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Document of

The World Bank

FOR OFFMCIAL USE ONLY

f/0. RePot NM 8591-AL

STAFF APPRAISAL REPORT

ALGERIA

FIRST PETROLEUM PROJECT

JUNE 26 1991

Industry and Energy Operations DivisionCountry Department IIEurope, Middle East and North Africa Regional Office

TWhis document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit Algerian Dinar (AD)

DA 17.11 (April 1991) US$ 1.00DA 1.00 - US$ 0.06

WEIGHTS. MEASURES AND ENERGY CONVERSION FACTORS

1 kilogram 2.2046 pounds (lbs)1 metric ton (ton) - 1000 kg

- 2204.6226 lbs1 meter (m) - 3.2808 feet (ft)1 kilometer (km) 1000 m

- 0.6214 miles1 cubic meter (CM) - 35.3147 cubic feet (cu ft)1 barrel (bbl) - 42 US gallons

- 159 lit-rs1 kilocarie (keal) - .9683 I itish thermal units (Btu)1 British thermal unit (Btu) = 0.2520 kcal1 thermie (th) = 1,000 kcal1 kilowatt hour (kWh) = 1,000 watt hours1 Gigawatt hour (GWh) - 1,000,000 kWih1 Megawatt (MW) = 1,000 kilowatt (kW)1 ton of oil equivalent (toe) - 10,000 th

- 0.9091 tons of crude oil- 0.8475 tons -if LPG- 0.9091 tons of refined petroleum products- 1068.4 e3 of natural gas- 1.333 tons of coal- 6.6667 tons of fuel wood

ABBREVIAT1ONS ANL ACRONYMS

ASMIDAL: Entreprise Nationale d'Engrais et de Produits PhytosanitairesBAD: Banque Algerienne de DeveloppementCREPS: Compagnie de Recherches et d'Exploration des PetrolesENAFOR: Entreprise Nationale de ForagesENAGEO: Entreprise Nationale Algerienne de GeophysiqueENIP: Entreprise Nationale de la PetrochimieENPC: Entreprise Nationale des Plastiques et CaoutchoucENSP: Entreprise Nationale des Services aux PuitsGTP: Entreprise Nationale de Grands Travaux PetroliersLNG: Liquefied Natural GasLPG: Liquefied Petroleum GasMMI: Ministry of Mines and IndustriesNAFTAL: Entreprise Nationale de Commercialisation et de DistributionNAFTEC: Entreprise Nationale de Raffinage des Produits PetroliersOPEC: Organization of Petroleum Exporting CountriesSONATRACH: Societe Nationale pour la Recherche, la Production, le Transport,

la Transformation et la Commercialisation des Hydrocarbures

FISCAL YEAR

January 1 - December 31

FOR OFFICIAL USE ONLY

ALQERIA

FIRST PETROLEUM PROJECT

STAFF APPRAISAL REPORT

Table of CnteaNt

Page Nov

PROJECT SUMMARY i

I. SECTOR CONTEXT

A. Overview .IB. Linkages to the Economy. 1C. Energy Resources. 2D. Domestic Demand and Pricing. 6E. Hydrocarbon Exports .10F. Petroleum Sector Institutions .12G. Government Objectives and Strategy .14H. Priority Issues and Bank Role .15

II. THE BORROWER

Background and Scope of Activities .19Present Organization .20Proposed Organizational Changes .20Staffing and Training .21Accounting, Audit and Insurance .22Financial Performance .23SONATRACH's Investment Program .26Summarized Financial Projections .27Sensitivity of Financial Projections .29Finar.c.al Covenants .29

III. THE PROJECT

Project Objectives .30Project Description .30Project Implementation .31Project Cost .32Project Financing .33Procurement .33Disbursements and Retroactive Financing .34Environment .35Reporting Requirements .36

Following an appraa mission to Algeria In January/Februaay 1990 and a post-appraisal rrs i In June 1990, thireport was'prared by: A. Barbu (Task Man, H. Ari (Senior Petoleum Specialist), R. Hamilton (SeniorEnergy Economist), G. Khoury-Haddad (Senior Petroleum Engineere, T. O'Connor (Principal Petroleum Engineer),T. Gofton and K Sakoglu (Consulants). Secretarial assiance was provided by Mrs. Yvalne Schulz.

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

Table of Contents (contd.)

IV. PROJECT BENEFITS AND RISKS

General Benefits .............................................. 37Economic Analysis ............................................. 37Project Risks ................................................. 38

V. AGREEMENTS TO BE REACHED ...................................... 39

ANNEXES

1.1 1987 Energy Balance1.2 Energy Production, Exports and Consumption, 1972-19881.3 Production, Trade and Consumption of Natural Gas, 1979-891.4 Production, Trade and Consumption of Crude Oil, Condensates, LPGs and

Refined Petroleum Products, 1979-891.5 Domestic Consumption of Petroleum Products1.6 Hydrocarbon Exports Forecasts (volume)1.7 Forecast Energy Demand1.8 Forecast Supply and Demand of Natural Gas and Condensates1.9 Forecast Supply and Demand of Crude Oil and Refined Petroleum Products1.10 Economic Cost of Natural Gas1.11 Summary Information on Major Sector Enterprises1.12 Petroleum Geology and Exploration

2.1 SONATRACH - Organization Chart2.2 SONATRACH - Main Financial Statements and Assumptions

3.1 Summary Project Cost3.2 Annual Project Expenditures3.3 Project Implementation Schedule

4.1 Economic Analysis of Mesdar subproject4.2 Economic Analysis of Amassak subproject

5. Documents Available in Project File

Map IBRD No. 22406

First Petroleum Project

Loan and Project Summary

Borrower: SONATRACH (Societe Nationale pour la Recherche, laProduction, le Transport, la Transformation esc laCommercialisation des Hydrocarbures).

Guarantor: Democratic and Popular Republic of Algeria.

Loan Amount: US$100 million.

Terms: Seventeen years, including a 5-year grace period, at theBank's standard variable interest rate.

ProjZect The project's primary objectives are to: (i) help theObjectives: Government and SONATRACH in their efforts to attract

investments in exploration and development by foreign oilcompanies; (ii) help improve the efficiency of the petroleumservices subsector (and particularly of drillingoperations); (iii) help SONATRACH optimize the production ofits oil fields through enhanced oil recovery schemes; and(iv) address environmental problems related to drilling andproduction operatlons. A related objective is to helpSONATRACH mob.lize external funds through co-financingarrangements with Eximbank of Japan, and more generally, tofacilitate SONATRACH's efforts at reentering theinternational capital markets.

Prolect The project comprises four components: (i) assistance forDescriotion: the promotion of exploration acreage to foreign oil

companies, including basin studies, the setting up of amodern exploration data base, promotional and contractualassistance, and the services of full-time foreign experts;(ii) technical assistance and training in drillingsupervision; (iii) selected enhanced oil recoverysubprojects and related studies; and (iv) training and othertechnical assistance inter alia in the area of organization,financial systems, platning optimization, and environmentalprotection.

Benefits and Project benefits would include an enhanced ability to&iskm: attract and/or foster private investments and financing, as

well as improvements in SONATRACH's own efficiency(including investment planning and environmental managementcapabilities). In addition, the enhanced oil recoverysubprojects would be highly profitable and would generatevery substantial foreign earnings. Main risks associatedwith the oil recovery projects concern reservoirperformance, project implementation, and oil priceuncertainty. These risks are considered acceptable in light

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of (i) the detailed reservoir studies which have beencarried out, (ii) SONATRACH's extensive experience withsecondary recovery schemes, and (iii) the fact that oilprices would have to decrease to unrealistic levels for theprojects to become uneconomic.

Estimated Locli Foreign TotalCosts: (US$ million)-----

Exploration promotion assist, 1.6 37.6 39.2Drilling supervision T.A. 0.4 9.9 10.3Enhanced oil recov. & studies 49.0 85.3 134.3Other T.A. and trairing 5.4 8.7 14.1I.D.C. 12.7 29.6 -42.3

Total 69.1 171.1 240.2

Financing Plan: Local Foreign Total

SONATRACH 27.5 - 27.5Domestic loans 28.2 - 28.2IBRD - 100.0 100.0Japan Eximbank 13.4 63.4 76.8French Govt. - 7.7

Total 69.1 171.1 240.2

Estimated FY91 FY92 FY93 FY94 FY95Disbursements: ------------(US$ million) ------

Annual 20.0 35.0 35.0 5.0 5.0Cumulative 20.0 55.0 90.0 75.0 100.0

Economic Rates Above 40X for enhanced recovery components (not applicableof Return: to technical assistance and studies components).

Map: IBRD No. 22406.

ALGERIA

FIRST PETROLEUM PROJECT

1. SIECTOR CONTX

A.

1.1 Since Algeria's independence, hydrocarbons have been and remain tothis day, the dominant sector in the country's economy. They account foralmost all of the country's energy resources and primary energy production,represent the bulk of merchandise exports (96X). and still provide a majorshare of the Government's budgetary revenues (381). While retaining thiscritical role in the economy, the hydrocarbon sector has undergone verysignificant changes over the last thirty years. One major change has been thediversification of both production and exports which took place since 1962 asa result of the Government's policy to develop downstream activities and totap Algeria's enormous gas reser-ves: while Algeria, in 1962, was essentially aproducer and exporter of crude oil, it has become a major producer andexporter Af gas liquids (condensates and LPGs), refined petroleum products,LNG (liquified natural gas, in which it was a world pioneer) and piped naturalgas. Another development has been the growth of domestic energy consumption(which now accounts for 14X of total primary energy production) and mostparticularly of natural gas, which resulted from the country's rapidindustrialization combined with a zelatively low energy efficiency (itselfinduced, until recently, by low energy prices). Final'v, major changes haveoccurred in the sector's institutional framework, and are still underway;whereas, since the nationalizations of 1971 and throug the mid-1980s, mostpetroleum activities had remained concentrated in SONATRACH (the national oilcompany) and a few related public enterprises, the Government has now openedup the sector to investment by foreign oil companies; a number of newexploration contracts have already been signed and major joint-ventures indownstream activities are currently being negotiated.

S. Unkage to the Economy

1.2 First and foremost, the hydrocarbon sector represents the country'smajor source of revenues. Because of the importance of such revenues forAlgeria, the collapse in international oil prices of 1986, which led to a 381fall in total exports in 1986, largely explains the contraction of GDP growthfrom an average growth of 4.5 p.a. in 1980-85 to an average decline of 0.5Xbetween 1986 and 1988. In 1989, hydrocarbons still accounted for 96X of totalAlgerian exports (US$9.1 billion). In spite of recent efforts to promoteexports of industrial and other products, hydrocarbons are expected to remainthe predominant source of export earnings for years to come (about US$22billion or 90X of total projected exports in 1998). The prospects forcontinued hydrocarbon export revenues and their continued diversification alsoprovide th3 Government with added flexibility in mobilizing externalborrowings in order to finance its balance of payment deficit. Direct taxesassessed on hydrocarbons production and profits amounted to US$4.3 billion in

1'88, accounting for 26% of total Government revenuesAl; another US$1.4billion of ad valorem taxes were assessed on domestic sales of ref4 nedproducts, providing the Government with a total of US$5.7 billion inpetroleum-related fiscal revenues. Massive investments in oil and gas wererequired through the 1970s and early 1980s in order to support the country'sdiversification strategy, averaging US$1.5 billion p.a. between 1985 and 1987.Major investments were also carried out during that same period inhydrocarbon-based industries, most particularly petrochemicals andfertilizers. Although the sector's share of total egRloymsnt is relativelylow, it comprises a large part of the country's highly skilled staff, both attechnical and managerial level, since it has traditionally benefited fromsubstantial training resources.

C. EnerMv Rfoiur

EneM3( Su2RIV

1.3 Algeria's substantial energy resources consist mostly of natural gas,gas liquids and crude oil, alhtough there are also minor coal deposits, alimited potential for the generation of hydroelectricity, uranium deposits,geothermal resources and solar energy. Proven na_tt-ral Zas reserves at thebeginning of 1989 amounted to about 3,200 billion cubic meters (BCM) or 3,000billion tons of oil equivalent (toe), accounting for nearly 4% of proven worldreserves. These reserves include estimates for condensates and LPGs (about570 million toe). Proven gas reserves correspond to about 60 years ofproduction at current levels. At the beginning of 1989, Algeria's provenrecoverable reserves of crude oil amounted to about 775 million tons, most ofwhich were discovered before 1962. This figure corresponds to about 22 yearsof production at current rates, one of the lowest ratios among Lajor producingcountries. Although recent discoveries of crude oil have been small and havenot added significantly to reserves, forthcoming secondary and tertiaryrecovery schemes could increase proven reserves by a sizeable amount (seepara. 1.10). Algeria's gpal reserves--about 40 million tons (30 million toe)--are located mainly in the Abadla Basin in the southwest; none of them,however, are currently commercially exploitable, and Algeria imported 1.4million ton (1 million toe) of coking coal in 1987. Most of Algeria's limitedbydroelectr_i potential is already being exploited. Average annual generationfrom controlled storage is about 320 GWh, supplemented by an avera,e of 70GUh/year from small run-of-river plants and 50 GWh/year from plants associatedwith irrigation schemes. Current itastalled capacity is 285 MW, of which 194KW could be considered firm power. Uranium reserves in the extreme south ofthe country are estimated at 25,000 tons of uranium metal. Preliminarygeophysical and hydrogeochemical studies indicate the presence of substantialgeotheral, s-olar and wind energy resources, which could be exploited at somefuture date.

1/ Sdos or II for detail on histoftai an prOec taxes pi byr 5O#ATPA.

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Petoleum Ex,tlaon

1.4 Although petroleum exploration in Algeria began at the end of the19th century in the Chelif basin, the first commercial discovery dates backonly to 1948; intensive exploration in the Sahara started in 1953, resultingin the discovery of the giant Hassi-Messaoud (oil) and Hassi R'Mel (gas)fields in 1956. In the following years, additional fields were discovered inthe Ilizi, Ghadames and Oued Mya Saharan basins, and more recently furthersouth in the Ahnet basin (gas). Details on Algeria's petroleum geology andexploration history are provided in Annex 1.12.

1.5 With most of main discoveries having taken place almost 30 years ago,Algeria is now a mature oil producer and future exploration in the producingareas of the Eastern and Southeastern Sahara is unlikely to yield very largediscoveries. However, the use of modern exploration techniques in theseareas, which are generally considered oil-prone and low-risk, is likely tolead to small or medium-size discoveries which would boost the country'sreserves. On the other hand, the vast areas of the Western and SouthwesternSahara remain largely unexplored due to the distance from existinginfrastructure and the fact they have been so far considered mostly gas-prone; the possibility of finding major reserves of oil and/or gas in thesebasins cannot be discarded and their exploration is now a priority. A firstand important step in that direction will be the undertaking by SONATRACH ofseveral integrated basin studies to be financed under the project (see chapterIII).

Leasl and Contractual Framework

1.6 Algerian policy in the late 1970's to mid-1980's had been to relyessentially on SONATRACH for most of the country's exploration efforts,effectively discouraging any substantial investment by foreign oil companiesthrough rigid and unattractive contractual and fiscal terms. A major shift inpolicy was undertaken in 1986 with the realization that the country's crudeoil reserves were not being replenished through new discoveries, and thedecision to attract foreign investment to complement and enhance (through theintroduction of modern exploration techniques) SONATRACH's efforts. As thebasis for its new policy, the Government enacted a new Petroleum Code (Law 36-14 of August 19, 1986 and subsequent decrees) which has modernized theprevious framework and provides considerable latitade to the Ministry of Minesand Industries (MMI) and SONATRACH to conclude exploration and productioncontracts with foreign firms. The new law allows for four types ofcontractual arrangements between SONATRACH (as sole holder of the miningtitle, or permit) and foreign companies: joint stock companies, unincorporatedjoint ventures, service contracts and production-sharing arrangements. Onlythe last two are currently being pursued, with most companies preferring theproduction-sharing version.

1.7 Since promulgation of the new Code, a total of eleven explorationcontracts have been signed with seven European and North American companies(see map) and several others are under negotiations. SONATRACH has agreed toa wide variety of economic formulas in the contracts they have negotiated,

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reflecting a new flexibility; this is especially the case for the production-sharing versions, for which the law gives only the very general guideline thatthe 'foreign associate's" share must not exceed 49Z of total project revenues.On some contracts, SONATRACH is carried only through the exploration andappraisal stage, paying its (minimum 51%) share only after commercialdiscovery; in others, it never contributes to project costs, with the companypaying SONATRACH's share and recovering the monies advanced for this purposefrom a percentage (substantially less than half) of SONATRACH's share inproduction. The signing of these new contracts marks a sharp departure fromprevious restrictive policies. However, their number so far is notcommensurate with a country with the size and potential of Algeria; thispoints to a need for better organizing and structuring the promotion processwhile improving on both the form and the substance of the contractual/legalframework for exploration (eg. through the elaboration of a single modelcontract, and the inclusion of provisions to make exploration in gas-proneareas more attractive and to permit tax creditability for US companies). Inorder to address these weaknesses, SONATRACH recently established a newDepartment in charge of joint ventures; specialized assistance (including taxand legal advice, training, etc.) to this new Department is included in theproposed project (see chapter III).

1.8 Although the opening up to private investment had so far beenrestricted to exploration of new acreage, a major breakthrough was achievedvery recently (April 1991) with the signing of a joint-venture agreementbetween SONATRACH and CFP (Total) for the development of the Hamra condensatefield (about 150 MMB oil equivalent and total investments estimated at US$500million); this is the first time a foreign oil company is allowed to invest inthe development of already proven reserves and it clearly paves the way forthe future involvement of oil companies in the massive program of enhanced oilrecovery in fields currently produced by SONATRACH, which is critical toAlgeria's oil future (see para. 1.36).

cQ%W9e Oil Reserves and Production

1.9 Reserves. Of original recoverable reserves of crude oil of about1,750 million tons, about 1,010 million tons have been produced, leavingremaining recoverable reserves of 740 million tons, as of January 1, 1990.About 66% of remaining recoverable reserves are in the Hassi Messaoud Region,and 11% and 9% in Haoud Berkaoui and Rhourde El Baguel respectively, the nexttwo largest fields. Algerian crude oil is light (0.8 density) and withoutsulphur, ensuring its marketability. The following table illustrates thecurrent reserve situation:

Table 1.2: PROVEN CRUDE OIL RESERVES(million tons)

Orig. in Place Crig. Recoverable Produced Remaining Recoverable(as of 11/190)

7,500 1,750 (232) 1,010 (58%) 740

NB: These figures do not include additional recoverable reserves which canbe produced by future enhanced recovery schemes as such additions are onlyincorporated at the time such projects come into effect.

1.10 Production of crude oil fell during the 1980s, from 52 million tonsin 1979 to 32 million tons in 1988 (Annex 1.4). This fall occurred because ofthe gradual depletion of existing reserves coupled with a policy ofcontrolling production in accordance with OPEC quotas. Production increasedagain to 33.6 millio.i tons in 1989 and 35.3 million tons in 1990 as a resultof recent investments in secondary recovery (i.e. through enhanced recoverymethods such as water or gas injection). Currently, about 70a of Algeria'scrude oil production is provided by secondary recovery means (75X in HassiMessaoud, 30X at Haoud Berkaoui and 352 at Rhourde El Baguel). Theimplementation of additional secondary and tertiary recovery schemes in theregions of Haoud Berkaoui, Hassi Messaoud, Hassi R'Mel, Rhourde El Baguel, TinFouye, Tabankort and Stah should permit maintenance of overall crudeproduction at slightly above the current rate until about 1993 (37 milliontons)" after which time, in the absence of further new enhanced recoveryschemes or significant new discoveries, productia- from existing fields woulddecline again (30 million tons by 2000).

Gas Reserves -anPM.gdjon

1.11 Algeria had about 3,200 BCM of proven recoverable natural gas inplace as of January 1, 1990, of which 70% were in the Hassi R'Kel region.Natural gas produced in association with crude oil (associated gas) isinjected after removal of the gas liquids for purposes of enhanced crude oilrecovery (pressure maintenance schemes). With the introduction of gasinjection projects, the amount of flared gas has diminished to negligiblelevels. Algeria's sales of dry natural gas come entirely from noni-associatedgas reservoirs, nearly all in the Hassi R'Mel region. More than half of grossproduction is reinjected after removal of the gas liquids. This is the resultof a deliberate policy by SONATRACH to produce gas in excess of marketrequirements in order to increase ultimate recovery cf these liquids.31

1.12 Detailed data for natural gas production, trade and consumption areshown in Annex 1.3. Gross production more than doubled between 1979 and 1985,from 43.6 BCM to 90.7 BCM and grew by 7.2X per year from 1985 to 1989,reaching 119.6 bcm. Gas transported to market, grew by 8.72 per year from1979 to 1985 and by 6.72 per year from 1985 to 1989, reaching 43.9 bcm in thatyear. This slower growth is due to the fact that an increasing proportion ofthe gross production was reinjected into the reservoirs after removing the gasliquids. Whereas in 1978 most (81X) of the gas transported was sold to gasliquefaction plants for exports (see para. 1.24), this proportion fell to 53Xin 1989 as pipeline exports of natural gas became significant after 1982(reaching 9.0 BCM in 1989) and domestic consumption of natural gas grewrapidly (reaching 9.0 BCH in 1988) as a result of the country's fuelsubstitution policy.

1/ Algeria's OPEC quta was Increased to 37.9 millin tons (E27,000 S0) In Jianuary 1990, Le. about 3a % o total OPEC poductin.

3/ The procedure ot producng tne wet (rich) gas. removing the Uquks, and reinjoding tne dry gas which Is not soWd ncreaesumiate lquids mcovery since the gas r ning In the resewolrs once producton ceas W contain fewer gas Uqulds.

6-

1.13 Production of condensates and liquid Retroleum gafses (LPGs) Increasedsignificantly from 1979 (4.9 and 0.8 million tons respectively) to 1989 (16.8and 4.8 million tons) (Annex 1.4). The bulk of the production of conder.satesand LPGs comes from the Hassi R'Mel region (LPGs are separated in the ArzewJumbo plant). LPGs are also produced at refineries and gas liquefactionplants, with such production increasing from 0.4 Mt in 1980 to 1.1 Mt in 1988.Production of condensates is expected to further increase until 1995 butdecrease afterwards as declining recovery from the gas at Hassi R'Mel is lessthan fully offset by increasiag recovery from other gas regions. All of thecondensa'ps are projected to be exported. Detailed supply and demandforec' for natural gas and gas liquids are shown in Annexes 1.6, 1.7 and1.8.

D. Domestic Demand and Pricing

1.14 Algeria's per capita energy consumption (about 1 toe per year) ismuch higher than in neighbouring countries (about double that of Tunisia andfour times that of Morocco) whereas its per capita income would not becorrespondingly higher when measured on a purchasing parity basis. However,its per capita energy consumption is not high relative to similar petroleumexporting countries such as Mexico and Venezuela. Nevertheless, Algeria'sratio of energy demand growth to GDP growth is very high (2.9 from 1980 to1988) compared to 0.7 in Morocco (1980-1988) and 0.5 in Tunisia (1986-1989).Algeria's high and increasing energy intensit7 is attributable to: significantenergy use by the large and relatively fast-growing energy industries(especially gas liquefaction for which use of natural gas as fuel accounts forabout one-sixth of total domestic demand); historically low energy prices,only partly justified by low economic costs (paras. 1.17 and 1.19); and thepoor productivity that has characterized the industrial sector. Energy demandby final domestic consumers has consistently grown more rapidly than primaryenergy production, and absorbed 15X of a total primary production of 97.5 Mtoein 1988 (Annexes 1.1 and 1.2). However, the growth of final consumptionslowed down significantly from 11.32 per year in 1972-80 to 2.9X in 1985-88,as a result of the slowdown in economic growth. The structure of final energyconsumption reflects Algeria's very rapid ineustrialization since indepen-dence, with industry and construction's share roughly doubling since 1965.Algez'2as industrial progress is even more emphatically shown by the size ofgas liquefaction, petroleum refining, electricity generation, andpetrochemical and fertilizer production. Net generation by the nationalelectricity company, SONELGAZ, grew by an average 10.3X per year from 5481 GWhin 1979 to 14610 GWh in 1989, with most of it generated by :team and combus-tion turbine units fuelled by natural gas. Estimates of forecast domesticenergy demand based on projections made by MMI and SONELGAZ show an averagegrowth of 4.71 per year between 1990 and 2000 (see Annex 1.7). This rate ofgrowth, however, is likely to be dependent on domestic pricing policies aswell as the success of energy conservation efforts undertaken by industrialenterprises in the context of their planned restructuring.

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Rina and Consumplion ot Petoem Produt and LPGa

1.15 Data for production, trade and consumption of Detroleum products.condensates and LPGs are shown in Annexes 1.4 and 1.5. Algeria has rapidlyincreased its petroleum refining capacity, thereby enabling an increasingproportion of oil to be exported in the form of refined petroleum products.While crude oil exports fell from 45.1 million tons in 1979 to 13.0 milliontons in 1989, exports of refined petroleum products grew from 2.9 million tonsin 1979 to 13.4 million tons in 1989. The growth of domestic consumption ofrefined petroleum slowed down significantly from 7.7X per year between 1979and 1985 to 1.11 per year between 1985 and 1988 to reach a level of 6.3million tons (201 of total crude oil production). These rates of growth arebelow those for domestic natural gas consumption, indicating substitution ofgas for petroleum products, particularly in the industrial sector. In 1988,gas oil and gasoline accounted for 851 of domestic refined petroleum productsconsumption, the only other significant oil products consumed being jet fuel,and bitumens and lubricants produced from imported heavy oil. Domestic LPGconsumption (nearly all by households, but also some by vehicles) wassignificant in 1988 at 1.2 million tons, but its growth rate was a fairly low2.91 per year from 1985 to 1988. In the future, about 21.5 million tons ofcrude oil (including 0.5 million tons of imported heavy crude) are expected tobe sent to Algerian refineries (based on nearly full capacity utilization) andthe rest exported. Exports of refined products are projected to diminishgradually as domestic consumption grows. The latter, consisting almostentirely of gasoline and gas oil, is projected to grow at a modest 4.41 peryear as a result of competition from natural gas and LPGs. Detailed supplyand demand forecasts for crude oil and refined products are shown inAnnex 1.9.

DomesUc Gas Consumtilon

1.16 Annex 1.8 includes a detailed breakdown of domestic demand fornatural gas and points out to a substantial use by energy industries (mostlyLNG plants) and for thermal power generation. As a result of SONELGAZ'smassive investments in gas-fired stati.ons, consumption by the power sector isexpected to continue to grow rapidly in the future, from 4.9 Mtoe in 1990 to9.0 Mtoe by 2000. Consumption of energy for non-energy uses grew from 0.6 Mtoein 1980 to 1.8 ttoe in 1988 (Annex 1.2), mostly for production of fertilizersand petrochemicals. The development of these industries has been undertakenby two companies formed after the reorganization of SONATRACH: the EnterpriseNationale d'Engrais et de Produits Phytosanitaires (ASMIDAL) and cheEntreprise Nationale de la Petrochimie (ENIP).

D_etc Enav Pricina

1.17 Government policy, which was reaffirmed in the context of thenegotiations of the recently-approved IMF standby loan, is to bring domesticprices of most energy products in line with economic cost so as to encourageenergy conservation and substitution of natural gas for petroleum productswhile enpbling the energy supply and distribution enterprises to achievefinancial equilibrium. Until early 1991, however, the gap between retail

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prices and economic cost had remained substantial for most energy products,and even increased in recent years due to t1s depreciation of the Algeriandinar (59% between late 1987 and early 1991). As a result implicit economicsubsidies on petroleum products were estimated to total US$1.0 billionannually at prices prevailing at the beginning of 1991.V The Government hastherefore set as its objective the elimination of all subsidies on energyproducts, with the possible exception of LPG for household use (for whichsubsidies have been a critical tool of the Government's fight againstdeforestation). Given the size of the gap to be covered, the authorities haveproposed, and the Bank agrees, that this objective could only be met inseveral stages. The first stage has already been carried out, with theimplementation, effective January 1 and April 1, 1991, of steep increases inthe prices of jet fuel (200%, with another 36% due in September 1991); fueloil (215%); lube oil (161%); and propane (29%). These increases (equivalentto an average 26X overall increase on all products) are expected to bringabout a r3duction of about 50% in total implicit subsidies. As a result, andas shown in the following table, prices of petroleum products are now about inline (or will be in September 1991 in the case of jet fuel) with economic cost(measured as border prices plus internal distribution margins), excepr for gasoil and LPG; due to remaining discrepancies on the latter, product prices on aweighted average basis, are currently at about 64X of economic cost.

TabLe 1.2: COMPARISON OF DOMESTIC PETROLEUM PRCDUCTS PRICES WITH ECOFCNCC COST

Domestic/ _Erort Domestic Price/Without dist. With dist. Export Price

(cAD/liter) (US$/ton) cost(US$/ton)k/ cost(US$/ton) Z

Premium gasoline 375 313 239 268 117Reguiar gasoline 310 265 236 265 100Jet fuel (domestic flights) 225 174 208 237 73Gas oil 95 70 1SO 219 32Heavy fuel oil 189 127 120 127 100LPGe for transportation 110 133 137 157 85LPGs (non-transport) (AD/bottle)

Butane (13 kg bottle) 19 90 137 214 42Propane (35 kg bottle) 58 104 in 6Q 57

Weighted average 144 192 225 64

s/ Prices effective April 1, 1991.,/ For each product, economic cost was calculated by adding to (or subtracting from) the

reference price of US$157/t (US$20/bl) for Algerian crude, the average margin (or discount)observed on the international market (CIF Mediterranean) between 1087 and 1989; to thisfigure, the respective domestic distribution cost (exl. taxes) was added.

1.18 The second stage will involve tackling remaining discrepancies forgasoil and LPG, most likely through gradual price increases to be implementedin coming months, in parallel with measures to mitigate the impact of suchincreases on the poorest segment of the population.

1/ Using the Mart 199 exchane rate. .e. OA 16.2/US$.

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1.19 Natural Gas. While Algeria's limited oil reserves provide ajustification for setting petroleum product prices close to the internationallevel, the much larger reserves of natural gas (relative to current andprospective demand) and the expectation that exports cculd not be greatlyincreased without large price adjustments in international markets provide ajustification for setting prices for domestic gas sales below the exportprice. The appropriate benchmark in this case is the long-run marginal cost(LRMC) of production, transmission and distribution plus a "depletion premiim"which reflects the opportunity cost of using the resource today rather thar.saving it for the future.V Detailed assumptions and calculations for theeconomic cost of natural gas at various pressure levels are included inAnnex 1.10 and a comparison of these costs with gas prices effsctive April 1,1991 is shown in the table below:

Ta.Le 1.3: COMPARISON OF DOMESTIC GAS PRICES WITH ECONO"IC COST(As of April 1, 1991)

omestic orice Economc cot Dooestic price/cAD/thermie US$/MMBtu (US$/MaBtu) Econoric cost (X)

High pressure (HP) 4.22 0.66 0.66 100Medium pressure (MP) 4.22 0.66 1.14 58Low pressure (LP) 3.79 _059 1.14

Weighted average 4.11 0.64 0.85 75

The above domestic prices reflect the latest increases which took place onJanuary 1 and April 1, 1991 (2882 for HP; 32X for MP; and 20X for LP).Further quarterly increases of 72 have already been scheduled for June 1 andSeptember 1, 1991 at medium and low pressures.

1.20 The above comparison shows that retail prices for medium and lowpressure, at US$1.20 per MMBtu, are at 58X and 52X of economic cists (662 and592 respectively if forthcoming quarterly increases are factored in), whilethe price for high pressure, at US$0.66 per MMBtu is already at 1002 of thecorresponding economic cost. On a weighted average basis, retail gas pricesare at 752 of economic costs (80X with forthcoming increases), which isconsidered acceptable. Although there is a more significant discrepancybetween SONATRACH's field cost (US$0.55 per MMBtu)v and its transfer price tnSONELGAZ (US$0.13 per MKBtu), this does not lead to any significantmisallocation of resources as SONELGAZ plans its investment program, nearlyall of it based on the use of gas as fuel, using the economic cost of gasrather than the actual transfer price; although the implication on the two

.£1 Tw depln premum s meaurd by Oh preaent value In a gIvn ye d a unn ol gas sold at tme tIme d st producion fommte resess the LUAC.

v Excudin _"tam costs d US$0.12 per MMBu, Sinoe such Cots are In the ftute to be bome by SOMHELGAL

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firms' finances is not a matter of immediate concern (SONATRACH's financesbeing healthy, contrary to those of SONELGAZ), the Government has indicatedits intention to gradually adjust upwards the gas transfer price to bring itin line with economic cost.

E. Hydrocarbon Exporl

1.21 The following table illustrates clearly the historical and forecastimpact of Algeria's diversification strategy on the structure of itshydrocarbons exports:

Table 1.4 BREAKDOWN OF HYDROCARBONS EXPORTS (X)

1979 1984 1987 1989 1990 1995 2000

Crude Oil 78 24 20 20 21 17 11Condensates 8 27 28 28 29 24 23Refined Products 7 24 23 22 22 13 12LPG 1 3 5 4 6 6 10LNG 6 14 14 16 14 23 27Piped Natural 6as - 8 10 10 8 17 17

Total (X) 100 100 100 100 100 100 100

Value (US$ billion) 9.3 17.5 8.5 9.1 12.2 14.4 16.5

It points out to the dramatic shift which has been taking place over the last10 years, away from crude oil and towards natural gas and gas liquids, andwhich has enabled Algeria to maximize its revenues in spite of OPEC productionceilings and the technical constraints imposed by decreasing crude oilreserves. This trend is likely to continue in the next ten years as Algeriaembarks on a major program to expand gas and gas liquids exports (see below).Details of volume forecasts by product are included in Annex 1.6,Attachment 2.

Crde Oil. Refined Products and Gas LUuids

1.22 Exports of crude oil and refined products are determined by productionlevels and refining capacity on the one hand and the growth of domesticconsumption on the other (Annex 1.4). Their marketing does not pose a problemas both crude and refined products are readily tradeable on the internationalmarket (usually on a spot basis). Production (and by extension exports) ofcondensates and LPGs is essentially determined by the capacity for liquidextraction and gas treatment, and reinjection (which itself is planned infunction of technical optimization criteria concerning the gas recyclingprocess), since the size of gas reserves is currently not a constraint.Export figures shown above reflect the country's plans for a major expansionof such treatment facilities, primarily in the Hassi aHel and Arzew areas.There again, market is not a constraint as both condensates and LPGs arereadily tradeable.

- ii -

Iluled Natua Gas (LNG)

1.23 Unlike exports of crude oil and liquid products, exports of natural gasare subject to demand constraints, in addition to constraints related toliquefaction and transport (LNG carrier ships) capacity. Algeria's currentnominal liquefaction capacity of 31.1 BCM is distributed as follows:

Site Stert-up Date CaDacity (billion m3)

Arzew GL 4Z 1964 1.7Arzew GL 1Z 1978 10.5Artew GL 2Z 1981 10.5Skikda GL 1K 1972 8.4

Total 31.1

1.24 As a result of the Government and SONATRACH's past gas marketing andpricing strategy and the slower than expected growth of the international gasmarket, which resulted in the loss of significant markets (eg. the El Pasocontracts of the early 1980s in the US), this capacity has never been fullyutilized, with LNG production fluctuating between 6 and 12 BCM from 1980 to1986. Starting in 1987, the Government's more aggressive marketing strategy(see below) has led to a significant increase in production (up to 17.3 BCM in1989 and 18.6 BCM in 1990, respectively 56X and 60Z of installed capacity).With firm contracts currently totalling about 25 BCM per year by 1995 (withEuropean and US customers) and reasonably conservative expectations for newcontracts with US and Eastern European customers it is estimated that Algeriawill be able to raise its LNG sales to 32 BCM by 1995 and 35.3 BCM by 2000.These figures are based on the assumptions that the forthcomingdebottlenecking/revamping (and expected concomitant expansion) of Algeria'sliquefaction installations will proceed on schedule (initial engineeringstudies have recently been completed by three major international firms).

PiDed Natural Gao

1.25 Following completion in 1982 of the TransMed I pipeline to Italy(through Tunisia), exports and sales of piped gas have gradually increased toreach 12.2 BCM in 1989; this figure is expected to increase to 16 BCM by 1995following the expansion of the line (through the addition of compressingfacilities and the construction of another sealine between Tunisia andSicily); additional sales would go to Italy, Yugoslavia and some East Europeancountries, for which contracts are currently under negotiations. Algeria'slong-term projections also include sales through the TransMed II pipelinewhich is planned through Morocco and Spain (crossing the Gibraltar strait); ajoint engineering company (OMEGAZ-Etudes) was recently formed by ENAGAS(Spain), SNPP (Morocco), SONATRACH (Algeria), Gaz de France and Ruhrgas(Germany) to prepare the detailed engineering of this project, and salescontract are currently under negotiations with potential customers (Morocco,Spain, --and possibly Portugal--in the first phase; and France and Germany inthe second phase). In connection with this work, the Bank is currentlyfinancing an in-depth study of Morocco's gas market under the ESMAP program.Forecarts assume that incremental sales through this new pipeline would startin 1995, gradually building up to 8.3 BCM by 2000; although there is obviously

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some uncertainty regarding the construction of the TransHed II pipeline, onecan safely assume, however, that most of the corresponding sales would be madethrough alternative means (eg. through building of additional LNG capacity, ora further expansion of Transmed I) if its construction is foregone.

1.26 Concerning export prices for crude oil, Algeria followed OPEC's fixedprice policy prior to 1986. After the 1986 oil price collapse and the abandonof official prices by OPEC, Algeria's policy has been to sell crude oil aswell as refined petroleum products, condensates and LPGs at the going marketprices. Algeria's policy with respect _o export prices for natural gas hasbeen evolving over time. In recent years an increasingly competitive markethas developed in North America and Western Europe. On both continents thereare now multiple suppliers with large reserves serving a nearly fully integra-ted gas distribution network. Under these market conditions, Algeria'sinitial reluctance to follow downward movements in international gas pricesled to a loss of markets and significant underutilization of its LNG exportcapacity (para. 1.24). Starting in 1987, Algeria switched to a moreaggressive gas marketing policy, negotiating new contracts with former UScustomers (such as Distrigas of Boston), and arranging spot LNG sales with newinternational buyers (e.g. in the UK, Japan and Southern Europe). Algeria'snew flexibility was evidenced by the agreement reached after several years ofnegotiations with its main customer Gaz de France in January 1989, whichlinked the LNG price to a basket of 8 crudes (instead of the previous netbackformula). More recently, an agreement was reached with Shell and Columbia Gas(US) to revive LNG shipments through the (previously mothballed) Cove Pointterminal, on the US eastern shore.

F. PEtoleum Seco nWhWiman

Sgect OrManizaon

1.27 Production, processing, transport and distribution of energy (includinguranium and coal) are the responsibility of a number of state-ownedenterprises, most of which fall under the general supervision of the Ministryof Mines and Industries (MMI). Until the early 1980s, vi:tually all oil, gasand electricity-related activities were centralized in two public enterprises-- SONATRACH (Societ6 Nationale pour la Recherche, la Production, leTransport, la Transformation et la Commercialisation des Hydrocarbures) andSONELGAZ (Soci6t6 nationale de l'Electricitd et du Gaz). In 1982, SONATRACHwas reorganized and split into a number of specialized enterprises (seepara. 1.28). Until recently, MMI was closely involved in all mattersconcerning the management of the sector through the day-to-day control of theoperations of all (public) sector entities; the liberalization of the economyand the drive toward greater enterprise autonomy has, however, led thegovernment to reassess the role of NMI vis-a-vis sector enterprises, mostparticularly SONATRACH. Such role is now to emphasize: (i) policyformulation; (ii) overall sector planning and coordination; and (iii)regulatory monitoring and enforcement for all petroleum activities.

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PIetrOlum Srvics Sub-stor

1.28 Following SONATRAC'I's restructuring in 1982 and its concentration onupstream oil and gas activities and hydrocarbon exports, a new enterprise,Entreprise Nationale de Commercialisation et de Distribution de ProduitsPetroliers (NAFTAL), was created to manage oil refining and domestic distribu-tion of petroleum products, including LPGs. Eight new companies were createdfor special-purpose petroleum activities including: geophysical work,drilling and petroleum engineering. Three enterprises were formed for civilworks and pipeline construction. Three enterprises were created to producefertilizers, petrochemicals, plastics and rubber. Besides, another entity wasformed for maritire transport of hydrocarbon and chemical products. In 1987,NAFTAL's refining activities were spun off to form a new enterprise:Entreprise nationale de raffinage des produits petroliers (NAFTEC). Synopsisof the sector's major public enterprises (outside of SONATRACi) are includedin Annex 1.11. Details on SONATRACH's organization, activities, and financesare included in Chapter II.

1.29 Although the 1982 restructuring resolved certain management problemsresulting from SONATRACH's excessive size, it has not resulted in significantimprovements in the efficiency of most sector enterprises. Petroleum serviceenterprises, in particular, have suffered from lack of competit.on, lowsalaries, technological obsolescence, import restrictions, overstaffing anddependence on SOliATRACH as sole customer. It is expected that theseconstraints will be gradually lifted as a result of recent policy changes:specifically, increasingly active foreign cil companies are now giver thepossibility to use foreign contractors; SONATRACH has become more cost-conscious as a result of enterprise autonomy and intends to strictly monitorthe performance of its contractors while considering spinning off some of itsown service activities (starting with logistical support in the oil bases);forthcoming changes in national salary regulations are expected to enableenterprises to attract and retain qualified technical and managerial staff;and local service enterprises will be able to form joint-ventures with foreignpartners; a first such joint-venture for well workover services was recentlyformed between SONATRACH and CFP (Total). Given these changes, a globalreflection on the future of the petroleum service sector in Algeria (and itsopening up to the private sector--both local and foreign) is necessary, andfunding is provided under the proposed loan for the carrying out of acorrosponding study by international consultants. The study will be managedby the Fonds de Participation Mines Hydrocarbures Hydraulicue, one of theeight Government holding companies with major shares in the subsector, whichhas an obvious and direct interest in promoting the future restructuring ofthe subsector.

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G. Govement OQbigLg Mnild SMY

Enem PoGcy

1.30 The Government's overall objective in the energy sector is to manage thecountry's energy resources so as to achieve a reconciliation between the need,on the one hand, to satisfy domestic energy demand over the medium and longterm and the desire, on the other hand, to maximize revenues from export salesin order to finance ec nomic development.

1.31 On the domestic front, the Government's main objectives are:

to ensure that electricity, natural gas and petroleum products arereliably available wherever they are needed;

to replace domestic consumption of petroleum products with naturalgas or LPG wherever possible, in order to maximize the exportablesurplus of crude oil and products;

to encourage direct use of natural gas by limiting electricityconsumption to non-substitutabl-e uses and off-peak thermalapplications that improve the economics of electricity genera-tion; and

to conserve national oil and gas resources by promoting efficientuse of energy.

Petroleum S w

1.32 Within the context of its overall energy policy, the Government'sstrategy in the petroleum sector aims at maximizing revenues from the exportof hydrocarbons subject to (i) technical criteria regarding optimal reservesrecovery and (ii) the satisfaction of the domestic market. To this end, theGovernment plans to continue its long-term program to develop the extractionof high value gas liquids while pursuing an aggressive natural gas marketingpolicy in order to fully utilize its LNG facilities; in parallel it plans tomaximize crude oil production through the systematic undertaking of enhanced(secondary and tertiary) recovery schemes on most fields when reservoirconditions warrant it.

1.33 Concerning exploration, the Government's ultimate objective is to ensurea replacement of the oil and gas reserves produced each year; this is mostcritical for crude oil for which the reserves to production ratio has steadilydecreased (to 22 years by end-1988, vs. 60 years for gas) as a result of theabsence of significant discoveries over the last 25 years; this long-termobjective is not unrealistic as a large proportion of Algeria's prospectiveareas remain un- (or under-) explored (witness the exploration drillingdensity of 0.6 wells per thousand sq.km compared to 50 wells in North Americaand 4.5 in Western Europe). The Government has now realized that the requiredlevel and depth of the exploration efforts required to achieve that objective

- 15 -

were beyond SONATRACH's capacity and has effected a major shift in itsexploration policy which now emphasizes:

(i) attracting foreign oil companies' capital and expertise throughthe adoption of an appropriate legal and contractual framework(para. 1.6); and

(ii) refocusing SONATRACH's exploration efforts towards areas where itseffectiveness (or knowledge) is greatest, or where foreigncompanies will not or cannot go; in addition, it will carry outunder the project an intensive program of basin studies andreconnaissance work to serve as the technical basis for thepromotion of potential acreage to the oil industry.

SONATRACH's medium-term investment program (which is presented in chapter II)reflects these priorities; in the long-run, SONATRACH plans to put in place asophisticated hydrocarbon development optimization model which will ensurethat investment planning is based on sound financial and economic criteria.Specialized assistance for the development and installation of this model isincluded in the project (see chapter III).

H. Prlort Issues fAnd Bank Role

Main Sectoral Is3ue8

1.34 The Government's overall strategy and objectives for the energy sectorin general, and more specifically for the petroleum sector, are appropriate.There is a question, however, as to whether some of the current policiesimplemented in the sector are fully conducive to achieving these objectives.The main policy issues which have been identified during project preparationcan be categorized under three main headings: (i) efficiency of petroleumexploration and productiou operations; (ii) gas utilization; and (iii) demandmanagement.

1.35 Efficiency of Petroleum Exploration and Production Operations. Futureimprovements in sector efficiency are going to be largely dependent on theimplementation of policies designed to enhance competition and permit accessto modern technology and private capital. The legal and contractual frameworkfor exaloration, in particular, needs to provide sufficient incentives for theprivate sector to bring into the country risk capital as well technologicaland managerial expertise; in addition, a wider involvement of the privatesector is needed in order to provide at the very least a reference forassessing the performance of state enterprises, and in selected subsectors(e.g. services), direct competition. As already mentioned, the issuance ofthe new Petroleum Law in 1988 has already led to the signing of a sizeablenumber of exploration contracts with foreign oil companies (para. 1.7);problems remain in two areas, however: first, there is a need to betterorganize and structure the promotion process while improving both the form andthe substance of the current framework; second, the country's overallexploration strategy requires further elaboration (in terms of long-term

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objectives, regional priorities, respective roles of SONATRACMi and the privatesector, etc.).

1.36 Changes in the legal framework are also needed to accelerate thedevelopment of crude oil reserves by allowing foreign companies to invest inenhanced oil recovery in fields currently being produced by SONATRACH. Thecurrent declining trend in oil production over the next 8-10 years (seepara. 1.10) is not likely to change significantly even in case of majordiscoveries resulting from recently renewed exploration efforts, given thetime required for any new production to come on stream. However, this declinecould be stopped or at least slowed down significantly by an aggressiveprogram of secondary and tertiary oil recovery which recent Bank studies showcould increase total oil recovery by up to 450 million tons (an increment ofabout 15 million tons p.a. by 2000). Such program will require themobilization of very large financial resources (up to US$22 billion) as wellas a level of technological expertise and project management capabilitieswhich SONATRACH on its own cannot provide. Although a major step in thisdirection has recently been taken with the signing of the joint-ventureagreement with CFP on the Hamra condensate field (para. 1.8), negotiationswere complicated by the rigidity of the current law; changes to the law itselfare thus required for such ventures to be replicated on a larger scale (theGovernment is currenitly finalizing a draft legislation for submission to thenext Parliamentary session).

1.37 Another way to improve efficiency in the sector is through restructuringof existing state-owned enterprises; although a systematic analysis of theefficiency of these enterprises, including SONATRACH, is difficult to make inthe absence of reliable cost accounting systems, there is at least episodicevidence that these enterprises' costs are not in line with internationalnorms. Recent policy changes may obviate some of the constraints previouslyfaced by these enterprises, e.g. low salaries, technological obsolescence,import restrictions, overstaffing and lack of competition. However, theGovernment needs to integrate recent actions within the framework of acoordinated restructuring strategy to improve the efficiency of state-ownedpetroleum enterprises. Human resources development is also key to futureefficiency improvements in the sector, in order to overcome the technologicallag which resulted from years of isolation from the rest of the oil industry,and the lack of sufficient emphasis, in the past, on training in managementand finance.

1.38 Gas Policy. Gas is at the crux of Algeria's energy sector as gas andgas liquids together provide 76% of exports receipts and account for 57% ofdomestic energy consumption. Although inappropriate gas marketing and pricingstrategies, combined with a slower than expected growth of the internationalgas market, had resulted in the loss of zigpificant markets in the late 1970sand early 1980s and the subsequent underutilization of LNG capacity(para. 1.24), the shift to a more aggressive export marketing strategy since1988 is expected to lead to increased participation in the European and USmarkets in the next decade. There is a need, however, to place these effortsto develop export markets for piped natural gas and LNG within the frameworkof an overall gas development and utilization strategy, based on an economic

- 17 -

valuation of gas for different - , taking into account current estimates ofreserves, supply and demand. Thi- is particularly needed at a time whenconsideration is been given to several gas-based projects for the productionof methanol, aluminum etc. A major issue is that the timing for commissioningof such projects might correspond to the period when gas exports are alsoscheduled to be boosted significantly by the opening of new pipelines toEurope and the expansion of LNG capacity (paras. 1.24 and 1.25), raising thequestion of possible long-term supply constraints, in light of currentreserves estimates.

1.39 Demand Management. As already mentioned (para. 1.14), Algeria's percapita energy consumption is high as is its ratio of energy demand growth toGDP, as a result of (i) historically low energy prices, and (ii) poor energyefficiency in the (largely state-owned) industrial sector. A major steptowards addressing the former issue has already been taken, with the recentprice increases enacted for most energy products and the Government's declaredcommitment to bring prices up to economic cost for products which remainpartially subsidized (para. 1.18). Tackling the second issue will requiremore time as the design of an intogratec energy conservation policy is acomplicated task in any country, particularly in a socialist economy intransition like that of Algeria where many constraints prevent an automaticresponse to price signals at the enterprise level. There is therefore a needto design an approach which would combine price adjustments with directactions at the firm level.

Bsnk's Role and Lending Stategy

1.40 The Bank's strategy for assistance to Algeria focusses on supporting thecountry's economic reform program and the Government's drive towards improvedresource allocation and productivity. The Bank is implementing this strategythrough adjustment lending (an enterprise and financial sector adjustment loanwas recently approved and a fiscal and trade adjustment loan is currentlybeing prepared) and investment operations targeted at enhancing the efficiencyof productive sectors and the delivery of social and public services. Bankinvolvement in the petroleum sector is consonant with this strategy in view ofthe sector's predominant role in the economy as revenue generator and catalystfor industrial development. Specifically, the Bank's intervention in thesector aims at: (i) addressing key sector issues (see above), particularly asthey relate to other sectors where major reforms are underway and where Bankoperations are considered (e.g. energy-intensive industries); (ii) mobilizingfinancing for the sizeable foreign currency requirements of the sector,through direct funding and co-financing arrangements; and (iii) providingcatalytic support for increased involvement by the international petroleumindustry in developing Algeria's substantial hydrocarbon potential.

1.41 Given the complexity and sensitivity of the petroleum sector in Algeria,the Government and the Bank have agreed on a gradual but incremental strategyfor Bank involvement. This first project is therefore designed, as an initialstep, to address a selected number of key issues, while contributing to amodest extent to the mobilization of SONATRACH's financing requirements.Specifically, the issues of sector development strategy ant efficiency

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(including the private sector's role) and human resource development vill beaddressed under the project through (i) technical and legal/contractualassistance designed to help foster investment by foreign oil companies; (ii) astudy of the restructuring of the petroleum services subsector; (iii) thestrengthening of SONATRACH's planning capability and financial systems and thetraining of its financial/managerial staff; and (iv) the strengthening of itstechnical capabilities in the ar,.as of enhanced oil recovery and drilling. Inthis connection, the Bank's independent dialogue with international petroleumcompanies has provided valuable inputs into the designing of the project'stechnical assistance component, and into the technical support alreadyprovided to SONATRACH during project preparation. The issue of gasutilization will be addressed, through the development, under the project, ofa computerized model for the optimization of long-term hydrocarbonsdevelopment. Energy Pricing issues have been addressed during projectpreparation, resulting in the substantial price increases referred to above.Environmental issues will also be addressed under the project; in particular,it will help SONATRACH implement a comprehensive Environmental Plan of Actionrelated to its drilling and production operations, which has been prepared onthe basis of an initial re-iew carried out by the Bank during appraisal.SONATRACH has also agreed under the loan to discuss every year with the Bankits medium-term investment program and future finances, which will provide anopportunity for the Bank to contribute to the des1gn of the sector'sinvestment priorities and overall strategy.

1.42 Subsequent operations would build upon and extend the policy focus ofthe current project. To this end, they would concentrate on further improvingthe structure of domestic hydrocarbons pricing (an issue which is alsoaddressed jointly by the Fund and the Bank in the context of their overallmacroeconomic dialogue), as well as rationalizing gas utilization andpromoting energy conservation. They will also follow up on the restructuringof SONATRACH and other sector enterprises, and hopefully provide for directprivate sector involvement in order to maximize the Bank's catalytic role;this will be facilitated by expected changes in the legal/contractualframework designed to permit foreign investment in enhanced recovery projects,which have been prepared with the Bank's assistance. Finally, the Bank wouldpromote future regional energy projects, such as the planned gas pipelinebetween Algeria, Morocco and Spain which may prove critical for the wholeregion's energy future; in this connection, the Bank is already providingassistance to Morocco, under the ESMAP program, for a study of its future gasneeds.

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I. THE BORROWER

Mdkavound and ScR= of AsUz

2.1 SONATRACH (Societ6 Nationale pour la Recherche, la Production, leTransport, la Transformation et la Commercialisation des Hydrocarbures),Algeria's national oil company, was created in 1963 with initialresponsibility for transportation and marketing of hydrocarbons; these areasof activities were widened in 1966 to enco X-ass petroleum exploration,production and transformation; following the take over of most foreigncompanies' distribution and production activities in 1968 and 1971respectively, SONATRACH became one of the main instruments of the Government'sindustrialization policy, expanding rapidly into downstream activities,including gas liquefaction, refining and petrochemicals. Through the early1980s, SONATRACH enjoyed a quasi monopoly on the whole spectrum of petroleumand related activities, from exploration to petrochemicals production, and wasby far the largest Algerian enterprise, with a staff of about 100,000.

2.2 The increasing difficulties associated with the management of thisvertically and hotizontally integrated giant concern led to the Government'sdecision in 1982 to divide it into 18 specialized enterprises (para. 1.28).The new SONATRACH, for its part, is essentially involved in:

(i) petroleum exploration, and updating of the country's knowledge ofi.s petroleum potential;

(ii) oil and gas development and production, including gas liquidsextraction;

(iii) inland oil and gas transportation through pipelines;

(iv) production of liquefied natural gas (LNG) and liquefied petroleumgas (LPG); and

(v) export of all hydrocarbons (inclucing refined petroleum products).

SONATRACH had enjoytd until recent reforms a quasi monopoly on all theseactivities, having accounted for most of the country's exploration investmentsover the last 10 years (largely due to previous restrictive explorationpolicies; see para. 1.6), and for all of the production and sale of crudeoil,!/ gas liquids, natural gas and LNG, which provided '. with gross revenuesof US$15 billion equivalent in 1990. In addition, Sj,`ATRACH holds interestsin Anadarko, a US-based oil company, and in Panhandle, a US-based LNG company.

1/ WM% the exepon d CFP (Tos eMsh*re sI he pIoducton d crude olt from te Msen . a 49/51 t Vntue wMhSONATRAH.

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Prwent Organizitlon

2.3 SONATRACH is currently organized as a state-owned enterprise (SocieteNationale), and is headed by a General Manager, to whom report 6 DeputyGeneral Managers; they, in turn oversee 11 Technical Divisions and 8 Central(staff) departments (see current organization chart in Annex 2.1). OperationalManagement is reasonably decentralized, both at the level of the TechnicalDivisions, which have their own finance, personnel and legal functions, and atthe regional level for day-to-day production operations (with major bases inHassi Messaoud for oil and Hassi R'Mel for gas); until recently, however, anumber of operational decisions, most notably relating to procurement, hadremained centralized, resulting in unnecessary delays and inefficiencies.Furthermore, the basic strategic decisions and investnent plans were macse by,or under close scrutiny of, MMI, which decreased the flexibility of theenterprise and caused additional inefficiencies. This situation has changedmarkedly over the last twelve months as MMI has removed itself gradually fromthe day-to-day management of the company in anticipation of forthcomingorganizational changes (see para. 2.5). As is to be expected given thestrategic nature of SONATRACH and its role in the country's economy, majordecisions regarding, inter alia, the undertaking of large investments, exportstrategy and new joint-ventures still have to be cleared by the Government.

2.4 In the context of increasing exploration and production costs (seepara. 2.15), rapid technological developments and fluctuating oil prices,SONATRACH needs to improve its flexibility and capability in the areas ofstrategic management, cost accounting, economic analysis, internationalmarketing and procurement. Continued growth in Algeria's hydrocarbon exportsover the next decade, and its reduced vulnerability to fluctuations in worldoil prices will largely depend in SONATRACH's success in optimizing itsinvestments and operations and in luring joint venture partners. This callsfor a systematic process of institutional development, with emphasis onincreased flexibility, integration of different technical disciplines indecision making process and accountability at various levels of theorganization.

Proposed OmanMigonal Changes

2.5 In light of the above and in the context of the on-going reform and thedrive towards public enterprise autonomy, SONATRACH is planning a majorreorganization which would result in a further decentralization of itsactivities as part of its forthcoming autonomization. Specifically, it wouldbe restructured into five separate affiliates (each established as anautonomous public enterprise, a.k.a. EPE), responsible respectively for (i)international operations, (ii) exploration/production, (iii) gas liquefaction,(iv) transport, and (v) refining, under the umbrella of a holding managementwhich would design the Group's overall strategy and financing and coordinatethe affiliates' operations. The specifics of the new management systems,interaffiliate and affiliate-holding relations and other aspects related tothe practical implementation of this plan are to be refined in the coming

I/ NAFTEC wvoud tius reener the SONATIACH goup.

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months. This decentralized organization is expected to lead to greaterfinancial autonomy and efficiency in SONATRACHs own operations; it will alsopromote competition and efficiency in the rest of the sector as SONATPuACHintends to increase its use of both local and foreign private subcontractorsin order to minimize its costs (see para. 1.29).

2.6 The success of the new organization in delegating decision making,increasing specialisation and therefore promoting an efficient and responsivestructure, will largely depend on effective implementation and on theavailability of trained personnel (particularly middle managers) who will haveto assume greater responsibilit-7 and face greater accountability. To supportdevelopment of human resources the proposed project includes management andtechnical training programs (see para. 2.9).

2.7 Internal task forces have been set up to carry out an initialreflection on related issues and to identify the need for external assistancein implementing the new organization, particularly regarding human resourcemanagement, financial and managerial systems and affiliate-holding relations.The detailed scope of such assistance, for which funds are being providedunder the project, will be determined upon completion of the work of the taskforces, expected by the end of 1991.

Sffina gnd Trmninq1

2.8 As of December 31, 1988, SONATRACH's staff numbered 28,158 (of whom5,875 were professionals), down from 39,376 in 1983. SONATRACH's workers andtechnical supervisory staff are probably the most skilled in Algeria as aresult of the company's strong emphasis on technical training since itscreation, which aimed at eliminating the sector's dependence on foreignpersonnel: an average of about US$13 million per year has been spent ontraining over the last few years; most training was held abroad in the earlyyearsi and, since the late 1970s, mostly in the compar.y's own trainingcenters. In spite of the rigidity of the remuneration system imposed for manyyears on all public enterprises by the public sector labor legislation (SGT)and of !-he difficult working conditions in the oil fields (in which about twothirds of the staff work), SONATRACH's benefits (including medical, childcare,housing finance, vacation camps, etc.) have remained the best in the countryard, as a result, turnover has been low in recent years (4.5X in 1988).

2.9 SONATRACH's personnel situation had deteriorated markedly in the late197Qs and early 1980s: (i) low salaries and the lack of appropriate incentivesfor higher-level staff resulted in the loss of a number of senior staff andlow productivity at most echelons; (ii) SONATRACH's relative isolation fromthe rest of the oil industrv since the late 1970s resulted in areas oftechnological backwardness (e.g. in data processing, geology and geophysics);and (iii) training in management and finance had been somewhat neglected,resulting in the absence of a strong cadre of middle managers. Recent policychanges, and in particular the greater flexibility now given SONATRACH to send

1/ In ti We 1960a Sa ml 197 SONATRACH waS SpOft Up to 2.000 gaUato Sta per "a8f (n ft*IP CU (MlIn NW USA).

- 22 -

staff abroad for training, conferences, etc., as well as the recentelimination of the SOT will enable the company to put in place a more flexibleand performance-driven remuneration system should enhance the overallproductivity of the company. The Bank would contribute to that endeavourunder the proposed project by: (i) financing technical and managerial training(including attendance to stainars and conferences, purchase of specializedmaterial, etc.) in the areas of exploraUon, drilling supervision andproduction; (ii) modernizing the company's data processing capabilities inthose same areas; (iii) strengthening SONATRACH's two Management/FinanceTraining Centers in Arzew and Oran (which are among the top institutions inthat field in Algeria, and serve not only the needs of SONATRACH but also ofother enterprises of the sector); and (iv) funding several full-time foreignexperts to reinforce, and carry out on the job training for, the staff of theExploration Division over a period of about two years (see para. 3.2).

Accounting. Audit and InsuranCe

2.10 Although SONATRACH inherited in 1971 the financial and informationsystems developed by foreign companies for their Algerian operations, theiruniformization and the development of modern managerial and cost accountingsystems has been hampered by (i) the emphasis given until recently, as in allAlgerian enterprises, to production/technical versus financial considerations;and (ii) the scarcity of financial expertise in thb country. These weaknesseswould be addressed by the project in two complementary ways: first in thecontext of the consultants' assistance in the implementation of the company'snew organization (para. 2.7); and second, under the proposed external audit ofproject accounts (see below).

z.11 Before the 1982 restructuring, SONATRACH had been able to build aqualified internal audit function with the assistance of foreign auditingfirms comprising a cadre of about 30 fully-trained auditors which wereassigned, inter alia, to the audit of (i) major turnkey contracts, (ii)petroleum service subsidiaries, and (iii) exploration/production joint-ventures with oil companies. This group has since been significantlydepleted, however, as many staff moved to SONATRACH's spin-offs and otherenterprises outside the sector in need of scarce financial expertise. As aresult, the remaining group is limited to carrying out a few ad hoc auditsupon management's demand, instead of the systematic review of t.he company'soperations and systems; moreover, it currently reports to the FinancialDirector, instead of the General Manager or, more appropriately, theenterprise's Board of Directors when one is established. In anticipation ofits forthcoming autonomization, SONATRACH entered in the beginning of 1991into a framework contract with an international financial managementconsulting firm for assistance in improving its financial and managementinformation systems and in strengthening the company's internal auditfunction; such program is currently in its diagnostic stage and financingunder the Bank loan of selected follow-up activities may be considered once adetailed program is in place. The forthcoming reorganization will also be theopportunity to xaL4aJLy introduce the external audit of the company's annualaccounts, a procedure to which no Algerian enterprise has so far been

- 23 -

subjected.1 In this respect, agreement has been reached under the loan tothe effect that, starting in 1991, the project accounts (as well as theSpecial Account and SOEs; see para 3.8) will be audited annually byindependent external auditors acceptable to the Bank. The proposed audit willbe closely coordinated with the consultants' program for improvements ofSONATRACH's accounting and control systems at large (see above). It would beclearly unrealistic to require a full and immediate complete external audit byforeign auditors of SONATRACH's overall financial statements considering itssize, the current reorganization and the fact that the concept of audit itselfis relatively new in Algeria. For purposes of compliance with the Bank'srequirement for independant audit of the Borrower's annual financialstatements, the Bank would thus satisfy itself with the certification("Commissariat aux Comptes"), starting with FYl991, of SONATRACH's accounts bylocal accountants, which is now required by law for all algerian enterprises,but falls short of a full-fledged external audit. The implementation of itsnew organizational structure and the introduction of new financial systemsshould permit SONATRACH to move to full-scale audits after a transition periodof two to threle years.

2.12 SONATRACH carries adequate insurance on its major facilities andequipment both during construction and operation, against all major hazardssuch as fire, explosion, etc. Insurance for transportation and delivery ofgoods is regularly arranged.

Financil PerfonManc

2.13 Given SONATRACH's predominance in the sector and its role as theGovernment's commercial arm and de facto fiscal agent, its finances areobviously highly dependent on Government policies and actions regardingparticular petroleum taxation, domestic prices and rates of output. They arealso affected by other exogenous factors such as the international price ofhydrocarbons. Although its strategic decisions and investment plans have beenclosely scrutinized by MMI, SONATRACH has enjoyed a reasonable degree offinancial autonomy, compared to most other national oil companies. Inparticular: (i) it does not depend on Government direct funding for itsinvestments and is authorized to negotiate its own borrowings; (ii) the leveland structure of petroleum taxes has enabled it, so far, to self-finance asizeable proportion of its investments; and (iii) subject to the normalbudgetary process, the carrying out of its projects and day-to-day operationshas been relatively free of burdensome financial and administrative Governmentcontrols which are so commonly imposed on other countries' national oilcompanies.

2.14 ITaes levied on SONATRACH include two major components: (i) on the onehand, royalty (in fact sales) taxes are assessed at the rate of 201 on totalactual sales revenues (excluding exports of refined products which arepurchased from NAFTEC, and on which the company receives in effect only a 1Xmargin); and (ii) corporate income taxes are assessed at the rate of 85% onproduction income and 501 on income from transportation and gas liquefaction

1/ Moug aculn ahm boon MMwldd 0u Inn th PGM &/ Ue * lb GowewAmon audn awq.

- 24 -

activities (less than 5% of total income). In 1990, corporate taxes androyalties amounted to US$5.1 and US$2.3 billion respectively, representing 491of SONATRACHs total sales revenues, and accounting for about 481 of totalGovernment revenues.

2.15 SONATRACH's financial pertormance over the last four years issummarized below:

Table 2.1: SONATRACH. PAST FINANCIAL PERFORMANCE

1985 1986 1987 1988 1989 1990(est.)

Total export revenues (USS billion) 12.7 7.3 8.5 7.4 7.4 9.2(of which crude oil & condensates) 51% 43% 48% 42% 40% 47%Total domestic revenues (USS billion) 2.9 1.9 2.3 2.1 2.3 2.6Net incame (US$ billion) 1.0 0.5 0.5 0.5 0.8 1.0Operating costs/salesg/(%) 34% 44% 40% 39% 3S% 30%Gross operating income/sales 65% 47% 52% 55% 62% 67%Net income/sales (X) 6% S% 5% 4% 6% 6%Net income/fixed assets 18% 8% 7% 8% 17% 30%Total taxes/sales (X) 52% 43% 41% 40% 50% 49%Gross intern. cash gen. (USS bill1on)P 3.7 2.1 3.1 2.9 2.6 3.7

jI excluding export of ref. products.hi before interest.

The above table shows that the combination of several factors contributed tothe erosion of SONATRACH's export revenues and consequently its profits andcash-flow thru 1989: (i) the sharp decline in international oil and gas pricesin 1986; (ii) starting from early eighties, declining crude oil volumeexports that was not totally off-set by gradually increasing refined and gasproducts exports (LNG, LPG); and (iii) sizeable exchange losses in debtrepayments, (in 1987 and 1988) as a result of the DA depreciation. The trendwas reversed in 1990 thanks to the increase in oil prices that took place inthe latter part of that year. Aggregate cost figures provided by SONATRACHshow production costs (before depreciation, transport, and overhead) to haveincreased from about US$1.07/Bbl in 1985 to US$1.32/Bbl in 1988 for crude oil(primarily as a result of the increasing recourse to more expensive enhancedrecovery methods).

2.16 Despite the adverse exogenous factors which impacted its financesbetween 1986 and 1989, SONATRACH generated a healthy cash-flow stream whichhas enabled it to self-finance about 40% of investments over the last sixyears; the remainder has been financed from borrowings, of which about 281were in foreign currency (mostly export credits as SONATRACH has hadpractically no access to capital markets since 1987). The changing breakdownof investments since 1984 is clearly shown in the following table:

- 25 -

Table 2.2: SONATRACH. PAST INVESTMENTS

1985 ~1986- _987 1988 1989 1990USS X ir -_S X 5 §| SS US S SS -,% USSM X

Exploration 330 19 387 25 317 25 195 24 185 28 238 33Oevelopment/Production 535 30 696 44 725 58 406 50 277 44 317 44Transport 520 30 382 24 124 10 143 18 129 19 81 11LNG 26 1 57 4 36 3 25 3 37 6 57 8Others 347 20 ..i23 SO 4 42 5 22 --3 _ 4

Total 1758 100 1572 100 1252 100 811 100 650 100 725 100

This decline in investment levels is due to the fact that in 1985 SONATRACHentered a phase of consolidation of its activities following the completion ofthe major projects (refineries, petrochemicals, LNG, etc.) undertaken duringthe previous decade. The slowdown was seriously reinforced by the squeeze oninternal and external resources which followed the 1986 oil crisis.

2.17 SONATRACH's balance sheet is reasonably healthy (particularly in theAlgerian context where a large number of public enterprises show negative networth), as shown in the table below (detailed historical balance-sheets areincluded in Annex 2.2, Attachment 7):

Table 2.3: SONATRACH. FINANCIAL POSITION

1985 1986 1987 1988 1989 1990

Total assets (DA million) 127.921 134,740 139.903 128.013 125,014 149.620Total equity (DA million) 8.727 28.176 30,281 31,083 36,481 59.518Debt/equity ratio 91/9 76/24 73/27 70/30 63/37 48/52PJCurrent ratio 1.2 2.0 1.9 1.9 1.7 2.0Accounts receivable (days) 51 74 105 68 69 76

a/ Foreign debt valued at original exchange rates.

2.18 Due to the difficulties SONATRACH has encountered over the last severalyears to mobilize commercial funding abroad, the average maturity of its L-Tdebt is rather short : approximately 771 of it will be serviced before 1992.The company has therefore set reentering foreign capital markets in a sizeableway as one of its priorities, and the Bank's assistance in this respect isexpected to be critical (para. 4.1).V Two points need to be mentionedregarding SONATRACH's current financial position: first, foreign debts arecarried at their original value in DA (however since its fixed assets have notbeen revalued systematically over the years and they do not include any value

J/ "in a.tame Bankt es lsmady been Insrument In SONATRACH negotiIng, in ODcember 198.8 aommodly4lnkId bank lon dUSS100 mllion synde by a largp US bank

- 26 -

for oil reserves, the company's debt-equity ratio calculation is likely to beon the conservative side); second, L-T assets include a sizeable amount(US$1.9 billion equivalent) of receivables from spun-off enterprises inheritedfrom the 1982 restructuring; after 1982, SONATRACH has continued to repay theloans that were contracted by its old affiliates and reflects a reciprocalportion of the debt as receivables in its balance sheet. The treatment ofthese receivables is currently being discussed with the Government in thecontext of SONATRACH's and these enterprises' autonomization and is expectedto be decided during the upcoming months (it is expected that at least some ofthese receivables will be written off against SONATRACH's debt to theGovernment).IJ

SONATRACHs Invstment Proarsa

2.19 SONATRACH enters an ambitious phase of investments which will totalUS$7.6 billion during 1991-95 (including work in progress from 1985-90 plan),compared to US$6.04 billion during 1985-89, (a 26X increase). A summary ofSONATRACH's investment program is shown below, (details are shown in Annex2.2, Attachment 3):

lable 2.4 SONATRACH: FUTURE INVESTMENTS

9 11992 993 1299 1995 1 9---------------(USS)----------- (USM (

Exploration 187 144 167 42 240 970 13Crude production 289 229 198 151 157 1024 14Gas & Liquids Prod. 655 860 713 576 598 3042 44Transportation 310 113 108 153 159 843 11Liquefaction (LNG) 237 198 131 65 68 699 9LPG Extraction 307 258 75 - - 640 8Others 14 8 6 _ 9 46 1

Tota1lJ 1999 1810 1398 1186 1231 7624 100

/ Ii- .udes work in progress.

2.20 SONATRACH's medium-term investment program shows a rapid increase inthe areas of crude, gas, and liquids production (mainly secondary and tertiaryrecovery programs), reflecting SONATRACH's preoccupation with rapid yieldingproductive investments. The company's axploration budget is expected toaverage about $200 million per year, including 184 wells. Crue oildeveloDment and Droduction investments consist mostly of well workovers (341)and secondary recovery programs (gas and water injection) in the HassiKessaoud, Gassi Touil, Amassak, Oued Noumer and Rhourde el Baguel fields, anda tertiary recovery pilot project in Zarzaitine.

1/ Lmw by Barqu Aglsn de _w (AD). n slies tw Medan Teasuy.

- 27 -

2.21 The most important part of SONATRACH's investment plan, however, is ingas and gas liquids develoRment/oroduction (44X of total investments). ThePlan includes:

(i) Gas and LPG recovery projects in the South East of the Hassi-Messaoud field, in Rourde Nouss, Stah, Hamra, Alrar West andTiguentourine and transportation of gas to Hassi R'Mel forreinjection (engineering studies and drilling projects arescheduled to be completed in 1991 and, start of the constructionof processing units is planned in 1992). The impact of theseprograms on production is expected by 1997-1998.

(ii) Revamping of existing installations.

(iii) Development of the In Salah field which is programmed to starttowards the end of the 5-year investment plan (1994).

2.22 SONATRACH's transportation budget includes:

(i) Work in Progress including replacement of the North part of 34"oleoduc between Hamra & Skikda, and a third gas line betweenHassi R'Mel and Arzew, which is expected to be completed in 1991.

(ii) Revamping of two gas lines to feed LNG production units in Arzewand Skikda (from Hassi R'Mel), scheduled for 1991.

(iii) A 900 km 20-30" LPG pipeline between Alrar and Hassi R'Mel, forwhich engineering studies are under way.

(iv) Compression stations to increase the capacity of Transmed (toItaly) which are planned for 1993.

(v) Diverse studies on future gas pipelines.

2.23 SONATRACH's investment Rrogram for LNG aims at renovating the existingplants to restore capacity and expar.d it by 25X, a crucial factor to attainthe forecasted LNG export levels (see para. 1.24). Investments in LPGextraction include the revamping of existing installations, and capacityextension (3mt) at Arzew's "Jumbo" processing plant. Other inves;mentsinclude the expansion of management training centers and of SONATRACH'sheadquarters. SONATRACH's overall medium-term investment program would bereviewed jointly with the Bank on an annual basis (para. 2.27).

SummdM Eigncanl Preciodons

2.24 SONATRACH's financial projections for the 1991-95 period are summarizedbelow (detailed financial statements and related assumptions are presented inAnnex 2.2):

- 28 -

Iable ?-5: SONATRACH. SU MNRIZED FINANCIAL FORECASTS

1991 1992 1993 1994 1995

Gas & LNG exports (Bm) 33.05 35.80 41.15 45.70 48.05Oil, condensate & LPG

exports (Mt) 34.40 37.13 39.25 39.43 39.09

Sales revenues (US$B)P' 9.71 10.67 11.49 12.26 12.83Sales rev.growth rate neg. 10.0% 7.7% 6.7% 4.6%Total taxes (USS8) 7.56 7.90 8.50 9.02 9.41Net Income (US$mm) 927 995 1071 1143 1190Gross int. cash gen. (US$B) 2.90 2.19 2.36 2.58 2.73Investments (USSmm) 1999 1810 1398 1186 1231

Net Income on Sales 6% 7% 8% 8% 8%Oper. inc. on Sales 72% 74% 75% 75% 76%Debt service coverage (times) 1.8 2.2 2.1 2.2 2.1Self-financing ratio 52% 66% 88% 118% 116Current ratio 2.2 2.4 2.7 3.0 3.5Debt/Debt+Equity ratio/ 66:34 69:31 66:34 61:39 58:42

P/ USS figures are presented using current mid-year exchange rate projections.Refined products sales are excluded.

_/ Foreign debt valued at prevailing exchange rate.

2.25 The above figures show that SONATRACH's financial situation wouldimprove greatly over the next five years, mainly due to:

(i) average yearly volume export increases for LNG, LPG, Condensatesand Natural Gas. (see Annex 2.2, Attachment 2);

(ii) the expected depreciation of the Algerian Dinar by approximately59% against the US dollar between 1991 and 1995. (see Annex2.2, Attachment 1), which favors SONATRACH whose revenues arefor a large part in foreign currency; and

(iii) the expected increase in international hydrocarbon prices (about1.5% p.a. on average in nominal terms).V

Revenues are forecast to grow from US$9.7 billion in 1991 to US$12.8 billionin 1995, an average yearly increase of 5X. Net income is forecast to increasefrom US$800 million in 1989, to US$1.19 billion in 1995 SONATRACH's five-yearinvestment plan which has a 50X foreign component will require continued heavyborrowings, but the strength of its internal cash generation will allowSONATRACH to reach a very comfortable 58:42 debt equity ratio and to self-finance all of its investments by 1995. The access to international financialmarkets will be crucial for SONATRACH, due to the high percentage foreigncomponent of its investment program which would mainly be financed through

In acomMc Oi eabnWs aft

- 29 -

international borrowing. Its current ratio is expected to reach a solid 3.5in 1995 from its low of 1.7 in 1989.

SensltMft of Financial Prolicons

2.26 Sensitivity analyses were carried out for several key parameters asfollows:

(i) 5X decrease in production of oil and gas;(ii) slower depreciation of the DA (10 p.a. between 1990 and 1995);(iii) increase in domestic crude oil prices (up to border prices);(iv) 20X decrease in crude oil and gas export prices.

Key financial ratios based on these scenarios are presented in Annex 2.2,Attachment 7. The results show that none of the above changes would have amajor impact on SONATRACH's financial viability-with some improvement observedin SONATRACH's revenues and cash flow as a result of scenario (iii). Allmajor ratios would remain within acceptable limits. We can therefore concludethat SONATRACH should be able to sustain, and most probably improve, itsfinancial situation over the next five years; this assumes of course thatSONATRACH's taxation regime will not be changed in any substantial way.

Financial Covenants

2.27 In order to ensure that its financial performance will remainsatisfactory, the following agreements have been reached with SONATRACH duringnegotiations: (i) that it will review jointly with the Bank, by June 30 ofeach year, its financial performance for the previous year as well as itsinvestment plan and related medium-term financial forecasts for the next fiveyears; and (ii) that it will keep its debt-equity ratio below 75:25 in 1991and 1992, 70:30 in 1993 and 66:34 thereafter, and a minimum debt servicecoverage ratio of 1.3 in 1991 and 1.5 from 1992 onwards; if it cannot meetthese ratios in any year, SONATRACH would submit to the Bank, within 60 daysof said review and at the latest by August 31, a program of measuresacceptable to the Bank, aimed at bringing them back to said levels (the abovefigures for debt-equity and debt service coverage ratios are included in asipplemental letter to the loan agreement)

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Ill. THE PROJECT

Prolect Oblectives

3.1 The project's primary objectives are to: (i) help the Governmentand SONATRACH in their efforts to attract investments in exploration anddevelopment by foreign oil companies; (ii) help SONATRACH improve theefficiency of drilling operations, the high cost of which has proved to be amajor financial drain on the company's budget;' (iii) help SONATRACH optimizethe production of its oil fields through enhanced oil recovery schemes; and(iv) address environmental problems related to drilling and productionactivities. All these will lead to very substantial and rapid foreignearnings/savings, and thus contribute to alleviate the country's severebalance of payments difficulties. Moreover, the Bank's involvement will helpSONATRACH mobilize incremental external funds through co-financingarrangements with Eximbank of Japan.

ProleCt Desciption

3.2 The project includes four main components: (i) assistance to thepromotion of exploration acreage to foreign oil companies; (ii) technicalassistance and training for drilling supervision; (iii) studies andinvestments in selected enhanced oil recovery projects; and (iv) othertechnical assistance and training.

(a) Exploration Promotion Assistance. This component consists, first,of the carrying out of comprehensive basin studies in selectedpriority areas (starting with the Ilizi, Ahnet, Constantine andChelif basins); these studies will include the compilation andintegration of all existing geological, geochemical, geophysicaland well data in each area, with a view to permit a newinterpretation of its petroleum potential and the identificationof new exploration leads which could prove attractive to oilcompanies. Second, it includes the development and setting up ofa modern, computerized, exnloration data base; given the extremelylarge amount of data acquired over the years and the need for bothforeign oil companies and SONATRACH to access them quickly andefficiently in order to prepare their exploration plans, theacquisition of such a tool is an immediate priority. Thirdly,technical assistance will be provided to SONATRACH's ExplorationDivision in the form of geophysical and geological computerizedworkstations as well as the services of full-time foreign expertsfor a period of up to 3 years (about 125 man-months). Finally,consulting services will be provided to assist SONATRACH inoromotional activities (organization of seminars and/or contacts

1/ 07twng eypenduurme In 1989 amounted to about US$350 mion.

- 31 -

with oil companies, etc.) and in cntract ReLotiations with oilcompanies.

(b) Technical Assistance and Training in Drilling Supervision. Thiscomponent aims at strengthening SONATRACH's drilling supervisorycapabilities which have remained weak since SONATRACH's drillingoperations were spun off (to form ENTP) in 1982. It includes:(i) an extensive T.A. and on-the-job training package to beprovided by a foreign oil company (Total/CFP of France) over a 3-year period in order to train about 40 drilling supervisors; and(ii) the acquisition of a drilling simulator and relatedassistance (including upgrading of the Drilling Division's dataprocessing facilities).

(c) Enhanced Oil Recovery and Gas Liguids Extraction. This componentconsists of: (i) two subprojects designed to enhance the recoveryof crude oil in the Hesdar/Rhourde-El-Bagumel field (throughinjection of miscible gas at a rate of 2.4 MM m3/day in order toincrease ultimate oil recovery by about 13X, i.e. 130 millionbarrels), and in the massak field (through water injection at arate of 3,500 m3/day in order to increase oil recovery by about3OX, i.e. about 19 million barrels)--in both cases investmentsinclude the drilling of injection wells as well as the acquisitionof surface facilities (compressors, generators, pipes, etc.);(ii) detailed feasibility studies and engineering/supervision of atertiary recovery pilot project through the injection of CO2 inthe Zarzaaitn field; and (iii) strengthening of SONATRACH'sProduction Division's data processing facilities.

(d) Other Training and Technical Assistance. This component includes:(i) studies, technical assistance and training related to theimplementation of SONATRACH's Environmental Action Plan (see para.3.10 below); (ii) the development of a computerized L-Thydrocarbons development optimization model (about 75 man-months);(iii) the strengthening of SONATRACH's Management and FinanceTraining Centers in Arzew and Algiers as well as technical andmanagerial training in the area of exploration, production,drilling and administration/finance; (iv) consultant studies andservices related to the implementation of SONATRACH's neworganization (paras. 2.7 and 2.11); (v) specialized documentation;and (vi) an in-depth study of the petroleum services subsector(para. 1.29).

MOMt ImO0MMnton

3.3 SONATRACH's Exploration, Production and Drilling Divisions, aswell as its Organization, Planning, and Human Resources Departments and theResearch Center (CRD) will be primarily responsible for implementing theirrespective components. Coordination vis-&-vis the Bank will be provided bySONATRACH's Finance Department. Implementation arrangements for the study of

- 32 -

the petroleum services subsector are recorded in a supplemental letter betweenthe Fonds de Participation Mines Hydrocarbures Hvdraulique and the Bank.Foreign suppliers/contractors and consultants will carry out most componentsof the project with the exception of civil works and drilling for thesecondary oil recovery subprojects, which will be undertaken by localcontractors under reserved procurement and local competitive biddingrespectively; this arrangement is considered acceptable as it is consistentwith considerations of economy and efficiency (see para. 3.7). The projectwould be implemented over a four-year period, starting in mid 1991 (a detailedImplementation Schedule is shown in Annex 3.3). Project preparation is wellunderway for the two main physical components of the project, i.e. the Mesdarand Amassak subprojects: in both cases, bidding documents for surfacefacilities have already been issued, following clearance by the Bank, and bidsare currently being evaluated; contract signature is expected before June 30,1991. The procurement process is also well advanced for a number of other keyproject components (see para. 3.7).

Prolect Cosa

3.4 The detailed cost estimate for the project appears in Annexes 3.1and 3.2 and is summarized below:

Table 3.1: PROJECT COST(USS million)

Local Foreign Total

(i) Exploration promotion assistance 1.4 33.5 34.9(ii) Drilling supervision T.A. 0.4 8.8 9.2

(iii) Enhanced oil recovery and studies 43.0 76.2 119.2(iv) Other T.A. and training 4.Q8 7., 12.5

Base cost (1989 prices) 49.6 126.2 175.8

Contingencies 6.9 15.2 22.1Interest during constr. 12.7 42.3

TOTAL COST 69.1 171.1 240.2

The base cost estimates are expressed in 1991 prices. Physical contingencieswere calculated at the rate of 10%. Price contingencies were based onforeign inflation rates of 9.0% in 1991, 1.1% in 1992, 0% in 1993, 1.6X in1994 and 3.8% in 1995, and local inflation rates of 30% in 1991, 18.8% in1992, 11.7% in 1993, 10.3% in 1994, and 10.8% in 1995. These costs alsoassume local currency depreciation of 59.5% in 1991 and 25.4% in 1992.

- 33 -

3.5 The financing plan for the project is summarized below:

XTabl 4.a: PRCT FICING PLAY(U8s miUllon)

Domestic Japam pronebSONATRAC8 loans IBPD Ezim- Govt. TOTAL

bank

(i) exploration prlowtion assist. 1.5 - 8.0 29.7 - 39.2Cii) dillUng sup. T.A. 0.4 - 2.2 - 7.7 10.3

(iWi) second. rtacov. & ges 1. extract 10.7 28.2 65.3 30.1 - 134.3(iv) Other T.A. & training 5.4 - 6.5 2.2 14.1(v) I.D.C. 9.5 __._ _L 8. 8 ._ 42.3

TOTAL 27.5 28.2 100.0 76.8 7.7 240.2

3.6 The proposed IBRD loan of US$100 million will cover 42X of theproject total cost and 581 of its foreign cost (respectively 41X and 58Z ifIDC is excluded). It will finance the foreign exchange cost of: (i) threebasin studies; (ii) surface facilities for the Mesdar and Amassak subprojects;(iii) data processing equipment for the CRD and the Production and DrillingDivisions; (iv) the drilling simulator; (v) training; (vi) selected studiesand negotiations/promotion assistance; and (vii) IDCG. The funds (US$0.5million) allocated to the study of the petroleum services subsector(para. 3.3) will be onlent by SONATRACH to the Fonds de Particination on thesame terms and conditions as the Bank loan. Other external source of fundsare (i) a grant made by the French Government of about US$7 million equivalentto finance the drilling, training and T.A. package, and (ii) a proposed untiedloan from Eximbank of Japan of about US$76.8 million equivalenr. The latteris expected to be finalized shortly after the Bank loan and will beadministered by the Bank under standard co-financing arrangements; maturityand grace period will be the same as fir the Bank loan; interest rate will bethat normally charged by Eximbank (currently 7.7X p.a.) Details on therespective allocation of funds for the Bank and Eximbank loans are shown inAnnex 3.1. Most of the project local cost will be covered by domestic loans(412) and SONATRACH's internal funds (40X).

3.7 All goods and services financed by the Bank under the project willbe procured according to Bank guidelines using ICB, LIB (for some contractsfor specialized goods and services below US$ 500,000), or direct procurementin case of goods or services of a proprietary nature. Documentation for Bank-financed contracts ovir US$ 500,000 will be subject to prior review by theBank. Although civil works and drilling will be contracted to localspecialized firms under reserved procurement and LCB respectively, this is notexpected to adversely affect project cost or scheduling, as such firms are

1/ 10 1OO ,'.d s baWd i. adIatd interne Wast foi IDR (?-5% P).84 Udr * (P.?% P.&) WWd dOmesti heO (IVA' . deftai In Amnu 2.2

- 34 -

accordance with Bank guidelines. Procurement for the Mesdar and Amassaksubprojects is already well underway (para. 3.3). Bidding documents for thedrilling simulator, data processing equipment, and mud-logging units havealready been reviewed by the Bank as well as TORs for four major basinstudies. Overall procurement arrangements for the project are summarized inTable 3.3 below:

Tgale 3.3: PROCMUBENT ART UR3ED

Procurement Mbtbod TotalICB LIB LCB Other Cost

1. Equipment for surface instail.. 64.1 64.1and construct. superv. (64.1) (64.1)

2. Civil works 33.5V/ 33.5t-) (-)

3. Drilling consumables 10.8 14.2 25.0and services C-) C-) C-)

4. Computer equipment & software!) 22.9 22.9(4.0) (4.0)

5. T.A., studies, and consult. 41.VV 41.9services (10.7) (10.7)

6. Training equipment and 1.0 2.2 4.8 8.0construct.w (1.0) (-) C-) (1.0)

7. Training services 2.s54 2.5(2.2) (2.2)

Total 88.0 13.0 19.0 77.9 197.9V(69.1) (-) (-) (12.9) (82.0)

Note: Figures in parentheses represent the respective amounts to be financedby the Bank.

1 includes geolo. cabins and exploration data bank.2J includes drilling simulator.kf excludes IDC.A/ Bank guidelines for consultants./ loaal specialized contractors under reserved procurement.

Dibursembnt and Reactve Financing

3.8 The proposed loan will cover up to 100X of eligible foreignexpenditures for Bank-financed components. A Special Account of US$ 7.0million (equivalent to about 4 months of loan disbursements) will beestablished in foreign currency by SONATRACH in a local commercial bank. Thedisbursement schedule for the loan is shown in Schedule B of the Memorandum ofthe President, and is consistent with the Bank's standard profile for Algeriataking into account the advanced procurement status of some key components(para. 3.3). Withdrawal applications will be fully documented except forexpenditures under contracts of less than US$100,000 equivalent that will bemade against certified Statement of Expenditures (SOE). Supportingdocumentation would be retairsd by SONATRACH for at least one year afterreceipt by the Bank of the Audit Report for the year in which the lastdisbursement is made. The closing date for the lotin is June 30, 1996.

- 35 -

Retroactive financing for US$10 million (10 of loan amount) will be allowed,primarily to cover expenditures that would have been incurred in the thirdquarter of 1990 for the Mesdar-Rhourde El Baguel subproject as well asselected consultant services which are on the critical path to projectimplementation (e.g. exploration data base consultant, explorationpromotion/contractual assistance). The signing of a satisfactory on-lendingagreement between SONATRACH and the Fonds de ParticiDation is a condition ofdisbursement on the amount corresponding to the study of the petroleumservices subsector (US$0.5 million)

Envaonmn

3.9 The project is expected to have a major positive environmentalimpact as it would initiate, for the first time, a comprehensive process bywhich the country will address issues related to the environmental impact ofpetroleum drilling and production operations in Algeria. This process wasoriginated by the Bank carrying out, during project appraisal, anenvironmental review of such operations, which take place mostly in theSaharan desert; in the course of this review, a number of issues wereidentified, concerning primarily: (i) the need for a detailed proceduresmanual for well drilling, testing and abandonment, which should take intoaccount the hydrogeological characteristics of Algeria's petroleum provinces;(ii) the need to review current practices for land disposal of drilling mudsand well wastewater (as well as possible alternative uses); (iii) improvementsneeded in the handling and disposal of toxic chemicals used indrilling/production operations; and (iv) organizational arrangements forenvironmental regulation monitoring and enforcement within and without thecompany.

3.10 As a result of the Bank's review, SONATRACH has already taken anumber of steps to address the above issues: in October 1990, it established aspecial Committee at senior management level (under the chairmanship of theDeputy General Manager for Hydrocarbons) to prepare an Environmental ActionPlan, and a technical committee to implement it. This plan, which wassubmitted to the Bank in March 1991 and discussed extensively during loannegotiations, considers a two-phased approach: the first phase, to becompleted in June 1992, will encompass a comprehensive program of datacollection and assessment of impacts on groundwater, as well as a study ofalternative technologies and comparative costs for remedial action; it wouldalso cover the preparation on a drilling manual with emphasis on environmentalprotection. These activities will be carried out in close coordination withappropriate Governmental entities (MNI, the Environment Department, and ANRH).The second phase will be based on the findings of the first phase and willinclude acquisition and installation of specialized equipment and thestrengthening of SONATRACH's own monitoring and enforcement capabilities.SONATRCAO has agreed under the loan to carry out the above Action Plan andmeet with the Bank by June 30, 1992 to jointly review the findings of theFirst Phase and proposed follow-up actions. Funding of selected activities tobe carried out under the first phase (e.g. training of staff, specializedlaboratory analyses, etc.) would also be provided under the loan (para. 3.2).

- 36 -

Given its strong environmental dimension, the project has been rated "BI.SONATRACH has agreed under the loan to carry out the project in accordancewith sound environmental practices.

Renortina Reauiremerns

3.11 SONATRACH has agreed under the loan to provide the Bank with semi-annual technical progress reports on major aspects of the project as well as acompletion report upon project completion.

- 37 -

IV. PROJECT BENEFITS AND RISKS

Genrl Benefits

4.1 One of the primary benefits of the project would be an enhancedability to attract and foster private investmgnts: the entire explorationpromotion component of the project is geared specifically towards promotingacreage to foreign oil companies; in addition, the study of the petroleumservice sector will aim, inter alia, at identifying ways to improveproductivity through restructuring, greater competition and the development ofa local private service industry. Second, the project is expected to havemajor environmental benefits as it provides for specific actions/studies to beundertaken in the area of toxic waste disposal, water usage and institutionalstrengthening (para. 3.2); third, major benefits, although difficult toquantify, are expected from the strengthening under the project of SONATRACH'sinvestment planning caRabilities; even minor improvements in this area areexpected to yield major savings in light of the magnitude of SONATRACH'sfuture investments (US$ 8.7 billion over the next five years). Fourth, theBank's direct involvement in the sector and the proposed co-financingarrangement with Eximbank of Japan, although relatively small when compared tothe sector's overall financial requirements, is expected to be an importantcatalyst to SONATRACH's (and Algeria's) renewed ability to enter theinternational capital markets, by providing added comfort to potentialcommercial lenders. Finally, the enhanced recovery components of the projectwould generate very substantial and rapid foreign earnings, while yieldinghigh returns on investment (see below).

Economic Analhys

4.2 The internal economic rate of return was estimated separately forthe Mesdar/Rhourde El Baguel gas injection subproject and theAmassak/Tiraremine water injection subproject. For the former, the benefitswere measured by the additional oil production multiplied by the export priceof oil less transportation cost to the export point plus the value of theinjected gas which would be produced after the oil is depleted. The costsinclude: the proposed investment (excluding import duties and other taxes);the natural gas used as fuel and the natural gas injected, both valued attheir economic cost (condensates loss plus depletion premium - para 1.17); andother operating costs. Under these assumptions, the internal rate of returnwas estimated to be 87X. A sensitivity analysis showed that either theincremental oil production or the price of oil would need to be reduced tojust above one-quarter of their forecast levels (US$18.50/BL increasing by2.4X p.a. until 2000) in order to reduce the rate of return to the opportunitycost of capital, estimated to be 10. Other sensitivity analyses were notconsidered to be necessary because of the high rate of return. Furtherdetails on the economic analysis of this subproject are given in Annex 4.1.

4.3 For the Amassak/Tiraremine subproject, the benefits were measuredby the additional oil production multiplied by the export price of oil less

- 38 -

transportation cost to the export point. The costs include: the proposedinvestment (excluding import duties and other taxes); fuel costs for injectingthe water; and other operating costs. The internal rate of return wasestimated to be 44X. A sensitivity analysis showed that either theincremental oil production or the price of oil would need to be reduced toone-sixth of their forecast levels in order to reduce the rate of return tothe opportunity cost of capital. Further details on the economic analysis ofthis subproject are given in Annex 4.2.

PWm Risks

4.4 The risks directly associated with the project are those inherentin the petroleum industry. With respect to the enhanced oil recoverycomponent, they fall into three main categories related to geology, projectimplementation and oil price uncertainty. The geological risk, i.e. that theperformance of the reservoir in response to water or gas injection may not beas expected, is minimized by the fact that thorough reservoir studies havebeen carried out by SONATRACH with the assistance of well-known internationalconsulting firms. Possible implementation delays will be minimized bySONATRACH's extensive experience with enhanced oil recovery projects and itsuse of qualified foreign contractors. Finally, economic and financialsensitivity analyses have shown that oil prices would have to decrease tounrealistic levels for the projects to become uneconomic (see above). Marketrisk is not considered to be significant as crude oil is a fully tradeablecommodity, and Algeria has declared its intention to maximize oil productionand sales, subject to technical optimization criteria (para. 1.32).

. 39 -

V. AGREEMENTS REACHED

5.1 The following agreements have been reached:

(a) with SONATRACH, that it will:

(i) review jointly with the Bank, by June 30 of each year, itsfinancLal performance for the previous year as well as itsinvestment plan and related medium-term financial forecastsfor the next five years (para. 2.27);

(ii) keep its debt-equity ratio below 75:25 in 1991-92, 70:30 in1993, and 66:34 thereafter and its debt service coverageratio at a minimum of 1.3 in 1991 and 1.5 from 1992 onwards(figures stipulated in a supplemental letter); and, if itcannot meet these ratios in any year, to provide the Bankwithin 60 days of the above review, and at the latest byAugust 31, with an acceptable program of measures designedto bring them back to said levels (para. 2.27);

(iii) have its annual financial statements and the projectaccounts audited yearly by independent auditors acceptableto the Bank, starting with fiscal year 1991 (para. 2.11);

(iv) carry out the project according to sound environmental andsafety practices; carry out its Environmental Plan of Actionfor drilling and production operations; and meet with theBank by June 30, 1992 to review jointly the findings of thefirst phase of this plan and proposed follow-up actions(para. 3.10).

(v) onlend US$500,000 to the Fonds de Particigation Xinesftdrocaur boraullJ E for carrying out the petroleumservices subsector restructuring study; a conditfg. gfdilsbursement oa tis amount will be the signing of acorresponding onlending agreement (paras. 3.6 and 3.8); and

(vi) provide the Bank with semi-annual technical progress reportsand a project completion report (para. 3.11).

(b) with the Fonds de Participation Hines Hydrocarbures frA1J.gmthat it will carry out the petroleum services subsectorrestructuring study based on terms of reference agreed with theBank (para. 1.29).

(c) V=z21 the Government, that it will guarantee the punctualperformance of SONATRACH's obligations under the loan agreementand adequate funding of the project.

ALGERIA FIRST PETROLEUM PROJECT198B7 EllERGY BALAICEW

tshggand toe)

Refined ProcuctsNetall. Crude B Light Heavy Natural Coke Furnico Nydro &Coal Cake ..- _______gg GM5 Ga aLa GasW_ fb Etb fle&.

Prodwtion S80 9 53,746 6,686 14,733 37,060 13,532 37 199 5,448 105 4,698lsports 1049 40 448 147E2ports 40 30,592 4,322 10.517 10,916 13,608 3,985Bunkers 273Producer Stock

hange -73 +1EneruvAVailable 1049 727 10 23,602 2,364 4,091 26,205 37 199 1,463 105 4,698Com;oer StockChanwe -16 e34 +338 -2Gross EnerayConsumotf 1033 727 23,602 2,398 4,429 26,205 199 1,460 105 4,698Transformation 993 22,897 178 18.173 25Cokeries 993

FurmaceLUG rPants 14,397LUG Prodaction 13,532Prod. Ethane,LPG, Uaphta 865

Refineries 22,897Thermal PowerStations 178 3,776 25Mon-EnergyConsumption 614 874 105Net EneravConsumttion 727 10 705 2,398 3,637 7,159 37 174 1,460 4,698Energy Indust. 586 4,646 734Tranap/Distrib.Losses 64 19 72 816Final EneravC"Uonsutin 722 10 41 2,582 3,549 2,455 18 102 1.404 3,151Ind. & Constr. 722 41 589 1,509 18 102 21 1.552.Steel 722 44 340 18 102 536.Chemicals 11 78 161.Other Indust. 41 342 1,091 855.Construction 48 849 392transportation 2,550 1,432 14 71Residential & Other 5 10 13 32 1,528 1,039 1.359 1,528

a/ The table is based on the following schdwe: production + imports - exports bunkers ± producer stock change a energy available I consumer stockchange n gross energy consuqpt ion - transformation - non-energy consurption a net energy consumpt ion - energy industries - transmfssion anddistribution loSSes a final energy consaaption. The figures do not aW to the given totals in somu columns because of statisticaldiscrepancIes. Source: OM

ALGERIA

Energy Production. ExDors and Consumption, 1972-19,8

(Ktoe)

Average Average AverageAnnual Annual Annual

1922 Growth(%) 1980 Growth(%) 1985 £rowth(X) 1988

Primary Energy Production 59.0 2.2 70.6 4.5 88.0 3.5 97.5

Gross Energy Exports 53.4 0.7 56.3 3.8 68.0 3.5 75.4

- X of Primary Production 90.5 79.7 77.3 77.3

Total Domestic Energy Consumption 5.1 13.4 13.9 8.7 21.1 4.8 24.3

- X of Primary Production 8.6 19.7 20.4 24.9

Consumption for Non-Energy Use 0.5 2.3 0.6 18.4 1.4 6.5 1.8

Final Energy Consumption 3.6 11.3 8.5 9.2 13.2 2.9 14.4

- X of Primary Production 6.1 12.0 15.0 14.8

Final Consumption Structure 100.0% 100.0% 100.0% 100.0%

- Industry and Construction 24.3% 30.7% 30.8% 31.5%

- Transport 33.1% 30.6% 28.5% 29.0%

- Households and Services 42.6% 38.7% 40.7% 39.5%

Source: MMI

- 42 -

A&GERIA

PRODUCTION, TRtADE AND CONSUMPTION OF NATURAL GAS, 1078-

(Billion Cubic nwters)

Average AverageAnnual Annual (Mtoe)

1979 Growth 1985 Growth 1989 1989Ib X

Gross Production 43.6 13.0 90.7 7.2 119.6 112.4Net production 35.9 7.6 55.8 1.8 60.0 56.4

(after reinjection)Gas transported 20.6 8.7 33.9 6.7 43.9 41.3Pipeline gas exports - 9.1 7.6 12.2 11.5Sales to liquefaction plants 16.6 1.0 17.6 7.4 23.4 22.0LNG exports' 11.8 1.1 12.6 8.2 17.3 16.3Domestic consumpttontP 4.3 10.0 7.6 4.3 9.0 8.5

Source: NMIA/ Gas equivalent (1 m3 LNG - 603 me natural gas).h/ Excludes gas used as fuel or lost in producing LNG.

- 43 -

&x 1 .4

ALGER

PRODUCTION, TRADE AND CONSUMPTION OF CRUDE OIL, CONDENSATES,LPGs AND REFINED PETROLEUM PRODUCTS, 197949

(Hillion Tons)

Average AverageAnnual Annual

1979 Growth 1985 Growth 1989X X

Production

Crude oil 51.9 -6.9 33.8 -0.9 33.6Condensates 4.9 19.0 13.9 4.9 16.8LPGs 0.8 26.0 3.2 10.7 4.8

* Refined petroleum products 5.4 22.9 18.6 1.6 19.8

Extpott

Crude oil 45.1 -16.8 15.0 -3.5 13.0Condensates 3.9 22.5 13.2 5.6 16.4LPGs 0.3 38.3 2.1 12.8 3.4Refined petroleum products 2.9 27.7 12.6 1.6 13.4

Marine bunkers 0.5 -3.7 0.4 0.0 0.4

Imoorts 0.4 -4 9 0.3 13.6 0.5

Domestie Consumntion

LPGs 0.7 7.8 1.1 4.3 1.3Refined petroleum products 3.9 7.7 6.1 1.2 6.4of which:- gasoline 1.0 10.3 1.8 3.9 2.1- gas oil and domestic fuel oil 1.9 8.5 3.1 1.6 3.3

Source: MMI

ALGERIA

EIRST PETROLEUM PROJECT

DOMESTIC CONSUMPTION OF PETROLEUM PRODUCT

(in thousands of tons)

Crude Oil to refineries 5,475 10,353 13,625 19,051 17,785 19,934 19,621 21,358 20,815 21,522 21,92 21,486

LPG 680 748 770 857 898 1.027 1,065 1,152 1.190 1,2A3 1,269 1,329

Refined Products 3,83 4,082 4,412 4,655 5,280 5,655 6,098 6,289 6,29Q 6,258 6,444 6,384

of which:-gasolines 1,034 1,213 1.327 1,393 1,529 1,655 1,785 1,897 1.963 1,987 2,109 2,174- je fuel 272 290 333 348 389 393 414 382 355 347 354 364

- gas Oil 949 963 1,100 1,202 1,414 1,413 1,487 2,704 3,232 3,204 3,2W8 3.235

- fuel oid(resIdt.) 982 1,011 1,062 1,083 1,221 1,493 1,660 533 0 0 0 0

- fuel il 318 264 249 239 239 191 184 190 155 137 135 139

- kerosene 55 50 30 31 32 33 33 30 29 28 0 0

- naphta 165 175 187 31 328 324 409 402 405 412 408 322

- lubrif. 108 116 124 128 149 153 146 151 153 144 150 145

Source MMI

ALGERIA

FIRST PETROLEUM PROJECT

HYDROCARBON EXPORT F-ORECASTS CQVLUME)

OIn thosands of tons)

(Est)

Cnudvj Oil 14.33 14.10 14.80 15.70 15.00 15.00 14.00 13.00 12.00 12.00 9.00Condensates 17.12 16.80 17.60 17.85 18.78 18.59 18.34 19.08 18.30 17.48 1726Refined Products 1j4j 1 M, jM 12S j= IM j 11.21 1M.3 15 0

s/total 4491 44.08 45.29 46.11 46.00 45.49 43.90 4329 41.19 39.04 36.47

Lquee p-d.gases (LPGs) 3.72 3.50 4.73 5.70 5.65 5.50 9.20 9.53 9.48 9.43 9.38 U

(in billions of m3)Uqildnat gas (LNG) 18.56 20.80 22.95 27.50 30.85 32.00 33.15 35.25 35.25 3525 3525

Piped gas t 1225 gji j 16.05 17.95 21.5 JIM I 24.05 25

Tota Gas 30.64 33.05 35.80 41.15 45.70 48.05 51.10 56.30 57.80 59.30 63.30

Scnou. MMI

|a'

ALGERIA

FORECAST ENERGY DEMAND(Mtoe)

am m in a

ToW'D Domestic Energy Demand

On1 and Condensates 9.0 9.5 10.5 12.4Natua Gas 12.7 12.7 19.1 25.3LPG$ 1.5 1.8 2.1 2.6Hydro 0.1 0.2 0.2 0.2Coal 1.0 1.0 1.1 1.5

Total 24.3 25.2 33.0 42.0Annual Rate of Growth (%) 1a 5.5 4.9

Fhal EneWy Demand 14.4 16.5 22.8 30.6Annual Rate of Grwth (%) 7.0 6.7 61Forcast Annual GDP Gwth (%) 2.0 4.5

Sources: MMI, SONELGAZ, World Bank

I

- 47 -

Annex 1f

ALGERIA

SUPPLY AND DEMAND OF NATURAL GAS AND CONDENSATES

-----:t--uaX Ir- --- IF-,r ea sttl

Natural Gas (billion m3)

Gross Production 111.5 112.6 119.6 129.7Net Production 55.7 52.1 60.0 66.3Sales 38.7 39.9 40.1 42.2 68.5 87.9Pipeline Exports 11.7 11.1 12.2 12.0 16.1 25.1LNG Exports 14.0 15.0 17.3 18.8 32.0 35.3Use by Energy Industries 5.1 5.2 5.0 5.5 5.4 6.1Use for Thermil Power Generation 3.5 3.9 4.5 4.9 6.7 9.0Transmission/Distribution Losses 0.1 0.1 0.2 0.2 0.2 0.2Non-Energy Use 1.0 1.1 0.9 0.8 1.6 2.0

Final Consumption (of which): 3.2 3.3 2.5 2.5 6.5 9.7industry/construction/transport (2.0) (2.0) (1.3) (1.2) (4.0 (5.6)housing/others (1.2) (1.3) (1.2) (1.3) (2.5) (4.1)

Condensates (million tons)Production/Export 16.0 14.5 16.4 17.1 18.6 17.34

Sources: NMI. SONELGAZ and World Bank. Columns for 1987 and I988 do not addto totals because of statistical discrepancies.

ALGERIA

FORECAST SUPPLY AND DEMAND OF CRUDE OIL AND REFINED PETROLEUM PRODUCTS(milion tons)

(Est)

Crude Oil Production 33.6 35.3 38.0 30.0Cnrde oi Imports 0.5 0.5 0.5 0.5Crude Oil Expons 13.0 14.3 15.0 9.0CrudeSenttoRelnefies 21.4 21.5 21.5 21.5Use and Losses in Refineries 0.8 0.8 0.8 0.8Refined Product Output 20.2 20.7 20.7 20.7Refined Product Exports 13.4 13.5 11.9 10.2Bunkes 0.4 0.3 0.3 0.3Domestic Consumption of Refined

Products 6.4 6.9 8.5 10.2

Source: MMI, World Bank

g IndMd gue do mg add to tots beas of stock cgs and sttcal dacies

- 49 -

£mLxs1ePage 1 of 4

ALGRAFIRST PETROLE-UM PROJCb<T

ECONOMIC COST OF NATURAL GAS

1. The largest components of the economic cost consist of transmission anddistribution costs calculated by the average incremental cost approach usingSONELGAZ's projected expenditures and sales for the period 1990 through 1994.The long-run marginal cost of production is assumed to be zero since SONATRACHproduces more gas than it sells in order to extract the condensates and muchof the LPGs; excess dry gas is then reinjected into the reservoirs, therebyincreasing ultimate recovery of condensates. This implies that when a unit ofgas is sold rather than reinjected there is a loss in ultimate recovery ofcondensates (but according to SONATRACH no significant loss in LPGs). Thepresent volume of this loss net of reinjection costs is therefore assigned asa cost of gas supply in the table below; it accounts for about 40X of theweighted average cost to final consumers (US$0.36 per MMBTU). Estimates ofthe deletion nremium are subject to much uncertainty since they depend onforecasts of the date of last production from proven gas reserves and thevalue of gas at that time. However, given Algeria's abundant gas resources,the depletion premium is bound to account for only a small portion of thetotal economic cost of gas to final consumers (US$0.19 per MMBTU vers.us thetotal average cost of US$0.83).J,

TabIle 1: ECONONIC COST OF GAS(April 1991 prices)

(CAD/thermie) (USS/m110ion Btu)

Econan1cg Costs

Field:- condensate loss 2.32 0.36- depletion prenium LL2 Q L

Subtotal well-head 3.52 0.55

City gate (SONELGAZ) 4.17 0.65

High pressure 4.22 0.66Medium pressure 7.33 1.14Low pressure La L14Weighted average 5.46 0.85

T1 estwe tean Om nuh ie as n Is bued on a csm_Ow fok gas reeriv Ora"en only).

- 50 -

AamEaa 1. XPage 2 of 4

2. The assumptions used to calculate the economic cost of gas are givenbelow for the following components: condensates loss, depletion premium, andaverage incremental transmission and distribution costs.

Condensates Loss

3. SONATRACH provided estimates of additional condensate production by yearat Rhourde Nouss together with estimates of the amount of gas injected byyear. Assuming that the per unit value of the condensates grows according tothe current World Bank projection of international crude oil prices, thepresent value of additional condensate production divided by the present valueof injected gas gives a figure of cDA 1.87/thermie (in January 1990 prices).This is a gross measure of the condensate lost as a result of selling 1thermie of gas rather than reinjecting it.

4. On the basis of data for the Nesdar subproject (Annex 5.1),0.133 thermie of gas is used as fuel for each thermie reinjected, and wouldtherefore be saved in the absence of reinjection. Similarly operating costsfor reinjection of cDA 0.99/thermie would be saved by not reinjecting.Adjusting the gross value of condensate gas by these two savings yields a netvalue of cDA 0.59/thermie, in January 1990 prices. After adjustments forinflation and devaluation, this is equivalent to cDA2.32/th or US$0.36/MMBTUin April 1991 prices.

Depletion Premium

5. Unassociated plus associated proven gas reserves were 3200 bcm onJanuary 1, 1989.

6. Projected cumulated net production through the year 2000 is 978 bcm.Net production is assumed equal to sales plus 15.9 bcm per year from shrinkagedue to removal of gas liquid and s.el for reinjection.

7. If sales and net production grow by 4S per year after the year 2000,about I percentage point per year less than from 1989 to 2000, proven reserveswill be exhausted by early 2016.

8. The 1989 export price of gas of cDA 6.5/thermie less average incrementaltransport cost of cDA 0.37 (see below) gives a field value of cDA 6.14 Ifthis value grows at the same rate as the current Bank projection forinternational crude oil prices, it would reach cDA 7.93 in 2000. It isassumed to remain constant thereafter.

9. At the time of exhaustion the marginal cost of production is assumed tobe US$0.6 per thousand cubic feet (cDA 1.9/thermie in 1989 prices) based onestimate for several countries given in Energy Department Paper No. 10.NarXgnaL Cost of Natural Gas in DeveSlogng Countles: Cgoncepts and&Ulic1atiDM, August 1983. The net value of gas in the year 2016 would thenbe cDa 7.93 - 1.9 - cDA 6.03. The present value in January 1990 is cDA0.51/thermie assuming a discount rate of 10. After adjustment for inflation

- 51 -

Ane l1QPage 3 of 4

and devaluation, this is equivalent to eDA 120/th or US$0.19/HNBTU in April1991 prices.

A£sags.. IXncemental Transmission and DistiXbution Cost

10. Estimates of awerage incremental gas transmission and distribution costsare shown in tables 2 thru 4 below. These costs (expressed in January 1990prices) exclude the portion of connection costs paid directly by customers.The investment c^8sts exclude duties and taxes, but the results have beenadjusted to include operating costs equal to 3X of cumulated new investments.The gas sales figures used in the transmission cost calculation are totalnational sales of gas (incl. exports). The sales figures used in thedistribution cots calculation are for SONELGAZ only. All costs have beenadjusted for inflation and devaluation between January 1990 and April 1991 forinclusion in table 1.

11. Since low-pressure as well as medium-pressure customers are served fromthe medium-pressure distribution network the only cost paid by low-pressurecustomers is for equipment to reduce pressure. Since this cost is covered bythe connection charge which is paid directly by the customers, it does notaffect the calculations below.

Table 2: AVERAGE INCREMENTAL AS TRASPORT COST

Gais sales tncr. NPV Inv. NPV Av. Inv. AIC(N th) (N th) (N th) (N DA) (N DA) (DAWth) (OAIth)

1989 374000 170540.2 4574.576 0.026824 0.003650 The average incraental1990 412000 38000 495 tr_1ssion cost is1991 453000 41000 611 cOA 0.37 per themise1992 498000 45000 4531993 548000 50000 3003 (cDA 0.65/th in April1994 603000 55000 1978 1991 prices)

Table J: AVERAGE INCREMENTAL HP DISTRIBUTION COST

6 Sales Incr. MPV Inv. NPV AICHP

(N th) (N th) (M th) (N DA)

1989 20500 The average incremental1990 22000 1500 9803.198 31.6 80.90411 0.000299 high pressure distribution1991 24000 2000 12.3 cost is cDA 0.03 per thermie1992 27000 3000 27.11993 30000 3000 20.7 (cDA 0.OSJth in April 19911994 34000 4000 12.1 prices)

103.8

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AmLPage 4 of 4

Table 4: AVERA6E INCRENENTAL DISTRIBUTION COST (NPILP)

6 Sales Incr. NPV RCN OP Total Inv. Inv(2) NPV AICKP+LP(h th) (N th) (N th) (km) (km) (km) (N DA) (N DA) (1 DA) (WAJth/y)

1989 12000 The average incremental1990 14000 2000 6755.127 390 580 970 65.164 135.8 250.2322 0.017724 medium/low pressure1991 15000 1000 390 580 970 65.184 69.3 302.8811 distribution cost is1992 17000 2000 400 580 980 65.856 68 cDA 1.77 per them1is1993 19000 2000 420 580 1000 67.2 54.5 (cDA 3.11/th in April1994 21000 2000 420 580 1000 67.2 54.5 1991 prices)

330.624 382.1 553.1133

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Page 1 of 4

Fk PerobmM

SummarX Ilbnr on an prf Sector EntjgWf

1. Subsequent to restructuring of SONATRACH activities related torefining and distribution of petroleum products were carried out by NAFTAL.In 1987 NAFTAL inturn was restructured and its mandate was refocused ontransportation and distribution of LPG, CNG and petroleum products and a newenterprise, NAFTEC, was established to promote, develop, and manage petroleumrefining in Algeria. Since the nationalization of the petroleum distributionin 1968, distribution of all products in Algeria has been in the h nds ofSONATRACH followed by NAFTAL. Gasoline is distributed through 1,260 pumpstations. Expansion of the distribution network is planed, including 300 newpump stations, a network of multi-product pipelines and storage facilities.NAFTAL has a fleet of 4,600 tanker trucks that moves 50X of all petroleumproducts; another 25X is transported by rail and 25X by pipeline. NAFTAL isalso responsible for distribution of LPC through 60 service stations which canserve 18,000 vehicles. About 8,000-10,000 vehicles are equipped to run onLPG. To encourage replacement of gasoline by gas, the price of LPG is setbelow that of gasoline. NAFTAL has over 25,800 employees.

NAEQ

2. Refining in Algeria is the responsibility of NAFTEC. It wasestablished in August 1987 to produce LPG, motor-fuels, solvents, aromatichydrocarbons, lubricants, paraffins and bitumen for domestic and exportmarkets. The entity owns and manages five plants with about 4,000 employeesat the following sites:

Hassi t4essaoud I - It has a capacity of 200,000 tons per year. Itprocesses Hassi-Messaoud stabilized crude to produce LPG, gas-oil andkerosine for local consumption.

Hassi-Messaoud II - It has a capacity of 1,070 million tons per year.It supplies gasoline, benzine, kerosine, and gas-oil to the localmarket.

AILrs RefinerY: The refinery is located 20 km. east of Algiers. Ithas a capacity of 2,700 million tons per year. It mainly producesmotorfuels, jetfuel and LPG for the county's northern market. It alsooperates a marine terminal.

Argew-RefLUM: The refinery is located in the industrial area of Arzewon the El-Mahgoun plateau. The refinery is designed to supply fuels,lubricants, bitumen and paraffins to the local industries and exportsurplus motor-fuels, naphtha and kerosine. Its main facilities are:

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Anmex 1.11Page 2 of 4

- An atmospheric distillation unit with capacity of 2,500 milliontons per year.

- A catalytic reforming unit.

- A gas recuperation unit.

- An oxidation unit for bitumen production with annual capacity of120,000 tons.

- Two lubricant-and-grease production units with capacities of50,000 tons and 120,000 tons per year.

Skikda Refinery: This refinery is situated in the industrialized areaeast of Skikda. It is designed to process a mixer of reduced importedand stabilized domestic crude with capacity of 15,277 million tons peryear. Its main facilities are:

- Two atmospheric distillation units of 7.5 million ton capacityeach.

- Two gas processing units.

- A catalytic reformer.

- Utility facilities and a pumpstation to forward products throughthe pipeline to the two Skikda ports and various distributiondepots.

3. The Enterprise Nationale de Grands Travaux Petroliers (GTP) wascreated in 1980 as a result of SONATRACH's restructuring. GTP is acontracting engineering firm which provides engineering, installation,supervision and maintenance services to the petroleum industry. The companywas initially formed in 1969 as a small engineering firm with 700 employeesnamed ALTRA. In 1970 SONATRACH bought the company and gradually expanded itto implement civil engineering, plant installations, road and pipelineconstructing and mechanical engineering tasks. In 1980 the comparny had grownby 6,000 staff and currently employs over 7,400. The company has an annualturnover of about DA 800 million equal to US$100 million, however, itsfinancial performance is not satisfactory. The management of GTP attributeweak financial performance of the institution to: (i) civil service pay scalewhich does not provide adequate remuneration for operational staff working inthe field causing overstaffing in administration and understaffing ofoperational units in the field; (ii) lack of spare parts and not being able toreplace old machinery and equipment due to shortage of foreign exchange; and(lii) sluggish growth of petroleum sector in recent years. In general theorganization has adequate technical and professional staff to carryoutprojects acceptable to the industry standard, however, absence of appropriatecorporate structure prevent achievement of satisfactory performance.

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Page 3 of 4

4. Enterprise Nationale des Travaux aux Puits (ENTP) is a largedrilling contracting company with over 7,400 staff. It owns 63 drilling rigsof which 42 are operable. The drilling performance of the company is farbeilow the industry standard, the average completion record of ENTP for oneyear is 110,000 meters per year,which means that each rig is used to drill onewell per year. This is about 1/4th of the normal rate. The financialperformance of ENTP is proportional to its drilling. The management of ENTPattributes the main cause of the low performance to: (i) rig waiting timeresulting from uncertain work program; (ii) late receipt of invoices fromclient (SONATRACH) which ENTP bears the financial charges and interests -this makes up 50% of ENTP's deficits; (iii) low drilling rates set in 1983which are far bellow current rates; and (iv) overstaffing - 70% of thecompany's operating cost is for salaries - and other maladies of public sectorregulations. Consequently ENTP has diversified its operation in to:catering, transportation, maintenance and manufacturing of machine parts.

5. ENTP's turnover is approximately DA 1.0 billion per year, 80% ofwhich is related to its drilling activities and the other 20X is for cateringand maintenance work. In 1983 ENTP had a deficit of AD 350; million in 1988the deficit has been reduced to DA 100 million through 30% staff reduction andother cost saving measures. Although involvement in peripheral activitieshave helped to reduced ENTP's deficit it has prevented the institution todevote its full attention to increasing efficiency in its drilling operation.

ENAF OR

6. In 1966 a joint venture drilling company was formed between Sedco(USA) and SONATRACH starting with 3 rigs; by 1981 20 more rigs had been added.The joint venture was dissolved in 1981, ENAFOR becoming another public sectorenterprise owned by the Government and working for the Government. CurrentlyENAFOR has about 2,800 staff who operate 26 drilling rigs. It utilizes 80X ofits capacity drilling about 40 wells per year for total of about 80,000meters. The annual turn over of ENAFOR is about DA 550 million. Theinstitution has been making a profit except for one year when there was a blowout due to lax safety practices, consequently the operation was held up untilall the facilities were inspected, upgraded and adequate safety provisionswere installed. Company's operation is based on SONATRACH's work program.Shortage of foreign exchange, public sector salary scale and high attritionrate of technical staff are the institution's main constraints.

ENAG 0

7. Enterprise Nationale Algerian Geophysique (ENAGEO) started work in1967 with two seismic crews as a joint venture between SONATRACH and aforeign firm. After nationalization it was absorbed by SONATRACH as part ofthe country's exploration group in SONATRACH. In 1982 it was detached fromSONATRACH and became an independent geophysical seismic data acquisition,about 952 of ENAGEO's work is done for SONATRACH of which 852 is related toexploration and 152 to production activities. The entity's annual turnover is

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A&ms wex Page 4 of 4

DA (300-400) million. Currently ENAGEO has about 2,500 staff operating 10seismic crews and plans to add two more shortly. From 1982 to 1988 ENAGEO hasshown profit. The profit has been decreasing continuously due to increasedcosts and stable rates which are to be negotiated annually between SONATRACHand ENAGEO, nevertheless, in practice the rates for ENAGEO's services havebeen set by the client. Salaries constitute the major portion of theoperating cost, about 701 of the total. Due to unavailability of foreignexchange the entity have not been able to replace its equipment at the cost ofits work quality. The management of ENAGEO is counting on the new changesresulting from the proposed law of public enterprises autonomy, availabilityof foreign exchange and salary structure reform law currently debated in theparliament to improve its performance.

ENSP

8. Enterprise Nationale Des Service Aux Puits (ENSP) was created in1981 as a result of SONATRACH restructuring. ENSP was has inherited assets andstaff of three joint ventures: (i) Dresser Industries ; (ii) Baker Hughs; and(iii) Christensen of USA with SONATRACH. Its main function is to provide wellservices namely wireline, perforation, well testing, well cementing, wellstimulation, and drill fluid. ENSP is the only company which has competitorsin some of the areas it is active. Consequently the company performance hasbeen enhanced. With its 2,300 staff it has 100l of the market for drillingmud service, 60X of the well cementing, 75X of wireline service, 401 of thewell testing.

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Page 1 of 6

ALGERIA

PETROLEUM GEOLOGY AND EXPLORATION

Gno

1. The geology of Algeria which is relevant to petroleum, iscomprised of three major components:

- the crystalline massifs to the south, in which there is nopetroleum potential;

- the Saharan Platform, which is represented by an irregularlynortherly thickening wedge of sedimentary rock, subdivided into aseries of basins, the eastern three of which contain virtually allof Algeria's established production of oil and gas; and

- The geologically complex area of the Atlas Mountain Chains, orOrogen, which forms the northern portion of the country, andwhich, although it has yielded numerous shows and indications ofoil, is not yet petroleum productive.

h"bar-o P -orm

2. From the tectonic point of view, the Algerian Sahara is a part ofthe western portion of the North African continental plate, in which thecrystalline basement has been down-warped over time, and is now covered with anortherly-thickening wedge of Paleozoic and Meso-Cenozoic sediments. ThePlatform is bordered on the south by the crystalline massifs of the Hoggar andrelated areas, and on the north by the South Atlas fault system. This latterseparates the relatively stable Saharan Platform from the Alpine-related AtlasMountain Complex which have been considerably deformed through folding andfaulting of the involved sedimentary and underlying basement section as aresult of the continental collision between North Africa and southern Europe.

3. The thick sedimentary cover of the Algerian Sahara is made upchiefly of a transgressive, unconformable Paleozoic sedimentary section whichoverlies the PreCambrian basement. The younger Meso-Cenozoic sedimentarysection is considerably less developed here then it is elsewhere in Algeria.

4. The Paleozoic sequence includes formations dating from theCambrian to the Carboniferous in age, and largely clastic in nature, becominggenerally finer grained as they become younger. The Mesozoic where it ispresent, contains a complete sedimentary section which is comprised ofcontinental, lagoonal and marine sediments.

5. The Algerian Sahara has been divided into two hydrocarbon-bearingprovinces: the Western Province, and the Eastern Province, the latter ofwhich contains the hydrocarbon-productive Triassic-age basins of Oued Mya,Illizi and Ghadames.

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Anx L1ePage 2 of 6

6. fl1 Western Province is made up of six separate basins: theTindouf and Reggane basins of the far west; and the Ahnet, Mouydir, Timimounand Bechar basins in central Algeria. The major portions of these relativelydeep basins are filled with Paleozoic-age marine sediments . The thickness ofthese sediments ranges from 4500 meters in the Ahnet basin, through 6000-6500meters in Reggane, to 7-8000 meters in the Tindouf and Timimoun basins.

7. The Tindouf and Reggane basins are separated by the Bou-Bernoushigh. The Tindouf basin is asymmetrical, with the axial area beingconsiderably displaced towards the northern edge, adjacent to the Anti Atlasmountains of Morocco. The south eastern part is monoclinal and has a veryshallow northerly dip into the basinal axis. Although barely explored, thissouthern flank is however, considered to be highly prospective because of itssource rock and reservoir sequences. In similar fashion, the Paleozoic of theReggane depression also includes sediments ranging in age from Cambrian to theupper Carboniferous, and is asymmetrical with its axis aligned south-east/northwest. Indications of both oil and gas have been found throughoutthe Lower Devonian, but as yet no commercial production has been established.

8. The Ahnet basin lies to the east of Reggane, and is separated fromit by the Azzel Matti saddle. The Paleozoic sedimentary sequence, which issimilar to the two previous basins, crops out over most of the Ahnet Basin.The structural evolution of the basin is closely related to the tectonics ofthe crystalline massif of the Hoggar to the south. As a result, thestructures in general involve basement block faulting, are large in aerialextent and amplitude, and have random orientations. The reservoirs ofcommercial importance found here include the Ordovician fractured quartzites,and the overlying Devonian irregular channel sands enclosed in a shaleenvelope. Both reservoirs have proved to often be gas bearing, but because ofthe irregular nature of their reservoir characteristics, their containedreserves are difficult to determine with accuracy.

9. The Mouydir Basin lies to the east of Ahnet, and is separated fromit by the Idjerane arch. It is similar in its stratigraphy to that of theAhnet Basin, and like the Ahnet, the Paleozoic formations also outcrop in thesouthern part of the depression. The basin has not been thoroughly studied,and only a small portion of it has been explored seismically, with only a fewwells having been drilled.

10. The Timisoun Basin is situated between the Western Great Erg sanddune field overlying the Becahar Basin on the west, and the 0ued Mya Basinwhich contains the giant Hassi-R-Nel and related gas fields, on the east.Hydrocarbon reservoirs have been found in numerous intervals within the basin,including the Sabaa oil discoveries, but none have gone into commercialdevelopment yet.

11. The Becahar Basin, and adjacent areas in the western portion ofthe country adjacent to Morocco, contain sandstone reservoirs of the lowerPaleozoic succession in which fracture porosity is important, the porousclastic reservoirs of the Devonian, and the overlying reef limestonereservoirs of the Upper Devonian. The largest indications of gas and oil have

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AnE!ex 1. 12Page 3 of 6

been encountered in the latter reservoirs, but these too, have not enteredinto commercial development.

12. The Eastern Province includes the productive Triassic basins ofOued Mya, Chadames and Illizi Basins in which are to be found all of thecommercial oil and gas fields currently in production in Algeria. TheReservoir horizons are numerous and include the Cambrian, Ordovician,Devonian, Carboniferous and Triasssic formations. The chief source for theoil and gas are to be found in the Gothlandinan shales of the Silurian age,which overlie the Ordovician. Sealing formations are found in several salts,mostly of Triassic age, and shale units.

13. The Cambrian reservoirs are comprised of sandstones andconglomerates, generally becoming more fine grained upwards, and areproductive at the giant Hassi-Messaoud and Rhourde El-Baguel oil fields. Thebasal section everywhere is comprised of coarse to micro-conglomeratic sandsoverlying the crystalline basement. Porosities range from 15 to 20X, andpermeabilities from 10 to 1000 millidarcies in the fracture zones. TheOrdovician is comprised of alternating sandstone and shale formations and isonly rarely productive.

14. The Silurian shales are represented generally by black graptoliticshales whose base is strongly radioactive. The upper part occasionallycontains sandstone beds, several of which are productive in the Oued MyaBasin. These shales are generally considered to be the principal source rocksfor petroleum in the Eastern Provence.

15. The Devonian and Carboniferous formations of Paleozoic age arelimited in extent, and occur only in the northern portions of the area. Theirincluded sands occasionally produce in the area, with porosities of 201, andpermeabilities reaching 1000 millidaries. The most notable productionhowever, is found in adjacent areas of Tunisia to the east.

16. ' rast to the Western Province, the Eastern Province iscommonly ovei y a thick, well developed Mesozoic section, which istransgressive . unconformable with respect to the underlying Paleozoicsedimentary section. The lowest of these Mesozoic sections is Triassic inage, and commences with continentally derived sandstones and shales, oftencontaining andesite volcanic flows, overlain by salt and anyhrdriteevaporites. The latter make excellent cap rocks for the underlying ubiquitousbasal clastics which commonly form oil and gas reservoirs. The latter form byfar the largest reservoir in the Province, and contain porosities of 15-20X,with permeabilities of 500 to 1000 millidarcies. These permeabilitiesincrease to 3000 millidarcies at the Oued Noumer field, and 5000 millidariciesat the giant gas field of Hassi-R-Mel South.

17. The younger Jurassic system is well dcveloped in this province,and is comprised characteristically of dolomites, with lesser amounts ofevaporites and marine shales. The youngest rocks which are generally foundthroughout the province are Cretaceous in age, and are comprised at their baseof continental sands and shales, grading upward to carbonates overlain byanhydrite and salt. Much of the Ghadames B sin, and to a lesser extent the

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ArmlilX 1.SPage 4 of 6

Oued Hya basin, are overlain on the surface by the sand dune field of theGrand Erg Oriental, which has severely restricted exploration.

18. For the reasons given above, the Ghadames Basin is the lestexplored of the productive basins in the Eastern Province, although it hasbeen well explored in adjacent Libya, east of the dune field, where a largenumber of small to medium sized oil fields have been discovered. Recentexploration by Sonatrach and foreign companies has however resulted in thediscoveries of several hydrocarbon deposits in the Algerian portion of thebasin, along with the localization of several additional prospective areas.The prospective reservoirs are similar to those described above. The sourcerock, as with Oued Mya Basin, is the Silurian shales whose thickness rangesfrom 250 to 300 meters. Similar shales in the underlying Ordovician, as wellas the younger Devonian and Carboniferous shales also have similar source rockcharacteristics.

19. The Illizi Basin, lies along the south-eastern border of Algeriaextending into Libya, between the Ghadames basin to the north, and thecrystalline basement rocks which are exposed in the Hoggar Massif to thesouth. Its Paleozoic stratigraphy is very similar to the other basins of theSaharan platform, although it to a large extent lacks the limestones anddolomites of the upper Devonian. These formations outcrop along the southernmargin of the basin, and have been studied extensively. In the northernportion of the basin, the younger Mesozoic formations appear in similarfashion, thickening to the north as they plunge into the subsurface.

20. As with the other basins, the principal source rock is theSilurian shales, with a thickness similar to that found in the Ghadames Basin.The principal reservoirs are in the Cambrian sands, the Ordovician sands andquartzites, and the channel sands of the Devonian. Younger reservoirs arealso found in the Carboniferous sands, and the overlying Triassic sands.Generally speaking the reservoirs imprvve as they become younger, withporosities in the lower reservoirs in the five to eight percent range,increasing upwards to highs of 25X in some of the Triassic reservoirs. Depthsto the reservoirs vary from a few hundred meters to 3500 meters. It is inthis basin that the first giant field, the Edjeleh field, was found in 1956 aswell as numerous subsequently discovered oil and gas fields.

21. To a large extent, the structural deformation of this basin is theresult of large basement faults which have propagated upward into theoverlying sedimentary section over time. These faults diminish northward intothe center of the basin. It is this fault-derived structural deformationwhich provides most of the entrapment of hydrocarbons in the Illizi basin,rather than fold structures derived from compression.

22. Exploration has therefore been focused on the ever finerdelineation of these fault structures, until at present, there are no knownstructures left to explore. Exploration of the basin is hence at a maturestage, and future exploration must focus on the more subtle facies changeswhich involve horizonal variations between reservoir sands and entrappingshales around the basin margins, and within the basin.

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Annex 1.12Page 5 of 6

The North of AeIQa

23. The Atlas Mountains of Algeria are actually comprised of twomountain chains, the Tell to the north, along the coast of Algeria, and theSaharan Atlas in the south, facing the Sahara desert, and separated from theTell by the Haut Plateaux.

24. The Saharan Atlas is a long chain of mountains extending from theMoroccan border, eastward across Algeria Into Tunisia. The mountain chain isseparated from the Saharan platform by a complex system of flexures,ovcrthrust faults and en echelon faults. To the north of the Saharan Atlas,between it and the more northern Tell Atlas mountains, is the region of theHigh Plateaux.

25. The Tell itself is a complex geographical and geological regionwhich includes thick sedimentary sections as well as crystalline massifs, bothof which have been severally deformed in a manner similar to that seen alongthe northern margin of the Alps mountains in Europe. Superimposed upon thisTellian complex are several younger basins, such as the Chelif near Oran,which largely postdates, but to some extent till incorporates the last phasesof deformation which the Tellian Atlas underwent.

26. Little is known concerning the offshore portion of Algeria, to thenorth of the Tell, but by comparison with similar geology in Morocco itlargely postdates the mountain building period which formed the Atlas complex,and represents a post-orogenic relaxation phase. Its petroleum prospectivityis unknown at present.

27. Several oil prospective areas are present in this Northern Region,the foremost of which is the Miocene Chelif basin near the coast, east ofOran. It was in fact this basin in which the first oil exploration was donein Algeria prior to the turn of the century. Additional potential areas arepresent in the western Saharan Atlas area, in which the Jurassic horizonsprovide the primary objectives. Further east, in the Sudest ConstantinoiseBasin, which lies adjacent to the Tunisiaia border, the principal objectivesare the Cretaceous reef carbonates, in which frequent shows and minorproduction which have recently been discovered are thought to be sourced fromthe older Jurassic shales in the adjacent foreland fold belt at the edge ofthe Saharan Platform to the south.

28. The syntheses of these basins, in which the disparate elementsrequired for the generation, migration and entrapment of petroleum, are pulledtogether into a coherent exploration plan, are as yet unrealized. This isprimarily because of the geologic complexity of these basins, and the lack oflocal availability of the advanced geophysical and geological tools andexpertise which is required for their evaluation.

29. This expertise, and to a lesser extent the knowledge of how to usethe available tools, have not as yet been utilized in Algeria by Sonatrach.The reasons for this are complex, but stem largely from the lack of need forthis type of expertise in the exploraticn of the simpler basins which haveheretofore provided Algeria's exploration success, and commercial production.

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Annex 1. 12Page 6 of 6

In short, this Northern area represents new frontiers of explorationtechnology and methodology for both Algeria and Sonatrach.

Histoy of Oil ExDlomtion

30. Although exploration for petroleum in Algeria began at the end ofthe 1880s in the Chelif basin, in the northwest portion of the country, thefirst commercial discovery was not made until 1948, at Oued Guetirini (in theSaharan Atlas, 150 km southward from Algiers). Between 1953 and 1956exploration extended southward, into the then unknown Sahara Desert, where theAlgerian sector includes a significant portion of the major sedimentary fringeof the northern margin of the African continent: in 1953, oil prospectinglicenses were granted on an area of about 250,000 km2 in the northern Saharato SN REPAL and CFP (Total), which subsequently entered into a partnershipagreement. Hydrocarbon shows encouraged these companies to undertake a fullreconnaissance program throughout the Saharan exploration area, including thedrilling of several deep (3,000 meter) stratigraphic sells. The results ofthis combined program was the discovery of the Edjeleh field in the Illizibasin, adjacent to the Libyan border, by Compagnie de recherche etd'exploration des petroles (CREPS), followed by the discovery of the HassiMessaoud field by SN REPAL, in July 1956. Delineation drilling was followedby a full field development program, and the construction of a first pipelineto the Mediterranean Coast, which was completed in November 1959.

3:. Further to the Northwest, this phase of exploration drillingresulted in the discovery of the Hassi R'Mel gas field in November 1956.During the following decade more than fifty additional major oil and gasfields were also discovered in the Illizi, Ghadames and Oued Mya Basins lyingwithin the Saharan platform, and were put into production. Production levelsfollowing these discoveries and their subsequent delineation, were dictated bythe construction of pipelines to the coast, and the development of thepetrochemical complexes which were needed to handl,-. treat, ship, and refinethe produced hydrocarbons. Additional major gas fields and several smalleroil fields were discovered later as exploration moved further south, to theAhnet Basin and adjacent areas to the northwest of the town of In Salah. Dueto the distance to market, however, these more recent fields have yet to beput into commercial production. In more recent years, several small oilfields have also been discovered in the Constantine basin, near the Tunisianborder, to the north of the Saharan platform.

ALGERIAFIRST PETROLEUM PROJECT

SONATRACHOrganization Chart

uw wt

! I 11 1 ,~. M I L II q

DtEIfl g - I-.naie W at i

r ~~~~~~~~sot I . .pw.*.

r;;~Us o m sb8 9... .~~~~~~

{E~~~I E c E H Mbb EZ" {5s3{E

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Annex 2.2Page 1 of 2

ALGERIA

FIRST PETROLEUM PROJECT

Assumptions Used In SONATlACI1's Financial Forecasts

Macroeconomic Assumotlonu:

1. World Bank estimates are used for domestic and foreign inflationforecasts. Domestic inflation is expected to gradually decline from its highsof 23.5% and 24.4% in 1991 end 1992 to stabilize around 10.5% in 1994.Foreign inflation is expected to peak at 9% in 1991 and subsequently rangefrom Ov te' 3.8% p.a. This and the already overvalued level of Algerian Dinarimplies a real depreciation of the currency. The Dinar's depreciation againstthe US dollar {s forecast to peak at 59.5% in 1991 and decrease progressivelyto 4.6% in 1995. (See Attachment 1)

Price Assumotions:

2. Tlte export and domestic price forecasts on hydrocarbon sales ofSONATRACH are presented in detail in Attachment 1. The export crude oilprices conform to the World Bank's forecasts. Price projections for otherhydrocarbon exports are made in accordance with the yearly price increase ofcrude oil.

Production, Domstic and InteaUonal Sales Volume A"sumotions:

3. SONATRACH's production schedule provided to us reflects itsphysical production and transportation capacity, new investments program andmedium term marketing strategy. Domestic sales forecasts are based on theexpected demand growth in each of the product items. International sales ofcrude oil are in line with Algeria's current Opec quota. Natural gas, IPG andLNG export forecasts are derived from already established individual salescontracts or advanced negotiations. (See Attachment 2)

Qoeratina C:ost Awmations:

4. An approximate average unit cost for each production activity isderived by SONATPACH analysts in accordance with current cost trends andreflecting changing techniques and processes, and economies of scale. Othercosts are calculated as a percent of total revenues. (See Attachment 4).

PeRMmmmtln Asum .tl

5. An average straight line depreciation over 15 years is assumed forall capital expenditures, except for Exploration investments for which 90% ofthe expenditures are depreciated at the end of the same year. The forecastassumes that cnnual depreciation expense would be equivalent to 7X of theaverage gross assets in operation during the year (except for explorationinvestments).

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Page 2 of 2

Oebt Asumpt(onA:

6. SONATRACH's existing debt, which is presented in its officialbalance sheets at original exchange rates of the time of borrowing was forforecasting purposes revalued and updated yearly by using prevailing exchangerates, to reflect a realistic debt structure. Exchange losses on yearly debtrepayments are calculated by the increase in the value of repayments due tothe difierence in exchange rates between the beginning of the year and themiddle of the year, where repayments take place.

7. SONATRACH's future debt is forecasted according to the assumptionthat 85X of its future foreign currency investments will be financed byforeign loans and 701 of its DA investments will be financed by domesticloans. The rest will be self-financed by SONATRACH. Terms and conditionsassumed are as follows:

Foreign Loans: 1) World Bank Loan: 7.5 interest, 5 years of grace, 15years maturity; 2) other loans: 11.5X interest, 2 years ofgrace, 8 years maturity.

Domestic Loans: 15X interest, 2 years of grace, 8 years maturity.

Other Financial Staement AssUmtlons:

8. All future financial statement are presented in current dinars.Forecasts made in constant dinars are converted into their current valuesusing expected inflation rates. Cash and Retained Earnings forecasts arederived from Sources and Utilizations of Funds Statements and IncomeStatements respectively, Accounts Receivable were assumed at 60 days ofsales. Other Current Assets and Current Liabilities are assumed to increaseat the same rate as local inflation.

Conversion factr Hydroarbons:

Crude Oil:1 metric ton - 7,86 bbls

Condensates:1 metric ton - 8,70 bbls

Refined Products:1 metric ton - 7,74 bbls

LPG:1 metric ton - 11,7 bbls

Natural Gas (piped):1000 m - 37,20 mmbtu

LNG:1 m - 600 m$NG

1,000 n3e 23,85 mmbtu

- 66 -

Annex 2.2Attachment 1

ALGERIA

FlsT PErROLEUM PROJECT

MAJOR COEfFlaENTS

ACTUAL FORECAST1988 1969 1990 1991 1992 1993 1 994 1995

DomnestIiclIn(%) 7.66 13.19 23.59 24.4f 15.3%f 11.0% 10.8%Domestic aton(Cumuluted) 1.00 1.13 1.40 1.74 2.00 -22 246

FoegnInflation (%) 2.496 6.3 9.04 1.1f 0.0% 1.60A 3.8%Fore1gn Infagon (Cumulated) 1.00 1.06 1.16 1.17 1.17 1.19 1.24

Crude ExptPrPce(U$$BB 18&50 24.17 20.00 20.22 20.14 20.46 21.24Crude ExpoetFrics (Yearly Incrase) 1.31 0.83 1.01 1.00 1.02 1.04

lncrease n DomestUoi il Presdcs 7.6 1&1 23.5 24.4f 15.3f 11.0% 10.80Cumulated ncrease 1.00 1.13 1.40 1.74 2.00 2.22 2.46

Piped NaL Ga Exp4Rt Prce(SIMM 0 1.94 2.26 2.84 2.61 2.62 2.64 2.71Pfpe NaL GaEi¢K>t Pvoe (eary I rwrease) 1.16 1.26 0.92 1.00 1.01 1.03

LNG Export Prlce(ItMMTUO 2.11 2.41 2.85 2.45 2.39 2.46 2.53LNK Expot Pfle (Yeady lncrease) 1.14 1.18 0.86 0.98 1.03 1.03

Beginning Year Exchange Res 4.94 6.73 &03 12.19 19.4' 24.38 26.93 28.68End of Year Exchange Rate 6.73 8.03 12.19 19.44 24.38 26.93 28.68 30.00Mld-yer Exchange Rate 5.83 7.38 10.11 16.20 22.68 26.08 27.77 29.58Depreciation (9t ) 36.3" 19.4" 51.89 59.5" 25.49 10.4% 6.5%1 4.6%9

J/ Mid-year to mid-year.

- 67 -

Annex 2.2Attachment 2

ALGERIA

FIRST PETROLEUM PFROJECT

SONAT1ACH - VOLUME SALES OF HYDROCARBONS

ACTUAL FORECAST

1985 1988 1987 1968 1e89 1990 1991 1992 1993 1984 199 -

L. CRUDEOIL(MiIlio Tons)

aL TlddSaiss 34.23 33.99 32.26 31.83 34.01 34.31 35.10 85.80 36.70 se.00 36.00b. SalestoUAFTEC 19.62 21.34 201l2 21162 21.00 19.98 21.00 21.00 21.00 21.00 21.00c. Ei4xts 14.61 12.65 11.44 10.21 13.01 14.33 14.10 14.80 16.70 15.00 15.00

IL CONO NSATESO"D (FIl) fMlon Tons)

a. TutlSaJ 13.16 14.09 16.03 14.46 16.42 17.12 16.80 17.60 17.85 18.78 18.59b. DomnesiConsump8On 0.00 0.00 0.00 0.00 o.oo 0.00 0.00 0.00 0.00 0.00 0.00c. Eiqmats 13.18 14.09 10.03 14.40 16.42 17.12 16.80 17.60 17.85 18.78 18.59

111. NATURAL GS ( Piped)iman nS)

a. Throughput ewl.LNG 18.70 16.95 20.43 20.25 21.59 21.28 23.20 24.54 28.46 3.38 30.35b. mknsaEfCansumnpion 7.64 8.37 8.77 0.12 9.38 0.20 10.95 11.69 12.80 - 353 14.30c. E2ipoft 9.06 8.68 11.68 11.13 12.21 12.08 12.26 12.85 13.65 14.85 16.05

Pi. LIQUIFIED NATURAL GMS (LNG) i m3)

aL lbrouahput LNG 17.64 17.64 19.12 20.23 22.77 23.88 24.76 27.08 32.18 35.79 37.12b. LesswAuto-consumpUan 5.01 6.20 5.16 6.23 6.50 5.32 3.95 4.13 4.68 4.94 6.12c. Not Eqipmx 12.63 12.35 13.99 16.00 17.27 18.56 20.80 22.95 27.60 30.85 32.00

V. LPG (MIion Tons)

1 a. T.Sutes frm South 0.07 0.06 0.06 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08I b. Dorn.Cwns. fron South 0.07 0.06 0.00 0.00 0.08 0.08 0.08 0.08 0.08 0.08 0.08lc. Expotefromn dh 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0 000 0.00 0.00

2a.T. SoestafnMouth 2.66 3.39 4.03 4.21 4.14 4.46 4.37 6.65 6.57 6.57 6.452 b. Dan,. Cons. fom Nath 0.54 0.61 0.65 0.65 0.73 0.74 0.84 0.82 0.88 0.92 0.952 a. Exports fromNokth 2.12 2.78 3.38 3.56 3.41 3.72 3.63 4.73 6.69 5.65 5.50

ALGA

FPR9T PETROLEUM PROJECT

SONATRAlH - ONsE5TMENT PFOGRAM

(In UW/ ncnrt am)l1989 1BM lost 1992 INS 1" 19j5 - TOTAL 9056-

Foreign Ftogn Foreign Freign Foeig FortV Fp ForeigLOW EXL TOM Loco1 Exc6. ToW LOE Eeh. Totl Local h Toa LO Exch. Toa Loom Exal. fOW Loa E90. Tal LooM EYA*. Tot

IL r I m3 17 3S0475 0 475 OD7 0 6 07 604 0 O4 7 0 709 Ns 0 905 1003 0 1003 410O 0 4103t. sg 974 0 974 172) l8 1836 1913 453 236 2009 540 254 286 M 3407 3811 1473 82 4223 1WO 8862 16M8 491 21299o d 0 0 0 O1 0 91 99 so 158 130 se 217 140 99 235 145 94 239 tOD 104 24 76 436 1200

a 0 q 600 0 800 72 344 '067 619 lo68 2287 ON0 1637 2817 S97 1786 2052 749 168 2437 58 1866 2697 47M 6NO8 13t66tL. 0 F a 0 0o 4o 9O0 275 285 882 1313 402 1715 8 18sc 2878 1015 1807 254 140i 36 1770 150 401 tS8t Sam 45tl 11210c .*A P 1 aea 0 0 0 922 656 s77 62 12 681 0 0 0 0 0 0 0 0 0 0 1464 M 22M

ax a Ld P&ctna 0*Xb 290 0 200 348 144 490 S99 12S7 1986 M7 2379 3S1 148S 1751 3267 1219 2454 3672 1360 2713 4863 8816 11238 7T062b. Iatsm t14 16D 3W0 130 127 287 3S16 4890 s506 705 9894 1S89M 639 10078 15387 3561 eM8 1232 4046 9585 13630 23757 42243 M46M0cO.% Pl 40o0 0 0 0 393 169 882 103 60 14 0 0 0 0 0 0 0 0 0 0 0 0 49 178 67

Trpm

a easo 8 996 31 S5 253 143 S9W 29 1720 38 6347 1224 2871 148 757 2248 256 746 333e 2865 627 369 10750 428 16177 Cb. Onafto m > -tt* a 0 0 a 0 a O a 0 a a 0 75 454 562 125 793 917 138 676 1014 341 2163 36m4 Da as=bo MM-Uw9 0 a 0 0 0 0 0 0 0 0 0 0 0 0 0 a 0 0 0 0 0 0 0 0 c. b Plog6 0 0 0 317 102 419 es3 442 1035 0 0 0 0 0 0 0 0 0 0 0 0 o 69 44 1614

a. R 91. 20 32 272 284 266 872 3 3263 3840 1s6e 3333 4480 7e 2339 3414 eV 686 l5s8 6092 9o 293 6on 11096 :613b. Umt1sre 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 a

UFMEtF"tc No).fboAL 17 2n 45 0 0 0 0 0 0 0 0 0 a 0 0 a a 0 O a 0 0 a 0L 80mf 0 0 0 0 0 0 1 0 68333 3 493 7 703 6m WM 4S 1490 6971 0 0 0 0 0 0 2606 0191 12901

L ~~~~0 0 0 0 a 0 0 0 0 0 a 0 0 a 0 0 0 0 9 0 a 0 0 aL .ghwA&m 122 30 1m 260 73 3Z2 182 65 233 156 36 12 120 41 182 200 48 245 m 60 271 1129 295 1424

T w&6Uorvefr 4J0S 707 4707 8177 2448 624 14402 18010 32411 15 653 25451 41104 ISM9 21016 36487 1T721 tM2 32942 17419 1041 360 44 M8187 I0M

hth)~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~t

el l Nl E 0 0 01831 99 2668 1318 S72 tSS0 0 0 0 0 0 0 0 O 0 0 O 0 29691 6 444Z7

w

ALGERIA

SONATRACH

Existing Foreln Debt(as of Dec. 31, 1988)

(n millions)

Signatire Original Principal Grace First LastBanks Date amount at date Maturity Period Repay- Repay- Interest Rate

12/31/88 ment sentDate Date

Arab Banking Corporation 0.SX-0.625 p.a.(ABC) 06/03/83 US$ 700 US$ 500 8 years 5 years June '88 July '91 + LIBOR

Citicorp International Dank 10/24/79 US$ 500 US 410 10 years 5 years Oct. '84 Oct. '89 0.5%-5/8% p.a.+ LIBOR

Bank of America 03/27/84 US$ 857 US$ 339 10 years 8 years July '88 Jan. '98 l0.7% p.a.

9zimbanIz, U.S.A. 12/01/78 US$ 240 US$ 81 10 years 8 years Marchb88 Sept. '191 .4%-10.t7 p.8.

SMAGAZ 09/15/75 US$ 199 US$ 131 17 years 3 years June '88 Dec.2002 '4X per annum

szimbank of Japan 06/17/77 Yen Yen99,392 19.596 10 years 3 years Feb.'81 Aug.'90 8S per annum(US$790) (US$ 156)

Ezimbank of Japan 03/02/79 Yen Yen 10 years 5 years May '84 Nov. '93 7.6S per annum96,075 48.038(US$763) (US$ 382)

rt~

,,,

Drt

- 70 -

ALGERIA Annex 2.2FIRST PETROLEUM PROJECT Attachment 5

SONATRACH - ACTUAL AND FORECAST INCOME STATEMENTS(in Milion Current DA9)

ACTUAL FORECAST

1186 1986 18o? 1108 1989 U100 18f1 1912 1993 1904 1096SALES REVENUES

Domestic 14,t18 8.776 10,730 11.65 16.736 26.542 23.116 20.6.9 35,253 40.347 44.806Expo 44.628 26.267 33.014 36.348 54.615 02,977 148.924 211.175 263.001 298,734 333,46Reflined Producte 18,284 8,.72 9.534 10.720 16 25,134 31.486 4.341 51,138 64.626 58.139Oher (1) 7.068 423 4.272 6.223 6.450 6,040 1,210 1,274 1.420 1.458 1,458

Toa RPnue 84.163 48.944 67.550 63,8o0 01.010 151.593 201.716 286,390 350.810 396.084 437,857

OPERATING EXPENSES

PrductionCnrud 1.458 1.818 2.190 2.142 2.326 3.5682 4.526 6,742 6,764 7.387 8,185Condmonatos 139 192 196 266 386 431 522 681 796 920 1,019Naturalt az (o) 316 367 407 63d 883 098 1,309 1,753 2,294 2.787 3,247Uquetaton LG) 1.484 1,064 1.008 871 975 1.388 1.777 2.418 3.311 4,088 4.699LPG(EtiacL &Treamel 133 142 189 176 172 282 341 530 738 816 ageTransport 754 863 901 924 1028 9s0 1316 1382 1441 1490 1490

Totl Production 4.264 4.448 4.891 5.015 6.769 7,671 6.791 12.515 15,362 17.408 19,528Refined products(oughl) 13.815 7.946 9.747 11,470 15.618 26.527 31,151 43,898 50.024 53,980 67.58Admin. &OthwrExenoee (2) 4.654 5,133 4.937 4.841 5203 6.683 1.043 1.199 1.408 1.674 1.674

Towal Operatng Costs 22,633 17,525 19.675 21.326 2s6590 38.881 41,985 57,612 67.393 73,052 78.650lass: DpfecIap in (3) 7.226 7.401 8,081 7,330 7.879 11,218 14,538 16,803 20,405 24,841 27,8968

GROSSOPERATINGINOOME 54,306 22,018 29.014 365294 67,441 101.494 145,104 211.886 262,922 297,171 331.301

FINANCIALCHARGES(4) 2.022 1.559 1.603 2.464 2,979 3.400 6.521 9.050 12,609 14.640 17.340

NON OPER EXP. (Nt (5) 4.206 (1.473) 2.s90 4.643 2.797 13.422 2,131 1.126 e6s 317 385

ROYALTY TAXES 0,465 4.861 8.814 9,735 14.301 23,659 33.808 48.155 59,651 07.816 75,652

NET INCOMESEFOREOORPTAX 38,522 17.071 16.601 18.462 37.364 61,013 103.733 153,654 190,007 214,398 237,924

Corporate Income Taxes 33.507 14.664 14.051 16.620 31.480 51.348 88.717 130,696 162,059 182.6s5 202,717

NET INCOME AFTER TAXEB 5.015 2.407 2.460 2,842 5,884 9,665 15,010 22.559 27,947 31.743 35.207

NETINCOOMEONSALES(9%) 6% 6% 4% 4% 6% 7% 8% 8% 8% 841NET INCOLMEON EQUITY(q) 67% 9% 8% 0% 16% 1 30% 39% 36% 31% 2e4TAXESONSAES (%) 61% 42% 40% 40% 50% 61% 63% 63% 03% 640AOPERATINGCOSTSONSALES(%) 27% 37% 34% 33% 29% 21% 20% 19% 18% 18AGROSS OPERAT. INCOME ON SALES( 6% 47% 62b 55% 62% 67 72% 74% 75q4 765 7NET INCOMEON FIX ASSETS 18% 8% 7% 8% 17% 30 36% 36% 35% 35% 3

(1) 1985-190 Includes exploration Invesments that are later written-off1989-1694 Includes uniquely other production rexenues

(2) 1985-19 lincludesexploration investmentsthat are expensed before being deprecIated(3) 198198 Includes Provsions(4) 1989 Includes exchange losses(6) 1686-1988. 1990-1994 Includes exchange looss

- 71 -ALGERIA Annex 2.2

Attachment 6FIRST egtROLEM PROJECT

SONATRACH - SOURgES AND APPLICATIONS OF FUNDS STATEMENTS

(n MiNion Current DAS)

1991 1992 1993 1994 1995

USES OF FUNDS

Uliat1m2stmnts 32411 41104 36487 32942 36400

Plus: Db ObeC-

Domestic: Interest 2193 3458 4711 5731 6586Capitat 6139 5731 6932 7708 6688

Foreign: Interest 3328 5591 7897 8909 10754Capital 8611 7883 10065 10419 12590

Total: Interest S521 9060 12609 14640 17340Capital 14750 13614 16997 18127 21278

Plus: Inct. (Decr.) in W.C. 13758 2936 6895 5866 5499

TOTAL USES 86440 66703 74987 71575 80577

SOURCES OF FUNDS

Net Income Bef. Int. 20637 31609 40556 46383 52547Plus: Depreciation 14538 16693 20495 24841 27896

Plus: Other Non Cash EXp 2131 1126 656 317 385

Gross Internal Cash GeneratIon 37206 49628 61707 71540 80829

ME oowInas

Domestic Loans 10364 10957 10829 11005 12055IBRD 486 907 522 278 0Other Foreign Loans 15366 21633 17865 14638 28001

Total Borowings 26216 33498 29215 25921 40056

TOTAL SOURCES 63421 83126 90923 97461 120885

CASH SURPLUS(DEFIC.) -3019 16422 15935 25886 40308

SL-FINANCING RAMO, 52% 66% 88% 118% 116O SEVICECOVAkO' -- 1.8 2.2 2.1 2.2 .1

(1) Includes Increase In partlclpations In affiliated companies [only In lorecasted year8s(2 Includes increase In liabilities to affiliated (assocIated) companles lonly In forecasted

lSe _

- 72 -

Annex 2.2Attachment 7

ALGERIA

FIRST PETROLEUM PROJECT

SONATRACH - ACTUAL AND FORECAST BALANCE SHEET8

Qn MUflon Current DAs)

ACTUAL FORECAST

1985 Is"19ss 1987 1088 196s 190 1091 1902 1993 1994 1995

ASOGrao Fxcd Asmfts() S4,565 92.390 103.986 113,072 119.29 1585649 1t1.923 219,924 258.120 292.749 328,361hle i. dept. 56,s97 63.808 70.625 78,480 85.447 126.892 140.430 157,323 177.818 202.e6s 230.55s

Nt Flicd AsQets 28s608 28.584 13,340 34.588 33.762 32.657 41.403 62,600 80.302 90.090 97.806WYork-la-Prograsa 19.908 20254 11.623 11.901 10.159 12.312 21,350 24.453 22.743 21,057 21.9050Ui LT Asuts(2) 44,853 47,067 48,680 38,140 Z.6.02 36,451 35.461 35.481 35.461 35.481 35,461

Curmren AsstsInventode 6.117 ,263 5.540 .840 6.141 6.859 8,581 10.674 12.302 13,6s5 15.130Mcbtsj. 11,874 9,471 16.552 11,864 17,394 31,635 41,962 47,078 57,657 64,942 71,976Oth. Owr. Asts 12,243 16,079 15,104 14.526 14.239 10,239 19,896 24.760 28,525 31,663 35.082Cash S;259 8.032 10,974 11.148 8,627 14.557 11.538 27,961 43,806 69,782 110,000

TslCuanrtmAst 34.483 38,835 UN 4 0 43.3864371 60,190 61,977 110,463 142,390 180,042 232,279

TOTAL.ASSETS 127,921 134.740 139.903 128,013 125,914 140.620 180.280 232.977 280,896 326,640 387,450

UABILITES& EQUITY

CapIaW(o .dtatlion) 1,658 1,635 1.635 1,635 1,635 2,117 2,117 2.117 2,117 2.117 2.117PRS nSiVSIUdprsSiis 314 315 294 478 434 13,611 13,611 13.811 13.611 13.611 13,611PRetand EarunW (3) 6.766 2e6 28,352 28,970 34.412 43,790 33.505 42.648 62.460 87.937 118,549

TOWlEquiuty 8.727 28.176 30,281 31.083 36.481 56.518 4s.233 6s,376 78,187 103,665 134,277

LTDebtonci. BTpertion) 90,474 87,005 83,672 73,867 62,650 64.739 60,339 114,647 140,937 157,184 182,612DOebt to 25,301 13.416 8,137 6.264 4,695

CurrenLqbWabttoActe. Payatle (4) 18,148 9,927 16,170 10,207 13.444 16,946 18,785 23.369 26,932 20.805 33,123

OtheCur. iJab. (5) fl,574 9,632 9,880 12,866 13.330 18,417 18.626 23,170 26.704 2s.841 32,843

Total CtIrentbbliuie 28.720 19.559 26,050 23,073 26.774 3s.363 37.411 40.539 53,63 59.636 65,966

TOTALUABILMEB&EQUITY 127,021 134,740 1389.03 128,013 126,914 149,620 180,280 232,977 280,896 326.650 387,450

LT ci3Etl 2IUTY 10 3 3 2 2 1 2 2 2 2 1LTDETILTDEBT+ilEOUITY(%) 914b 76 734s 70% 63% 48 68% 69% 60% 61% 58%CUiRRENTRATID 1.2 2.0 1.9 1.9 1.7 2.0 2.2 2.4 2.7 3.0 35.A= RE CJDAYS) 51 74 106 6s 69 7 00 so so 60 60

(1) Includes geological, geophysical and seismic studies (studes et travaux de recherche d'hydrooarbures)(2) Includes receivables from old affiliates (DA 31 billion In 1I t), and other investments(3)108-1094 Includes transfer claims from affiliates which are put on a reserve account

als Includes proWilonai recervee for debt revaluation that are written-off directiy by the amount ofyery revaluation

(4) 995-1088: Includes Taxes Payable,(5) includes workee' partilpation taken from retained earnings

- 73 -

Annex 2.2Attachment 8

ALGERIA

FIRST PETROLEUM PROJECT

SENSITIVITY OF FINANCIAL PROJECTIONS

Scenario 1: 5% decrease In production of oil and gas.

1991 1992 1993 1994 1995

Net Income after taxes (million DAs) 14425 21001 26068 29632 33403Gross Oper. Income/Sales (X) 71 73 74 74 75Debt/Debt + Equity (X) 66 69 67 63 60Self Financing Ratio (X) 50 62 83 lll 111Debt Service Coverage Ratio (times) 1.8 2.1 2.0 2.1 2.0

Scenario 2: Slower deprecIaton of DA (10% p.a. In 1990-95)

1991 1992 1993 1994 1995

Net Income after taxes (million DAs) 15016 17378 20415 24060 27792Gross Oper. Income/Sales (X) 72 72 73 13 72Debt/Debt + Equity (2) 61 63 61 59 59Self Financing Ratio (X) 52 63 84 111 110Debt Service Coverage Ratio (times) 1.8 2.1 2.0 2.1 2.1

Scenario 3: Increase In domestic crude prices up to border prices

1991 1992 1993 1994 1995

Net Income after taxes (million DAs) 18786 28253 34321 38391 42547Gross Oper. Income/Sales (X) 76 78 78 78 79Debt/Debt + Equity (X) 64 65 61 56 53Self Financing Ratio (2) 64 79 105 138 136Debt Service Coverage Ratio (times) 2.0 2.4 2.3 2.4 2.3

Scenario 4: 20% decrease In crnde oil and gas export prices

1991 1992 1993 1994 1995

Net Income after taxes (million DAs) 12559 19041 23436 26623 29448Gross Oper. Income/Sales (X) 69 71 7? 72 73Debt/Debt + Equity (X) 67 71 69 65 62Self Financing Ratio (X) 45 57 76 102 100Debt Service Coverage Ratio (times) 1.7 2.0 1.9 2.0 1.9

- 74 -Annex 31

ALGERIA -

First PeRleum Proleot - Cost Elimates(Current US$)

.. ~ ~ ~ ~~~lo- . 1RD iAP. BUMUBANK

LONFC LC TOTAL .FC LC To

1. jTlW*. AM8JEMPW PMOMOON

(albeen Oudy 6.6 Consutndi 1.4 02 1.0 1 1.4 0.0 0.0 0.0(b)badn Udy NMt 2.1 0.1 22 1 0.0 2.1 0.0 2.1(obuan dy IUS 2.0 0.2 2.0 1 2.0 0.0 0.0 0.0(d)baslieudyCholifThilog 1.0 0.2 2.1 1 1.9 0.0 0.0 0.0(e)oUw badn etudil 7.8 0.4 8.8 0.0 7.8 0.0 7.8(Adabvftk,Rplo. 3.8 0.2 3.7 0.0 3.6 0.0 3.6(g)dat pro . (work utaons) 4.6 0.0 4.5 0.0 4.6 0.0 4.6

(h)d RoDom.CFD 1.6 0.0 1.6 1 1.5 0.0 0.0 0.0(l" el0part 1.4 0.3 1.7 1 0.0 1A 0.0 1.40Oneooe ometodon aslt. 0.6 0.1 0.0 0.6 0.0 0.0 0.0

Wbin 10.3 0.0 10.3 4 0.0 103 0.0 10.3

8. 1.0 s32 t 7.0 PZ on ,_

2. ITECH. ASIST. DRiWNQ JUPERV.

(*.Oh. uut. CFP 7.7 0.4 8.1 0.0 0.0 0.0 0.0()dm .pro*n 12 0.0 12 1.2 0.0 0.0 0.0(odal u 1.0 0.0 1.0 0.0 0.0 0.0

0.0 0.4 103 4 !0. 0000

,a)waterl*iJ. A9asoak(wrt.) 7.9 2.8 10.7 4M 7. 0.0 0.0 0.0(b)watr I1j. 7.0 102 18.1 8t 0.0 7.0 102 18.1§o)g~soLM.riSq.I(eurf) 86. 2 30.7 86.9 86.2 0.0 0.0 o.0I )osMJsoLUeadarISagot(dru.4 2.0 4.0 6.0 0.0 2.9 0.0 2.6.e)$ot tsatut. ..... Za..m...t. . . 8.4 1.4 0. 4 0.0 8.4 0.0 6A1I)datsprooeesl_ . 1.0 0.0 1.0 1 1.3 0.6 0.0 0.6

65..3 :M. . 66.9 4 10.0 30.1

4. 1 .:...::.. .RA

ia)yroob a MO"umde 1.8 0.1 1.0 1t I. 0.0 0.0 0.0(bnIugCit.rt(OP5& n12 4.8 6.0 2% 0.0 1.2 0.0 1.2(c)ta@b. and .j dmlnbiut,trahinin 2.2 0.3 2.6 1 2.2 0.0 0.0 0.0

{d)otaR z utudle 2.4 0.3 2.7 1 2.4 0.0 0.0 0.0(e)doounwntao . t1.0 0.0 1.0 0.0 1.0 0.0 1.0

8.7 .. 4 14.1 U L .2

6. 20.0 12.7 42.3 1 18.0 11.6 3.2 14.6

.... :x!T ... ALO ouava.4U0$. . ..... t171.1 60.1 240.2 1t 100.0 6g.4 13.4 78.8

to

8ONATh14~~~~~~~~~*6 ~~0.0 27. 27.6 114DOUEGT.LQAI46 ~~~~~~~~~~0.0 28.2 28.2 1LO4R.~~~~~~~~~.. ~~~100.0 0.0 100.0.DA~~AN. ~~i~I6ANl~~~ 68.4 13.4 7.6.PRBaOHGOW~~~~~~~~~ 7.7 0.0 7.7

nd M U l 171.1 60.1 240.2 1NB. TOM$ may ntadu u otsd

ALGERIAFirst Petrmleumi Prolect - Cgst Estimate

(Current US$)

____ ____ ____ ___ LOA"C 1.0 'TOTAL. Fe Le0 TOA. P 1.0 FeAl P 1 TOTAL PC LO TOTAL PC 1.0 TOA 4 LC TO.

a&* ~~~~~~06 0.1 0.7 0.6 0.1 0.6 0 0 0 0 0.0 0.0 0 0 0 0 00a 0.0 0.0 1.4 0.2 I'se I 1.4 0 0 0.0 0.00 3 00 0.3 I13 0.1 1.4 0.6 0.0 0s 0.0 0 0 0 0 a00 0 0 0 0 at 0.1 2.2 I 00 21 0020.4 0.0 0.4 1.3 et 14 0.0 0.1 1.0 0.0 00 0.0 0.0 00 0.0 36 02 to .6 0.0 0.0 200(~~~~~~0SaWI~~~~~~~~~ ~1.3 0.1 1.4 cos o. 0.7 0.0 0.0 0.0 00 00 00 00 0.0 0.0 1.0 0.2 21 "I .0 0 0.0 0.000 0.0 00 1.3 0.1 14 2.6 0.1 2.7 26 0.1 to 14 01 14 ?6 04 8.3 0~0 07.6 0.0 70O"ftbW#. ampbl ~0.0 0.0 0.0 0.6 0.1 07 I.4 0.1 1.6 1.4 0.1 is 00 0.0 0.0 36 02 3.? 00 is 00 Ss0" 1I(ooRm 1.3 00 is i.3 co t.s to9 0.0 to0 0.0 00 00 0.0 00 00 46 0.0 465 0.0 4.5 0.0 4.500"K. cFa) ~~~0.6 0.0 0.6 00 0.0 De 0.0 0.0 0.0 00 0.0 00 00 0.0 0.0 1.5 0.0 1.6 1 1. 00 0.0 0.0lo I II . - &I0. 0.0 0 1 0.4 0.1 0.6 0 4 0.1 06S 0.3 0.1 0 3 0 3 0.1 0.3 1.4 0.3 1.7 1 0.0 1.4 0.0 1.4ktomtw 0.3 0.0 0.3 0.3 0.1 0.3 0.0 0 0 0 0 0.0 0 0 0 0 0 0 0 0 0 0 0.6 0.1 0. a0S 0.0 0.0 0.0Dg '10 IOW ao oo a.5 to o.o to 2.e 0.0 2.6 26 00 2.0 0.0 00 0.0 10.3 0.0 10.3 0.0 10.3 00 10.37.4 LO ~ 1.3 07 12 0 10.3 0.4 107 A ~ 16 01 9 1j 3J2 I 07002.

Ispok seaw CFP as3. 02 4.f &0 0.2 4.1 0.0 0.0 0.0 0 0 0.0 0.0 0.0 0.0 0.0 7.7 0.4 11 3 0 0 0.0 0.0 0.0ef,10, I - ~~~~0. 60.0 0.s 0.6 0. 0.3 0.0 go0 0.0 0.0 00 0.0 0.0 0.0 0.0 t.2 0.0 1.2 O* 12 0.0 00 0.01.0 0.0 1.0 0.0 d0 0.0 00 0.0 0.0 0.8 00 00 0.0 0.0 0.0 1.0 00 to S 1.0 00 00 0.0I

II "j$M=lMj& 4 a 6 .4 OO s .36 . to __ - -. 0.0 T 104 103 t 4. o102l9.3& 67. to1 072 4.0 00 100 00. 0.0 0.0 00 0.0 010 -o O" s.- 43 m 00

4ftwooeL Um"001404 190 .0 0.0 0.0 31 1 4. .6 to 7. 0.6 0.0 0.0 0.0 0.0 0.0 0.0 to 2. 10. 7. 0 0 0z 0.0 0.0~~u~~~W.~~~~m~~OS) 3.~~to0 40 6.6 3.6 4.4 0.0 0 0.0 1.2 0.0 0.0 006 0.0 0.0 0.0 7.0 102 10.1 0.0 .0 10.2 16.1fodftp -is 0~~~.0 4.0 6.0 to o. t 0.0 0. .0 0.0 tO t 0.0 0.0 0.0 tO00. 190 40 0.6 I 003 0.0 00 as0

oftammoon" 0to to0 o.o 2 04 030 4.6 0.7 164 0.3 0.3 1.0 0.0 0.0 00 .04 IA 06 . 040. .~~0~~~69Iw6~~~~~~ 0.0 0~~~~~.0 0.0 to i 0.0 t 1.0 t 1.0 0.0 0.0 0.0 a 0.0 to @. 1.0 0.0 . I 1.3 0.8 0.0 06

*00*04041"Wt0ow 0to @.@ o t .0.0 t.5 0.1 0.6 0.0 0.1 0.6 0.4 0.1 0.0 1.2a St . IS 1 2.) 0.0 tO 0.0to3 to0 0 1.4 0.1 1.5 0.6 0.1 tO 0.o 0.1 to3 to to to0 U. 0 2.? I 24 to as0 0.00.1 00 t 0. 4 0.4 t Q.4 t o 0. 1 to 0.i 0.1 0.0 0.1 . " L 1.0 0o Ia00 1.0 to iet 1.0______ 00~~~~~~~~~~~~~- -,S 34 3-I 2.2 6.3 3.0 1.8 4.6 0.2-1 -I$ 0.5 0.6 2- J. 5,4 14.1 6.6 ?92 0.0 1.2

IL 0fluftI01U to0 os il 40 aso . 7.0 0.5 11.4 11.2 4.3 156 6.0 2.2 0.2 .60 12.7 42.5 1 16.0 11.0 3.2 14.6

ID .OO8T4.ml~~~~~~~~ 27~.6 IS.2 4260 46.7 187 66.4 66.0 26.6 02.6 20.6 6.0 MY? 0.2 2.4 10. 171.1 6M. 240.2 10 100.0 684 14 .

IovWNs- RAW

~00AlTRAC14 00 26 28 00 0.8 6.0 0.0 13.4 13.4 0.0 37 37 0.0 1.0 1.6 0.0 27.6 27.6 1I40MM6T&OAN 0.0 7.3 7.3 0.0 60 so 00 11.0 11.6 0.0 04 0.4 0.0 01 P.l 0.0 2.2 28.2 1 t6.0.R.D. 12.2 00 122 2034 00 204 47.3 00 47.5 so 00 00 41 00 41 1000 00 100.0 41JAPA74.0LIMa04 11.6 61 16o7 16 4 S60 21 4 107 109 204 120 1.0 130 4 I 0 S 4.7 65 4 134 70 8 FRE70CNGOVT. 30a 0 0 3 0 3 9 0 0 309 0 0 0 0 00 0 0 0 0 0 0 0 0 0 0 00 7 7 0 0 7 7

Tot2 276 15S2 426e 46 7 10 7 06 4 68 0 260 020e 20 6 5 0 25 7 6 2 2 4 1o06t1711 691 240 21lcNB ?01.bo my u?a upd ld~r I 011f011

ALGERIA

First Petroleum Project

Implementatlon Schedule

ITEM Year 1990 1991 1992 1993 1994 1995~~- . _.-__ T~

Qlarter 1 ' 2 3 4 1 2 3 4 1 2 3 4 1 1 2 3 4 1 2 3 41. TECH, ASSISTANCE EXPLORATION PROMOTION

- Basin studies* Constantine . . - -------* Ahneto Ilizi

* Chelif* Other .'

- Exploration data bank -. -.------- -.--

- Other exploration T.A.

2. TECH. ASSISTANCE DRILLING SUPERVISION

3. PRODUC-TION/DEVELOPMENT ..

- Ammassak- Mesdar- Zarzaitine study NM

4. OTHER T.A. A TRAINING

- Optimization model- Training centers-Other training

-1-A- Other studies & documentation

IW44

mi ou ro ito meat i *mits tmia *uii ants tt surn met, stat tm ast eats so n uu rmto1t in ,o$11 S -l n it-1 1 #'- lot

lu Fit pwl a

I ' s s' IV L'i I'l S-tSI rlI U &I I'OIt UI t- Vt L@ti I-V1 I-01 S-ll'Dl L1 0-111 I'll,I'sgl-U A-" a I'l z' I' t-I' *U llDu em ea *e *u iern aiim r un mau mi run inn ro remi rn rei murn s uet mcci rt tutu roam re ru '. H

t'M LIt L*It L,1t lii I'M ta -litim I'Mfl i t tlu I 'M tl i Lt $'01 Lit S-SS Lit ll t I'll 'D I'll tit Lit it 'O MItltt cip Sin t 1 til, t lSI t t'lt l'lt 'llt I'm lm-U I'n mitt oun mis t tel 51 t1 I' I'l mi e n t- ret6 Is 1 I-o 186rem rut rim mit etc uta ni tic sit rut ram all ii: ret it cmi iii Iii rn rat ci ri aa at i.e~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-t -l3 u

n a.1 ma mi 1t111 mUl mtn 'M I'M I1t 'tm Ict mU So cl; i 1I It 9a asll I ti Iitl I'n (c P0 ),I up 'adm= -ua

8110*-1 S-4 II Il-lS t-lil t-"l t-*U I'm I'm I's" l-tlJ 1-11 I'MS 11-tlS $ls to -llit 6111t S'L sla S-Ut IUo 6-Stg S l lP "MII

01@ all W11 IS- $ Il- l 1"11 i@ Wo- -i It-0 u's "It till I111I' 0- 1 elf si Il-0 91-0S 1 - til II' U'll ( Pin)

Ime l t ls telst til tis tr l I'ls toIlllI Itll tIll tilm citsa I'l1t;lI trt tmll tlm tian o 'l taln t-lI I': t-ll ll ' tP "tillsollbwea us

ira ore #asI a II III III ml l InI tIn 1u11 at II we Ic H Ill Ill tI l Mra i l Il iUl cc ire1" t tlq1ll- tll)

fII'S fil- Its allal dls u s Lo's WSn 1 "'I il u's till U1 Il St9 U's U09 CS' ns ff-t 1-5 nt lit al "P.. _ ...... . ...

13S 1 11. iUOPf -b1111 nu13 ll io un1

tium

- 78 -

An~nex 4. 1Page 2 of 2

AbLGERLA

RST PELEUM PRJEC

ECONOMIC ANALYSIS OF MESDARMOUROE EL 6AGUEL SUBPROIECT

Assumptions

Costs and benefits are all valued in constant January 1990 prices.

The oil price at the wellhead is assumed to increase from the 1989export value of DA 148 ($18. -. per barrel, less DA 3.2 transport cost, inaccordance with the Bank's cuw.ent projection for international crude oilprices. The Bank's projection goes only to the year 2000. The crude price isassumed to remain constant after 2000.

The economic cost of gas is equal to the condensate cost plus depletionpremium (Annex 2.3). The former is assumed to escalate over time to the year2000 with the international oil price, after *which it is replaced by themarginal cost of production, assumed to be cDA 1.9 per thermie. The depletionpremium grows by lOX per year.

Investment costs exclude duties and taxes.

Fuel costs are equal to the gas used for fuel multiplied by the economiccosts.

The costs of injected gas are equal to the injected gas quantitiesmultiplied by the economic costs.

Other operating costs include: personnel costs, spare parts, insuranceand maintenance expenses.

The injected gas would be produt.ed after the year 2017 according thefollowing profile supplied by SONATRACH: 2 bcm in 2018 and 2019, 1.5 bcm in2020 and 1 bem in each of the years 2021 through 2025. The annual quantitiesforecast to be produced are multiplied by the depletion premium value ofcDA 3.94 per thermie for the years from 2017 on, and then converted to presentvalue using a discount rate of lOX. The total net present value assigned tothis production is treated as a benefit of the sub-project.

_ 7., _

Annex 4.2Page 1 of 2

FIRST PITROLIO PIOJECT

RTE of 1RTORI CALCOLATIOU - WSSi/TIURMAII

Incr. oil Price Eter ioj. Inveatme later Other Revenue let Inop.cost op. costs Benefits

(a b) (01/b) (a *) ( DA) ( DA) ( DA) (a DI) (a DI)

1992 33.4 -33.4 0.4422081993 50.1 -50.11994 -0.31 140 1.28 1.26 8.2? -43.4 -52.9599s5 0.63 142 1.26 1.28 8.27 89.46 78.91-996 0.63 144 1.28 1.28 8.27 90.72 81.17

199? 0 151 1.28 1.28 8.21 0 -9.551998 0.63 159 1.28 1.28 8.27 100.1? 90.621999 1.26 16? 1.28 1.28 8.27 210.42 200.872000 0.63 175 1.28 1.28 8.21 110.2S 100.72001 0.63 104 1.28 1.28 8.21 115.92 106.3?2002 1.26 184 1.28 1.28 6.21 231.84 222.192003 0.94 184 1.28 1.28 6.2? 172.96 163.412004 0.94 164 1.28 1.28 8.2? 172.96 163.412005 0.94 184 1.28 1.26 8.21 112.16 163.412006 0.63 184 1.28 1.28 8.2? 115.92 106.372007 0.94 184 1.28 1.28 8.2? 112.86 163.412008 0.94 184 1.28 1.28 6.2? 172.98 163.412009 0.75 184 1.28 1.28 8.2? 136 128.452010 1.13 184 1.25 1.28 8.21 207.92 198.372011 0.75 184 1.28 1.28 8.2? 138 128.452012 0.82 184 1.28 1.28 6.21 150.88 141.332013 0.94 184 1.28 1.28 8.2? 172.96 163.412014 1.57 184 1.28 1.28 8.2? 288.66 279.332015 1.45 184 1.28 1.28 8.27 266.8 257.252016 1.13 164 1.28 1.28 8.27 201.92 196.3?2017 0.94 184 1.26 1.28 8.2? 112.96 163.412018 1.26 184 1.28 1.28 6.2? 231.84 222.292019 1.13 164 1.26 1.28 8.27 207.92 198.312020 1.07 164 1.28 1.28 8.21 196.86 181.33

- 80 -

AnnWex 4.2Page 2 of 2

ALGERIA

FIRST PETROLEUM PROJECT

ECONOMIC ANALYSIS OF AMASSAK SUBPROJECT

Assumptions

Costs and benefits are all valued in constant January 1990 prices.

The oil price profile is the same as for the Mesdar subproject (Annex5.1), but it is DA 2 per barrel lower in each year because of additionaltransportation cost (Amassak is further south than Mesdar; see map).

Investment costs exclude duties and taxes.

Water operating costs include the fuel costs of injection waterestimated to be DA 1 per cubic meter of water injected.

Other operating costs include: personnel costs, spare parts, insuranceand maintenance costs.

81 -

ALGERIA

FIRST PETROLEUM PROJECT

Main Documenft Avilable In Pm1 FRie

1. Algerian Energy Policy and Programs--Third Arab Energy Conference (1985)

2. L'Energie en Alg6rie--Ediafric (1988)

3. L'Exploration en Algerie--SONATRACH (1986)

4. Annual Reports 1984-89--SONATRACH

5. Loi No. 86-14 du 19.8.86 relative aux activites de prospection, derecherche, d'exploitation et de transport par canalisation deshydrocarbures (Petroleum Law); and related implementation decrees (1987,1988)

6. Plan d'Actions sur l'Environnement--SONATRACH (1991)

7. Terms of Reference for Studies of Ahnet, S.E. Constantinois, Illizi andChelif basins.

8. Avant-projet. Injection de gaz & Mesdar. SONATRACH (1989)

9. Mesdar. Description des reservoirs. SONATRACH (1989)

10. Rapport sur l'Etude de r6servoir3 d'Amassak. SONATRACH (1989)

11. Plan Directeur Informatique. Division Forage. SONATRACH (1989)

12. Plan de D4veloppement Informatique du CRD. SONATRACH (1989)

13. Plan de Developpement de la Documentation. SONATRACH (1989)

14. Programme de Perfectionnement. SONATRACH (1990)

MAP SECTION

IBRD 22406

ALGIERS E

.0. h -o

A-,w> L HFLIF BoMI A-idi 0 OOum El B.lovhO.

FTen IF ommo-g h'Sdao 0\P Oo,oTm EhO,e.I°oIO ril= 35>

-35° O r t ~~~~~~~~~~~~~~CfNTRAL. , CONSTANTINE:/ S iEl, I SAHARIAN /

S \ ATLAS / IAT

t OElrlOhodh t S , ; | /~~~~~~~~~El -.

-/ CB fBFCHAR M |

'I.~~~~~~~~~~~~~~~OA

- A~~~~~~~~~~~~~~~~~~~~~~NAI)ARKOI-3v %5 ANA7 0,» 30-

AHNET

T,mb.9. N4? To5oTToL Z ,,zonneOT,,do~~~~~~~~~~~~~~l 00db, 9ll~~~~~~~~~~~~~~~~~~~~~l 0~~~~T

Nledwf (ElAdl, IILIZI '9/ fl Ad.I, 101,I I

t ,A Sobhl lAblb0 1N,

-75 ** . I.

N 1,

A L G E R I A N,

FIRST PETROLEUM PROJECT . ,PROJECT COMPONENTS. , oSom,.- r1t

OIL FIELD DEVELOPMENT ' '

BASIN STUDIES 'N -

EXPLORATION PERMITS , N,1 OIL FIELDS

= GAS FIELDS - -

OIL PIPELINES s T 01000000001

- GAS PIPELINES .,....1 Z' u49M4.=>:SELECTED TOWNS AND VILLAGES

B NATIONAL CAPITAL ,- - INTERNATIONAL BOUNDARIES ; _

130

0300

LIIOMEIERS

h IMAY 1991