ASIAN DEVELOPMENT BANK PPA: PHI 18039

PROJECT PERFORMANCE AUDIT REPORT

ON THE

PHILIPPINE NATIONAL OIL COMPANY ENERGY PROJECT(Loan No. 726-PHI)

IN THE

PHILIPPINES

May 1997

P1.00 =$1.00

CURRENCY EQUIVALENTS

Currency Unit - Peso (P)

At Appraisal At Project Completion$0050 $0.039P20.00 P25.38

At Postevaluation$0.038P26.29

ABBREVIATIONS

BPC 0BPSDEIRRFIRRISSLRMCMCCMWNPCPCPCCPCRPNOCPPARPSTCRSRSTA

barrels per calendar daybarrels per stream dayEconomic Internal Rate of ReturnFinancial Internal Rate of ReturnInstitutional Strategy StudyLong Run Marginal CostMalangas Coal CorporationmegawattNational Power CorporationPetron CorporationPNOC Coal CorporationProject Completion ReportPhilippine National Oil CompanyProject Performance Audit ReportPNOC Shipping and Transport CorporationRefinery Sector Rationalization StudyTechnical Assistance

NOTES

(i) The fiscal year of the Government ends on 31 December.(ii) In this Report, "$' refers to US dollars.

PE - 482

Page

II

V

VII

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11

222

2

2455677

8

8999

11111112

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13

131414

15

CONTENTS

BASIC PROJECT DATAEXECUTiVE SUMMARYMAPS

1. BACKGROUND

A. RationaleB. FormulationC. Objective and Scope at Appraisal0. Financing ArrangementsE. CompletionF. Postevaluation

II. IMPLEMENTATION PERFORMANCE

A. DesignB. Contracting, Construction, and CommissioningC. Organization and ManagementD. Actual Cost and FinancingE. Implementation ScheduleF. Technical AssistanceG. Compliance with Loan Covenants

Ill. PROJECT RESULTS

A. Operational PerformanceB. Institutional DevelopmentC. Financial PerformanceD. Economic and Financial ReevaluationE. Socioeconomic and Sociocultural ResultsF. Women in DevelopmentG. Environmental Impacts and ControlH. Gestation and Sustainability

IV. KEY ISSUES FOR THE FUTURE

V. CONCLUSIONS

A. Overall AssessmentB. Lessons LearnedC. Follow-up Actions

APPENDIXES

11

BASIC PROJECT DATAPhilippine National Oil Company Energy Project

(Loan No. 726-PHI)

PROJECT PREPARATION/INSTITUTION BUILDING:

Person-months Amount

$7000027 $450,00014 $200000

As per BankLoan Documents

109.00

52.7125.3815.5215.39

85.00

40.1519.3710.0915.39

24.00

12.566.015.43

85.00

32.0615.97

8.1815.3913.40

TA No. TA Prolect Name Type

595-PHI BRC Subproects (Energy Sector Loan) PP552-PHI Refinery Sector Rationalization Study AD653-PHI Institutional Strategy Study AD

KEY PROJECT DATA ($ million):

Total Project Cost

Part A - Petroleum RefiningPart B - Coal MiningPart C - ShippingInterest During Construction

Foreign Currency Cost

Part A - Petroleum RefiningPart B - Coal MiningPart C - ShippingInterest During Construction

Local Currency Cost

Part A - Petroleum RefiningPart B - Coat MiningPart C - Shipping

Bank Loan Amount/Utilization

Part A - Petroleum RefiningPart B - Coal MiningPart C - ShippingInterest During ConstructionUnallocated

Bank Loan Amount/Cancellation

Part A - Petroleum RefiningPart B - Coal MiningPart C - ShippingInterest During ConstructionUnallocated

Approval Date

23 Mar 198420 Dec 196420 Dec 1984

Actual

81.13

51.805.909.64

13.79

63.50

36.995.736.99

13.79

17.63

14,810.172.65

63.50

36.995.736.99

13.79

21.33

(1.94)10.87

1.361.609.44

Ill

KEY DATES:

AppraisalLoan NegotiationsBoard ApprovalLoan AgreementLoan EffectivenessFirst DisbursementProject CompletionLoan ClosingMonths (Effectiveness to Physical Completion)

KEY PERFORMANCE iNDICATORS (%):

Economic Internal Rate of Return

Part A: Petroleum RefiningVacuum Tower DebottleneckingProcess Control UpgradingAddition of Merox UnitMiscellaneous Improvement5 MW Power Plant

Part B: Coal MiningBislig MinesLittle Baguio MineMalangas Mine

Part C: ShippingFour Tanker Company Tankers

Financial Internal Rate of Return

Part A: Petroleum RefiningVacuum Tower DebottleneckingProcess Control UpgradingAddition of Merox UnitMiscellaneous Improvement5 MW Power Plant

Part B: Coal MiningBislig MinesLittle Baguio MineMalangas Mine

Part C: ShippingFour Tanker Company Tankers

Expected

28 Mar 1985

31 Dec 198730 Jun 1989

33

Appraisal

above 100783920

n .e.

• 3472

above 100

above 90

Appraisal

92523925

n.e.

87above 100above 100

above 90

Actual

13 Aug-21 Sep 198416-21 Nov 1984

20 Dec 198428 Dec 198411 Jun 198530 Jun 1985

30 Jun 199019 Feb 1992

61

PCR PPAR

n.e. above 100

n.e. 42.7

n.e. 18.6

n.e. n.e.

n.e. 32.0

n.e. nil

n.e. nil

nc. nil

n.e. n.a.

PCR PPAR

n.e. above 100

n.e. 41.2n.e. 15.8

n .e. n.e.n.e. 30.2

n.e. nil

n.e. nil

n.e. nil

n.e. n.a.

n,a. - not applicable.n.e. - not calcuLated.

a The Projectwas substantially completed by thisdate. Miscellaneous improvements were undertaken up to March

iv

BOA ROWER:

Philippine National Oil Company (PNOC)

GUARANTOR

Republic of the Philippines

EXECUTING AGENCY:

Under the overall supervision of PNOC, the Project will be executed, asappropriate, by PNOC subsidiaries concerned:

Part A: Petron Corporation (PC), formerly Bataan Refining Corp.Part Bi: PNOC Coal Corporation (PCC)Part B2: Malangas Coal Corporation (MCC)Part C: PNOC-Shipping and Transport Corporation (PSTC)

MISSION DATA:

Type of Mission

No. of Missions

Parson-days

Appraisal 1 280Project Review 4 99Project Completion 1 11Fostevaluation 1 37

V

EXECUTiVE SUMMARY

The Government requested Bank assistance to the Philippine National OilCompany (PNOC) to implement improvements to its refinery and to meet urgently needed importrequirements of its coal mining and marine transport activities in response to the economic aridpolitical difficulties facing the country in 1984. Consequently, on 20 December 1984, the Bank'sBoard of Directors approved the PNOC Energy Project for $85 million. The main objective of theProject was to strengthen the energy supply and distribution capacity in the country byimproving the efficiency and productivity of existing facilities operated by PNOC, to attain agreater degree of self-sufficiency in energy supplies, and to ensure continuity of energy suppliesduring a time of major economic difficulty. This objective was to be achieved through investmentin equipment in PNOC's Bataan Refinery, completion of ongoing development programs atseveral coal mines operated by PNOC, and provision of spare parts and dry-docking facilitiesfor PNOC's tanker fleet.

The actual cost of the Project ($81.13 million) was 26 percent less than appraisedbecause of the reduction in the scope of the coal mining and shipping components.Disbursements under the Bank's ordinary capital resources loan amounted to $63.5 millioncompared with the loan amount of $85 million. Implementation of the Project was substantiallydelayed, resulting in a time of completion of June 1990 compared with the original end of 1987time frame. The delay was mainly attributable to the refinery component of the loan because ofcumbersome Government and PNOC procedures, and political and economic uncertainties inthe country at the time.

Most of the components of Part A (refinery) were implemented as originallyenvisaged at appraisal, but with some modifications and additions. The six additional items costanother $8.19 million. The scope of Part B (coal mining) was scaled down substantially and wasnot fully implemented because of low coal prices, unexpected geological conditions in a few ofthe mines, and the Government's privatization plans for PNOC's coal mining operations. Part C(shipping) was largely implemented as appraised. However, PNOC's subsequent rationalizationprogram considerably reduced the size of the fleet. Since the Project was in the Bank's hostcountry, more frequent Bank review missions could have been mounted to heLp resolve someof the implementation problems and mitigate the negative impacts of the delays on the Project.

The Project provided training under the refinery component to improve theefficiency and expertise of refinery personnel. As a result, the refinery was able to establish itsown engineering department and project management group. Moreover, most of the trainedpersonnel are still employed with the refinery.

The overall environmental impact of the Project was positive. Investments in therefinery resulted in improved process control and improvements ri product yields, thus reducingeffluents. Replacement of the spent monometallic catalyst in the reformer with a bimetalliccatalyst reduced the lead content of gasoline. The rehabilitation of the separator unit in therefinery substantially reduced the release of oil into Manila Bay. However, no measures weretaken to address the Government's policy of maintaining a low price for diesel fuel, which hashad a significant effect on air quality and the health of urban dwellers in the Philippines. Theexpansion of coal mining operations did not significantly increase the amount of waste rock, and

vi

chemicals were not used in the washing of coal. The environmental impact of the coal miningand shipping components was essentially neutraL

The benefits from the Projects investments in Part A (refinery) were large andapproached the orders of magnitude anticipated at loan appraisal. The economic internal ratesof return of Part A components varied from a low of 19 percent to over 100 percent. The financialinternal rates of return were of a similar magnitude. However, the benefits from investments inPart B (coal mining) were negligible. Part C (shipping) achieved its objective in continuing theoperation of the fleet of the PNOC Shipping and Transport Corporation.

Given the estimate of the economic internal rate of return of Part A, the positivelong-term sustainability of the benefits of the investments made in the refinery, and theachievement of the objectives of Parts A and C and the reduction in scope of Part B, the Projectis considered generally successful.

The Project illustrated the need for thorough project preparation to ensure thatsubproject components are appropriate for financing by Bank loans. Furthermore, the Projectillustrated the need for a thorough assessment to determine the sustainability of theGovernment's energy self-sufficiency policy, particularly in terms of the sector's comparativeadvantage. The Government's subsequent success in privatizing the Petron Corporation andseveral other parts of PNOC's operations demonstrated the benefits of private sector participationin the energy sector, However, this led to questions on the future roLe of PNOC in the economy.

'Butuan

Gingoog

Puerto P 5a77

Sir J. Brooks Point

Finoba-an /pO Baia

__*°Bayawan \ Tagbilaran

I B°OON

viiMap 1

I I5OO'N

I 18E - - - 126°E

P H I L I P P I N E S

PHILIPPINE NATIONAL OIL COMPANY

7 \parrt ENERGY PROJECT/ PET1RON REFINERY SITE

/ AND PETROLEUM PRODUCTS/ DISTRIBUTION NE1'ORK OF PSTC

/ (as completed)

San Fernando

2c!ric OcE

PETRON REFINERYCALIEX REFINERY

SHEU. REFINERYBatangas

BoacPili

Legazpu/ P!tiippiues 5eo

South Chzua Se' ,0CalbayogTables Is. )

aclbanoRoxas

bib City Cadiz

Oormoc L1e I,if

Mabangas0

-N-

0 50 100 150 200

Kilometers

o City/Town

Ci Refinery

-' Shipping Route

- Pipeline

1 I8kIOE

lDavao

Cotabato City

Gen. Santos

C!'z Scal26E

i

I- 8°00N

O City

o Power Plant

• Cement Plant

A Mine

• Othe Major Industrial Consumer

1 18°OOE

I

I

Oavao City0

U

8°O0'N

viiiMap 2

1180O0E26°0O'E

u1Ia ,'a,incE P H I L I P P I N E S

PHILIPPINE NATiONAL OIL COMPANYENERGY PROJECT

COAL MINES ANDMAJOR COAL CONSUMERS

(as completed)

BaguioCily

I 16D0N

o 50 100 150 200

16°O0N -I- -

Ki'ometers

I

I

II

Manila0I

CALACA (NPC) Batangas CityI

SEMIRARA MINE

South China Sea

A

Philivpwes Sea

0Bago

• 0Cebü City

01NAGA POWER PLANT (NPC)

CENTRAL CEBU MINES

BISIJG MINES (1,2, 2A

LITTLE BAGLIIO & KAUSWAGAN MINES

MALANGAS MINES

I UlIlganLALAT MINE OEVELOPMENT I

A

0Zamboanga City

Cclebe5 Sert12e°O0E

1. BACKGROUND

A. Rationale

1. The Philippines, like many other countries, was nearly whoUy dependent onimported oil to meet the commercial energy needs of its economy. The high level of dependenceon foreign sources of energy supplies became a major concern in 1984 when economic andpolitical difficulties resulted in a crisis of confidence in the country and in declining foreignexchange reserves with which the importation of energy supplies were financed. 1 Moreover, thelack of foreign exchange seriously constrained economic activity through its adverse effect onthe availability of imported equipment and materials needed to operate and maintain energy-related 'facilities in a normal manner. Events at the time demonstrated an urgent need for thecountry to increase efficiency in the energy sector, to develop a framework for more effectivemanagement of energy supply and demand, and to improve its energy self-sufficiency.

B. Formulation

2. During the 1984 country programming mission to the Philippines in November1983, the Government requested the Bank 'for assistance to the Philippine National Oil Company(PNOC) to implement improvements to its refinery, and to meet urgently needed importrequirements of its coal mining operations as well as those of its marine transport activities. Aproposal for Bank assistance was formuLated based on a Bank examination of the priorityrequirements of PNOC in these activities, the work done by a consultant under a Bank-financedtechnical assistance (TA), 2 and taking into account the prevailing economic condition of thecountry. The proposed loan was appraised from 13 August to 21 September 1984, andsubsequently approved soon thereafter on 20 December 1984 by the Bank's Board of Directors.

C. Objective and Scope at Appraisal

3. The main objective of the Project was to strengthen energy supply and distributioncapabilities in the Philippines by upgrading the operating efficiency and productivity of existingPNOC facilities. This objective was to be achieved through support for (i) modifications toPNOC's refinery in Bataan to produce an improved output mix, and for a technical capacity tohandle the refining of heavier, less expensive crude oil; (ii) energy conservation and thereduction of energy and material costs in the Bataan refinery; (iii) completion of ongoingdevelopment programs for seven coal mines in Mtndanao and Cebu; (iv) maintenance of normaloperating and production activities of PNOC's Bataan refinery, coal mines, and shipping fleetduring the 19851986 period; and (v) consulting services to help implement the Project andstrengthen the operational and planning capabilities of PNOC and its subsidiaries responsiblefor the day-to-day execution of the Project.

On 17 October 1983, the Government declared a moratorium on certain categories of external debt

repaymentsTA No. 595-PHI: Bataan Refinety Corporation Subproject, for $70,000, approved on 23 March 1984, Thissmall-scale TA identified possible components at the Bataan refinery for financing by the Bank loan,

D. Financing Arrangements

4. The total cost of the Project was estimated at $109 million, $85 million of whichwas the foreign currency cost financed by the Bank. PNOC was the borrower of the loan andthe Republic of the Philippines was the loan's guarantor. The loan was made from the ordinarycapital resources of the Bank at an interest rate of 10.25 percent per annum and a repaymentperiod of 15 years including a grace period of 3 years. Local currency costs were to be financedout of PNOC's internally generated funds.

E. Completion

5. The Project was substantially completed in June 1990 compared with thecompletion date of December 1987, which was envisaged at the time of appraisal. A Projectcompletion report (PCR), prepared by the Bank's Energy Division (East) in October 1992.discusses the design, scope, implementation, and operational aspects of the Project, andprovides detailed Project information. The PCR identifies the additions and modificztions 'to FartA, the reduction in scope of Parts B and C, and estimated cost savings in each Projectcomponent. it also provides a thorough discussion of the implementation delays, which were duemainly to the Government's cumbersome procedures and political unrest in the country.Although Project benefits in the PCR were identified and quantified, no economic or financialinternal rate of returns were calculated.

F. Postevaluation

6. This Project performance audit report (PPAR) focuses on pertinent aspects of theProject and presents the findings of the Postevaluation Mission from 26 November to 17December 1996. The PPAR presents an assessment of the Project's effectiveness in terms ofachieving its objectives and generating benefits, and of the sustainability of the Project'soperations.

7. The PPAR is based on a review of the PCR, the appraisal report, material in Bankfiles, a consultant's report, and discussions with staff members of the Bank, the ExecutingAgency and other agencies of the Borrower. Copies of the draft PPAR were provided to theGovernment, the Borrower, and Bank staff concerned for review and comments. Commentsreceived were taken into consideration in finalizing the Report.

II. IMPLEMENTATION PERFORMANCE

A. Design

8. PNCC was the Government's primary institution involved in the nonpower energysubsector for the importation, refining, and distribution of oil and petroleum products, and for thepromotion of the development of indigenous energy resources. It was within PNOC where muchof the subsectors greatest inefficiencies and bottlenecks were found in the early 1980s. Thus,the Project was designed in three parts to address the critical issues in each of the mainoperations of PNOC: Part A, for improvement of the process capability of the Bataan refinery;Part B, for development and improvement of coal production from PNOC's coal mines; and PartC, for improvement in the efficiency of transporting crude oil and petroleum products by PNOC'sinternational and domestic shipping vessels.

3

9. Most of the components of Part A were implemented as originally envisaged, butwith some modifications and additions. See Appendix 1 for a schematic diagram before and afterthe Project. The component Addition of Merox Unit was modified from a 10,000 barrels perstream day (bpsd) light naphtha Merox unit and a 15,300 bpsd kerosene unit to a 16,000 bpsdkerosene unit because the existing hydrotreater for kerosene had more than sufficient capacityto treat light riaphtha efficiently. Six additional items were included under the MiscellaneousImprovements and Rehabilitation Schemes component: (i) upgrading of facilities to produce afull range of naphtha and reformed naphtha; (ii) upgrading of the off-line blending facilities toblend products for the production of kerosene, jet fuel, diesel oil, and industrial fuel oil; (iii)provision of eight marine loading arms to facilitate the loading of tanker ships by allowing theloading of specific petroleum products for each loading arm; (iv) conversion of the controlsystem for the Atmospheric Pipestill No. 3 to a digital control system; (v) installation of a 5megawatt (MW) power plant to reduce dependency of the refinery on power supply from thenational grid: and (vi) a Real Time Production Management Lntegrated System, a computer-assisted refinery management system. Under the Training and Technical Services component,selected managerial and technical staff of the refinery underwent 260 weeks of various trainingcourses, compared with the 285 weeks originally provided under the loan. The 36 person-monthsof advisory services, primarily for troubleshooting, were not pursued but were instead providedby Universal Oil Products, Inc. of the United States under a three-year bilateral technical servicesagreement. Notwithstanding these modifications, the design of the Project's Part A seems overallto have been well thought-out, comprehensive, and appropriate. The scope of work andtechnology adopted in Part A resulted in significant energy savings, higher throughputs, higherproduct yields, increased production of middle distillates, greater operating efficiency and safety,improved environmental control, a capacity to process heavier grades of crude oil, and areduction of losses.

10. The scope of Part B was scaled down and was not fully implemented because oflow coal prices, unexpected geological conditions in a few of the mines, and the Government'sprivatization plans for PNOC's coal mining operations. The development of the Little Baguio minewas curtailed because of the disruption of the coal seam by intrusive rocks, which drasticallylessened the volume of minable coal. The mine was consequently closed in 1989. In the CentralCebu mine, the marginal thinning of the coal seams together with increasing production costswith depth strained the profitability of operation. The coal, when temporarily stored underground,also exhibited spontaneous combustion. Because of these factors, the Central Cebu mineoperation ceased in November 1990. The BisIig 1, 2, and 2A mining rights and assets weretransferred to the private sector in October 1987 after about two years of operation. The newoperators increased coal production by as much as six-foLd over peak production in 1986. TheKauswagan mine was closed in November 1987 because of its small production volume.Because of PNOC's privatization policy, exploration of the Lalat coalfield was not fully carried outand only the consulting services were provided. In the Malangas mine, the coal seams becamethinner and did not continue in the anticipated direction as mining operations progressed. As aresult, the mine had to fall back on the less productive retreat mining method, which requiresthe construction of more shafts surrounding the area to be mined. It was also found that due tochanges in geology of the adjacent noncoal-bearing layers, the fixed-type steel arches boughtunder the loan were not suitable for shaft support in the coal-bearing strata mined after 1991;and there was a need for stronger shaft support. In 1994, the Malangas mine suffered a seriousmethane gas explosion in which 84 persons were killed. Malangas Coal Corporation (MCC)subsequently ceased all operations at the mine after this tragic accident, but resumed operations

4

again on 18 April 1995 after assigning the mining rights to the Coal Miners MultipurposeCooperative. The Cooperative mined the concession for about 17 months before terminatingoperations because of geoLogical problems and excessive water seepage.

ii. Inclusion of the coal mining component of the Project should be questioned. Para.24 of the Project's appraisal report states that the rapid increase in coal production in the late1 970s was "partly due to the incentives offered by the Government such as import and advalorem tax exemptions on the importation of coal mining machinery and income tax benefitsfor coal investments," thus indicating that there was a need for some form of subsidization. Thisneed brings into question whether the Philippines has a comparative advantage in coalproduction, and whether the coal industry has any long-term economic viability. Moreover, thereseems to have been insufficient investigation into the geological aspects of the coal mines, eventhough an ongoing project financed by the Bank 1 was experiencing similar problems at theMalangas mine.

12. Although there were no changes in the components of Part C, there was a slightadjustment in the scope of work. Depressed tanker charter prices and the generally unfavorableeconomic conditions prevailing in 1985-1987 prompted PNOC to rationalize PNOC Shipping andTransport Corporation's (PSTC) tanker operations by reducing the number of shipping vesselsfrom 46 to 17. This was accomplished over an eight-year period and the last tanker, along withany dedicated spare parts for the vessel, some of which were financed by the Bank's loan, wassold in 1995. As with Part B, Part C seems to be a weaker component of the Project. A morethorough investigation of the operations of PSTC, its financial position, profitability, andcompetitiveness in the market would most likely have concluded that PSTC should not be acomponent of the Project until a rationalization of operations was undertaken.

13. The coal mining and shipping components were not based on a projectpreparatory technical assistance, the usual practice of the Bank, but rather on discussions withPNOC, the Government, and the Appraisal Mission's own perceptions. A project preparatorytechnical assistance could have placed both Parts B and C of the Project on a sounder footing.

B. Contracting, Construction, and Commissioning

14. Apart from delays, no major problems were encountered in the recruitment ofconsultants and the procurement of equipment and materials. Consultancy services for MineEngineering and Operational Planning originally envisaged under the loan were not utilized byPNOC, which instead engaged consultants from Canada and Germany under bilateral programsof these countries. Procurement of equipment, materials, and services that were financed by theBank were undertaken in accordance with the Bank's Guidelines for Procurement. Performanceof consultants, contractors, and suppliers was generally satisfactory. All components of theProject or those subsequently modified were commissioned as designed.

Loan No. 421-PHI:Malangas Coal Development, for $14 mI1ion, approved on 19 November 1979.

5

C. Organization and Management

15. Petron Corporation (PC); PNOC Coal Corporation (FCC); MCC; and PSTCundertook the implementation of Parts A, B, and C under the overall supervision of PNOC, theborrower of the loan. PC recruited a Project consultant and established an in-house Projectmanagement team consisting of engineers and senior refinery experts. The Project managementteam was effective in supervising the contracting, construction, and commissioning of the PartA components. Although scaled-down substantially, implementation of Part B components wereundertaken satisfactorily by FCC and MCC staff who closely followed arrangements prescribedin the Project's appraisal report. Part C components were implemented by PSTC staffsatisfactorily and according to appraisal report arrangements as well. However, major delayswere experienced in the engagement of the consultants under Part A. These delays were mainlydue to (i) the Government's cumbersome procedures; (ii) PNOC's internal approval procedures;(iii) political unrest in the country, which led to a change of Government in 1986; and (iv)prolonged discussions between the Bank and PNOC on the scope of the Project consultant'swork. Only minor delays were experienced in Parts B and C.

16. Although the location of the Project sites was in the Bank's host country, only 'fourreview missions were fielded during the whole Project implementation period, and no inceptionmission was mounted. Considering that implementation of the Project took about five years, orone review mission almost every 15 months, the Bank's administration of the Project seems tohave been lacking. More frequent Bank review missions would have undoubtedly helped toexpedite implementation.

D. Actual Cost and Financing

17. Actual total Project costwas $81 .130 million equivalent, comprising $63.500 millionin foreign currency costs and $1 7.630 million equivalent in local costs. Counterpart funds for thelocal cost components were provided in a timely manner. Because of the reduction in the scopeof work, mainly under Parts B and C, savings of $27.870 million equivalent (consisting of $21 .500million in foreign currency costs and $6370 million equivalent in local costs) were realized.Under Part A, there was a cost saving of $0.91 1 miflion equivalent, consisting of an underrun of$3.1 65 million in foreign currency costs and an overrun of $2.254 million equivalent in localcosts. In the foreign currency costs, there were overruns of about $7.0 million in the ProcessControl Upgrading component because of the additional requirement for hardware, analyzers,instruments, engineering services, and software development, and there were also overruns ofabout $5.4 million in the Miscellaneous Improvements component because of the additionalitems discussed in para. 9. These foreign cost overruns were compensated by savings of $7.5million incurred in the Vacuum Tower Debottteriecking, Merox unit, Operating Equipment andMaterials, Training and Technical Services and Consulting Services, and about $8.1 million fromthe category of contingencies. On the other hand, the cost overrun in local costs was mainly dueto the extra local currency costs associated with the additional facilities.

18. The cost of Part B at the time of appraisal was estimated at $25.379 millionequivalent, consisting of $19368 million in foreign exchange costs and $6.01 I million equivalentin local currency costs. The actual cost of Part B was onLy $5.899 million equivalent resulting insavings of $19.480 million equivalent ($13.634 million in foreign currency costs and $5.846million equivaLent in local costs). The savings were due mainly to the reduced development

6

programs of the coal mines following the privatization policy of the Government, and to technicalproblems encountered in a few mines. The contingency allocations were also not utilized.Savings of about $0.7 million were made in the consultancy services for Mine Engineering andOperational Planning, which were available under a bilateral program. On 24 February 1988,PNOC requested cancellation of loan savings amounting to $10873 million.

19. The cost for Part C was estimated at $1 5.520 million equivalent at appraisal, whichconsisted of $10.092 million in foreign currency costs and $5.428 million equivalent in localcosts. The actual cost was $9.641 million equivalent with a saving of $5879 million equivalent($3.101 million in foreign currency costs and $2.778 million equivalent in local costs). A largepart of the savings came from dry-docking, maintenance, and the unutilized contingencyallocation brought about by the rationalization program of PSTC's fleet of vessels andconsequent improvement in its operating performance.

E. Implementation Schedule

20. At appraisal, implementation of the Project as a whole was expected to besubstantiafly completed by the end of 1987 or within a period of 33 months from the start of theProject. However, all components of the Project suffered delays, the reasons for which are givenin para. 15 (also, see Appendix 2). Delays in the initial stages of implementation of Part A wereattributable to delays in engaging consultants for two studies, defining the scope of work, andpreparing detailed specifications and bid documents. However, once contracts were awarded,work proceeded rapidly and was completed by November 1989, 41 months after the start ofimplementation. By that time, the political and economic situation in the country had stabilizedand demand for the refinery's output, particularly diesel oil and jet fuel, was accelerating. Thisled to the realization of several shortcomings that had to be corrected to accommodate highersates of diesel oil and jet fuel. Thus, the implementation of the six additional items underMiscellaneous Improvements and Rehabilitation Schemes of the Project was approved by theBank and were subsequently completed by March 1992.

21. Implementation of Part B closely followed the schedule established in the appraisalreport. There was only a three-month delay and Part B was completed by the end of 1987.However, some additional procurement of safety equipment and tunnel support materials wasdone in 1991. Part C was completed in September 1988 with a ten-month delay. The dry-dockingof the four large tankers, mostly overseas, took longer than estimated due to the unavailabilityof dockyards and the rescheduling of dry-docking to optimize shipping engagements.

22. The delays in the implementation of the Project seem to have been unavoidablegiven the economic and political uncertainties at the time. However, past experience in thePhilippines indicates that the implementation period of 33 months estimated at appraisal mayalso have been unrealistic. Nevertheless, delays could have been mitigated with closerconsultation between the Bank, the Government, and PNOC. Better administration of the Projectthrough more frequent review missions to circumvent the Government's and PNOC'scumbersome procedures and to resolve difficulties in the recruitment of consultants could havehastened actual implementation of the Project.

F. Technical Assistance

23. Two other TAs were provided under the PNOC Energy Project in addition to thepro;ect preparatory technical assistance for the Bataan refinery (see para. 2): the Refinery SectorRationalization Study (RSRS) and the Institutional Strategy Study (ISS). The objectives of theRSRS were to formulate appropriate action plans to minimize supply costs of petroleum productsand to outline alternative restructuring programs for the refineries consistent with the actionplans. The RSRS does not seem to have completely met these objectives of the TA. The RSRSdiscussed extensively the market for petroleum products in the PhiLippines and the world, andprepared forecasts for the demand for petroleum products and their prices, but there was noevidence of discussions of restructuring and rationalizing capacity configurations to meet productdemand or managing product demand to alter the demand for surplus products, the core of thestudy. The terms of reference for the study were comprehensive and clear, thus it may only beconcluded that insufficient supervision of the consultants is the reason for the incompletenessof this study.

24. The ISS was better prepared. The objectives of ISS were to carry out an irtdepthstudy of the basic objectives and energy policy goals underlying the operations of PNOC as apublic sector enterprise and to formulate appropriate strategies for structuring its future activities.Many of the report's recommendations were implemented including those dealing withprivatization of the refinery operations, coal mines, and shipping operations. Although brief, theterms of reference seem to have been adequate and resulted in a comprehensive report.Nevertheless, the study does not seem to have been well timed. Had the ISS been undertakenduring the preparation of the Project, Parts B and C would have been most likely designeddifferently, if included at all.

G. Compliance with Loan Covenants

25. PNOC's obligations with respect to the covenants of the loan expired in 1995when the final installment of the loan was repaid by PNOC to the Bank. The loan was repaidfrom funds transferred from the Petron Corporation 'to PNOC soon after its privatization in '1994.Nevertheless, PNOC generally complied with the conditions and covenants stipulated in the LoanAgreement and Project Agreement except for a few financial ratios (see Appendix 3). Theconditions and covenants of the loan were reasonable and did not seem to impede theimplementation of the Project. However, the loan's covenants contained no requirementsregarding policy or institutional reforms.

26. The financial ratio covenants not complied with were the debt/equity ratio of PC,which exceeded the covenanted 60:40 and peaked in 1990 at 84:16. However, by 1995, this ratiowas brought down to 50:50, PC complied with the debt-service and current ratio covenants. Thedebt/equity ratio of PCC in 1990 exceeded the covenanted level of 60:40, but essentiallycomplied thereafter. The debt-service covenant was complied with except for the years 1992 and1993. The current ratio covenant was also complied with. The debt/equity and debt-service ratiosof MCC were not complied with because of lower than expected coal production, followed bythe closure of the Malangas mine in 1994 as a result of a major explosion (see para. 10). Thecurrent ratio was also not complied with. PSTC complied with all financial covenants.

8

III. PROJECT RESULTS

A. Operational Performance

27. With some minor exceptions, the new facilities and rehabilitated systems underPart A have performed and continue to pertorm well. Savings in fuel cost and higher productyields have met or exceeded expectations, and substantial benefits have been realized from thenew instrumentation and other systems provided. The diagrams in Appendix 1 show the increasein feed rates into the atmospheric distillation columns (APS 1, APS 2, and APS 3) and theresultant higher product yields. Appendix 4 provides a comparison of before and after Projectresults, which shows the volume of total output in barrels per calendar day (bpcd) increasing byabout 29 percent between 1983 and 1993, and a reduction of residual products (pitch/asphalt,refinery fuel, and losses) as a proportion of total output from about 13 percent to 9 percent andan increase in marketable products such as liquified petroleum gas (LPG), kerosene, naphtha,diesel oil, and solvents from 86 percent to 91 percent. The refinery now has the capacity toprocess up to 165,000 bpsd of crude oil, and ran at this rate during 1996, com pared with acapacity of 155,000 bpsd in 1984, running at a 85-93 percent utilization factor. The number, andparticularly the duration, of unscheduled shutdowns from electrical faults fell from seven in 1983to one in 1993 and two in 1994. Although the frequency of fires has not been reduced (seeAppendix 5), fires that did occur were less severe, and the acquisition and use of a truck withfoam-producing equipment has reduced damage from these fires.

28. The facilities provided under the Project reflect the state of the art as of 1986 andare of adequate quality. These facilities were superimposed on the existing plant, which datesfrom 1960 to 1972. However, these new facilities introduce a disparity into the life cycle of theequipment. With normal refinery life cycles of 25 to 30 years before complete depreciation orobsolescence, it must be anticipated that in the not too distant future some of the newequipment financed under the loan will be replaced.

29. Operational performance of the coal mines under Part B did not achieve theexpected results because of low coal prices, unexpected geological conditions, and theGovernment's privatization plans for the coal mines (see para. 10). Little Baguio, Central Cebu,and Kauswagan mines were closed, and the Bislig 1, 2, and 2A mining rights and assets weretransferred to the private sector. Only under the new operators did coal production achieve itsfull potential. Exploratory work on the Lalat coalfield was not completed. The Malarigas mineproduced coal continuously, but production volumes were below target until the mine was closedin 1994 after the serious methane gas explosion.

30. The dry-docking facilities, maintenance, and spare parts provided under Part C(shipping) of the Project were instrumental in ensuring the continued operation of PSTC's fleetof vessels. Although the subsequent rationalization program significantly reduced the numberof vessels, the smaller number of vessels reduced costs and improved profitability of thecompany. Moreover, the improved profitability enabled PSTC to utilize internally generated fundsto procure equipment and spare parts or-i its own account instead of borrowing from the Bank'sloan,

9

B. Institutional Development

31. As originally appraised and subsequently implemented, the Project provided fewcomponents for the institutional improvement of PNOC or its subsidiaries. Under Part A, trainingand technical services were provided to improve the efticiency and expertise of refinerypersonnel. This component seems to have been successfully implemented because the refinerywas consequently able to establish its own engineering department and project managementgroup. Moreover, most of the trained personnel are still employed at the refinery today.

C. Financial Performance

32. PC, PCC, MCC, and PSTC comprise the major operating entities of PNOC anddetermine PNOC's overaLl financial performance. PC has been consistently profitable over theyears and its balance sheet has been considerably strengthened recently (see Appendix 6) asa result of the reduction in its debt/equity ratio. This was caused by both a reduction in PC'slongterm debt obligations and a rapid growth in shareholders equity following PC's privatization.PCC returned to profitability in 1994 and 1995 after a period of low profits and losses associatedwith the lower than expected production of coal, weak prices, and the costs of the subsequentclosure of several mines. The improved financial performance of PCC is mainly attributable toimprovement in the volume of coal sold. MCC has accumulated substantial losses over the pastseveral years because of low coal output and weak prices. However, with the closure of theMalangas mine in 1994, MCC has ceased operations. PSTC returned to profitability in 1991 andis competing effectively in the market for the provision of shipping services. Lts financial positionis sound and is expected to contribute to PNOC's overall profitability in the future.

33. Overall, as a public entity, PNOC is in a good financial position after undergoingmajor restructuring, including debt reduction, privatization of PC, closure of several coal mines,and disposal of some shipping assets. PC, PNOC's major asset, is managed independently ofPNOC, while PNOC's other main subsidiaries, PCC and PSTC, are still operated by PNOC, withthe collaboration of the private sector in the case of P00. PNOC's future profitability should beassured because of its minority ownership of PC, however, PNOC's coal mining and shippingfunctions operate in a more competitive market and may experience greater variations inprofitability over the Longer term.

0. Economic and Financial Reevaluation

1. PartA(Refinery)

34. The main objective of the Vacuum Tower Debottlenecking component was todouble the capacity of the vacuum distillation column from 16,000 to 32,000 bpsd so that theunused capacity of the thermal cracker could be reduced. As a result, less of the atmosphericpipestill bottoms would be diverted to lower value industrial fuel oil, and more would beprocessed in the vacuum column and cracker producing higher value diesel fuel oil, liquidpropane gas, and naphtha. The EIRR is estimated at more than 100 percent. The correspondingFIRR is also in excess of 100 percent. The high rates of return are the result of large incrementalbenefits compared to the relatively small investment. See Appendix 7 for details. Implementationof the Vacuum Tower Debottlenecking component was delayed by about two years. This isestimated to have resulted in a loss of about $9 million to the economy.

10

35. Before the upgrading, the refinery control system consisted of 1970s vintageconventional analog instrumentation, as well as some pneumatic instrumentation of even oldervintage. This type of control relied to a great extent on operator intervention, measurements werenot very accurate, and response time was slow. The Process Control Upgrading componentprovided digital instrumentation, advanced analyzers, and a computational capability for the rapidcollection and processing of data with automatic adjustments to maximize product yield andquality, reduce losses, and minimize energy consumption. The EIRR was calculated at 42.7percent and the corresponding FIRR at 41 .2 percent (see Appendix 8). Implementation of theProcess Control Upgrading component was also delayed by about two years. Based on the neteconomic benefits of this component, the cost of the delay was in the order of $11 mUllen.

36. The addition of the Merox unit 1 also resulted in energy savings, productupgrading, and increases in product yields. The EIRR on the investment is estimated at 18.6percent and the FIRR at 15.8 percent (see Appendix 9). Implementation was delayed by abouttwo years, resulting in an economic loss of about $2 million.

37. The installation of the 5 MW steam turbine generator added power-generatingcapacity to the refinery, improved the reliability of the power supply, and lowered the cost ofpower. An EIRR of 32.0 percent was estimated based on the capital and associated operatingand maintenance costs, and the avoided cost of purchasing power (valued at the long runmarginal cost of power) from the National Power Corporation (NPC) (see Appendix 10). TheF1RR, based on NPC's average tariff to the refinery, was 30.2 percent.

2. Part B (Coal Mining)

38. Investments made in the Bislig 1, 2, and 2A mines; Kauswagan; Central Cebu; andLittle Baguio mines were primarily for the completion of ongoing development to raise outputfrom 221,500 tons per year, in 1983, to 306,000 tons per year. However, by 1987 coal outputfrom these mines fell to 70,000 tons per year, and by 1991 production had ceased altogetherexcept in the Bislig mines (see para. 10). Because of the absence of any incremental benefitfrom the investment made under the Project, the EIRR and FIRR would be well below acceptablelevels.

39. The Malangas mine began production in May 1982, and by 1983 coal output was136,000 tons per year. Investment under the Project in the Malangas mine aimed at increasingoutput to 240,000 tons per year. However, output exceeded the 1983 level ordy during the 1987-1990 period when output ranged from 148,000-188,000 tons per year. In the other years, outputwas below the 1983 level until the closure of the mine in 1994. Thus, it may be concluded thatthe net benefit from the investment in the Malangas mine was negligible relative to theinvestment made.

The Merox unit converts monosuiphides (mercaptans) to disuiphides to remove the foul odor present inkerosene at distillation. The disulphdes may subsequently be removed by decanting.

11

3. Part C (Shipping)

40. Part C of the Project was not designed as a specific investment in PSTC, butrather as a stopgap measure to ensure the continued operation of the fleet through the provisionof financing of recurrent foreign costs, such as dry-docking, maintenance, and spare parts forPSTC's fleet at a time when foreign exchange was in short supply. The financing of these costsfacilitated keeping the fleet in seaworthy condition, and meeting national and internationalmaritime regulations, without which operations would be virtually impossible. Therefore, the mainbenefit of Part C was the continued operation of the fleet, and the calculation of an EIRR andFIRR is thus not appropriate in this circumstance.

E. Socioeconomic and Sociocultural Results

41. The main objective of the Project was to strengthen the energy suppiy anddistribution capacity in the country. Thus, the Project had few if any direct socioeconomic orsociocultural impacts on the population as a whole.

F. Women in Development

42. There were no provisions in the Project to address women's issues in thePhilippines.

G. environmental Impacts and Control

43. The Project did not involve the creation of new facilities, but rather the moreefficient use of existing refinery facilities, coal mines, and shipping vessels. Investments in therefinery resulted in improved process control, product yields, and energy conservation which ledto a decrease in effluents. Replacement of the spent monometallic cataLyst in the reformer witha bimetallic catalyst helped to reduce the lead content of gasoline and comply with newenvironmental regulations. The separator unit in the refinery, used to collect untreated effluentto separate oil from water, was rehabilitated. This resulted in a 50 percent reduction of oilreleased into Manila Bay and a reduction in chemical and biological oxygen demand.

44. The rationale of the debottlenecking and process control upgrading componentswas to convert low value fuel oil to high value distillates because of the supply-demandimbalance in marketable petroleum products at the time. However, the reasons for thisimbalance were rooted in the Government's pricing policy. In 1980, the price ratio of diesel togasoline was 0.53, thus making diesel more competitive in the market vis-a-vis gasoline, andresulting in a large segment of the transport sector switching to diesel as a fuel source. Althoughthis ratio rose to 0.79 by 1984, today this price differential is 0.70 for unleaded gasoline and 0.65for regular gasoline. The upshot of this is the very poor air quality in Metro Manila and otherurban centers, caused by the sociaLly inefficient use of diesel, and the high incidence ofrespiratory problems, such as bronchitis and asthma: eye irritation; and increase in mortality fromcancers and cardiopulmonary disease. Bank studies show that 34.5 percent of inhalableparticulates in Manila, which cause these respiratory and cardiopulmonary diseases, comes from

12

diesel vehicle emissions alone. 1 Although air quality in Manila has been a serious concern forsome time, the Project provided no remedial measures to address the issues of petroleumproduct pricing and the environment as affected by the consumption of petroleum products.

45. Coal mining did not involve any substantial physical changes in the surface or inthe vegetation. No significant amounts of waste rock are excavated during mining operations andtherefore solid waste was minimized. At the Malangas mine, chemicals were not used for thewashing of coal, and suspended solids were removed from the water effluent in a settling pond.Thus, the environmental impact was minimal.

H. Gestation and Sustainability

46. Project benefits under Part A (refinery) were immediately realized after completionof the components and met or exceeded expectations. In 1994, 60 percent of PC, which ownsthe Bataan refinery, was sold by PNOC to the private sector, and today it is a viable andprofitable firm. Moreover, the private sector interests have plans for the expansion at the refineryin the near future, thus ensuring that most benefits under Part A will be realized well into thefuture. Benefits under Part B (coal mining) never reached target levels because of law coal oricesand changes in geological conditions at the mines. Except for the Bislig mines, all coal minesincluded in the Project were eventually closed, thus nullifying any future benefits from theProjects investments. No benefits arising from the subsequent investments in the BisLig minesby the private sector are attributable to the Project's small contribution. The Project providedmuch needed foreign exchange under Part C (shipping) to maintain the operation of the fleet ofvessels at a time when foreign exchange was scarce. As a result, PSTC was eventually able torationalize its fleet through the saLe of a number of ships and continue operations in a moreefficient manner.

IV. KEY ISSUES FOR THE FUTURE

47. PNOC was established by the Government in 1973 essentially as an instrumentfor coping with the energy crisis. It main functions were (I) to deal with oil exporters whopreferred to do business on a government-to-government basis: (ii) to participate in the import,refining, and distribution of oil and petroleum products to ensure a dependable energy supplyto the economy; and (iii) to promote rapid development of indigenous energy resources.However, the international oil market has stabilized since the 1970s when importing countrieslike the Philippines faced rapid oil price increases and a decreased security of supply. Moreover,with the privatization of PC in 1994, the scaling down of coal mining operations, and thesubstantial reduction of PSTC's fleet of ships, PNOC has removed itself to a great extent fromthe direct involvement in the production and distribution activities of the nonDower energysubsecto r.

It is the view of the Infrastructure, Energy and Financial Sectors Department East that the major cause of airpoflution in Metro Manila is the poor maintenance of the diesel engines rather than the use of diesel fueLHowever, the Post-Evaluation Office maintains that adjustments to the diesel fuel price will be the mosteffective way of incorporating the social costs of using diesel fuel.

13

48. The role of PNOC in the economy and as an instrument of Government policy hasdiminished substantially over the past number of years, particularly since the Government'sdirective to privatize several of its operations in 1986. Its current role is primarily in thedevelopment of the country's coal and geothermal resources, and as a holding company for itsminority ownership of PC. PNOC management has recognized the limited role PNOC now playsand recently has begun to map out new directions for itself. However, the options available toPNOC are few because of the Government's market-oriented policies in the energy sector andthe evolution of a conducive environment for private sector involvement in the development ofindigenous energy resources. Future Bank involvement with PNOC, if any, will need to be basedon a clear and thoroughly thought-out rationale for such involvement.

49. The goal of energy sell-sufficiency is a laudable one if it can be sustained over thelong term. To date, few countries have achieved energy self-sufficiency or can afford to supportthis objective without incurring a considerable economic cost. Therefore, the Bank shouldcarefully investigate the implications of any energy self-sufficiency policy, particularly in energysubsectors in which the country does not seem to have a comparative advantage. In thePhilippines, the Government's current position on the coal mining industry is to promote mine-mouth coal power plant operation for low-grade coal deposits. This is in line with its OiIC topromote the utilization of indigenous resources. However, the commercial viability of such powerplant operation has not yet been firmly established. A thorough investigation of the coalsubsector would need to be undertaken to determine whether the Philippines has a comparativeadvantage in coal, and whether coal production is able to compete with other energy formswithout subsidies. Future Bank involvement in the coal subsector in the Philippines needs to becarefully considered in light of past experience.

50. The Government's policy for energy pricing has had a serious negative effect onthe environment and the health of the population in urban areas. These social costs have notbeen reflected in the pricing of diesel fuel, and there is an urgent need to engage in a dialoguewith the Government to address this issue. Future Bank assistance to the Philippines should becontingent on the Government taking the necessary steps that will resolve the issue in a timelymanner.

VI. CONCLUSIONS

A. Overall Assessment

51. The PNOC Energy Project consisted of three components: refinery, coal mining,and shipping. The refinery component, the largest of the three, was well designed; successfullyimplemented, although with substantial delays; and achieved the expected benefits originallyenvisaged. The shipping component ensured the continued operation of the fleet, also achievingthe objective envisaged under the Project. On the other hand, the outcome regarding the coalmining component was less than satisfactory. Preparatory work for this component was notadequate, and the benefits expected were not realized. In retrospect, a more appropriateintervention with respect to these operations would have been divestiture and closure of minesrather than further investment. However, the lack of success of this component was mitigatedby the substantial reduction in scope of Part B. On this basis, therefore, it can be concluded thatthe Project as a whole was generally successful.

14

B. Lessons Learned

52. Experience with the PNOC Energy Project has highlighted two issues with broaderimplications on Bank operations in the energy sector. Although the Philippines was nearly whollydependent on imported oil for its commercial energy needs, and the political and economicdifficulties and foreign exchange shortages at the time threatened to restrict the Government'saccess to the oil market, there does not seem to have been sufficient justification to dispensewith proper project preparation in order to expedite the processing of this loan. Parts B and Cof the Project were not well conceived and, in hindsight, probably should not have been includedin the Project. More thorough and careful project preparation would have uncovered importantaspects of PNOC's coal mining and shipping operations that would likely have excluded thesecomponents. Sufficient time for proper project preparation should therefore be mandator?,whether a country is in economic difficulties or not.

53. The Government benefited greatly from the privatization of PC, Proceeds from thesale of a 60 percent equity stake helped to reduce its budget deficit, secured a reliab'e andsteady source of crude oil suppLy, and ensured private sector financing of PC's futurerehabilitation and expansion plans. The transfer of mining rights of some of FNCC's coal minesto the private sector, the closure of others, and the disposal of a large number of shipingvessels also contributed to the financial health of PNOC directly, and to the Governmentindirectly. Although not part of the Project, the experience with privatization has been a positiveone and indicates that expanding the private sectors involvement, at least in the nonpowerenergy subsector, should be seriously considered as part of any future loans in this subsectorin other DMCs.

C Follow-up Actions

54. The PPAR has identified two issues that will need followup by the Government andthe Bank to further improve the efficiency of the energy sector in the Philippines. These are: (I)the role of PNOC as an institution; and (ii) the impact of energy pricing on environment.

55. Although PNOC's management is attempting to define PNOC's role in theeconomy, few options are avaiLable at this time and the windup of PNOC operations may need'to be considered. A comprehensive study would need to be undertaken to review PNOC's rolefrom a broader public policy perspective, as well as, proposing options for the rationalization ofits operations including the divestiture of some operations that could be better undertaken bythe private sector. If privatization is recommended, such a study would need to look at PNOC'scoal mining operations in depth, particularly from geological and technical points of view, toassess the feasibility of either the sale of the mining concession and its assets, or the outrightclosure of the mines if the longer term outlook for coal mining is not favorable.

56. The Bank is already actively involved in discussing environmental issues with theGovernment as part of its technical assistance program to the Philippines. The scope of thesediscussions should be broadened to address the issue of energy pricing and the environment,particularly as it relates to the pricing of diesel fuel in the Philippines. This dialogue could besupported by one or more advisory technical assistance grants, followed by an appropriatelending strategy that will encourage the Government to take the necessary steps.

15

APPENDIXES

Number Title Page Cited on(page, para.)

I Refinery Material Balance, 1987 and 1993 16 3,9

2 Comparison of Projected and ActualImplementation Schedule 18 6,20

3 Status of Compliance with Loan Covenants 20 7,25

4 Refinery Product Yields for 1983 and 1993 25 8,27

5 Incidences of Fire in the Bataan Fefinery(1984-1995) 26 8.27

6 Key Financial Indicators of Subsidiariesof the Philippine National Oil Company 27 9,32

7 Economic and Financial Analysis ofthe Vacuum Tower Debottlenecking Component 28 9,34

8 Economic and Financial Analysis ofthe Process Control Upgrading Component 30 10,35

9 Economic and Financial Analysis ofthe Addition o the Merox Unit 32 10,36

10 Economic and Financial Analysis ofthe Five Megawatt Steam Turbine Plant 34 10,37

REFINERY MATERIAL

Diesel, 25.2 MBSD

Fuel Gas, 2.3 MBSD

LPG, 4.3 MBSD

MRJMS/Naphtha, 18.4 MBSD

Kero/Jet Fuel/Solvents,

9.8 MBSD

IFO, 29.9 MBSD

Asphalt/Pitch, 7.7 MBSD

-a-a(D

0

x.

-S

-oCO

CD

Kero/Jet Fuel, 10.9 MBSDL9ottornu 14.5 MBSD

Nahtha 161 MOSO

Feed 13.9 I51880 Kero

I Merox

Kern 2 7.4 MBSD

I DFO=174M880

Feed r 751 MOSD I

I APS-2

-S

Botluma 338 51080

Haptitha = 4.8 MBSD

Kero=2OMBSO

22.2MDAp3DFO;48M050

Bottnis= 10.0 M030 -o-o(0

x.—s

-o0)

(0

OMOSO TCCLPS= 1.551830

ccu CN =4,0 MBSO

LFO = 2.3 'IBSO

FO 14 MOSOIFO, 39.4 MBSD

Asphalt/Pictti, 6.6 MBSD

Fuel Gas, 2.0 MBSD

LPG, 3.9 MBSD

MRJlvlSlNaphtha, 28.2 MBSD

1993 MBSD

[!1-I Crude LPG 15 MBSD Trealar

I Feed Gas 0.8MBSD

REFINERY MATERIAL BALANCE

i

12.5 MOSO Ill MBSD - INpFdha 7.1 MBSD

_______________________

2.tMBSDPWF 2 RakernatalO3MBSD

HVN I43MBSD F.ada2M[_

Keroa2M0SD

Feed 32.3 MBSD I I LDO 42 MBStI I Feed = 2.0 MBSDs-i

I IHDO=3.3MBSD i A

Solvents, 2.0 MBSD

DFOIoRiIJ=117MBSD

3.SME3SO

LVGO 26 51880

Feed 269 MBSO HVCO 10.1 SIBSD

'Jr _____________141 MOSO

Burn to IFO 27.4 jTS VIB t IFO 7.551030

PITCH tO MOSO

Diesel, 34.8 MBSD

COMPARISON OF PROJECTED AND ACTUAL IMPLEMENTATION SCHEDULE

19a5 ia 19e7Proje,iCGmponent M[.J1JiA '' . . . . F

p..-, A: Prtum I:vlj!1wy I 1

•1 IVurn lowe! Dboffleneckuiigp. •I* w . • 1 S " I fl !r 'C -r n .i P • • t 0

1m ImIjd llMlMerox Un4 ; ..::?. ::. < : :, V -:: •: : :1 : .< : : : :

p. . I V IN • • I! ! I • P Wt W Y U !I Il.Ia

:: : ; . : : : :F • • • I'I*! l • " •' ,1 • • j - - - - - - .- - - - — -

--- ..---u r i I I

MiscIianeou rnproemen1 :) . • T•

.. .- ;:; -:- • -•••i't !J.PY '.S)iIJI .a'.p • a — — — — - — — —

Oa1inEqupmtandMutrS iJ LIa , ,._ . U P(. .M. . • a,M.0 •. .a.I! .. ttie

Tranung dTecfln$l Selea a U U P . - ------------- - - - -

NNdNI U iaaN

co,Liltingser'ieu.Projctconnuttur*• P UU N tU flLU- • - it U N •M I U" - - - - - - - -

N a N N UI UI I a UI 4 • U • a N • N I U I UI I a a I I at I

Consulting Semicea Energy Coneervation Study

PalS: CoalUining

- - - _________ - —- - I — - -

Dc elopmentot Siulg Minee 1 2 2A Kauegan - Biclg 1 2 2A prrvatiued In OcSber hitS?andCentralCebu Minea : : — — - - — Kauawagan Mi cloae.d m Nonember 1957,

..... I........L. CentraCebu Mue csad in November 1990SapailaKin ot Little Baguin _____________ 1 itSe Ba lo Kiosed in Janua 1589

OpCting Equipment tot Above Mines 4

In estlgatKin at Lalal TJ T

I I

Operating Equipment and Malariala tor Mangaa Mine _______ ____________________ :

Cunsuting Services for ln5litutnsl ptt br J _____________ _Luun1nefled .

I

Mining and Planning T

Patt C: Snipping

L I II I I '1 __Dry-doclang Ma ntena end Ope atlons of PS1C a Fleet

— — r — ___________

D-docking MaintenanandOperaIlenaolFourTankers• . *'?91 ;Fu.itrirwTy ...... .rt4...

I flFTTLLJ J_LL Lull J_II IIJ LIll llLrL - - j__L-

tugand:Actual______________________

Original

a)

-o

CD

xN)

-D

COCD—4

I gag Iggo Iggi 1g92PeslectCo mpo nents J F MJ J A S 0 t D J M j J AT óT .T 1TA U . Ô •j .1 .1

Pafi A: Pelesleum ReIiney

Vecuttn Tower Dotltenectang •.. .: : :.: .

MIru.oUn : ::::::

Process Control Upgrading j:

Miscellaneous Improvements - - - - - - Addt iTini PrcLurprneni - - - - -

Operating Equipment and Materials

Training and Technical Se,vices :. . .... ... .

Consulting Saiices ProieclConnuttert :

Consufling Sruic.s: Energy Consorvation Study

Part B: Coat Mining

Development at Bislig Mines 1. 2, 2A. Kauswagan

endCentralCebu Mines

Eupanuionot Little Bagulo -

Operating Equipment for Above Mines

Investigabon at Lalat

_____________ I AdditiiaI PrrCuremcni _________________

Operating Equiprrianl and Materials for Malarigas MinO -:: :: - : :::..

Consulting SeMca$ for tnatitutbnel SupN tar

kliningandPlanning

I

Part C: Shipping

D-dochiuig, Maintenance and Operations at PETCa Fleet

DIy-docklng Maintenance and Operationl 01 Four Tankets

1 ._.L_....... ._L. I

Legend.

____________

Actual______________________

Oligiflal

(0

>13-oCD

0

x

-D

CD

LA, Schedule 6.2(c)

LA, Schedule 6.3

LA, Schedule 6.4(a)

LA, Schedule 6.4(b)

LA, Schedule 6.5

Appendix 3, page 1

STATUS O COMPLIANCE WITH LOAN COVENANTS

Covenants Reference

Compliance

1. Carry out the Project with diligence andefficiency.

LA, Sec. 4.01(a)PA, Sec. 2.01 (a)

Complied with.

2. Overall monitoring and coordination of LA, Schedule 6.2(b)Project implementation will be undertaken bythe Project Coordination Committee, whichshall be the Management ExecutiveCommittee of PNOC, consisting of itsExecutive \/ice Presidents.

Complied with.

3. The Project Coordination Committee shallreview the progress and problems of Projectimplementation coordination among theProject Executing Agencies and otheragencies concerned, and recommendsuitable measures for effective Projectimplementation.

4. Furnish to the Bank financial reportsincluding projected financial statements.

5. Effective 1 January 1985, revalue the fixedassets of its consolidated corporate group inoperation at the end of each fiscal year,including the assets of PC, PCC, MCC,PSTC. PCOT, POC, PNOC-TC, and PTCusing appropriate indices satisfactory to theBank.

6. Submit within six months after the end ofeach fiscal year, unaudited accountsreflecting such revaluation of assets.

7. PNOC and the Project Executing Agenciesshall not, during Project implementation,effect any material change to existingcontractual arrangements between PNOCand its subsidiaries concerned with Projectimplementation, relative to equity ownership,corporate control, transfer pricing, andcorporate fees.

Complied with.

Complied with.

Complied with.

Complied with.

Complied with.

a LA = Loan Agreement: PA = Project Agreement; PNOC = Philippine National Oil Company; PC = PetronCorporalon; PCC = PNOC Coal Corporation; MCC = Malangas Coal Corporation; PSTC = PNOC Shippingand Transport Corporation: PCOT = PNOC Crude Oil Tankers; POC = PNOC Oil Carriers. Inc.; PNOC-TC =PNOC Tankers Corporation; PTC = Petrophil Tankers Corporation.

LA, Schedule 6.7

Complied with.

LA, Schedule 6.10

Complied with.

LA, Schedule 6.11

Complied with.

LA, Schedule 6.12

Complied with.

LA, Sec. 4.02

Complied with.PA, Sec. 2.02

PA, Sec. 2.03(a)

Complied with.

PA, Sec. 2.03(b)

Complied with.

PA, Sec. 2.04

Complied with.

21

Appendix 3, page 2

Covenants Reference

Compliance

8. Ensure that the Bank is informed and itsviews duly taken into account prior to theimplementation of any plan for therationalization of the fleet owned or operatedby PSTC and/or Four Tankers Company.

9. Inform the Bank and take into accountBank's views prior to undertaking anyactivity involving substantial commitment ofits resources for any significant deviationfrom its existing energy activities.

10. Ensure environmental protection controlsand safety devices in the design of Projectfacilities.

11. The Government shall give dueconsideration to the financial viability ofPNOC and its subsidiaries in determiningprices of energy products.

12. Consult the Bank regarding any proposal toprivatize PNCC or its subsidiaries, taking aswell into account the findings of theInstitutional Strategy Study.

13. Make available funds, facilities, services,land, and other resources required incarrying out the Project.

14. Employ competent and qualified consultantsand contractors.

15. All goods and services to be financed by theloan shall be procured in accordance withSchedules 4 and 5 to the LA.

16. Carry out the Project in accordance withplans, design standards, specifications, workschedules, and construction methodsacceptable to the Bank.

LA, Schedule 6.6

Complied with.

17. Insure the goods to be imported for the PA, Sec. 2.05 Complied with.Project.

PA, Sec. 2.06 Complied with.

LA, Sec. 4.03(a)PA, Sec. 2.08(a)

Complied with.

LA, Sec. 4.03(b)PA, Sec. 2.08(b)

LA, Sec. 4.03(c)PA, Sec. 2.08(c)

Complied with.

Complied with.

LA, Sec. 4.04PA, Sec. 2.09

Complied with.

LA, Sec. 4.05PA, Sec. 2.10

Complied with.

LA, Sec. 4.06 Complied with.

LA, Sec. 4.07(a) Complied with.

PA, Sec. 2.14 Complied with.

LA, Sec. 4.07(b) Complied with.

Appendix 3, page 3

Covenants Reference

Compliance

18. Maintain records and accounts adequate toidentify the goods and services financed bythe loan.

19. Furnish to the Bank all reports andinformation the Bank shall requestconcerning the Loan.

20. Submit to the Bank quarterly progressreports.

21. After physical completion of the Project butnot later than six months thereafter, submitto the Bank a report on the execution andinitial operation of the Project.

22. Submit to the Bank audited financialstatements not later than six months aftereach related fiscal year.

23. Enable the Bank's representatives to inspectthe Project.

24. PNOC shall enable the Project ExecunngAgencies to perform their respectiveobligations under the respective PAs.

25. PNOC shall exercise its rights under therespective Subsidiary LAs in such a manneras to protect its interests and that of theBank and to accomplish the purposes of theLoan.

26. The Project Executing Agencies shallperform all its obligations under theSubsidiary LA.

27. No rights or obligations under anySubsidiary LA shall be assigned, amended,abrogated or waived without priorconcurrence of the Bank.

LA, Sec. 4.08(b)PA, Sec. 2.11(b)

LA, Sec. 4.08(c)PA, Sec. 2.11(c)

LA, Sec. 4.09PA, Sec. 2.12

LA, Sec. 4.10(a)

PA, Sec. 2.13

Complied with.The Bank wasadvised in thisregard.

Complied with.

23

Appendix 3, page 4

Covenants

Reference

Compliance

28. Promptly take all action to maintain its LA, Sec. 4.08(a)

corporate existence, to carry on its PA, Sec. 2.11(a)operations and to acquire, maintain andrenew all rights, properties, powersprivileges and franchises necessary incarrying out the Project.

Complied with.

29. Conduct its business in accordance withsound administrative, financial, and energyindustry practices, and under thesupervision of competent and experiencedmanagement and personnel.

30. Operate and maintain its plant, equipmentand other property, and make necessaryrepairs thereof.

31. The Borrower shall not sell, lease or disposeany of its assets, except in the ordinarycourse of business.

32. If the Borrower shall create any lien on anyof its assets as security for any debt, suchlien will ipso facto equally and ratably securethe payment of the principal of, and interestand other charges on, the Loan and theBorrower; if any statutory lien shall becreated on the assets of the Borrower, theBorrower shall grant to the Bank anequivalent lien.

33. Apply the proceeds of the Loan to thefinancing of the expenditures on the Project.

Complied with.

Complied with.

Complied with.

34. Notify the Sank of any proposal to amend, PA, Sec. 2.15 Complied with.suspend or repeal any provision of itsArticles of Incorporation.

PA, Sec. 2.16

Complied with.

PA, Sec. 2.17 Complied withexcept far 1992and 1993.

PA, Sec. 2.18

Complied with.

PA, Sec. 2.16

Not compliedwith.

PA, Sec. 2.17

Not compliedwith,

PA, Sec. 2.18 Not compliedwith from 1992onward.

PA, Sec. 2.16

Complied with.

PA, Sec. 2.17

Complied with.

PA, Sec. 2.18

Complied with.

24

Appendix 3, page 5

Covenants Reference

Compliance

35. PC shall maintain

a) a debt-equity ratio of not more than60:40

b) a debt-service ratio of not less than1.25:1

C) a current ratio of not less than 1:1

36. PCC shall maintain

a) a debt-equity ratio of not more than60:40

b) a debt-service ratio of not less than1.25:1

c) a current ratio of not less than 1.1:1

37. MCC shall maintain

a) a debt-equity ratio of not more than70:30

b) a debt-service ratio of not less than1.25:1

a) a current ratio of not less than 1.1:1

38. PSTC shall maintain

a) a debt-equity ratio of not more than60:40

b) a debt-service ratio of not less than1.25:1

c) a current ratio of not less than 1.1:1

PA, Sec. 2.16

Not compliedwith.

PA, Sec. 2.17

Complied with.

PA, Sec. 2.18

Complied with.

3.24

18.58

9.27

0.27

28.32

31.26

5.07

3.99

2.59

17.43

10.74

0.30

26.74

28.60

7:73

5.33

LPG/C3/C4

Mogas/Napthta

Kero/JP— 1

Solvents

DFO/LSD

Resid. Fuel Oils (IFO)

Pitch/Asphalt

Refinery Fuel and Loss

Total

850

5,733

3,533

100

8,749

9,407

2,544

1,952

32,868

1,370

7,855

3,918

112

11,976

13,218

2,145

1,688

42,282

25

Appendix 4

REFINERY PRODUCT YIELDS FOR 1983 and 1993

1983 Actual

1993 ActualProducts

bpcd Volume (%)

bpcd Volume (%)

LPG = liquefied petroleum gas; bpcd = barrels per calender day; kero/JP-1 = kerosene, jet fuel;DFO = diesel fuel oil; LSD = low sulphur diesel oil; IFO = industnal fuel oil.

26

Appendix 5

INCIDENCES OF FIRE IN BATAAN REFINERY(1984-1995)

OtherYear Major Minor (flash)

(Giass fires, etc.)

1984

1986

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

0

0

1

0

0

1

0

0

1

3

0

1

13

8

4

8

I

10

4

1

2

0

9

4

6

3

3

6

5

I

1

6

12

5

14

0

27

Appendix 6

KEY FINANCIAL INDICATORS OF SUBSIDIARIES OF THEPHILIPPINE NATIONAL OIL COMPANY

Corporation 1990 1991 1992 1993 1994 1995

A. Petron Corporation aNet Income before tax (P million)Current RatioDebt/Equity RatioDebt-Service Coverage

B. PNOC Coal CorporationNet Income before tax (P million)Current RatioDebt/Equity RatioDebt-Service Coverage

C. Malangas Coal CorporationNet Income before tax (P million)Current RatioDebtiEquity RatioDebt-Service Coverage

1,160.6 1,641.3 1,930.4

1.08 1.18 1.38

5.29 3.30 2.10

18.77 10.73 12.06

8.22 0.75 -35.48 b

1.97 1.86 1.07

2.57 1.55 1.54

5.12 2.70 0.00

-6.66 -80.87 -126.59

2.03

1.36

0.48

2.48

3.97

29.77

1.19

0.75 -0.16

4,103.6 5,205.5 5,748.0

1.33 1.43 1 68

2.14 1,76 0,99

10.34 15.43 453

-30.90 24.31 85.41

1.04 1.17 1.13

1,46 1.18 1.63

0.23 2.46 1.49

-97.10 -263.69

0.58

0.40

0.47

-39.51 -2.40 -23,50

-0.38 -0.99 -3.83

D. PNOC Shipping and Transport CorporationNetincome beforetax(Pmillion) -20.32 32.53 61.04 2.20 86.59 1.90CurrentRatio 1.75 1.87 1,82 1,84 2.05 2.80Debt/Equity Ratio 0.94 0.92 0.75 0.71 0.71 0.41Debt-Service Coverage 3.97 7.71 8.84 2.29 3.39 0.82

PNOC = Philippine National Oil Company.a Petron Corporation was privatized in September 1994. Data from 1993-1995 refer to the parent company

Losses before an operating subsidy of about P 24 million.Losses before an operating subsidy of about P 22 million.Losses before an operating subsidy of about P 333 million.

Source: Philippine National Oil Company.

28

Appendix 7, page 1

ECONOMIC AND FINANCIAL ANALYSISOF THE VACUUM TOWER DEBOTLENECK1NG COMPONENT

1. The Vacuum Tower Debottlenecking component comprises interventions in boththe vacuum distillation column and the thermal cracker to double the feed rate to the vacuumcolumn and the production of heavy vacuum gas oil and light vacuum gas oil. The greaterproduction of heavy vacuum gas oil reduces the unused capacity of the thermal cracker toproduce more diesel fuel oil, liquid propane gas, and naphtha. Benefits are primarily in terms ofproduct yield increases valued at the difference in the economic value of diesel, liquid propanegas, naphtha and the economic value of fuel oil, exclusive of taxes and duties. Data is notcompiled or collected on volumes of product at each stage of the refining process, and it is notpossible to distinguish the benefits of investments made by the Bank from those of others, forexample, the World Bank and Petron Corporation, made after completion of the Project. Thus,estimates based on actual refinery parameters, before and after the Project, are used. Since therefinery runs on a more or less continuous basis at a steady rate, it is believed that theseestimates are an accurate reflection of actual output levels. Operating and maintenance costsare similarly estimated. The economic and financial evaluations follow closely those in theProject's appraisal report. A standard conversion factor of 0.9 for nontraded costs and benefitsis used in the economic evaluation.

Economic Evaluation(In P millIon, 1996 prices)

Net

Year

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Capital O&M

Cost Cost

25.67 -

45.00 -

46.16 -

13.83 4.55

- 4.55

- 4.55

- 4.55

- 4.55

4.55

- 4.55

- 4.55

- 4.55

- 4.55

Total Economic Economic

Cost Benefit Benefits

25.67

(25.67)

45.00

(45.00)

46.16

(46.16)

18.38

467.00

448.62

4.55

467.00

462.45

4.55

467.00

462.45

4.55

487.00

462.45

4.55

467.00

462.45

4.55

467.00

462,45

4.55

467.00

462.45

4.55

467.00

462.45

4.55

467.00

462.45

4.55

467.00

462.45

EIAH =

145.7%

29

Appendix 7, page 2

2. The financial evaluation is based on the same costs and benefits as the economicevaluation but valued at market prices.

Financial Evaluation(In P miUlon, 1996 prices)

Net

Capital O&M Total Financial Financial

Year Cost Cost Cost Benefit Benefits

1988 29.40 . 29.40 (29.40)

1989 50.15 50.15 - (50.15)

1990 49.89 . 49.89 . (49.89)

1991 14.49 5.06 19.55 467.00 447.45

1992 - 5.06 5.06 467.00 461.94

1993 - 5.06 5.06 467.00 461.94

1994 - 5.06 5.06 467.00 461.94

1995 - 5.06 5.06 487.00 461.94

1996 - 5.06 5.06 467.00 461.94

1997 - 5.06 5.06 467.00 461.94

1998 - 5.06 5.06 487.00 461.94

1999 - 5.06 5.06 467.00 461.94

2000 - 5.06 5,06 467.00 461.94

FIRR 136.3%

0.58

36.11

65.76

237.41

45.98

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

113.00

226.00

226.00

226,00

226.00

226.00

226.00

226.00

226.00

226.00

226.00

EIRR

(0.58)

(36.11)

(65.76)

(237.41)

67.02

226.00

226.00

226.00

226.00

226.00

226.00

226.00

226.00

226.00

226.00

42.7%

0.58

38.11

65.76

237.41

45.98

30

Appendix 8, page 1

ECONOMIC AND FINANCIAL ANALYSISOF THE PROCESS CONTROL UPGRADING COMPONENT

1. Process Control Upgrading consisted of a capital investment in instrumentation,analyzers, and computer-assisted controls. There were no incremental operating andmaintenance costs associated with this component, since this equipment replaces other olderequipment already in place. Benefits are primarily in terms of product yield increases orupgrades and in energy savings. These benefits are valued on the basis of differences in theeconomic value of fuel oil and the upgraded products in the case of upgrades, the economiccost of imported products in the case of increased yields, and the economic cost of importedfuel oil in the case of energy savings. As in the Vacuum Tower Debottlenecking analysis, dataon the higher yields and amounts upgraded are not available, thus estimates based on actualrefinery parameters were made. The economic and financial evaluations follow those in theProject's appraisal report. A standard conversion factor of 0.9 is used in the economic evaluationto convert nontraded benefits and costs to border prices.

Economic Evaluation(in P million, 1996 prices)

Net

capital O&M Total Economic Economic

Year

Cost Cost Cost Benefit Benefits

O&M = operation and maintenance.

31

Appendix 8, page 2

2. The financial evaluation is based on the same costs and benefits as the economicevaluation but valued at market prices.

Financial Evaluation(in P millIon, 1996 prices)

Net

Capital O&M Total Financial Financial

Year Cost Cost Cost Benefit Benef its

1986 0.95 - 0.95 - (0.951987 - - - -

1988 51.90 - 51,90 - (51.90)

1989 90.22 - 40.22 - (90.22)

1990 311.40 - 311.40 (311.40)

1991 49.64 49.64 144.00 94.361992 - - - 288.00 288.001993 - - - 288.00 288.00

1994 - - - 258.00 288.001995 - - - 288.00 288.00

1998 - - - 288.00 288.00

1997 - - - 288.00 288.00

1998 - - - 288.00 288.00

1999 - - - 288.00 288.00

2000 - - - 288.00 288.00

2001 - - - 288.00 288.00

FIRR = 41.2%

32

Appendix 9, page 1

ECONOMIC AND FINANCiAL ANALYSISOF THE ADDITION OF THE MEROX UNIT

1. As in the Process Control Upgrading component, the Addition of the Merox Unitalso achieved product yield increases and upgrading, and energy savings. The benefits of thesewere similarly valued. The increase in product yield was the result of using the bimetallic catalystthat increased the reformate product yield volume by 2.6 percent. This economic and financiajevaluation differs from that in the Project's appraisal report in that the appraisal report assumesthat the benefits of the addition of the Merox unit were only from energy savings. Again, data isnot compiled or collected on the higher yields and amounts upgraded by the Merox unit, thusestimates based on actual refinery parameters are used. The value of the standard conversionfactor is 0.9 for nontraded benefits and costs.

Economic Evaluation(in P million, 1996 prices)

Nt

Capital O&M Total Economic Economc

Year Cost Cost Cost Benefit Benefits

1987 1.74 - 1.74 - (1.74)

1988 43.23 - 43.23 - (43.23)

1989 81.28 - 81.28 - (81.28)

1990 91.54 - 91.54 - (91.54)

1991 19.60 4.99 24.59 64.00 39.41

1992 - 4.99 - 64.00 59.01

1993 - 4.99 - 64.00 59.01

1994 4.99 - 64.00 59.01

1995 - 4.99 - 64.00 59.01

1996 - 4.99 - 64.00 59.01

1997 - 4.99 - 64.00 59.01

1998 4.99 - 64.00 59.01

1999 - 4.99 - 64.00 59.01

- 4.99 - 64.00 59.01

2001 4.99 - 64.00 59.01

EJAR = 18.6%

33

Appendix 9, page 2

2. The financial evaluation is based on the same costs and benefits as the economicevaluation but valued at market prices.

Financial Evaluation(In P million, 1996 prices)

Net

Capital O&M Total Financial Financial

Year Cost Cost Cost Benefit Benefits

1987 2.07 - 2.07 - (2.07)

1988 50.95 - 50.95 - (50.95)

1989 86.49 - 86.49 - (86.49)

1990 105.13 - 105.13 - (105.13)

1991 22.13 5.55 27.68 64.00 36.32

1992 - 5.55 5.55 64.00 58.45

1993 - 5.55 5.55 64.00 58.45

1994 - 5.55 5.55 64.00 58.45

1995 - 5.55 5.55 64.00 58.45

1996 - 5,55 5.55 6400 58.45

1997 - 5.55 5.55 64.00 58.45

1998 - 5.55 5.55 64.00 58.45

1999 - 5.55 5.55 64.00 58.45

2000 - 5.55 5.55 64.00 58.45

2001 - 5.55 5.55 64.00 58.45

FIRR = 15.8%

34

Appendix 10, page 1

ECONOMiC AND FINANCIAL ANALYSISOF THE FIVE MEGAWATT STEAM TURBINE PLANT

1. Inclusion of the five megawatt (MW) steam turbine plant in Part A of the Projectmade a major contribution to meeting the refinery's power demands, which have been in theorder of 13.6 MW in recent years. The economic evaluation assumes that the benefits of thissubproject are derived from the avoided cost of purchasing power, valued at the long runmarginal cost (LRMC) of power, from the National Power Corporation (NPC). The most recentestimate of the LRMC of power of R2.41 per kilowatt-hour was estimated by the Bank in 1994.However, this is an average incremental cost and no estimate at 69 kilovolts is available. It wasthus assumed that the LRMC of power at 69 kilovolts is 90 percent of the average LIRMC. Capitalcosts were based on actual costs incurred less any taxes or duties, and operating andmaintenance (O&M) costs comprised the steam cost and the cost of spare parts, also withouttaxes or duties. These were converted to 1996 constant prices using appropriate inflation data.There was no incremental labor cost, and the standard conversion factor used for nontradedcosts and benefits is 0.9. Technical parameters of the plant estimate that each pound of steamgenerates about 0.3 kilowatt-hours of electricity. The economic life of the generator is assumedto be 20 years with a major overhaul every 6-10 years. No economic or financial evaluation ofthe steam turbine plant was undertaken at appraisal because this subproject was included laterwhen the scope of Part A was modified, arid thus no comparison is possible.

Economic Evaluation(in million, 1996 prices)

Energy LRMC Net

Generated Capital O&M Costs Total of NPC Economic

Year (MWh) Cost Steam Spares Cost Power Benefits

1991

132.66

132.66

(132.66)

1992

24,637

14.78

0.20

14.98

45.57

30.59

1993

29.236

17.17

0.40

17.57

5818

40.6 1

1994

30.222

16.13

0.43

16.56

59.00

42.44

1995

30,879

16.52

0.47

16.99

65.16

48.17

1996

29,893

15.60

0.50

16.10

68.25

52.18

1997

29.500

15.40

0.50

15.90

67.38

51.48

1998

29,500

15.40

0.50

15.90

67.38

51.48

1999

29, 500

15.40

0.50

15.90

67.38

51.48

2000

29,500

15.40

0.50

15.90

67.38

51.48

2001

27,000

2.60

14.10

0.50

17.20

61.67

44.47

2002

29,500

15.40

0.50

15.90

67.38

51.48

2003

29,500

15.40

0.50

15,90

67.38

51.48

2004

29,500

15.40

0.50

15.90

67.38

51.48

2005

29.500

15.40

0.50

15.90

67.38

51.48

2006

29,500

15.40

0.50

15.90

61.67

51.48

2007

29,500

15.40

0.50

15.90

67,38

51.48

35

2008 27,000 2.60 14.10 0.50

2009 29,500 15.40 0.50

2010 29,500 - 15.40 0.50

2011 29.500 - 15,40 0.50

Appendix 10, page 2

17.20 61.67

44.47

15.90 67.38

51.48

15.90 67.38

51.48

15.90 67.38

51.48

EIRR = 32.0%

MWh = megawatt-hour; NPC = National Power Corporation.

2. The financial evaluation is based on costs at market prices inclusive of taxes andduties. The financial benefit is valued at the avoided cost of purchasing power from NPC at thecurrent tariff.

Financial Evaluation(in miHion, 1996 prices)

Energy Net

Generated Capital O&M Costs Total NPC Tariff Financial

Year (MWh) Cost Steam Spares Cost at 69 kV Benefits

1991 - 152.12 - - 152.12 . (152.12)

1992 24,637 - 16.42 0.22 16.64 55.43 38.79

1993 29,236 - 19.08 0.44 19.52 65.78 46.26

1994 30.222 - 17.92 0.48 18.40 68.00 49.60

1995 30,879 - 18.36 0.52 18.88 69.48 50.60

1996 29,893 - 17.33 0.66 17.99 67.26 49.27

1997 29500 - 17.11 0.66 17.77 66.37 48.60

1998 29,500 17.11 0.66 17.77 66.37 48.60

1999 29,500 17.11 0.66 17.77 66.37 48.60

2000 29,500 - 17.11 0.66 17.77 66.37 48,60

2001 27,000 2.90 15.66 0.66 19.22 60.75 41.53

2002 29.500 - 17.11 0.66 17.77 66.37 48.50

2003 29,500 - 17.11 0.66 17.77 66.37 48.60

2004 29,500 17.11 0.66 17.77 66.37 48.60

2005 29,500 - 17.11 0.66 17.77 66.37 48.60

2006 29,500 - 17.11 0.66 17.77 66.37 48.60

2007 29,500 - 17.11 0.66 17.77 66.37 48.60

2008 27.000 2.90 15.66 0.66 19.22 60.75 41.53

2009 29,500 - 17.11 0.66 17.77 66.37 48.60

2010 29,500 - 17.11 0.66 17.77 66.37 48.60

2011 29,500 17.11 0.66 17.77 66.37 48.60

FIIRR = 30.2%