proposedstandards for oil refineries.

2. Attachment II shows the required air quality standards applying tothe four major pollutents 21 in three location categories. DOEn is in theprocess of formulating stricter standards for refinery emissions to theatmosphere.

3. When construction is completed on the enhanced effluent treatingplant (scheduled for end-December 1988) the Barauni refinery is expected to bein 100Z compliance with the proposed DOEn effluent standards. The additional4 cu.m. per hour of effluent produced by the catalytic reformer when it goeson stream will be insignificant when compared to the average 600 cu.m. perhour currently treated by the refinery, and no perceptible change in effluentquality should result. Ambient air monitoring shows that average levels ofthe three main pollutants (SO2 - 38, NOx 33 and SPM 75 micro grams per cu.meter) are well within the acceptable limits shown in Attachment II. Thecatalytic reformer will add about 37 kg per hour (1OX) to the current sulferdioxide emission which is not sufficient to significantly increase theconcentration of this pollutent when compared to the permissible limits shownin Attachment II.

4. There were no effluent treating facilities at the Digboi refinerywhen it was taken over by IOC in 1981. On completion of Phase 2 of the 300cu.m. per hour effluent treating plant (scheduled for end-December 1988), therefinery is expected to be in full compliance with the proposed DOEnstandards. The 2 cu.m. per hour effluent flow added by the catalytic reformershould not result in any perceptible change in effluent quality. Atmosphericemission is currently well within acceptable limits (SO2 - 52, NOx - 57 andSPM -22 micrograms per cu.m.). The catalytic reformer will only produceneglible amounts of sulfur dioxide which should not significantly effectcurrent concentration levels.

1/ Inland surface waters, public sewers, on land for irregation and marinecoastal areas.

2/ Suspended particulate matter (SPM), sulfur dioxide (S02), Carbonmonoxide (CO) and nitrogen oxides (NO.)

-68 - ANNEX 3. 4Attachment I

INDIA

PETROLEUM TRANSPORT PROJECT

Effluent Standards

Parameters Standard presently Proposed new standard by DOEn /afollowedIndian Standard Maximum Max. kgs/ MaxilmIS -2490 for concen- 1000 MT Kgs/lOOOM3

discharge into tration of crude of crudeinland surface processed processed /bwater

BOD mg/i 30 15 10.5 8.9COD mg/l 250 _ - _TSS mg/i 100 20 14.0 11.9OIL mg/i 10 10 7.0 6.0PHENOL mg/li 1 1 0.7 0.6AMMONIANITROGEN mg/i 50 _ _ _SULFIDES mg/i 2 0.5 0.35 0.3TOTAL CR mg/l 2 - - -CR+6 mg/i 0.1

la For other parameters limits specified in ISs2490 are to be followed.

b Converted to volume basis assuming a density 0.85 gns/lit for crude.

ANNEX 3.4

- 69 - Attachment II

INDIA

PETROLEUM TRANSPORT PROJECT

National Air Quality Standards

Area Category Concentration in microgram per cubic meterSPM S02 Co NOX

A Industrial and 500 120 5,000 120mixed use

B Residential and 200 s0 2,000 80rural

C Sensitive 100 30 1,000 30

- 70 - - 70 - ~~~~~ANNEX 3.5

INDIA

PETROLEUMI TRANSPORT PROJECT

Progress Reporting Recuirements

The Bank requires periodic progress reporting on the implementationof projects it is financing. For this project, the format and content of thereports can be arranged to suit both the Bank's and IOC's management'srequirements. During negotiations agreement will be reached with IOCregarding the format to be adopted. The Bank's minimum requirements are thata progress report issued at no longer than quarterly intervals contain thefollowing:

(a) a short concise narrative account of such project highlights as keyevents and accomplishments during the reporting period, futureprospects and in general where the project stands at that point intime compared to where it should be;

(b) a master implementation plan in the form of a simplified CPM diagramfor each project component showing the major activities, events andmilestones from start to finish;

(c) a measuring of accomplishments and developments against the masterplan to identify critical activities falling behind schedule and adescription of the action plans undertaken to bring such activitieson schedule;

(d) as a corollary to (c) a running account of the activities behindschedule and status of action plans to bring them on schedule and thecurrent projected project completion date;

(e) a procurement schedule giving all pertinent data such as status,cost, delivery dates, problems, etc.;

(f) a project cost account and cost analysis for each project componentupdated for each reporting period covering expenditures andcommitments, comparison with SAR project cost estimates, revisedproject cost estimates and projected final project costs; and

(g) a narrative account, supported with appropriate charts or tables, ofthe status and activities regarding the technical assistance andtraining project components (in greater detail than under (a) above).

- 71 - ANNEX .1Page 1 ef 2

INDIA

PETROLEUM TRANSPORT PROJECT

INDIAN OIL CORPORATION LIMITED. (IOC)

Notes and Assumptions for Financial Statements

Income SLatement

1. The cost of crude, products, consumables and duties is expected toincrease in line with the Bank's commodity price forecast for crude oil(January 27, 1988) adjusted for projected Indian rupee devaluation of the Rsagainst the US$ (about 2% p.a.). Volumes are assumed to increase by 6% ayear.

2. IOC revenues will be determined by the GOI established prices, whichwill be set at appropriate levels to allow IOC to earn the regulated return.

3. Salaries are assumed to increase by 2% p.a. in real terms, which alsowould allow for an addition of about 400 employees during the project period.Other operating expenses (except for depreciation) are assumed to increase inline with projected domestic inflation: 9% in FY89, 8% in FY90, 7% inFYs91-93 and 6.5% thereafter.

4. Interest paid has been calculated on average outstanding balances at8% for invested funds (Rs8.6 billion under a special arrangement with GOI) and13% on average for other long-term debt.

5. Income tax has been estimated at 50% of taxable profit, whichexcludes interest income from investments and credits for strategic storage.

6. Dividends have been projected at the rate of 18% of paid up capitalas from FY88.

Balance Sheet

7. Projections of fixed assets and work in progress are based on IOC'sinvestment program adjusted for price contingencies in accordance with Bankguidelines. Depreciation has been calculated according to current rateaveraging 10%, on fixed assets not fully depreciated.

8. Accounts receivable and inventories (mainly crude and products) havebeen projected on the same basis as under 1. above. Other current assets havebeen assumed to increase in line with inflation.

9. Accounts payable have been projected on the basis of 1. above; othercurrent liabilities in line with inflation.

-72 - ANN-EX 4. 1Page 2 of 2

Funds Elow

10. The adjustments to income include adjustments for prior years, asshown in the income statement, as well as difference between depreciation, asshown in the income statement, and the Increase for the year of accumulateddepreciation, as shown in the balance shest.

11. Increase in long-term debt does not include current portion, which isincluded under working capital.

12. Repayment of long-term debt has been projected assuming five years ofgrace for the Bank loan and three years of grace for other loans. IOC hasbeen assumed to prepay loans as from FY95 when its cash flow may permit this.

INDIA

ItQIAN OIL CORTION LIMIT

PETROLEUM lRlMART PROJECT

DICOME STATEMENT Met a 4-90)

(Sn M lllon Ra)

ACTUAL PROJECTION

Fisal Year Ending 8/51: 1964 1906 196 1907 1968 1i6 1990 1901 1902 1005 1994 1906

Oil 1e6,72 16,871 18,860 11,677 18,174oet-oIeu products 061,288 94,288 00,6614 114,275 130,658

otheu Reve 9ue007 830 2,s 0 11,671 460

Total Operating itos ue 108,712 110,942 116,012 120,028 144,267 I6,400 206,400 286,200 266,090 808,000 8420001 ,So

Products aVrvds for leei 44,018 45,424 40,8 55,186 64,60RaT Master ialner R 5 37,1666 41,662 8,9'7o 415,20 165,185

Duties 11,515 12,627- 14,787- 42,60 46,168

Total Cost of Sales 94,018 99,913 105,652 118,061 127,2906 162,060 16,6090 21,540 242,450 271,560 1006,600 345,00

GROSS MARGIN 9,700 11,080 12,160 14,902 16,991 16,850 19,710 21,060 24,450 81,440 85,200 80,020

Powerandi FuEl 98 1038 125 184 207 220 280 250 270 200 510 2'

recistion 0~~~~~~76 1,101 1,26 1,420 1,540 1,650 1,600 1,070 2,160 0 sm 0

~iei OpratingExpense 4,741 5,6661 6,466 7,421 6,020 6,800 0,070 6,97000 10,400 11:100 u1",m 12,m

Total Operating Expense 7,686 8,67 10,21 10 11,771 12,520 1,260 14,60 16,640 10,680 20,580 22,50

OPERATING INCOME 2,062 2,493 2,009 8,964 5,220 6,8O 6,460 6,6O 7,910 11,66 14,670 17,540

Less : tnt 600 724 562 211 (26 (1,010) (600) 0 0 1,100 1,460 1,650

MeAsuGhts ~~146 )0 2 30 061 0 0%

Income Tax (1) 788 ( 2,800) (230 2,8250 2,318 1,w81 2,180 8,180

NET INCOME 626 U6 1,269 4,28 4,09 4,660 4,010 4,400 6,010 9,140 11,260 12,800

Dividndb o17 178 175 197 221 220 220 220 220 220

Surplus carried forward s65 862 1,116 4,060 5,677 4,440 4,500 4,260 5,860 6,020 11,00 12,140

Averge rnt fixed assets : 6,686 0,56 6,02 7,175 7,416 3,009 9,150 10,265 18,970 26,805 44,615 54,120

Rate of Retuen () (a) 21.6 26.1 20.8 21.2 40.6 46.1 46.0 40.6 40.1 88.2 26.6 20.3

Operating Ratio (t) (b) 76.7 7.4 08.2 78.6 609. 66.2 67.5 62.6 54.2 61.6 60.1 52.2

"M.te 2 !ope?tiin 9 om - taxes)/(aver net fIxed assets){DJ tto eoSt OTsales)/(gros arg n)

A0.

w1

INDIA

INIAN OIL CORPORATION LIMITED

PETROLEUM TRANSPORT PROJECT

BALANCE SHSET (FYs 64-95)

(In MIIo In Re)

ACTUAL PROJECTION

Fiscal Year Ending /a1 1964 1-- 5 1986 1967 1966 1989 1-90 1991 1992 1998 1994 1996

ASSETS

Fi xed Asset 13,221 14,916 17,361 19,786 21 ,66 2,190 2o6 480 82 580 42,420 70,780 66 ,60 10280soLess: Accumulated Depreciation 6,780 8,184 10,515 12,452 14,812 16,5690 16,740 21,650 25,860 81,210 86,670 48.710

Not F;xed Asset 6,491 6,664 7,065 7,264 ?,66 6,610 9,690 10,660 17,060 89,550 49,660 66,s60

Capital Work In Progros 2,160. 2,774 2,447 2,972 8,270 8,850 5,750 16,720 85,180 82,450 88,640 82,500

Investmt 5 5 6 5 5,406 11,926 17,980 4,940 760 760 760 760 760

Current AsstsCash an Bankis 167 917 751 627 697 780 790 640 900 960 1,080 1,090Account receivables 2,629 8,188 2,807 2,867 8,458 4,820 4,950 5,680 6,400 7,260 3,200 9,240Inventorias 18,221 14,667 20,762 18,282 1 ,691 28 240 26 590 80,800 84,890 890 ,640Other current assets 8,207 1,982 8,606 8.696 6,976 6,240 6,760 7,220 7,720 6,260 6,800 9,870

Total Current Assets 19,214 20,639 27,84s 25,422 26,721 34,580 89,060 48,990 49,410 55,520 62,090 69.840

TOTAL ASSETS 27,869 80,001 1,1S85 41,083 51,484 64,420 69,460 74,860 102,860 128,280 146,170 161,160= _== =G== e==== =_= _= _=_ =_= =-

LIABILITIES A EQUITY

Share Capital 1 288 1 288 1 288 1 288 1 288 280 1,280 21280 1 280 1 280 1,280 1 280Reserves and Surplus 6,869 7,082 6,149 12,284 16,110 20,550 25,140 29,400 84,760 48,720 54,760 86,910

…-…- … -- ------ …Tots) Equity 7,602 8,264 9,881 I18466 17.848 21,760 26,870 80,080 86,010 44,960 56,990 66,140

Long Term Debt 8,989 8,788 4,181 6,570 9,294 16,770 8,840 12t240 82,280 46,260 47,840 45,840

Current LbilItieCurrent logtendet8276 1,2568 8062 1,596 2,112 1oo 0 0 0 1,800 2,000Account paya3ble 9,86 9 976 9 644 11 273 12 119 1 ,150 17 ,80 19 760 22 400 26 450 26,2 382 ,60S ri 00ty 7Depos0t0 7 2,876 5,88 2 9,2 86 6,8 97 7,094 77 7,00 , 7,0 7 7,0 7,000Provisio fo aain145 648 661 62 617 1,700 1,800 1,400 1,200 900 1,900 2,200ProvisonorDidd 178 178 17n 197 221 220 220 220 220 220 220 220Other current liabilities 520 578 556 2,262 2,484 2,700 2,900 8,100 8,800 8,500 8,700 a,900

Total Current Liabilities 16,826 18,008 28,852 22,045 24,647 26,670 29,250 81,460 84,120 8?,070 42,640 47,660TOTAL LIABILITIES & EqUITY 27,869 80,001 36,864 41,081 51,404 64,420 59,460 74,850 102,860 126,260 146,170 161,160

-==- - ===:= ==Z=:= =

Current Ratio (timq 1.16 1.15 1.17 1.15 1.16 1.29 1.84 1.40 1.45 1.50 1.45 k.45Debt/Equity RatioR 84.13 8X 1 3O1.13 0 34.7X 89.7X 4i.2111 12.7X 2e.6x 47.2! 50.7! 46.5! 41.o0

Note: Total asset. may not qual liabilities A equity due to rounding .

1%

INDIAN OIL CORPORATION LIMITED

PETROLEUM TRANSPORT PROJECT

SOURCES AND APPLICATIONS OF FUNDS (FYs 84-96)(In Million Rs)

ACTUAL PROJECTION

Flscal Year Ending 3/31: 1984 1986 1988 1987 1988 1989 1990 1991 1992 1993 1994 1995…______ -- ---- ------- ------- ------- ------- -------

SOURCES

Operating Income 2,062 2,493 2,039 3,954 5,220 6,830 8,450 8,830 7,910 11,880 14,870 17,340Add:

Depreciation 1,828 1,847 2,281 2,025 1,996 2,280 2,180 2,910 3,710 6,860 6,880 8,880Non - Operating Revenues

Adjustments 23 (188) 386 2,882 93 8 0 0 0 30 (20) 10Invorost Rocoived 112 127 177 348 1,163 1,010 800 0 0 0 0 0

GROSS INTERNAL CASH GENERATION 4,023 4,079 4,882 9,207 8,481 9,108 9,210 9,740 11,820 17,740 20,610 24,230

Now Long Term Loan 2,488 3,070 1,854 0 5,320 8,588 0 8,400 19,990 14,030 1,080 (700)

TOTAL SOURCES 8,609 7,179 8,616 13,728 13,781 17,692 9,210 18,140 31,810 31,770 21,590 23,630= -=-== ====---___. - ===:=- == e _=

APPLICATIONS

CroitjIExpond7tures: 1 260 8 400 6,140 1,380 680 0

Other works 1,865 2,311 2,338 2,880 2,442 3,390 4,390 10,870 21,180 24,280 18,420 14,820-__ _ _ _-_ _ -__

Total Expend Tur.k 1,855 2,311 2,338 2,880 2,442 3,390 6,840 17,070 28,300 26,880 18,980 14,820

Investments 0 0 0 6,400 8,620 8,006 (12,990) (4,180) 0 0 0 0

Debt ServiceInterest Paid 802 851 739 55' 885 0 0 0 0 1,110 1,480 1,850Amoritization 898 3,276 1,265 3,082 1,696 2,112 10,180 0 0 0 0 1,300

Total Debt Service 1,700 4,127 1,995 3,839 2,481 2,112 10,180 0 0 1,110 1,480 3,160

Taxes 815 788 862 2,430 1,820 2,180 2,240 2,360 2,310 1,820 2,180 3,130

Dividends 173 173 173 197 221 220 220 220 220 220 220 220

Inc (Dec) In Working Capital 2,168 (250) 1,380 (819) 497 3,786 3,940 2,880 2,780 3,160 800 2,410

TOTAL APPLICATIONS 6,509 7,149 8,56 13,727 13,781 17,892 9,210 18,140 31,810 31,770 21,590 23,530~~~=_ - _= == ==

Debt Service Ratio (Tims) 2.37 0.99 2.44 2.63 3.41 4.31 0.91 - - 16.98 14.06 7.89

(a) New long-term loans exclude curront portion of long term debt which has been Inciuded under variations in working capital.

(b) (gross Internal cash generation)/(total debt services)

0*o

-76 - ANNE 4.3Page 1 of 2

PETROLEUM TRANSPORT PROJECT

INDIAN OIL CORPORATION LTD. (IOC)

Financial Rate of Return Calculations for Pipe Line Comnonent

1. The IRR calculations are based on the following assumptions regardsincremental costs and benefits:

(a) Pipe line operations start in 1993, about one year behind IOCschedule; I

(b) Investments include incremental working capital, e.g. average valueof tank and pipe fill as well as the capital cost for the pipe lineinvestments with corresponding taxes, duties and contingencies;

(c) Annual operating costs are assumed to equal about 2% of capital costsand exclude interest and depreciation;

(d) The annual products volumes pushed through the pipe line is assumedto always follow the lowest volume according to IOC's threealternatives; this is a rather conservative assumption;

(e) Benefits per MT are assumed to equal the sales price of products(less excise duties, distribution costs and all other costs to getthe products from the pipe line terminal to the consumer), less theCIF per MT (plus port charges, normal taxes and duties etc.);

(f) The useful life of the pipe line is assumed to 20 years and no scrapor other residual value has been considered; and,

(g) All nominal cash flows have been deflated by 7% p.a. in FYs9'-93,6.5% p.a. in FYs94-96, and 6% p.a. in FYs97-98. Thereafter operatingcosts and benefits are assumed to remain constant in real terms.

2. Based on the above assumptions, the following cash streams wereprojected, all expressed in Rs million at 1990 puwcchasing power:

- 77- ANNEX 4.3Page 2 of 2

Deflation Capital Operating NetPeriod Year Factor Costs Costs Benefits Benefits

1 1990 1.00 877 0 0 (877)2 1991 0.93 3,962 0 0 (3,962)3 1992 0.87 2,014 0 0 (2,014)4 1993 0.81 919 150 4,050 2,9815 1994 0.77 670 180 4,620 3,7706 1995 0.72 0 180 5,040 4,8607 1996 0.68 0 180 5,400 5,2208 1997 0.64 0 180 5,400 5,2209 1998 0.60 0 180 5,400 5,22010 1999 0.60 0 180 5,400 5,22011 2000 0.60 0 180 5,400 5,22012 2001 0.60 0 180 5,400 5,22013 2002 0.60 0 180 5,400 5,22014 2003 0.60 0 180 5,400 5,22015 2004 0.60 0 180 5,400 5,22016 2C05 0.60 0 180 5,400 5,22017 2006 0.60 0 180 5,400 5,22018 2007 0.60 0 180 5,400 5,22019 2008 0.60 0 180 5,400 5,22020 2009 0.60 0 180 5,400 5,220

The above cash streams give an IRR of 43.7%

3. A sensitivity analysis was carried out as follows:

IRR

Capital costs +10% 40.6%Operating costs +10% 43.6%Benefits -10% 40.2%

- 78- ANNEX 4.4Page 1 of 2

INDIA

PETROLEUM TRANSPORT PROJECT

INDIA OIL CORPORATION LTD. (IOC)

Rate of Return Calculations for Single Buoy Mooring System (SBM)

1. The SBM is mainly justified on security of supply grounds. Acomplete break-down of the existing SBM at Salaya would, in FY93, reduce thesupply of petroleum products equivalent to 11.2 million mtpa of crude forabout three months at high financial costs. The IRR calculations are based onthe following assumptions regarding costs and benefits attributable to thisproject component:

(a) capital costs include taxes, duties and contingencies for the SBMand necessary offshore pipeline investments; the works will becompleted over t'hree years in FY90-92;

(b) benefit est!Aates are based on expected financial losses in caseof damage to the buoy, which is expected to happen once every 33years (such damage would stop supplies for 15 days) and damage tothe plem of the buoy, which is expected to happen every 66 years(such damage would interrupt supplies for 90 days). Emergencysupplies would last for about five days and only a fraction ofpetroleum supplies could be supplied by alternative means oftransport, e.g., by rail and road within 90 days. The financialloss would equal the sales price of products (less distributioncosts, taxes and duties) minus the crude cost (plus normal portcharges and duties) and direct variable refining costs, e.g.,chemicals and power. Plants, wages and indirect refinery costshave been considered fixed for a 90-day period;

(c) the installation of a second SBM would also reduce ship waitingtime (see Annex 6.1), valued at US$13,900/day;

(d) the useful life of the SBM is estimated at 15 years and noresidual value has been considered; and

(e) nominal cash flows have been deflated by 7% in FY91-39 and areassumed to remain constant in real terms thereafter.

- 79 AMUE 4.4Page 2 of 2

2. Based on above assumptions, the following cash streams wereprojected, all expressed in Rs millions at FY90 purchasing power:

Capital Operating Benefits NetFY Cost Cost Waiting Time Supply Benefits

90 70 - - (70)91 102 - - (102)92 52 - - - (52)93 - 21 9 58 4694-07 21 9 59 47

The above cash streams result in an IRR of 15.8%.

3. A sensitivity analysis was carried out as follows:

(a) Capital Cost +10% 14.2%(b) Operating Cost +10% 15.0%(c) Benefits -10% 10.0%

- Po - Annex 4.5Page 1 of 2

INDI

PETROLEUM TRANSPORT PROJECT

INDIAN OIL CORPORATION (IOC)

Financial Rate of Return Calculations for theCatalytic Reformers at Barauni and Digboi

1. The IRR calculations are base don the following assumptions regardingincremental costs and benefits:

(a) capital expenditures are based on IOC/EIL's feasibility studiesand include taxes, duties and contingencies; the constructionperiod is estimated at four years;

(b) quantities of feed (naphtha) and output (gasoline, C1C2, H2 andC3C4) are based on the feasibility study;

(c) product values are based on mid-November 1988 border pricesadjusted for freight; naphtha $109/mt, gasoline $187/mt, C1C2$85/mt, H2 $90/mt and C3C4 $165/mt;

(d) the useful life of the reformers is estimated at 15 years and noresidual values have been considered; and

(e) nominal cash flows have been deflated by 7% in FY91-93 and 6.5% inFY94-95; thereafter costs and benefits are assumed to remainconstant in real terms.

2. Based on assumptions, the following cash streams were projected, allexpressed in Rs million at FY90 purchasing power:

Barauni Dib_oiDeflation Cap. Op. Net Cap. Op. Net

FY Factor Cost Cost Ben. A... Cost .Cost Ben. Ben.90 1.00 15 - - (15) 10 - - (10)91 0.93 73 - - (73) 23 - - (23)92 0.87 368 - - (368) 144 - - (144)93 0.81 308 - - (308) 117 - - (117)94 0.77 - 11 85 74 - 4 32 2895-08 0.72 - 21 172 151 - 9 66 57

Corresponding ZRR: 14.3% 13.9%

- 81 -

Page 2 of 2

3. A sensitivity analysis was carried out as follows:

Bara-uni DigboiIRR IRR

Capital Cost +10% 12.7% 12.4%Op. Cost +10% 14.1% 13.7%Benefits -10% 12.3% 12.0%

- 82 - - 82 - ~~~~ANNEX 4.6iPage 1 of 2

INDIA

PEPTOLEUN TRANSPORT PROJECT

INDIAN OIL CORPORATION LTD (IOC)

Financial Rate of Return Calculations for theDistributed Digital Control System (DDCS)

1. The IRR calculations are based on the following assumptions regardsincremental costs and benefits:

(a) Capital costs include taxes and duties and contingencies;

(b) The DDCS will have a lower operating cost than currently usedpneumatic control system. Therefore, no operating costs have beenconsidered; neither have cost saving compared with current systemsbeen considered;

(c) Benefits are based on projected increase in distillate recovery andreduction in fuel consumption and losses resulting from conversion tothe DDCS, valued at the import parity prices;

(d) The useful life of the DDCS is assumed to be 15 years and no residualvalue has been considered; and

(e) All nominal cash flow have been deflated by 78 in FYs 91-93, 6.5% FYs94-95; thereafter, benefits are assumed to remain constant in nearterms.

2. Based on the above assumptions, the following cash streams wereprojected expressed in Rs million at FY90 purchasing power:

Deflation Capital NetFY Factor Costs Benefits Benefits

90 1.00 88 - (88)91 0.93 381 - (381)92 0.87 361 - (361)93 0.81 396 - (396)94 0.77 434 30 (414)95-05 0.72 - 733 733

The above cash streams give an IRR of 27.2%.

- 83 - ANNEX 4.6Page 2 of 2

3. A sensitivity analysis was carried out as follows:

Capital cost + 10% 25.1%Benefits - 10% 37.3%

I

I

- 84 - Annex 4.7Page 1 of 2

INDIA

PETROLEUM TRANSPORT PROJECT

INDIAN OIL CORPORATION (IOC)

Financial Rate of Return Calculations for the Haldia Lube Revamp

1. The IRR calculations are based on the following assumptions regardingthe incremental costs and benefits:

(a) capital expenditures include the sulphur plant and are based onIOC's feasibility study and include taxes and duties (about Rs65.0 million) and contingencies (33%); the revamp would becompleted in three years and start to earn revenues in the fourthyear;

(b) the demand for industrial lubes will increase by 5% p.a. and willsubstantially exceed domestic supplies;

(c) the Haldia revamp will result in increased production of lubes (60mtpa) and diesel (196 mtpa); the production of fuel oil willdecrease (-91 mtpa), as well as kerosene (-70 mtpa);

(d) the incremental lube production has been valued at the equivalentof US$275/ut, fuel oil at US$81/mt, kerosene at US$163/mt anddiesel at US$153/mt, which reflect estimated CIF prices, Bombay;those prices are also close to the ex-refinery prices;

(e) the increase in value of output base don (b) and (c) is Rs 164million p.a., at FY90 price levels; incremental operating costs(chemicals, consumables, wages, maintenance, insurance, etc.) isestimated at Rs 21.5 million p.a. The sulphur revenues are onlyexpected to cover the operating cost of the sulphur plant;

(f) the useful life of the revamp is estimated at 15 years and noresidual value has been considered; and

(g) nominal cash flow have been deflated by 7% in FY91-93 thereafter,operating costs and benefits are assumed to remain constant inreal terms.

- 85 - A .7

Page 2 of 2

2. Based on above assumptions, the following cash steams were projected,all expressed in Rs million at FY90 purchasing power:

Deflation Capital Operating NetEX Factor _Cost coRst Benefita Benefits

90 1.00 49.0 - - (49.0)91 0.93 200.0 - - (200.9)92 0.87 151.0 10.0 - (161.0)93-08 0.81 - 21.5 164.0 142.5

The above cash streAms result in an IRR of 28.1%.

3. A sensitivity analysis was carried out as follows:

Capital cost +10% 25.8%Operating cost +10% 27.7%Benefits -10% 25.1%

SupplyIDemo"rd Balance of Major Products InNorth-West and Xovali-Kendla-Okha ReaLona. 1988-2005

('000 tons)

1988 1990 1991 122Z 1191 199794 2000 2005

Demand 11,269 13,058 14,034 15,108 16,252 17,479 18,807 21,295 25,174 33,023Production 8,389 8,475 8,595 8,545 9,605 9,315 11,974 13,526 13,526 13,526Deficit (2,880) (4,583) (5,439) (6,513) (6,647) (8,164) (6,833) (7,769) (11,648) (19,497) ISupplies fron

Oter Regions 1,023 1,648 2,097 2,082 1,468 1,623 1,726 2,243 3,050 4,773 0%Supplies to

Other Regions (323) (10) (11) (11) (79S) (531) (38) (14) (15) (20)Net Deficit to

be Suppliedtbroush Xandla (2,180) (2,945) (3,353) (4,442) (5,974) (7,072) (5,145) (5,540) (8,613) (14,744)

Mode of SupplyPlpellne - - - - 5,661 6,626 4,502 4,838 7,151 12,147Rail 1,751 2,744 3,140 4,214 69 182 354 386 1,045 2,118Road 429 201 213 228 244 264 289 316 367 479

Source; GOI, Report of the Committee on Supply Measures, Januasy 1988, and OIC.

i-u'

- 87- ANME 5.2Page 1

strolu-m _ t Pwojest

Isole-auemal .sott1i to mb CGot of *.1l 2r9 eport hlteraatie

Tap-off point 614be tat sUeagm U * rt ernal

*tt toal uwa mt

ovim moey"&l EmIt AA1* EAol. Km1-

destimtos Sabemtt Jodhpur Jaipur Bsw s t artalDl tmae An Om 625 a0 1130 1075Costiten CUe) 53.2 141.2 167.6 236.2 209.2

Te* otal Coat ofo s --------------- bro puts I 000 ta--------- 3-1t _rnpot

Hash 31 Total as Slilton

19S3 231 72C 679 309 3521 3660 10tU1994 0 293 722 530 4224 60O0 121$1605 286 637 790 $92 2017 4302 *a199 232 a90 045 65 1453 4107 738160 299 94 002 67 2012 "SO 6031996 215 1002 936 720 2319 3512 10171999 51 1039 1012 767 sill ooo 1154200 0 304 1072 608 3816 6000 12122001 0 0 726 64 4420 6000 12402002 0 0 0 860 5140 6000 12782003 0 0 0 63 3917 6000 172004 0 0 0 0 "o0 6000 12005 0 0 0 0 6000 6000 12332006 0 0 0 0 6000 6000 12332007 0 0 a 0 6000 600 15200S 0 0 0 0 O000 o00 12352009 0 0 0 0 600 6000 1s2010 0 0 0 0 6000 6000 12532011 0 0 0 0 6000 6o00 12552012 0 0 0 0 6000 6000 1s201S 0 0 a 0 6000 6000 12332014 0 0 0 0 6000 6000 1233201s 0 0 0 600 6000 125s2016 0 0 0 0 6000 6000 12552017 0 0 0 0 000 6000 12332018 0 0 0 0 6000 6000 12s2019 0 0 0 0 6000 6000 12020 0 0 0 0 6000 6000 12532021 0 0 0 0 6000 6000 12532022 0 0 0 0 6000 6000 12332022 0 0 0 0 6000 6000 12332024 0 0 0 0 6000 6000 12532025 0 0 0 0 6000 6000 12332am0 0 0o00 0 15

mt" 1. atmal "ims. Sim3ua fhe SW poset e_.

S. 3*1 dietam. sam rdtim of uustla dietmee to uatbmOujarat ant Rajeathan by 40Om follo"la coervorbn of tC to 3W.

S. Ra1 tleo tano on RIS tudY of Nov 1967 for Luthxa Ccomttee, updated.

-88- AM 15.3Page

ADOA

Petrolem Trespot Project

KAmdla-Xwml etlesUm: Pro_u_t Los. Avoide

Ytar Volume Total Value of

kde ftrasnetd Value V1WduWe Losses

Narch 31 Cmlli to#) (RJ mill) (as Mill)

1995 5.7 10188 35.7

1994 6.0 10600 37.8

1995 4.5 6105.0 25.4

1996 4.1 7592.6 25.9

199 4.6 8710.2 30.5

1996 5.5 9921.6 34.7

1999 6.0 10800 37.S

2000 6.0 10800 37.8

2001 6.0 10800 37.6

2002 6.0 10800 37.6

2005 6.0 10800 37.8

2004 6.0 10600 $7.8

2005 6.0 10600 37.8

2006 6.0 10800 37.6

2007 6.0 10800 37.6

2008 6.0 10600 37.6

2009 6.0 10800 37.8

2010 6.0 10600 37.8

20:.1 6.0 10600 37.8

2012 6.0 10600 37.8

2013 6.0 10600 37.6

2014 6.0 10600 57.8

2015 6.0 10800 37.8

2016 6.0 10800 37.8

2017 6.0 10800 37.8

2018 6.0 lOO0 37.8

2019 6.0 10800 37.6

2020 6.0 10600 57.8

2021 6.0 10800 37.6

2022 6.0 10800 37.8

2025 6.0 10600 37.8

2024 6.0 10800 37.8

2025 6.0 10600 37.8

2026 6.0 lOO0 57.6

_89 _-8-AkM 5.4Page 1

INDIA

Petroleum Transport Project

Xagrnl-UbatiMa Secttont OonomLao Wot of ReUl trasort Alternative

Tap-off polit Sangrur Shatl"ud

Alt ral lnvansat

oangnL Xaruel Arual

desttnatie Ptlela tKtkopura

Distsae In ksm 140 229

Costiton (Rs) 64.6 78.4

Throuahputs in 000 tons Total Produe

Year nding --------------------------- Rall Costs Losses

Harch 31 Total Rs .ll as oil

1994 608 609 1217 87.1 7.7

1995 656 657 1313 95.9 8.3

199 703 704 1407 100.6 8.9

1997 748 752 1500 107.3 9.5

1998 702 798 1500 107.9 9.5

1999 654 846 1500 108.6 9.5

2000 603 897 1500 109.3 9.5

2001 550 950 1500 110.0 9.5

2002 495 1005 1500 110.6 9.5

2003 437 1063 1500 111.6 9.5

2004 575 1125 1500 112.4 9.5

2005 309 1191 1500 113.4 9.5

2006 240 1260 1500 114.3 9.5

2007 166 1334 1500 115.3 9.5

2008 S6 1412 1500 116.4 9.5

2009 6 1494 1500 117.5 9.5

2=10 0 151'0 1500 117.6 9.5

2011 0 1500 1500 117.6 9.5

2012 0 1500 1500 117.6 9.5

2013 0 1500 1500 117.6 9.5

2014 0 1500 1500 117.6 9.5

2015 0 1500 1500 117.6 9.5

2016 0 1500 1500 17.6 9.5

2017 0 1500 1500 117.6 9.5

2018 0 1500 1500 117.6 9.5

2019 0 1500 1500 117.6 9.5

2020 0 1500 1500 117.6 9.5

2021 0 1500 1500 117.6 9.5

2022 0 1500 1500 117.6 9.5

2023 0 1500 1500 117.6 9.5

2024 0 1500 1500 117.6 9.5

2025 0 1500 1500 117.6 9.5

2026 0 1500 1500 117.1 9.5

- 90 - ANLE 5.5

lDWA Page 1

Petrole TranpoGt Project___________________________

Noonoo Evaluation of landl.-Rhatlnd, Product Pipelines Kandle-Karal Section

(Re million)

--------------- Central Anhayis ---------------------- ----------- Senstivtty TSt ----------Year - --Cost* ------ ------- nefits------- ------------- Net Bfits-------------eding i4at. & Avoied Reduced Neot f Costs If Dcend If C=*pletionar 31 Capital Operating RALL Costs Prod Losaes Benefits +101 Growth -251 Delayed 2 Years

1990 353.4 -353.4 -3S8.7 -353.4 -176.71991 2650.4 -2650.4 -2915.4 -2650.4 -706.81992 530.1 -530.1 -583.1 -530.1 -883.51993 137.3 1085.5 35.7 983.9 983.9 752.3 -883.51994 139.7 1212.6 37.8 1111.7 1111.7 942.5 -883.51995 132.5 827.7 28.4 723.6 723.6 410.0 723.61996 130.7 738.0 25.9 633.1 633.1 282.0 633.11997 133.9 883.3 30.5 779.9 779.9 364.5 779.91998 136.7 1016.9 34.7 914.9 914.9 473.4 914.91999 138.7 1153.9 37.8 1053.0 1053.0 615.7 1053.02000 138.7 1211.6 37.8 1110.7 1110.7 791.9 1110.72001 198.7 1247.9 37.8 1147.0 1147.0 1021.2 1147.02002 138.7 1278.2 37.8 1177.3 1177.3 1177.3 1177.32003 138.7 1257.2 37.8 1156.3 1156.3 1156.3 1156.32004 138.7 k255.0 37.8 1154.1 1154.1 1154.1 1154.12005 138.7 1255.0 37.8 1154.1 1154.1 1154.1 1154.12006 138.7 1255.0 37.8 1154.1 1154.1 1154.1 1154.12007 138.7 1255.0 37.8 1154.1 1154.1 1154.1 1154.12008 138.7 1255.0 37.8 1154.1 1154.1 1154.1 1154.12009 138.7 1255.0 37.8 1154.1 1154.1 1154.1 1154.12010 138.7 1255.0 37.8 1154.1 1154.1 1154.1 1154.12011 138.7 1255.0 37.8 1154.1 1154.1 1154.1 1154.12012 138.7 1255.0 37.8 1154.1 1154.1 1154.1 1154.12013 138.7 1255.0 37.8 1154.1 1154.1 1154.1 1154.12014 138.7 1255.0 37.8 1154.1 1154.1 1154.1 1154.12015 138.7 1255.0 37.8 1154.1 1154.1 1154.1 1154.12016 138.7 1255.0 37.8 1154.1 1154.1 1154.1 1154.12017 138.7 1255.0 37.8 1154.1 1154.1 1154.1 1154.12012 138.7 1255.0 37.8 1154.1 1154.1 1154.1 1154.12019 138.7 1255.0 37.8 1154.1 1154.1 1154.1 1154.12020 138.7 1255.0 37.8 1154.1 1154.1 1154.1 1154.12021 138.7 1255.0 37.8 1154.1 1134.1 1134.1 1154.12022 138.7 1235S.0 37.8 1154.1 1154.1 1154.1 1154.1

Rate of Return 22.2Z 20.62 17.8 19.52

Notes Capital costs eclude storage facillites, which are Coaon to both alternatives.

- 91 - ACNEX 5.6

Page 1

Petroleum Transport Project

Economic Evaluation of Randla-BhatStda Product Pipeline: Karnal-Bhetlnda, Seetlon

<Rs million)

------------------Central AnalysLi------------------- ----------SensLtLvLty Teso ----------

Year ------Costs------- -------Benefits -------- -------------Nt Beaefits------------

ending MaLnt. & Avoided Reduced Net If Costs If Demand If Completion

Mar 31 Capital Operating Rail Costs Prod Losses Benefits +10 Groawth -252 Delayad 2 Years

1° 2 233.2 -233.2 -256.5 -233.2 -58.3

1993 349.7 -349.7 -384.7 -349.7 -11.5.7

1994 11.2 87.1 7.7 83.5 83.5 73.5 -2)4.0

1995 12.0 93.9 8.3 90.2 90.2 77.7 -174.9

1996 14.5 100.6 8.9 95.0 95.0 80.0 95.0

1997 15.4 107.3 9.5 101.4 101.4 83.8 101.4

1998 15.9 107.9 9.5 101.5 101.5 88.8 101.5

1999 16.0 108.6 9.5 102.1 102.1 94.6 102.1

2000 16.1 109.3 9.5 102.7 1 2.7 100.7 102.7

2001 16.1 110.0 9.5 103.4 103.4 103.4 103.4

2002 16.1 110.8 9.5 104.1 104.1 104.1 104.1

2003 16.1 111.6 9.5 104.9 104.9 104.9 104.9

2004 16.1 112.4 9.5 105.8 105.8 105.8 105.8

2005 16.1 113.4 9.5 106.7 106.7 106.7 106.7

2006 16.1 114.3 9.5 107.7 107.7 107.7 107.7

2007 16.1 115.3 9.5 108.7 108.7 108.7 108.7

2008 16.1 116.4 9.5 109.7 109.7 109.7 109.7

2009 16.1 117.5 9.5 110.9 110.9 110.9 110.9

2010 16.1 117.6 9.5 111.0 111.0 111.0 111.0

2011 16.1 117.6 9.5 111.0 111.0 111.0 111.0

2012 16.1 117.6 9.5 111.0 111.0 111.0 111.0

2013 16.1 117.6 9.5 111.0 111.0 111.0 111.0

2014 16.1 117.6 9.5 111.0 111.0 111.0 111.0

2015 16.1 117.6 9.5 111.0 111.0 111.0 111.0

2016 16.1 117.6 9.5 111.0 111.0 111.0 111.0

2017 16.1 117.6 9.5 111.0 111.0 111.0 111.0

2018 16.1 117.6 9.5 111.0 111.0 111.0 111.0

2019 16.1 117.6 9.5 111.0 111.0 111.0 111.0

2020 16.1 117.6 9.5 11 .0 111.0 111.0 111.0

2021 16.1 117.6 9.5 111.0 111.0 111.0 111.0

2022 16.1 117.6 9.5 111.0 111.0 111.0 111.0

Rate of Return 15.82 14.42 14.72 14.72

Note: Capital costs exclude storage faclILties, vhlch are comnon to both alternatlves.

- 92 ANNEX 5.7

Page 1

INDIA

Petroleum Transport Project

Economic Evaluation of Kandla-lhatlnda Product Pipeline

(Rs million)

---------------Central Analys…S-------------------- ----------- ensitivity Tests-----------

Year ------Costs------- ------Benefits ------- --------------Net Benefits-------------

ending Maint. & AvoLded Reduced Net If Costs If Demand If Completion

Her 33 Capital Operating Rail Costs Prod Loss Benefits +1OX Growth -25 Delayed 2 Years

1990 353.4 0 0.0 0.0 -353.4 -388.7 -353.4 -176.7

1991 2650.4 0 0.0 0.0 -2650.4 -2915.4 -2650.4 -706.8

1992 763.3 0 0.0 0.0 -763.3 -839.6 -763.3 -941.8

1993 349.7 137.3 1085.5 35.7 634.2 599.2 402.8 -1029.2

1994 0 149.9 1299.7 45.5 1195.3 1195.3 1016.0 -1087.5

1995 0 144.5 921.6 36.6 813.8 813.8 487.7 548.7

1996 0 145.2 838.6 34.7 728.1 728.1 367.0 728.1

1997 0 149.3 990.7 39.9 881.3 881.3 448.3 881.3

1998 0 152.6 1124.9 44.2 1016.4 1016.4 562.3 1016.4

1999 0 154.7 1262.5 47.3 1155.1 1155.1 710.2 1155.1

2000 0 154.8 1320.9 47.3 1213.3 1213.3 892.6 1213.3

2001 0 154.8 1357.9 47.3 1250.4 1250.4 1124.6 1250.4

2002 0 154.8 1389.0 47.3 1281.5 1281.5 1281.5 1281.5

2003 0 154.8 1368.8 47.3 1261.2 1261.2 1261.2 1261.2

2004 0 154.8 1367.4 47.3 1259.9 1259.9 1259.9 12S9.9

2005 0 154.8 1368.3 47.3 1260.8 1260.8 1260.8 1260.8

2006 0 154.8 1369.3 47.3 1261.7 1261.7 1261.7 1261.7

2007 0 154.8 1370.3 47.3 1262.7 1262.7 1262.7 1262.7

2008 0 154.8 1371.4 47.3 1263.8 1263.8 1263.8 1263.8

2009 0 154.8 1372.5 47.3 1264.9 1264.9 1264.9 1264.9

2010 0 154.8 1372.6 47.3 1265.0 1265.0 1265.0 1265.0

2011 0 154.8 1372.6 47.3 1265.0 1265.0 1265.0 1265.0

2012 0 154.8 1372.6 47.3 1265.0 1265.0 1265.0 1265.0

2013 0 154.8 1372.6 47.3 1265.0 1265.0 1265.0 1265.0

2014 0 154.8 1372.6 47.3 1265.0 1265.0 1265.0 1265.0

2015 0 154.8 1372.6 47.3 1265.0 1265.0 1265.0 1265.0

2016 0 154.8 1372.6 47.3 1265.0 1265.0 1265.0 1265.0

2017 0 154.8 1372.6 47.3 1265.0 1265.0 1265.0 1265.0

2018 0 154.8 1372.6 47.3 1265.0 1265.0 1265.0 1265.0

2019 0 154.8 1372.6 47.3 1265.0 1265.0 1265.0 1265.0

2020 0 154.8 1372.6 47.3 1265.0 1265.0 1265.0 1265.0

2021 0 154.8 1372.6 47.3 1265.0 1265.0 1265.0 1265.0

2022 0 154.8 1372.6 47.3 1265.0 1265.0 1265.0 1265.0

Rate of Return 21.61 20.01 17.52 19.02

Note: Capital costs exclude storage facilities, which are coenon to both alternatives.

- 93 -

5ne .8Page 1 of 3

INDIA

PETROLEUM TRANSPORT PROJECT

Estimation of Economic Benefits for SBM

1. Three types of benefit have been qurntified: increased security ofsupply, savings in ship time, and savings in cargo time (inventory cost).

Increased securitq of suIply

2. There are two types of possible breakdown or damage to theexisting SBM: to the buoy and/or hoses, rendering the SBM unserviceable for15 days, or to the plem (the underwater connection to the submarine pipe),rendering the SBM unserviceable for 90 days. Industry experience suggeststhat th- probability of these events occurring in any one year is 3% and1.5% respectively. The provision of a second SBM would virtually eliminatethese risks, as the probability of both SBNs being rendered unserviceableat the same time is so slight it can be ignored.

3. In the event of any interruption to supply via the SBM, there aresufficient inventories to cover 5 days' requirements, so the net days ofinterrupted supply are 10 and 85 respectively. For a 10 day interruption,it is assumed infeasible to arrange an alternative source of supply. Theloss to the economy can be taken as the retail sales value of the productsales foregone, representing a conservative estimate (ignoring consumerssurplus) of the value consumers attach to the product. Against this loss,however, the nation would have saved on the corresponding volume of crude,so this has to be deducted. By 1993, when the second SBM would be inservice, the expected volume of crude handled by the facility will be 11.2MHTPA or 30,700 tons/day. The retail value of the refinery output mix(after allowing for production losses) is Rs 4,000 per ton while theaverage cif cost of crude is taken as Rs 1,600 per ton. Thus the cost of aday's loss of production is (4,000-1,600) x 30,700 - Rs 73.68 million, orRs 737 million for the 10 day interruption.

4. For the longer interruption to operations occasioned by damage tothe plem, it is assumed that after 10 days (at a cost as above), analternative source of products could be arranged, e.g., by purchasing onthe spot market. For days 11-85 of this event, the cost of theinterruption is taken to be the cif cost of product imports (Rs 2,200 perton), from which must be deducted the savings in crude consumption. Thecost of this event thus becomes:

first 10 days Rs 737 milliondays 11-85 (2,200-1,600) x 30,700 x 75 - Rs 1.382 million

Rs 2,119 million

- 94 - Annex 5.8Page 2 of 3

5. Taking into account the respective probabilities, the expectedannual cost of the risks avoided is thus

damage to buoy/hoses .03 x 737 - Rs 22.1 milliondamage to plem .015 x 2,119 - Rs 31.8 million

Rs 53.9 million

Savings in Ship Time

6. The provision of a second SBM would enable a second vessel toberth and prepare for discharging while the first SBM is occupied, or whilea vessel is being disconnected and cast off at the first SBM. Thistranslates into a 17% increase in available berth time, thereby reducingthe berth occupancy rate and thus the queuing factor. For the volume oftraffic expected in 1993, the net saving in ship time is 40 days per annum(see attached table). At an average daily ship cost in port of Rs 203,000this translates into annual savings of Rs 8.1 million. Approximately 20%of the imports, which account for 30% of the crude handled at Salaya, aredelivered by foreign vessels It is assumed that only 50% of the timesavings to these vessels is passed on to India, so the net savings in shipcost accruing to India are Rs 7.7 million per annum.

Savings in Cargo Time

7. The average parcel size is 70,000 tons, and the average CIF valueof the crude is taken as Rs 1,600 per ton. Taking an interest rate of 12%per annum, the value of cargo time savings associated with saving 40 shipdays per annum is given by:

70,000 tons x Rs 1,600 x 40 x 0.12 - Rs 1.47 million per annum365

As imported crude is purchased FOB, all these savings in inventory costsaccrue to India.

-95 -ANNEX 5.8Page 3 of 3

MAD

Additional Mat Seag"

otal al De" without ld Vithl hiitiml -

10*6 10*7 19U8 1995

A. SAWmC D UM ('000 TOWS) 10,130 9,5t0 10,350 11,200

B. WSini PROJECT

1 Ter.inl (_mbr) 1 1 1 1

2. Trffic (t'00 taow) 10.130 9,510 10,"0 11,200

S. Aaa1 .hlp borth de rquired 170 161 174 1i

4. _*1l .hp berth days available 320 520 320 320S. Dseth o _cancy rate (2) 53 50 54 59

6. Waiting tim queuing factors 0.45 0.39 0.47 0.60

7. Annal total shlp port dasy

a. Aetualhp berth days 170 161 1U4 i

b. Obp waiting days 77 6$ 11

Total ship port day. 247 224 256 501

C. mm PoJnC

1. TSumrl (_uuhr) 1 1 1 22. Traffie ('000 tONe) 10,1U0 9,50 10,350 11,200

S. Anl .hlp berth do" requIrd 170 161 174 1i.* mal .hlp berth day. avilable 320 Sa0 320 n57

5. eth ocaupinny rvat (2) 55 50 54 506. waitIn tim quein factors 0.45 0."9 0.47 0.39

7. Annual toml .bip port day.sa. Aatual ehip berth day 170 161 174 10

b. aip waiting days 77 65 82 73

Total ship port days 247 214 256 261

Wotes (t) anaal chtp berth days required - trafficltheorzetiol daily cap-city per berth.

(Ui) eanual .hlp berth day available - umber of berths n berth operating de" per yer.

(1ii) berth occupancy rate - annual .hlp berth day. required I anul .hip berth days available.

(iW) waiting tim queinng factor. - from Port Develop ent, U-ClAD 1978, page 209 and 210 ad

Berth throughput, uNClD 1975, Un, 3ev tork, pW 33.(v) aeual ship walting day. - an_ual shlp berth required x waiting tim queen factor.

NW-

INDIA

Petroleum Transport Project___________________________

Economic Evaluation of SBM

(Rs million)

--------------------Central Analyals --------------------- ----- Senitivity Test 1---- ----SSesitivity Test 2-----Year Costs------- --------Beneflts - (Costs +1Ox) (Delay of 2 years)

Ending Maint. & Ship Cargo Security yet get NetMarch 31 Capital operating Time Time of Supply Benefits Costs Benefits Benefits Costs Benefits Benefits

…_______ ------- --------- ---- ____ --------- -------- ----- _____ -------- ----- _____ --------

1990 40.9 -40.9 45.0 -45.0 11.7 -11.71991 46.7 -46.7 51.4 -51.4 23.4 -23.41992 29.2 -29.2 32.1 -32.1 23.4 -23.41993 16.2 7.? 1.5 53.9 46.9 17.8 63.1 45.3 40.9 -40.91994 16.2 7.7 1.5 53.9 46.9 17.8 63.1 45.3 17.4 -17.41995 16.2 7.7 1.5 53.9 46.9 17.8 63.1 43.3 16.2 63.1 46.91996 16.2 7.7 1.5 53.9 46.9 17.8 63.1 45.3 16.2 63.1 46.91997 16.2 7.7 1.5 53.9 46.9 17.8 63.1 45.3 16.2 63.1 46.91998 16.2 7.7 1.5 53.9 46.9 17.8 63.1 45.3 16.2 63.1 46.91999 16.2 7.7 1.5 33.9 46.9 17.8 63.1 45.3 16.2 63.1 46.92000 16.2 7.7 1.5 53.9 46.9 17.8 63.1 45.3 16.2 63.1 46.92001 16.2 7.7 1.5 53.9 46.9 17.8 63.1 45.3 16.2 63.1 46.92002 16.2 7.7 1.5 53.9 46.9 17.8 63.1 45.3 16.2 63.1 46.92003 16.2 7.7 1.5 53.9 46.9 17.8 63.1 45.3 16.2 63.1 46.92004 16.2 7.7 1.5 53.9 46.9 17.8 63.1 45.3 16.2 63.1 46.92005 16.2 7.7 1.5 53.9 46.9 17.8 63.1 45.3 16.2 63.1 46.9

2006 16.2 7.7 1.5 53.9 46.9 17.8 63.1 45.3 16.2 63.1 46.92007 16.2 7.7 1.5 53.9 46.9 17.8 63.1 45.3 16.2 63.1 46.9

Rate of Return . 29.12 26.12 24.82

Ii.s-n*0

MNDIA

Petrolem Transport Project

Economic Evaluation of Catalytic Reformn -s

(Ra million)

Barauni Digboi Baraunl + Digbol

Year -----------Net Benefits-----------Ending Capital Oper. Net Capital Oper. net Central Costs CompletLon

March 31 Cost Cost Benefits Benefits Cost Cost Benefits Beneflts Analysis Up 101 Delayed 2 Years

1990 11 -11 4 -4 -15 -17 -161991 45 -45 18 -18 -63 -69 -631992 282 -282 110 -110 -392 -431 -1561993 225 -225 87 -87 -312 -343 -1561994 10 8S 75 4 32 28 103 102 -2351995 19 172 153 8 66 58 211 208 -1561996 19 172 153 8 66 58 2li 208 1031997 19 172 153 8 66 58 211 208 2111998 19 172 153 8 66 S8 211 208 21119"9 19 172 153 8 66 58 211 208 2112000 19 172 153 8 66 5S 211 208 2112001 19 172 153 8 66 58 211 208 2112002 19 172 153 8 66 58 211 208 2112003 19 172 153 8 66 58 211 208 2112004 19 172 153 8 66 58 211 208 2.12005 19 172 153 8 66 58 211 208 2112006 19 172 153 8 66 58 211 9^9 2112007 19 172 153 8 66 S8 211 208 211 la2008 19 172 153 8 66 S8 211 208 211 b

Rate of Return 20.1S Rate of Return _ 19.6Z 19.9S 17.92 16.1S 2

Notes 1. Capital costs as per project cost table, excluding taxes.2. Operating costs as per financlal analysis (Annex 4.5), with local

coeponent w.I-#lLed by standard conversion factor of 0.8 to convert

- 98 - Annex 5.11Page I

INDIA

Petroleum Transport Project

Economic Evaluation of Distributed Digital Control System

(Rs Million)

Central AnalysLs Sensitivlty Tests

------------ Benefit …

Year Increase in Reduction Net Benefits Net Benefits

Ending Distillates in Fuel OlI Loss Net Vith Costs Completion

March 31 Costs Recovery Consumption Reduction Benefits up 102 Delayed 2 years

1990 50.0 -50.0 -55.0 -50.0

1991 215.3 -215.3 -236.8 -172.2

1992 204.1 -204.1 -224.5 -163.3

1993 223.6 -223.6 -246.0 -178.9

1994 229.4 18.7 7.5 1.5 -201.7 -224.6 -155.8

1995 525.8 156.1 51.3 733.1 733.1 -83.9

1996 525.8 156.1 51.3 733.1 733.1 -62.9

1997 525.8 156.1 51.3 733.1 733.1 733.1

1998 525.8 156.1 51.3 733.1 733.1 733.1

1999 525.8 156.1 51.3 733.1 733.1 733.1

2000 525.8 156.1 51.3 733.1 733.1 733.1

2001 525.8 156.1 51.3 733.1 733.1 733.1

2002 525.8 156.1 51.3 733.1 733.1 733.1

2003 525.8 156.1 51.3 733.1 733.1 733.1

2004 525.8 156.1 51.3 733.1 733.1 733.1

2005 525.8 156.1 51.3 733.1 733.1 733.1

2006 525.8 156.1 51.3 733.1 733.1 733.1

2007 525.8 156.1 51.3 733.1 733.1 733.1

2008 525.8 156.1 51.3 733.1 733.1 733.1

2009 525.8 156.1 51.3 733.1 733.1 733.1

Rate of Return 41.81 39.3X 31.41

Notes: 1. Based on folloving tbrougbputs of crude oll Ln NTPA: Guwahati 0.85, Baraunl 3.3,

HaldL 2.75, GuJarat 9.5, and Mathura 7.5

2. Assumes 12 increase In distillates recovery, 102 reduction in fuel consumptLon,

and 102 reduction in losses, valued at c.i.f. prices of Rs 2,200, Rs 1225

and Rs 2,200 per tonse.

- 99- Annex 5.12Page 1

ZUDIA

Petroleum Trsasport Project

Leonmoe gv&lu^tlpn of Ealdia Lube bock

(Rs million)

-C--------Ctral hnAlysi----------- ------ Seuitivity TeSts-----

Tr -------- t Bnfit--------

EndLig CapLial Operat. 8et With Costs CopletOn

march 31 Costs Costa Senfits Benefits up 102 Delaed 2 Years

1990 30.2 -3§.2 -33.2 -30.2

1991 126.6 -126.6 -139.3 -42.2

1992 32.2 10.0 -42.2 -46.4 -42.2

1993 21.5 !64.0 142.5 140.4 -42.2

1994 21.5 164.0 142.5 140.4 -42.2

l"S 21.5 164.0 142.5 140.4 142.5

1996 21.5 164.0 142.5 140.4 142.5

e 1997 21.5 164.0 142.5 140.4 142.5

1998 21.5 164.0 142.5 140.4 142.5

1999 21.5 164.0 142.5 140.4 142.5

2000 21.5 164.0 142.5 140.4 142.5

2001 21.5 164.0 142.5 140.4 142.5

2002 21.5 164.0 142.5 140.4 142.5

2003 21.5 164.0 142.5 140.4 142.5

2004 21.5 164.0 142.5 140.4 142.5

2005 21.5 164.0 142.5 140.4 142.5

2006 21.5 164.0 142.5 140.4 142.5

2007 21.5 164.0 142.5 140.4 142.5

Rate of Return 48.02 44.22 36.12

Notot All coats and befits a per financial antalysis ( Annex 4.7), except that

taxs hav been doducted frm capital costs. Standard convrsion factor of

0.8 has not been applied to operating costs becaus these bhve substantial

foreign campofent.

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