World Bank Documentdocuments.worldbank.org/curated/en/752951468286505058/pdf/multi... · Energy and Project Finance Division ... demand; and (iv) ... the fact that the power component

Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No. 16752

IMPLEMENTATION COMPLETION REPORT

PAKISTAN

REFINERY ENERGY CONSERVATION AND MODERNIZATION PROJECT(LN. 2842-PAK)

June 17, 1997

Energy and Project Finance DivisionCountry Department ISouth Asia Region

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

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CURRENCY EOUIVAI.ENTS

Currency unit Pakistan Rupee (Rs)US$1.00 = Rs 37.06 (September 1996)Rs 1.00 = US$0.027

MEASURES AND EQUIVALENTS

I Barrel (bbl) = 0.159 Cubic Meters (m3 )

I Metric Ton of Oil 7.4 bblBTU = British Thermal Unit

= 0.2520 Kilo CaloriesC34 deg. API Gravity 7.34 bblKWH Kilo Watt HourmmBTU = I million BTUMW M Mega Watt (1,000 Kilowatts)

= 35.3147 cubic feetTOE r Tons of Oil Equivalent

= 0.9091 tones of refined petroleum

ABBREVIATIONS AND AC'RONYMS

API - American Petroleum Institutebpd - barrels per dayGDP - Gross Domestic ProductGOP - Government of PakistanHOBC - High Octane Blending ComponentICB - International Competitive BiddingMOP - Ministry of ProductionMPNR Ministry of Petroleum & Natural ResourcesNRL - National Refinery LimitedPERAC - State Petroleum Refining and Petrochemical Corporation

FISCAL YEAR OF BORROWER

July I to June 30

Vice President Mieko NishimizuActing Director Fakhruddin AhmedDivision Chief Per LjungStaff Member Mikael Mengesha

FOR OFFICIAL USE ONLY

IMPLEMENTATION COiPLETION REPORT

PAKISTAN


Table of ContentsPage No.

PREFACE

EVALUATION SUMMARY ...................................... , .i

PART I - PROJECT IMPLEMENTATION ASSESSMENT

Project Identityy.Background.I

A. Statement/Evaluation of Objectives .2B. Achievement of Objectives .2C. Economic Performance .4D. Major Factors Affecting the Project .5E. Project Sustainability .6F. Bank Performance .7G. Borrower Performance .7H. Assessment of Outcome .81. Future Operation .9J. Key Lessons Learned .9K. Evaluation of Program Objective Categories .10

PART 11- STATISTICAL TABLES

Table I Summary of Assessments .. 1............... 1Table 2 Related Bank Loans ................. 12Table 3 Project Timetable ........... , 13Table 4 Loan Disbursements: Cumulative, Estimated and Actual . ........................................ 13Table 5 Key Indicators for Project Implementation ........................................ 13Table 6 Key Indicators for Project Operation ........................................ 14Table 7 Studies Included in Project ........................................ 14Table 8A Project Costs.15Table 8B Project Financing .15Table 9 Economic Costs and Benefits .16Table 10 Status of Legal Covenants .17Table I I Compliance with Operational Manual Statements .18Table 12 Bank Resources: Staff Inputs .18Table 13 Bank Resources: Missions .19

APPENDICFS

A. Mission's Aide-Memoire (with Operation Plan) .20B. Borrower's Evaluation .25

This document has a restricted distribution and may be used by recipients only in theperforrnance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.


PAKISTAN


Preface

This is the Implementation Completion Report (ICR) for the Refinery Energy Conservationand Modernization Project in Pakistan, for which LN. 2842-PAK in the amount of US$21 millionequivalent, was approved on June 16, 1987 and made effective on March 3, 1988.

The loan closed on June 30, 1996, following two extensions to the original closing date ofJune 30, 1993. Final disbursement took place on November 5, 1996, at which time a balance ofUS$1.38 million was canceled.

This ICR was prepared by Mikael Mengesha, Task Manager (SAIEF), Lakdasa Wijetilleke(IENOG/Consultant) and Richard James (Financial Consultant), and reviewed by Per Ljung,Division Chief, Energy and Project Finance, South Asia Region. The Borrower providedcomments that are included as Appendix B to the ICR.

Preparation of this ICR began during the Bank's final supervision/completion mission inJanuary 1996. It is based on the Staff Appraisal Report, the Loan and Project Agreements,supervision reports, correspondence between the Bank and the Borrower, internal Bankmemoranda and material in the project file. The Borrower contributed to preparation of the ICRby preparing its own evaluation of the project implementation and commenting on the draft ICR.


PAKISTAN

REFINERY ENERGY CONSERVATEION AND MODERNIZATION PROJECT(LN, 2842-PAK)

Evaluation Summary

Introduction

An adequate supply of energy from petroleum is critical to fuel Pakistan's expandingeconomy. At appraisal, Pakistan's three refineries were found to be inadequate and far below therequired capacity to meet the country's petroleum products requirements and were the primaryreason for the shortfall in domestic petroleum fuel supply. The refineries were designed during theearly 1 960s when oil was relatively inexpensive, and refineries endeavored to minimize capital costby designing equipment which are inefficient by current standards. The processing configurationwas ill-suited to market patterns dominated by distillate petroleum fuels, and refining capacity wasinsufficient to meet demand. All of these factors exacerbated the energy deficits (para. 2).

Recognizing the possible adverse impacts of increased dependence on imported refinedpetroleum products, the Government of Pakistan (GOP) accorded high priority to restructuring theenergy sector under the Sixth Plan (FY84-FY89). At that time, a core investment program wasidentified under the Bank's Energy Sector Loan (LN. 2552-PAK) that pointed to the need forrefinery modernization. The Refinery Energy Conservation and Modernization Program was oneof the first projects initiated under the priority investment program (para. 3). The projectbeneficiary, National Refinery Limited (NRL), is Pakistan's largest and most integrated refiningcomplex in terms of the range of its petroleum products.

Project Objectives

The primary objectives of the project were to: (i) improve NRL's efficiency; (ii)reduce energy consumption through, among other measures, the generation of electricity fromwaste heat; (iii) increase crude oil processing capacity and modify the output mix to better matchdemand; and (iv) strengthen production optimization and control systems and train staff. Theobjectives were realistic, relevant to the country's needs, and consistent with the Bank's and GOP'sstrategy for the development of Pakistan's energy sector (para. 6).

Implementation Experience and Results

The project substantially achieved its institutional objectives and, on completion of thepower plant component, will substantially achieve its physical objectives. The overall assessmentof the project can be rated as satisfactory.

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The project's estimated cost at appraisal was US$51.0 million, including foreign costsof US$27.4 million. Foreign costs were to be financed by the Bank (US$21.0 million) andsuppliers credits and other sources ($6.4 million). Local costs were to be funded by NRL. Inactuality, foreign funding from suppliers' credits and other sources was not required since (i)additional Bank funds were available to NRL since PERAC used internal funds to finance labequipment and (ii) local engineering consultants, as opposed to foreign, were used forimplementation of three of the four components. In addition, NRL did not utilize the entirebudgeted Loan amount for training because supplementary grant funds were made available fromthe Government of Japan for this purpose. On completion, the project is now estimated to costUS$39.4 million with financing of the foreign costs by the Bank of US$19.6 million. The projectwill be completed by December 1997 compared with the appraisal target of June 30, 1993 (paras.20 and 26).

Although smaller project components were completed about a year behind scheduledue to the particular nature of revamp projects spread across the entire refinery and delays causedduring refinery turn-arounds, the co-generation power plant addition, which comprised about 60percent of the project cost, significantly exceeded the time estimated at appraisal. This wasprimarily due to micromanagement of procurement by the Ministry of Production (MOP), despitethe fact that the power component was co-financed by the Bank and the implementing agency,NRL, following Bank guidelines. Procurement delays were further exacerbated due to the limitedautonomy granted to NRL even though the contracting arrangements were restructured in 1993with clearly assigned responsibilities for ENAR Petrotech Services Limited (ENAR) the localconsultants on the hydrocarbon components, foreign contractors for the power component andNRL. The power component was later further delayed pending the repair of the boiler, providingsteam for the turbine power plant, and other process requirements which were damaged in a gasexplosion in October 1996. The explosion affected areas outside the physical boundary of the Bankproject. (para. 20)

Project Sustainability

The modernization and balancing of the crude processing unit, the removal ofbottlenecks in the naphtha platformer and hydrotreater, and the revamping of the lube unit achievedtheir intended development objects. Upon completion by December 1997, the 7.5 MW steamturbine power plant is also expected to meet its objectives (para. 22). The sustainability of thepower plant component is assured as long as the refinery is in operation. However, thesustainability of refinery operations and its profitability may be hampered if NRL is unable to retainadequate profits (currently a minimum of 10% and maximum of 40% return on ex-refinery pricesset on import parity basis are retained) to make required investments to meet future changes inpetroleum fuels specifications which have now become mandatory in most countries to mitigate airpollution. Overall, the project is rated as likely to sustain the achievements realized at projectcompletion (para. 23).

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Summary of Findings. Key Lessons Learned and Future Operation

NRL staff are well trained and experienced. NRL's operation of the refinery processunits is not anticipated to pose any problems. With regard to the power plant component, NRL willneed assistance from their engineering consultants to ensure the turnkey contractor honors allwarranties and guarantees until the boiler is repaired and the power plant is commissioned.Agreement was reached with GOP\NRL to make appropriate arrangements with the turnkeycontractor and the consultants to get the required assistance (para. 30).

Given the large investments needed to meet the growing demand for petroleumproducts in Pakistan with an annual growth rate of nearly 12%, an increased level of private sectorinvolvement in NRL is crucial to develop and fund projects such as this one in the future. TheGovernment has taken major steps to develop the energy sector with private sector participationunder the Petroleum Policy of February 1994 by providing various incentives. Further mitigationof transport-related air pollution in the metropolitan areas of Pakistan is a high priority to GOP.Therefore, the Bank is supporting GOP in developing Clean Fuels Standards, followed by a FuelsReformulation Study to review the health costs of lead in gasoline and sulfur In diesel, with a viewto evaluating further investments by NRL and other refineries to mitigate the effect of petroleumproducts use on the environment (para. 31).

Overall, the state-owned refineries can perform better if given autonomy and the MOPand MPNR's monitoring role is confined to ensuring that the refineries stay within the policyguidelines defined by the Government. Attempts to micro-manage operations have a negativeimpact on operations and take away the responsibilities for refinery operations from NRLmanagement. In addition, in light of the substantial investments required to reconfgure NRL in themedium term, GOP should seriously consider developing a strategy for the involvement of theprivate sector by appropriate changes in the ownership structure of NRL. The Bank should paymore attention to evaluation of implementing agency's authority and capability when designing andappraising a project.(para. 32).

IMPLE:MENTATION COMPLETION REPORT

PAKISTAN

REfFINERY ENERGY CONSERVATION AND MODERNIZATION PROJECT(LN. 2842-PAK)

PART I - Project Implementation Assessment

Name: Refinery Energy Conservation and ModernizationLoan: 2842-PAK

RVP Unit: South AsiaCountry: Pakistan

Sector: EnergySub-sector: Refinery

Backgrond

1. The Refinery Energy Conservation and Modernization Project was identified at a timewhen the demand for energy was strong and inevitably growing to fuel Pakistan's expanding andincreasingly energy intensive economy. Growth in consumption of liquid petroleum fuels,during the years immediately preceding project appraisal, registered an average annual rate of 6percent, with diesel and fuel oil growth exceeding 10 percent in some years. Pakistan's domesticenergy resources, however, were being developed at a much slower pace due to public sectorfinancial constraints and the government's inability to mobilize private sector capital.

2. The limited capacity of Pakistan's three refineries-the Attock Refinery, the PakistanRefinery and the National Refinery-also hindered production. Old and outmoded, they weredesigned and built in the 1960s when energy prices were low and capital investments wereminimized. With rapid increases in oil prices, international oil companies rationalized theiroperations, added energy conservation facilities and modified their processing configurations.Similar measures, however, were not implemented in Pakistan's refineries. As a result,Pakistan's processing costs were higher than necessary, and the mix of products did not matchdemand. Continuing shortfalls in domestic supply resulted in Pakistan's increasing dependenceon imported energy.

3. Recognizing the possible adverse impact of increased dependence on imported petroleumproducts, the Government of Pakistan (GOP) accorded high priority in the Sixth Five Year Plan(FY84-FY88) to restructuring the energy sector. The overall objectives of the Sixth Plan were tocomplete the adjustment to high world energy prices by reducing the elasticity between growth ingross domestic product (GDP) and energy demand, and by sharply increasing investment toimprove energy sector operations and efficiency. The Bank and the GOP formulated a packageof policy reforms and priority investments under an Energy Sector Loan (LN. 2552-PAK), aimedat overcoming key bottlenecks in commercial energy supply systems. A core investment

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program including refinery energy conservation, upgrading of existing refinery operations andconversion of residual fuel oil to more valuable petroleum products were accorded high priorityin the reform package.

A. Statement/Evaluation of Objectives

4. This project was one of the first projects under the core investment program for therefinery subsector identified by a Bank-financed study under the Energy Sector Loan I.Although the refinery was well managed, it was neither energy efficient nor designed to operateas efficiently as modem refineries due to the lack of conversion facilities to upgrade fuel oil todistillate petroleum products. The broad objectives of the Refinery Energy Conservation andModernization Project were to: (i) improve refinery efficiency; (ii) reduce energy consumptionthrough more efficient waste energy recovery and the installation of steam-driven power plant;(iii) improve crude oil processing capacity and modify' the output mix; and (iv) strengthenproduction optimization and control systems. The objectives were realistic, relevant to thecountry's needs, and consistent with the Bank's and GOP's strategy for the development ofPakistan's energy sector.

5. The project was designed to meet the above objectives through the followingcomponents:

v debottlenecking the refinery to increase its processing capacity by about 30 percent,and thereby increase the production of naphtha, kerosene, diesel oil and fuel oil;

- increasing the capacity of the naphtha reformer capacity to enable the refinery toprocess surplus naphtha, and thereby produce additional octane blendingcomponents;

* reducing the consumption of fuel oil and losses in the refinery processes;

* utilizing excess steam in the refinery system for generation of electricity; and

* improving general refinery operations by providing training.

B. Achievement of Objectives

6. Overall, the project substantially met its major objectives. The sector policy objectivesunder the project were achieved through an improved ex-refinery pricing formula, applicable notonly to NRL but other existing refineries, to reflect import parity prices. In addition, the cap onretained refinery profits was raised to allow NRL to invest in needed refinery re-configuration andother improvements. Institutional development objectives were substantially met through both in-house and external training of staff which continued throughout the life of the project, coveringdisciplines from refinery management, operations, and marketing to quality control and assurance.However, the research and development activities by PERAC/NRL envisaged under the projectwere only partially realized. The completed project components have met all of their intended

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objectives; the power plant component, once completed, would also meet its physicaldevelopment objectives.

7. Component One: Balancing and Modernizing the Crude Processing Unit and ComponentTwo: Debottlenecking the Naphtha Hydrotreater and Platformer. Since their operations areinterdependent, the benefits derived from balancing and modernizing the crude processing unitand de-bottlenecking the naphtha reformer are assessed jointly. The crude unit modernizationwas completed in February 1990 and the naphtha reformer in May 1995. The completion of thesetwo project components resulted in the following tangible benefits:

(a) the refinery capacity was increased by 15,000 barrels per stream day (bpd) to 50,000bpd;

(b) the naphtha reformer capacity was increased from 2,500 bpd to 3,230 bpd;

(c) the yield of kerosene was increased by 3,402 bpd (135,900 metric tons per annum);and

(d) refinery energy consumption and losses were reduced by 25 percent from 2.857mmBTU per ton to 2.143 mmBTU per ton of feed.

8. Component Three: Process Modifications to Lube Unit I. This project componentinvolved the modification of the lube oil refining process. The lube unit was made more energyefficient, adopting advanced state of the art technology. The process modifications enhancedproduct quality, reduced some energy consumption, as well as marginally increased yield.

9. Component Four: Addition of a Captive Power Plant. The addition of a captive powerplant was intended to enable the Fuel Refinery and Lube Unit II to better meet its powerrequirements by utilizing the surplus energy available from an existing steam boiler, rather thanrelying exclusively on external sources for its total power supply. As the captive power plantutilizes available energy, this addition will result in financial savings to the refinery and providegreater reliability of power supply to NRL. To date, a 7.5 MW steam driven power generationplant has been installed and is scheduled to be commissioned by January 1998; the 4.5 MWdiesel engine standby generators have been installed and are undergoing reliability tests. Uponcompletion, the plant will supply 7.5 MW of power, out of NRL's total power demand of 21MW and the combined system can if needed meet about 40 percent of the total demand for therefinery.

10. Component Five: Studies, Training and Technical Assistance. The studies commissionedand consultants engaged under the project have enabled NRL to implement all components of theproject envisaged at appraisal, except for a few energy conservation sub-components whichbecame uneconomic due to increases in the investment cost after the bidding stage. About 60NRL staff completed technical and management training in refinery operations and planning asenvisaged. They attended international seminars on refinery economics, operations andmaintenance.

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C. Economic Performance

11. The project is essentially revamping of the National Refinery Limited, in order tomaximize the utility of existing process and infrastructure facilities and exploit the potential forenergy conservation at minimum incremental capital and operating costs. The return oninvestments on a revamping project of this nature are generally high. The current return on theproject is considered satisfactory at 32 percent despite being lower than the 42 percent estimatedat appraisal. The net benefits and economic rate of return (ERR) computed are given in the tablebelow.

Comparison of SAR and Comparison of SAR ERRActual (Projected) Net and Actual (Projected) ERR

Component Benefits (in Percent)(in million US$ per year)

SAR* Current SAR* CurrentEstimate Estimate

Crude Unit Balancing & 4.1 3.7 55.3 97.0ModernizationPlatformer Debottlenecking 1.6 1.5 30.0 17.8Lube Unit Modification 2.3 0.55 39.4 27.5Power Plant Addition 2.4 2.3 33.7 18.2

.................................................................................................... ....................................... ... ........... I................. ............................... ............ ........

TOTAL 10.4 8.05 41.9 32.0*Figures taken from the project's Staff Appraisal Report "Pakistan - Refinery Energy Conservation and Modemization Project,"Report No. 6648-PAK, May 29, 1987.

12. Increase in the margin between petroleum products and crude oil (which are 50% higherthan appraisal forecasts) have contributed to almost a doubling of the benefits from the CrudeProcessing Unit. More importantly the increase in through-put was achieved with minimuminvestment and without having to increase energy consumption.

13. The benefits from the Platformer Debottlenecking component are lower than appraisalestimates since they are extremely sensitive to the price margin between naphtha feed input andoutput of reformate. The margin between the input and output price was squeezed as the price ofthe naphtha feed input rose in response to high demand.

14. The benefits from the Lube Unit Modification component are lower than appraisalestimates since even though the weight of fiuel saved is about the same as at appraisal, the valueis considerably less given that the absolute price of crude oil dropped by half to lower thanUS$15 per barrel in late 1992.

15. Substantial increases in the capital cost of the Steam Turbine Plant resulted in a lowerreturn than estimated. The original estimate was made on a standard frame basis. However, themuch higher bid prices received reflected the non-standard nature of the 7.5 MW steam turbine

required by NRL. The overall cost was further exacerbated by the fact that the rupee hasdepreciated against the US dollar by a factor of two.

D. Major Factors Affecting the Project

16. Significant delays in project implementation due to the dispersed nature of the revampwork, which at times were put on hold until refinery turn-arounds were completed led to twoextensions to the original closing date of June 30, 1993, although the Bank closed all categoriesafter the initial one year extension with the exception of the captive power plant component.Availability of grant funds from Japan removed the incentive to use Bank funds for training. Forthis reason, combined with MOP reluctance to clear shortlists for training (para. 18), loanproceeds amounting to less than US$2 million, allocated for training, were not fully utilized.

17. Factors Subject to Government Control. Delays in project implementation werelargely a result of unnecessary Government interference and included:

(i) limited authority vested in NRL (and even PERAC as the holding company) tomake procurement decisions;

(ii) limited authority granted to NRL to commit funds and a low level of authority toincur expenditures without the prior approval of MOP;

(iii) procurement procedures requiring MOP to review all procurement decisions, andwhich more often than not, involved MOP questioning NRL recommendations anddecisions and unnecessarily reviewing consultant recommendations, especiallywhen these had already been reviewed and cleared by PERAC; and

(iv) need for GOP approval to train personnel or commit funds to research anddevelopment activities, and delays in granting these approvals;

18. The training of staff was made difficult throughout the life of the project by MOP'scontinued reluctance to clear shortlists of candidates for external training.

19. The addition of the power plant, representing about 60 percent of project costs, was mostadversely effected by delays in implementation. Bid documents for this component were issuedover the period August 30 to September 15, 1992; bids were received on March 31, 1993; andthe evaluation was completed and recommendations made on July 27, 1993. After protracteddelays due to the need for a revised evaluation report and to queries and objections raised by theMOP, a contract was finally signed with the supplier as recommended by the evaluationcommittee on March 15, 1994, nearly nine months behind schedule. This unnecessary delay(despite interventions by supervision missions) was the main reason for the delayed completionof the project. While the need for monitoring of expenditures by the Ministry responsible forparastatal agencies is required to ensure that government procedures are adhered to, the micro-management of refinery operations defeated its purpose, particularly since these activities wereof a specialized technical nature.

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20. Factors Not Subject to Government or Implementing Agency Control. After theaward of the contract, progress on the power plant component was satisfactory. The 4 MWdiesel generation set has been completed and is currently being commissioned. Completion ofthe 7.5 MW steam turbine power generation unit, scheduled to be commissioned by December31, 1996, was interrupted by an explosion in the boiler generating the steam, resulting inextensive damage to both the furnace refractory and the boiler. Until they are repaired, the 7.5MW steam turbine power generation unit cannot be commissioned and therefore projectimplementation cannot be completed. It is estimated that the component will be completed inDecember 1997. The boiler damage not only impacted project completion but also posed amajor problem with regard to the warranties and guaranties provided by the turnkey contractorfor the captive power plant. The Bank assisted NRL in developing a plan to ensure that theaccident would not negatively impact the supplier's performance guarantees. These measures arediscussed under future operations (para 29).

21. The implementation of the naphtha reformer unit was delayed primarily because of delaysin the supply of furnace material from the UK vendor. These delays were exacerbated bydisagreements on amendments to the original Letters of Credit (LC) when the Bank closed allLoan categories, except for the power plant. The Bank's special commitment lapsed, requiringNRL to take over the responsibility for guaranteeing remaining payments.

E. Project Sustainability

22. The sustainability of refinery operations and its profitability has been enhanced by theinvestments undertaken, particularly when the power plant is commissioned. However, NRL'ssustainability may be hampered if NRL is unable to retain adequate profits (currently a minimum of10% and maximum of 40% return on ex-refinery prices set on import parity basis are retained) tomake required investments to meet future changes in petroleum fuels specifications which havenow become mandatory in most countries to mitigate air pollution. The balancing andmodernization of the crude processing unit improved its capacity and energy efficiency. Giventhe continued increasing demand for all grades of petroleum products and the severe shortage ofrefining capacity in Pakistan, the capacity increase from 34,500 to 50,000 bpd (a 30 percentincrease) and modernization of the crude unit will serve the country well. The attendant energyconservation component will reduce processing costs by about US$6 million equivalent; again asustainable benefit. The naphtha reformer expansion and the installation of ancillary facilitieshas enabled NRL to convert excess naphtha into 28,000 tons per year of high octane gasolineblending component (HOBC). With consumption demand for high octane gasoline risingrapidly, this component is an important addition to NRL.

23. The captive power plant component would provide stable and uninterrupted electricity forcritical major equipment such as the fuel refinery. Although, additional generating capacity inPakistan is projected to increase by over 5,000 MW over the next ten years, frequent power-dipscan not be avoided and would pose a threat to efficient refinery operations, until the entire KESCpower distribution system is rehabilitated. The training and research and developmentcomponent (eventually financed primarily from the Japanese grant) provided essential activitiesto develop human resources and technical capabilities and will make major contributions to

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NRL's success. Overall, the project is likely to maintain the achievements realized at projectcompletion.

F. Bank Performance

24. The Project was identified during implementation of the Bank's first operation in thesubsector (Refinery Engineering and Energy Conservation Project Loan 2218-PAK), whichinvolved mostly low-cost investments but also helped define the additional energy conservationmeasures of a more capital intensive nature that became the physical aspects of this operation.The Bank having determined that the initial proposal for such energy conservation investmentsformed part of the least-cost solution to improve the efficiency of NRL was able to develop agood overall framework in the SAR for building on the ex-refinery pricing policy reforms set outin the GOP's "Kazi Committee Report" of 1986. In addition, appropriately the Bank made acondition of appraisal, agreement on a sectoral investment strategy to facilitate private sectorinvestment in the refinery subsector.

25. During supervision, the Bank played a significant role in over time improving ex-refineryprices for all existing refineries, in assisting NRL to solve numerous procurement problems andproviding guidance as required during project implementation. The Bank's mediation role wasable to limit micromanagement by MOP and give comfort to consultants and contractors who attimes felt there were undue delays in NRL's decision making. The Bank carried out ten missionsafter the loan became effective, almost one each year, with a reasonable continuity of staff drawnfrom Bank headquarters and the Resident Mission. The frequency of the supervision missions isdeemed adequate given that it was not always possible to obtain mission clearance to Karachidue to civil disturbances during most of 1993-95. Bank supervision was largely concentrated ondiscussing factors that impeded implementation with GOP, financial matters and otherproblematic contractual issues due to excessive micromanagement from Islamabad. When thecompletion of the power plant was delayed, the Bank intervened to ensure that the consultantscontinued to be retained to provide critical assistance to NRL until the commissioning of thepower plant.

G. Borrower Performance

26. NRL has benefited from the professional experience gained through the project,particularly in implementing energy conservation measures. PERAC and NRL gave adequatesupport to the project during both appraisal and implementation. However, GOP should havedelegated more authority to the Beneficiary, NRL, thereby expediting the implementation of theproject. Unnecessary intervention in project management and procurement by GOP causeddelays in implementation, resulting in a deficient rating for Borrower performance inimplementation. NRL's overall perforrnance, however, is considered satisfactory despite thelack of autonomy to manage the project independently of GOP. NRL staff on both thehydrocarbon and power components were motivated and performed and understood their rolesand functions. However, there was scope for maintaining greater oversight and coordination with

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contractors. Also, strikes and the law and order situation in Karachi, particularly in the generalindustrial area of eastern Karachi, impacted the implementation schedule. Contract managementwas significantly improved in the latter half of the project, when NRL management, theconsultants and contractor were able to better coordinate their efforts. Recognizing the need todevelop a critical mass of management skills regarding the captive power plant, a new PowerDivision under a General Manager has been established for the operations phase of thiscomponent.

27. While the trend in policy dialogue has always been positive, there remained a strongdisposition in MPNR to regulate returns to NRL and the other refineries through a cost-plusapproach. Hence GOP was slow in implementing the Bank's policy advice in this area untilrecently, when eventually the ex-refinery pricing formula began to approach import paritypricing levels. To date no grassroots refinery projects have been initiated, partly due to thevolatility of petroleum markets, but also partly because of investors perception of a highlyregulated market.

H. Assessment of Outcome

28. The project needs to be separated into two parts to comment on the outcome. Theoutcome of first part, refinery (hydrocarbon) project components related to balancing and de-bottlenecking, was highly satisfactory. The project components were timely, well conceived,met all of their objectives, and enhanced the refinery's economic and financial viability. Thefollowing specific benefits were achieved:

* Refinery crude distillation capacity increased from 34,000 bpd to 50,000 bpd,increasing production as follows:

(in metric tons per annum)LPG 5,000Naphtha 11,100Kerosene 135,900Diesel Oil 171,600Fuel Oil 219,600

* Naphtha reformer capacity was increased from 2,980 bpd to 3,800 bpd.

* The lube unit revamp resulted in the reduction of energy cost consumption in this unitby 4,970 metric tons of fuel oil equivalent.

* Energy consumption was reduced from 3.1 tons per 100 metric tons of feed to 2.9 tonsper 100 tons of feed for the refinery.

* In addition, the demonstration of benefits from NRL's modernization and energy savinginvestments lead the other two refineries to initiate similar investments.

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29. The second part, the captive power plant, is still a work in progress. The addition of thepower plant well ensure a stable supply of electricity for critical refinery units. The 4 MW dieselpower generation unit has been installed and is under commissioning. The 7.5 MW steamturbine unit is 95 percent physically complete but cannot be commissioned until December 31,1997, for the reasons explained earlier. When operational, it will eliminate frequent power dipsand power failures which impact adversely on the operation of critical equipment in the refinery.

I. Future Operation

30. The project components comprising the balancing and modernization of the crudeprocessing unit, debottlenecking the platformer and hydrotreater, and process modifications tothe lube unit improved and enhanced ongoing operations. NRL staff are well trained andexperienced and need no additional assistance to maintain operations. With regard to the powercomponent, the 4 MW diesel oil generation set is being commissioned by the supply and erectioncontractor. NRL staff has understudied the contractors personnel and will be involved in thecommissioning of the unit. This is not a complicated plant and NRL's experience operating therefinery provides adequate background to satisfactorily operate the new facility.

31. The plant which requires considerable assistance to ensure satisfactory future operationsis the 7.5 MW steam turbine power plant. Steam turbines are prone to be troublesome if notproperly maintained and operated. In this project, the problems are further compounded by thefact that the power unit cannot be commissioned as scheduled due to the failure of the processboiler, referred to in para 20. This poses a major operational problem as the contractor'sobligation typically ceases 30 days after notice is given that the plant is ready for commissioning.NRL will not be able to commission the plant until end-December 1997 which could jeopardizethe warranties and guarantees on the plant. The Bank has had extensive discussions with NRLregarding the measures to be taken to ensure that the contractor will honor all warranties andguarantees after the steam boiler is repaired and will assist NRL to obtain adequate experience tooperate the power plant thereafter. To this end, NRI will enter into an agreement with thecontractor to honor guarantees and provide adequate operations assistance after the plant iscommissioned and until NRL staff obtain enough experience. NRL will also enter into anagreement with the consultants employed by NRL to manage the implementation of thiscomponent and retain their services until (i) the steam turbine power plant is commissioned, (ii)the plant has achieved a satisfactory level of on-stream performance, and (iii) guarantees havebeen met. The Bank is supporting GOP in developing Clean Fuels Standards, followed by a FuelsReformulation Study, to review the health costs of lead in gasoline and sulfur in diesel. We remainconcerned about NRL's ability to meet fuel specifications, if it does not make further investmentssoon to mitigate the effect of petroleum products use on the urban air quality in particular.

J. Key Lessons Learned

32. An issue that has repeatedly arisen when implementing projects in most south Asiancountries is the limited autonomy given to parastatal agencies. The primary objective of GOP inestablishing parastatals was to provide these institutions with a high degree of autonomy in order togain efficiencies and compete with private sector industries. These objectives are negated by the

- 10-

degree of micro-management the Ministries engage in, resulting in unwarranted delays. A majorlesson to be learned is the need for a much higher degree of autonomy to parastatals and trust in thekey officials. The Ministries' role in monitoring the activities of parastatals should be confined toensuring compliance with GOP's broad policy guidelines. The line agencies should be responsiblefor all actions pertaining to daily operations, including procurement and project implementation.The necessary checks and counter-balances will be provided by the Government Auditor who isrequired to monitor all financial- and operations-related activities, thus ensuring that the State's andpublic interests are safeguarded. Monitoring of operations is not only extended to micro-management but also to duplication, resulting in many instances of virtual gridlock.

K. Evaluation of Program Objective Categories

33. The sectoral objectives were to improve the efficiency of refinery operations, reduce thedependence on petroleum product imports, and minimize the net economic costs of energysupply to the country. Despite the fact that the NRL refinery supplies only about 3.0 million tonsper year of products, i.e. 20 percent of the country's requirements of petroleum products (6.5million tons per year of crude processed at three refineries and about 9 million tons per year ofproducts are imported), the project made a small yet significant contribution towards: (i)reducing imports of refined products by converting a greater proportion of the crude oil to morevaluable distillate petroleum products; (ii) reducing the consumption of energy per unit of crudeoil processed; and (iii) providing the facilities to use process steam to generate electricity forrefinery operations. In addition, the project provided both NRL and ENAR Petrotech, anopportunity to gain valuable project management and implementation experience and training forsome of its key staff.

- 11 -

IMPLEMNTATION COMPLETION REPORT

PAKISTAN


PART 11 - STATISTICAL TABLES

Table 1: Summary Assessnents

A. Achievement of Objectives Substantial Partial Negligibl Not Applicable

Macroeconomic Policies 3 El D ()Sector Policies (/) O a oFinancial Objectives (v) L [ LInstitutional Development ($) L o LPhysical Objectives (El) a E lPoverty Reduction L L L (/)Gender Concerns El L (1)Other Social Objectives L L L (v)

Environmental Objectives L (V) LPublic Sector Management 1 O a (/)Private Sector Development L LI (1)Other (specify) 1 a o (/)

B. Proiect Sustainability Likely Unlikely Uncertain(V) n o

HigblyC. Bank Performance Satisfactry Satisfactory Deficient

Identification 3 (1) LPreparation Assistance 1 (v) 1Appraisal 1 (a)Supervision L (1) 1

HighlyD. Borrower Performance Satisfactory Satisfactory Deficient

Preparation (v) L LImplementation 1 1 (v')Covenant Compliance 3 (') 1Operation (if applicable) 1 1 1

Highly HWighYE. Assessment of Outcome Satisfactory Satisfactory Unsatisfactory Unsatisfactory

13 (1) 13 1

- 12 -

Table 2: Related IBRD Loans

Loan Purpose Year of StatusTitle Approval

1. Refinery (a) to obtain the necessary 1982 Loan closed June 30,Engineering process technology for the 1986;and Energy design and eventual construc- ImplementationEffficiency tion of a hydrocracker complex; Project CompletionProject and (b) to increase private Report prepared(Ln. 2218-PAK) participation in the refining February 5, 1991.

industry and to support GOPefforts to introduce energyconservation measures withinmajor industries.

2. Energy Sector (a) to continue the structural 1985 Loan closedLoan I adjustment process initiated December 31, 1994;(Ln. 2552-PAK) under SAL I to promote the Implementation

integrated development of the Completion Reportenergy sector (b) to assist GOP in prepared March 15,implementing a core investment 1996program in the energy sector; and(c) to serve as the basis for theBank's expanded lending forspecific energy investments andfor the more effectivecoordination of external financingfor the sector.

3. Energy Sector (a) to continue the sectoral 1989 Loan closedLoan II adjustment process initiated 1991 December 31, 1994;(Ln. 3107-0-PAK) under Energy Sector Loan I Implementation

and through a program of policies and Completion Report(Ln. 3107-1-PAK) institutional reforms introduced prepared March 15,

during Seventh Five Year Plan; 1996(b) support the implementation ofthe Core Investment Program(CIP) for FY89-91; (c) mobilizeresources for CIP by rationalizingenergy pricing integrating donorcofinancing mobilizing privatesector financing to the credit &capital markets; and (d) supportthe macroeconomic adjustmentprogram by facilating an adequatelevel of imports.

- 13 -

Table 3: Project Timetable

Steps in Project Cycle Date Planned Latest Estimate

Identification (EPS) 02/18/1986

Preparation 06/13/1986

Appraisal 10/02/1986 12/12/1986

Negotiations 04/20/1987 04/20/1987

Board Presentation 06/23/1987 06/16/1987

Signing 12/10/1987 09/10/1987

Effectiveness 01/31/1988 03/08/1988

Project Completion 06/30/1993 12/31/97*

Loan Closing 06/30/1993 06/30/1996

* This date reflects the estimated commissioning date of the captive power plantcomponent delayed due to unexpected damage to the steami boiler. The remainingcomponents were completed by May 1995.

Table 4: Loan/Credit Disbursements: Cumulative. Estimated and Actual($ Million)

FY88 FY89 FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97

Appraisal Estimate 2.10 6.70 11.70 15.90 19.10 21.0 21.0 21.0 21.0 21.0[ Actual 2.00 2.45 3.25 3.25 3.25 3.99 7.93 8.91 19.47 19.62Actual as % of Estimate 95.24 36.58 27.78 20.44 17.02 19.01 37.8 42.4 92.7 | 93.4Date of Final November 5, 1996Disbursement I

Table 5: Key Indicators for Project Implementation

I. Key ImplementationIndicators in SAR/Presidents Estimated ActualReport1. Crude Unit - Commissioning December 31, 1989 February 1990

2. Platformer - Commissioning June 30, 1993 May 1995

3. Lube Unit - Commissioning June 30, 1993 January 1995

4. Power Plant - Commissioning June 30, 1993 Projected December 1997

- 14 -

Table 6: Key Indicators for Project Operation

I. Key Operating Indicators inSAR/Presidents Report Estimated Actual1. Crude Distillation - anticipated capacity 50,000 bpd 50,000 bpd

2. Platformer - anticipated capacity 2,500 bpd 3,230 bpd

3. Lube Unit - a Fuel Oil reduction by 4,970 tons 4,970 tons

4. Energy Consumption Reduction overall 3% 3%

5. Power Plant - anticipated capacity 7.5 mw pending completion

Table 7: Studies Included in Project

Purpose as definedStudy at appraisal/redefined Status Impact of study

Feasibility and Basic Establish engineering Completed Provided basis for ICBEngineering Study for package (Schedule A) contract awardHydrocarbon Component

2. Feasibility and Basic Prepare technical Completed Provided basis for ICBEngineering Study for specifications for turnkey contract awardCaptive Power Plant contractor

3. Wax Fractionation Study Define economics of Completed Increased refinery__________________________ manufacturing lubricants profitability

- 15 -

Table 8A: Project Costs

($Million)

Appraisal Estimate Actual / Latest Estimate

Item Local Foreign Total Local Foreign Total1. Balancing& Modernization of 5.0 3.1 8.1 4.26 2.03 6.29

Crude Processing Unit */2. Addition of a Captive Power 2.0 6.0 8.0 3.74 12.42 16.16

Plant3. Debottlenecking of Hydro- 3.2 2.6 5.8 4.85 3.90 8.75

treater and Plafformer4. Process Modifications to Lube 3.3 3.6 6.9 1.72 1.19 2.91

Unit-I5. Efficiency Improvement 0.1 1.7 1.8 - - -

Measures6. Studies, Training, Technical 0.5 2.0 2.5 - 0.09 0.09

Assistance, and R&D

Base Cost 14.1 19.0 33.1 14.56 19.63 34.19

Physical Contingencies 1.4 1.9 3.3 - - -

Price Contingencies 4.1 2.1 6- - -

Sub-Total: 19.6 23.0 42.6 14.56 19.63 34.19

Interest during construction 4.0 4.4 8.4 1.88 3.31 5.19

Total Project Cost: 23.6 27.4 51.0 16.44 22.94 39.38*/ Air Pre-heat system component was dropped.

Table 8B: Project Financing($Million)

Appraisal Estimate Actual/Latest Estimate

Sources Local Foreign Total Local Foreign Total1. National Refinery Ltd. 22.0 0.0 22.0 16.44 3.31 19.76

2. IBRD 0.0 21.0 21.0 0.0 19.62 19.62

3. Suppliers Credits and Others 1.6 6.4 8.0 0.0 0.0 0.0

Total Financing: 23.6 27.4 51.0 16.44 22.94 39.38

- 16 -

Table 9: Economic Costs and Benefits

Assumptions Costs ($ million) Benefits

CrudeIJnit Modernization 3.72 Annual savings $4.6 million(a) increase in capacity 15,500 bpsd.(b) increase in yield of products ERR 97%based on processing current slate ofcrude oils.(c) cnde oil prices over projectperiod based on a recent study for arefinerv project in Pakistan.(d) Product prices CIF Karachi basedon imports either from Singapore orPG/AG based on recent study forproduct prices over a 12 year period.(e) Since a revamped unit and notnew, benefits period is limited to 12years.Platformer 7.26 Annual savings $1.5 million(a) Investment results in productionof HOBC, displacing part of the ERR 18%imported HOBC, by conversion ofnaphtha which otherwise would haveto be exported.(b) Prices for HOBC and naphthabased on Singapore postings; pricedifference is currently $40 per metricton.(c) Assumed project life is 12 yearsbased a recent study for a refineryproject in Pakistan.Lube Oil Revamp 1.93 Annual savings $0.55 million(a) Value of fuel oil over 12 years

based on a recent study for product ERR 27.5%prices for a project in Pakistan.Power Plant 14.65 Annual savings $2.3 million(a) Value of generated power isassumed at a minimum of US$ 0.006 ERR 18.2%per KWH annualized over 12 years.(b) Power plant will be commissionedin January 1, 1998.

- 17 -

Table 10: Status of Legal Covenants

Original RevisedAgreement Section Covenant Present Fulfillment Fulfillhnent Description of Comments

Type Status Date Date Covenant

1 3.01(c) 3 C 12/10/87 03/03/88 Subsidiary Loan Fulfilled.Agreement betweenPERAC and NRL. l

5.01(b) 1 C Submission by PERAC Fulfilled.and NRL of annualfinancial statements andaudit reports.

5.01(b) I C Audit Report of Special SA closed.Account maintained byNRL. l

5.02(a) 2 C NRL will maintain a Fulfilled for FY95.debt:equity ratio of notmore than 70:30.

5.03(a) 2 C NRL will maintain a Fulfilled.current ratio of 1.0 whennew pricing formulatakes effect.

2 3.01(a) it C GOP will review with N/Athe Bank the proposedFY89-93 coreinvestment program forpetroleum subsector.

3.01(b) 12 C 03/31/88 GOP will furnish to the N/ABank the FY89-93 coreinvestment program forthe petroleum subsector.

3.02(a) 12 C 12/31/87 GOP will review with Application of thethe Bank the report and principles of the newrecommendations of "Import Parity" basedHigh Level Committee formula for ex-refineryon Refinery Pricing. prices have been

endorsed by theFebruary 1994Petroleum Policy.

3.02(a) 12 C 03/31/88 GOP will review with Financial performance ofthe Bank the proposed refineries under therevised refinery pricing liberalized system beingimplementation. monitored.

Covenant types: Present Status:

I = Accounts/audits 8 = Indigenous people C = covenant complied with2 = Financial performance/revenue 9 = Monitoring, review, and reporting CD = complied with after delay

generation from beneficiaries 10 = Project implementation not CP = complied with partially3 = Flow and utilization of project covered by categories 1-9 NC = not complied with

funds 11 = Sectoral or cross-sectoral NYD = Not Yet Due4 = Counterpart funds budgetary or other resource5 = Management aspects of the allocation

project or executing agency 12 = Sectoral or cross-sectoral policy/6 = Environmental issues regulatory / institutional action7 = Involuntary resettlement 13 = Other

- 18 -

Table 11: Compliance with Operational Manual Statements

Project preparation, appraisal, negotiations and Board presentation were carried out in accordance with allBank policies.

Table 12: Bank Resources: Staff Inputs

Planned Revised ActualStage of

project cycle Weeks US$ Weeks US$ Weeks US$Preparation to appraisal N/A N/A N/A N/A 43.0 93.5Appraisal N/A N/A N/A N/A 32.9 79.7Negotiations through

Board approval N/A N/A N/A N/A 15.3 36.0Supervision N/A N/A N/A N/A 94.7 291.6Completion N/A N/A N/A N/A 11.5 24.7TOTAL - - - - 197.4 525.5

- 19 -

Table 13: Bank Resources: Missions

Performance rating

Specialized Implement Develop-Month/ Number Days in staff skills ation ment Types of

Stage of project cycle year of persons field represented status objectives problemsThrough appraisal 06/87 _

Appraisal through 10/19/87Board approvalSupervision 1 08/25/88 1 EGYSupervision 2 05/15/89 3 EGY, PRO,

REFSupervision 3 06/30/89 2 EGY, FNA S HS SSupervision 4 06/30/90 2 EGY, IND S HS PSupervision 5 06/30/91 2 EGY, IND S HS PSupervision 6 08/28/92 2 EGY, EGR S HS PSupervision 7 05/26/93 2 EGY,EGR S HSSupervision 8 08/16/93 2 ___EGY, EGR S HS _____

Supervision 9 09/21/93 2 EGY. EGR S HSSupervision 10 04/4/94 2 _ EGY, FNA S HSSupervision 11 09/10/94 2 S HSSupervision 12 12/23/94 2 _ EGY, FNA S HSSupervision 13 05/22/95 3 EGY, EGR, S S

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _FN A _ _ _ _

Completion 03/04/96 3 EGY S SEGR. FNA

Key:EGY : Energy SpecialistEGR : Chemical EngineerIND : Industry SpecialistREF : Refinery SpecialistFNA : Financial AnalystPRO : Procurement SpecialistECN : EconomistOPN : Operations Assistant

S : SatisfactoryHS : Highly Satisfactory

P : ProcurementS : Studies/Training Program

-20- AppndixAPage I of 5


PAKISTAN


Mission's Aide-Memoire

1. A World Bank Mission comprising Messrs. Mikael Mengesha, Lakdasa Wijetilleke andMs. Julie Fraser visited Pakistan from January 28 through February 2, 1996 on a supervisionmission, prior to the Loan closing date of June 30, 1996 of the above mentioned Project. TheMission would like to thank officials of GOP, PERAC and NRL for the cooperation andcourtesies extended to it. Mission discussions, review of Project progress, findings andagreements reached are summarized in this aide memoire.

2. Project Progress. The current status of the five Project components is summarizedbelow:

(i) balancing and modernization of the completedcrude oil processing unit

(ii) debottlenecking of the naphtha completedhydrotreater and platformer

(iii) process modification to the lube-oil completedrefinery ( unit 1 )

(iv) addition of a captive power plant 80 percent completed

(v) studies, training and technical assistance studies and technicalassistance completed,about 50 staff havereceived training,compared to theoriginal targeted 100

3. Components (i), (ii) and (iii) were completed well within the scheduled implementationtarget dates envisaged in the Staff Appraisal Report. The scope of component (v) was reducedconsiderably with regard to training of staff and technical assistance, as part of these activitieswere funded under a Japanese aid program.

4. With regard to component (iv), addition of a captive power plant, implementation istargeted to be completed by June 30, 1996. The mission reviewed the work plan leading up topower plant installation and commissioning. The power plant comprises a steam turbine and

-21- Appendix APage 2 of 5

associated boiler to generate 7 MW and diesel engines to generate a further 4 MW. Both unitshave been fabricated, shop-tested and transported to the Karachi port. The detailed engineeringfor civil works and site clearance are also complete. The time allowed in the implementationschedule is adequate to meet the scheduled completion date of June 30, 1996. NRL, theirconsultants and turnkey contractor have worked effectively as a team and overall performancehas been most satisfactory. The mission is satisfied that the targeted completion date will bemet. As for next steps to ensure the viability of the operation phase of the Captive Power Plant,it was agreed that NRL should prepare a staffing plan so that adequate manpower is madeavailable and trained to ensure smooth operation and maintenance.

5. The implementation of the Captive Power Plant was initially delayed by over two yearsdue to delays involved with the selection of the turnkey contractor for the supply, installationand commissioning of the power component. The Project's closing date, which at Boardpresentation was June 30, 1994 had to be extended by two years to facilitate completion of thiscomponent. At the time of loan extension a work plan to ensure timely completion of the Projectwas jointly developed by the Bank and NRL. The mission is pleased to report that NRL hasmaintained this schedule with no lag so far and expects that the contracted date of completionwill be met.

6. Operational Performance of Completed Items. Items (i) and (ii), the balancing andmodernization of the Crude Distillation Unit and the debottlenecking of the naphtha reformer,have to be considered jointly as most benefits are interdependent. These units were completedin February 1990. Tangible benefits from these component are: (a) increase in the crude unitcapacity by 15,500 barrels per day; (b) increase in the yield of light naphtha by 2.5 volumepercent, which in turn resulted in a larger proportion of heavy naphtha to the platforner, a directconsequence of which is lower severity of operation of the platformer; the tangible benefits oflower severity operation are lower energy costs per unit of feed and longer catalyst life; (c)increased yield of kerosene by 1.7 weight percent; and (d) reduced energy consumption, despitethe increase in through-put total energy consumption has decreased by 2,560 tons of fuel oilequivalent per annum. NRL has computed the total savings at $5.1 million. The totalexpenditure on these items was $5.9 million. The benefits have paid for these two items inslightly over one year.

7. With regard to item (iii), benefits from process modifications to the Lube Unit, have notbeen computed as yet. Expenditures for this component were US$1.4 million. The primarybenefits are enhancement of product quality and marginal increase in yield. In terms of thebenefits from item (v), which covers training, studies and technical assistance, the benefits fromtraining are long-term and not readily tangible. Studies commissioned under the Project andconsultants engaged have enabled NRL to implement almost all components of the projectenvisaged at appraisal, except for a few energy conservation sub-components which becameuneconomic due to increase in the investment costs after the bidding stage.

8. Disbursements. Out of a total loan amount of US$21 million over US$10 million hasbeen disbursed with a further US$9 million fully committed to the turnkey contractor andexpected to be disbursed upon delivery to site of all the imported equipment by early February1996. Almost 100 percent of equipment and material payable under these commitments are now


at Karachi port and will be transported to the site shortly. Loan proceeds amounting to less thanUS$2 million, not fully utilized under the allocation for training and technical assistance,partially due to the availability of Japanese aid for training and technical assistance, as explainedearlier, will be canceled by the Bank as savings.

9. Implementation Completion Report. Since this mission will be the last supervisionmission prior to project completion, the mission discussed the modalities of preparation of theImplementation Completion Report (ICR). The mission provided NRL with ICR preparationguidelines and sample copies of the ICR to enable NRL to staff to prepare the requireddocumentation to assist the Bank's ICR mission which will visit NRL towards the middle ofApril 1996 to initiate preparation of the borrower's evaluation of the project's implementationrecord and outcomes.

10. Project Sustainability and NRL's Clean Fuels Program. The sustainability of refineryoperations and profitability in the future will be predicated by the ability of NRL to meet futurechanges in petroleum fuels specifications which have now become mandatory in most countriesto mitigate air pollution, from the transport sector in particular. Reformulation of gasoline anddiesel oil will be required in Pakistan within the next few years. The mission therefore raisedthese issues with NRL and was informed that NRL is required to reduce the lead level ofgasoline to 0.35 milligrams per liter from the current levels and that NRL is proposing to install aPentane Isomerization unit. However, the mission is of the view this investment itself is notlikely to be adequate, even in the medium term to meet the increasingly stringent environmentalrequirements in the region, which Pakistan will have to be ultimately be measured against.While the proposed lead level is an improvement, most developing countries will have toembark on lead reduction in two stages, initially reducing to 0.15 grams per liter and finally to0.013 grams per liter, which in effect is unleaded gasoline. The mission also explained that thereduction of lead and options for compensating for octane loss have to be selected with caution,as there are other unwanted adverse impacts which may develop, such as excessive benzene andaromatics levels, high RVP etc., if the wrong choices are made.

11. In this connection the mission also discussed the need to reduce the sulfur level in dieseloil. Currently, the sulfur level in diesel oil is fixed at 1.00 weight percent. Here again, themission cited examples in various countries where fuels reformulation programs to reduce sulfurhave been initiated. The effect of sulfur, besides the contribution to acid rain and engine wearand tear, is the serious health impacts caused by contribution to the formation and propagation ofsuspended particulate material (10 microns and below) which give rise to respiratory diseases.The mission explained that over the past seven years the Bank has assisted countries to developair quality management and fuels reformulation programs and subject to senior Bankmanagement approval, would be willing to assist the Government of Pakistan to develop anaffordable, time and cost effective study/program, should GOP request Bank's assistance.

12. Future Project Monitoring Steps by Bank. As discussed in paragraph 9, the next stepis a final mission to confirm that the project has been completed as now envisaged.Simultaneously, the next Mission will also commence the preparation of the ICR. Performanceindicators will be on the basis of the data that will be prepared by the NRL project team per theproforma tables provided by the Mission.


13. Other Actions By GOP and NRL. Environmental issues that are now given highpriority have surfaced since this project was prepared some eight years ago. These couldundermine the viability and the sustainability of the investments. It is therefore imperativethat adequate steps to reformulate fuels are taken by PERAC/NRL to ensure that investmentsmade and to a greater extent the viability of the refinery itself is not jeopardized. The investmentrequirements are likely to be substantial and preparation of process modifications are complexand implementation could take 4 years from approval of a program. Hence, the missionrecommends that high priority should be given to the preparation of an integrated fuelsreformulation program. In this connection, it is worth noting that all the proposed refineryprojects in Pakistan, as far as the mission has been able to ascertain, are under noobligation to meet current internationally accepted reformulated fuels specifications. Threelarge refinery complexes are in their pre-project preparation stages. Unless the necessaryinvestments are included in these projects, it will become costly, if changes have to made at alater date. This would also aggravate the air quality pollution problem.

14. NRL Financial Performance. NRL's product sales were 2.75 million metric tons inFY94 and 2.66 million metric tons in FY95. This generated net sales revenues of Rs. 13.3 andRs. 14.2 billion in FY94 and FY95 respectively, a 6.5% increase. Operating costs for FY94 andFY95 were Rs. 13.2 billion and Rs. 15.2 billion, resulting in net income after tax of Rs. 0.35billion and a loss of Rs. 0.11 billion respectively. In FY95, NRL achieved a current ratio of 0.97and a debt:equity ratio of 49:51, meeting the Bank's financial covenant for debt:equity but fallingshort of the required 1.0 current ratio. The Mission advised NRL that it should examine itsworking capital management with a view to enhancing its cash management and reducing NRL'sdependence on short term loans, which had more than doubled from FY93 to FY94 and increasedby 6.3% in FY95.

15. The Mission noted that the FY95 figures mentioned in the above paragraph, are based onunaudited financial statements. In this regard the Mission advised NRL management that thecompany is in violation of the covenants under the Loan, by not submitting audited financialstatements by December 31, 1995. The Mission therefore requests GOP to finalize the necessarytariff adjustments by end-January 1996, and NRL to submit audited financial statements to theBank at the latest by March 31, 1996.

16. Confirmation of Aide Memoire Findings and Recommendations. The findings andrecommendations contained in this aide memoire are subject to review and confirmation by theBank's senior management. The Mission will send to GOP a final version within two weeks ofits return to Washington.


PAKISTAN

Refinery Energy Conservation and Modernization ProjectOperation Plan

Project Status Performance Monitoring ScheduleComponent Indicators

1. Balancing and Completed Throughput to crude unit MonthlyModernization of Energy consumption andCrude Unit losses Monthly

Yield patternMonthly

2. Platformer and Completed Throughput MonthlyHydrotreater Yield pattern MonthlyDebottlenecking

3. Process Modifica- Completed Energy Consumption Monthlytion of Lube Plant

4. Captive Power Erection Repair of boiler 5 Bi-weekly progress reviewPlant completed. scheduled to be meetings and monthly

Commissioning/ completed by December status report to the Bank.(7.5 MW Steam start-up 3, 1997, i.e. steamTurbine) postponed. T-O-C available for turbine by

(Taking over January 1, 1998.Certificate) inpreparation. Long Performance Test by Monitoring by Consultantterm preservation turn-key Contractor Electrowatt/Jafri &to be done. Siemens (test scheduled Associates to make sure

for spring 1998). the plant meetsperformance guaranteeand installation accordingto the Contract up to FinalAcceptance Certificate(FAC).

Diesel Generator Set Erection Performance test by Monitoring of(4MW) completed, start- turn-key Contractors performance and

up/tests in Siemens (Waertsilae) contractual completion upprogress to FAC by Consultant(completion Electrowatt/Jafri &expected end of Associates.May 1997)

* The commissioning/start-up of the Steam Turbine set with its auxiliaries (AC condenser, etc.)could not be started, as boiler 5, which was to supply steam to the turbine, was severelydamaged. Hence, repair of the boiler has become a necessary pre-requisite for the successfulcommissioning/start-up and operation of the Captive Power Plan Steam Turbine.

-25- A12pendixBPage 1 of 9


PAKISTAN

REFINERY ENERGY CONSERVATION AND MOIERNIZATIION PROJECT(LN. 2842-PAK)

Borrower's Evaluation

NATIONAL REFINERY [I NlITEI)

KARA(CHI

PAKISTAN

-26- Appendix BPage 2 of 9

NRL Contribution to the ICR

TIMPLEMENTATION COMPLETION REPORTNATIONAL REFINERY LIMITED

KARACHIPAKISTAN

A. INTRODUCTION

1. National Refinery Limited (NRL) was incorporated as a Public Limited Company onAugust 19, 1963. The Company installed and commissioned Lube Refinery-I in June 1966.Subsequently, Fuel Refinery and a BTX Unit were installed and commissioned in April 1977and April 1979, respectively. The Company installed a Second Lube Refinery which came onstream in January 1985.

2. Refineries are generally heavy consumers of energy. The Lube Refinery-I wasdesigned in 1960 whereas the Fuel Refinery was designed during 1974-75. Oil, whichprovided the energy for the refinery was relatively cheap during these years; the incrementalcapital costs to conserve energy from various process streams could not be justified and hencethere was no incentive to recover waste heat by addition of energy conservation equipment.With the sharp escalation of crude oil and petroleum products prices during 1979-81, energyconservation became an item of high priority, particularly in refineries similar to NRL, whichwere designed and built during the 1960-70 decade. Consequently, with the objective tooperate the refineries efficiently at optimum capacity with minimum energy consumption perunit of feed processed, a contract was awarded in October 1983 to M/s Stone & WebsterCorporation of USA to conduct an Energy Management Audit and Conservation Study. Thescope of study included a general audit of major systems and equipment of NRL, to identifypotential areas for significant energy conservation and to recommend the scope of a detailedstudy be for assessing the cost/ benefits of energy conservation projects identified by Stone andWebster detailed below:

(a) Balancing and Modernization of Crude Distillation Unit of Fuel Refinery

(b) Balancing and Modernization of Platforming and Associated Hydrocarbon Unit

(c) Self Generation of Power at NRL

(d) Process Modification at Lube Refinery

3. In order to confirm the cost and benefits of each scheme, contracts were awarded toM/s Lummus, UK, M/s UOP Inc USA and M/s Foster Wheeler, USA/Italy who carried outtechno-economic and cost studies for the above schemes. Studies by the consultants confirmedthe financial and economic viability of the four projects.

-27- Ap2pendix BPage 3 of 9

4. Based on the Consultants' studies and estimated potential benefits, a Loan in theamount of US$21 million was approved by the Bank to cover the foreign exchange costs of thefour projects. IBRD Loan 2842-PAK became effective in July 1988.

ENERGY CONSERVATION PROJECTS

5. Balancing & Modernization of Crude Distillation Unit of Fuel Refinery. The PC-1 ofthe scheme was approved by ECNEC on March 12, 1986. This scheme envisaged balancingof crude distillation unit for processing additional crude of 15,500 barrels per day. Theadditional crude will be processed by utilizing the energy saved through the various energyconservation measures which are part of this project.

6. The total cost of the project is Rs. 137.773 million as follows:

(Rs. in Million)Foreign Exchange Cost 46.641Local Currency Cost 91.132

The project was completed in December 1989.

7. Balancing & Modernization of Platforming & Hydrobon Units. The project envisagedbalancing and modernization of the Platforming and Associated Hydrobon Unit to process lowvalue surplus naphtha to produce of 28,000 tons of HOBC and 1750 MT of LPG which aredeficit products in the country.

8. The total cost of the project is Rs. 268.542 million as follows:


The project was completed in May 1995.

9. Self Generation of Power at NRL. The project envisaged installation of 7.5 MW steamturbine along with a stand-by Furnace Oil Engine. The estimated cost of the project is Rs.542.141 million as follows:


10. Completion target of the project was September 1996, but due to major break down ofBoiler-V, the source of steam supply, the commissioning of 7.5 MW steam turbine is expectedby June 1997. However, the testing and comnmissioning of Furnace Oil/Diesel Generator isanticipated in January 1997.


11. Process Modification at Lube Refinery. The scheme envisaged process modification atPropane De-asphalting (PDA) in order to improve overall thermal efficiency of heatexchanging equipment and effective heat recovery. The modifications will involve installationof heat exchangers for recovery of waste heat, multi-stage solvent recovery system at PDA.The total cost of the Project is Rs. 71.362 million as follows:


The project was completed in January 1995.

TRAINING OF REFINERY MANPOWER

12. The objective of the Refinery Manpower Training Programme is to impart practicaltraining to refinery personnel in various functional areas such as operations, energyconservation and management, design, technical services etc. in a scientific way with theassistance of international consultants and to up-grade the quality of these personnel which hasnow become imperative in view of the Refinery Energy Conservation and Modernizationschemes.

13. A total of 60 Engineers of different disciplines are trained in Japan Corporation forPetroleum Industry Development (JCCP Japan) and Universal Oil Product Company of USA(UOP USA/USSR).

14. The total cost of implementation is Rs. 2.575 millions in foreign exchange.

B. ACHIEVEMENT OF OBJECTlYES

15. Following are the benefits being realized in NRL after completion of the abovementioned projects:

(i) The crude processing capacity has increased from 34,500 to 50,000 bpd,increasing production as follows:

M.TQNSLPG 5,000Naphtha 111,000Kerosene 135,900Diesel Oil 171,600Fuel Oil 219,600

(ii) Although the crude refining capacity has been increased by 15,500 bpd, theenergy consumption has not increased. Instead the energy has been conserved.

-29- Appendix BPage5 of 9

The energy consumption has decreased from 2.857 MMBtu/Te of Crude in1988-89 (before revamp) to 2.143 MMBtu/Te of Crude in 1991-92 (afterrevamp). Based on excess crude processing of 655,743 Te after revamp, theenergy saving in TOE is 11,800 tonnes. This includes energy conserved due toshutdown of Kero-Hydrobon, viz, 2,560 TOE. Therefore, the net energy saveddue to balancing and Modernization of Crude Distillation Unit is 9,240 TOE.

(iii) The revamp of Crude Distillation Tower has allowed an increased processing oflocal crudes. The processing of local crude has now increased from about12,000 to 16,000 bpd. This is an increase of almost 33 %.

(iv) The addition of Pre-Flash Tower has allowed to reduce the load on main towerby at-least 10 percent. This allowed NRL to improve the cut points of light andheavy straight naphtha. The yield of light naphtha (also known as straight rungasoline) increased in volume from 7.5 % to 10%. Thus the additional lightnaphtha has increased the potential of producing motor gasoline by about16,000 Te.

The change of cut-point of light naphtha has in turn resulted in the change ofcut-point of heavy naphtha. The new cut-point has allowed to lower theseverity of reaction at Platforming unit thus improving the processingconditions.

(v) The separation efficiency of middle distillates has considerably improved as aresult of even distribution of vapor-liquid load in the crude distillation tower.The production of kerosene has improved by 1.7% wt. over furnace oil.

(vi) The processing capacity of Hydrobon & Platforming Unit has increased from itsdesign 2,210 bpd (2,880 bpd operating before revamp) to 3,800 bpd, i.e. anadditional up-grading of low value 32,000 tons of export naphtha annually tohigher value products. Reformatted production capacity has increased from2,500 to 230 bpd.

(vii) Increasing the processing capacity of Platforming unit has enhanced producingcapacity of 90 octane reformatted by additional 28,000 tonnes and LPG byadditional 1,750 tonnes per year.

(viii) Additional production of 28,000 tonnes of reformat (90 octane) has increasedthe manufacturing capacity of motor gasoline by an additional 86, 000 tonnesper year.

(ix) Multi-stage recovery system at PDA unit of Lube Refinery-I has reduced energyconsumption by 4,970 TOE with an increased solvent recovery.


(x) As a net result of energy conservation, the consumption of energy has reducedfrom 2.80 MMBtu/Ton (7.26 tonnes per 100 metric tonnes of feed) to 2.21MMBtu/Ton (5.73 tonnes per 100 metric tonnes of feed).

(xi) Once the 7.5 MW Power Plant is made operational and supplying to the vitalunits, the power dips and failures will be eliminated and the down-time will beconsiderably reduced.

C. PROJECTS IMPLEMENTATION

Balancing and Modernization of Crude Distillation Unit of Fuel Refinery

16. The pumps, air cooler, pipes and pipe fittings instrumentation and desaltermodifications parts were procured from M/s Ingersoll Rand, M/s Hudson Italiana, M/sPhoceenne, M/s Rosemount, M/s Fisher, M/s Yamatake, M/s Honey Well, M/s NuvovPignone and M/s Howmar International. All the material reached in time.

17. M/s Enar Petrotech Services Ltd (M/s ENAR) were appointed as EngineeringProcurement and Construction (EPC) Contractor to carry out all the engineering design,preparation of technical specifications for equipment, tender documents, bid evaluation andsupervision of construction activities of the Project.

18. The job of civil works was awarded to M/s Abaseen at Rs 3.963 million and completedsuccessfully. The job of mechanical works was awarded to M/s SEFEC at Rs. 3.923 millionand completed successfully. The job of electrical and instrument works was awarded to M/sENAR at Rs. 1.695 million and completed successfully.

19. The project was completed successfully in time.

Balancing and Modernization of Platforming and Associated Hydrobon Unit

20. The pumps, compressor, heaters, exchangers, pipes and pipe fittings, instrumentationsand insulation material for the project were procured from M/s. Dresser, M/s Nuovo Pignone,M/s Born Heaters, M/s Luigi Resta, M/s Phoceenne, M/s Fischer, M/s Foxboro, M/sRosemount and Yamatake. All the material reached in time except heaters material from BornHeater, which was delayed by 46 weeks.

21. M/s ENAR were appointed as EPC Contractor for the engineering design, preparationof technical specifications for equipment, tender documents, bid evaluation and supervision ofconstruction activities of the project. The contract price of M/s ENAR was Rs 16.00 million.

22. Civil works contract was awarded to M/s Jammy Constructors (Pvt) Ltd, at Rs. 2.855million and completed successfully. Mechanical works contract was awarded to M/s SEFECEngg. (Pvt) Ltd, at Rs 7.358 million and completed successfully. Instrumentation workscontract was awarded to M/s United Engg. Construction (Pvt) Ltd, at Rs. 2.378 million and


completed successfully. Electrical works contract was awarded to M/s Modem Engg. Worksat Rs. 1,645,500.00 and completed successfully.

23. The project was delayed by 44 weeks due to:

(a) delay in approval from Ministry of Production for award of contract to pumpsand compressor bidders and

(b) delay in supply of furnace material by M/s Born Heaters International, UK

Self Generation of Power at NRL

24. Presently, NRL Electrical supply system is hooked-up with the KESC electric gridnetwork system. Due to the frequent power failures and power dips of KESC, supply hadbecome very unreliable. This resulted in dangerous electrical stresses on H.T/L.T electricmotors. Moreover thermal shocks on mechanical equipment resulted in leakages and safetyhazards and production loss.

25. NRL therefore planned to put up its own power generation system to ensureuninterrupted power supply and reduction in down time of the Refinery. NRL being a vastpetroleum and a petrochemical complex was not having enough experience of implementationof power generation project. Therefore, IBRD approved Consultant M/s ElectrowattEngineering Services Ltd, (EWI) were engaged in 1988 for the following jobs:

(a) Preparation of EDS Package.(b) Tendering and Evaluation work.(c) Design Review and Project Implementation.

26. Two stage competitive bidding was done as per Consultant guidelines of M/s EWI andthe job was awarded to M/s Siemens, Germany in May 1994. Due to delay in establishmentof operative L/C, commencement date of the contract was September 1994 with a contractualcompletion date as September 1996. On the request of NRL, Siemens Germany agreed tocomplete the project by June/July 1996. However, due to late clearance of equipment fromcustom and other problems, sub-contractors of Siemens Germany could not complete the job intime.

27. In October 1996, unfortunately, we had a major break down of Boiler-V, the source ofsteam supply. This requires major repairs and may take more than six months. It is expectedthat Turbo Generator will be completed by June 1997. However, Siemens Germany are tryingtheir best to complete the Diesel Generator set by end-January 1997.

Process Modification at Lube Refinery

28. The pumps, pipes and pipe fittings, instrumentation and insulation material for theproject were procured from M/s Dresser, M/s Phoceenne, M/s Fischer, M/s Foxboro, M/sRosemount, Mls Yamatake and M/s Cape East. All the material reached in time.


29. M/s ENAR were appointed as EPC Contractor for same activities as mentioned inHydrobon Unit at S.No.2. rhe contract price was Rs 11.00 million. Civil works contract wasawarded to M/s Jammy Constructors (Pvt) Ltd, at Rs 1.471 million completed successfully.Mechanical works contract was awarded to M/s SEPEC Engg. (Pvt) Ltd, at Rs 3.790 millionand completed successfully. Instrumentation works contract was awarded to M/s UnitedEngg. Construction (Pvt) ILtd, at Rs 1.225 million and completed successfully. Electricalworks contract was awarded to M/s Modern Engg. Works at Rs. 847,698.00 and completedsuccessfully.

D. MAJOR FACTORS AFFECTING THE PROJECT

30. The major factors which delayed the project implementation were:

(i) Limited authority granted to NRL to make procurement decisions. Forprocurement above Rs 20.00 million, the decisions were taken by the Ministry,which questioned NRL reconmmendations and decisions.

(ii) Delays by the Vendors in supplying the material. For example delivery offurnace material was delayed by 46 weeks.

(iii) Need for govertnment approval to train ptersonnel and delays in getting theseapprovals.

The implementation of the Projects were delayed by over 36 months because of one or more ofthe above reasons.

31. The project component most adversely effected was the implementation of the powerplant, which represented about 50 percent of the project cost. It comprised one 7.5 MW steamturbo generator and one 4.0 MW stand by fuel oil diesel generator.

32. Bid documents for this component were issued in August - September 1992. Bids werereceived on March 31, 1993 which were evaluated and recommendations finalized by July 26,1993. After many clarifications from the Ministry, a contract was signed with the supplier onMay 15, 1994. The commencement date of the contract was September 30, 1994 andcompletion date of the project as September 30, 1996.

E. IBRD PERFORMANCE

33. IBRD approved a foreign currency loan amounting to US$21.00 million effective fromJuly 1988. The World Bank played a major role in assisting NRL to resolve difficultproblems as well as providing guidance as required during project implementation. All phasesof projects were executed in close adherence to World Bank guidelines, and procedures for


pre-qualifications and procurements World Bank extended its fullest cooperation in making theprogress of the projects smooth. There were several missions/visits of the World Bank toNRL for monitoring and advice. They also helped in resolving many problems with variousAgencies. During the entire process of implementation, the World Bank remained in closecontact with NRL and observed the physically progress of all projects and expenditure. NRLalso kept the World Bank posted in respect of the progress of the projects regularly.

34. There was no problem in the cash flow to make regular payments to the Contractors.The borrower experience strict supervision and adherence to rules in the procurement process,which helped us in financial discipline.

35. The Bank was gracious enough to grant extension in the Loan to complete the projectsespecially, the Self Generation of Power Project.

I

IMAGING

Report No 16752Type: ICR

Documents

World Bank Documentdocuments.worldbank.org/curated/en/752951468286505058/pdf/multi... · Energy and Project Finance Division ... demand; and (iv) ... the fact that the power component