Document of The World Bank

Report No: 27429

IMPLEMENTATION COMPLETION REPORT(CPL-37230 TF-20314)

ON A

LOAN

IN THE AMOUNT OF US$175.6 MILLION EQUIVALENT

TO

ROMANIA

FOR A

PETROLEUM SECTOR REHABILITATION PROJECT

DECEMBER 19, 2003

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CURRENCY EQUIVALENTS

(Exchange Rate Effective December 2003)

Currency Unit = Romanian Leu (L) 1 Leu = US$ 0.00003US$ 1 = 33,089 Lei

FISCAL YEARJanuary 1 - December 31

ABBREVIATIONS AND ACRONYMS

ANRGN National Gas Regulatory AgencyCONPET Commercial Enterprise for Crude Oil Transmission CRDP Corporate Restructuring and Development Program EA Environmental AssessmentEOR Enhanced Oil RecoveryEU European UnionGOR Government of Romania IMF International Monetary FundIOC International Oil CompanyMOI Ministry of IndustryMOF Ministry of FinanceNAMR National Agency for Mineral ResourcesPETROM RA for PetroleumPROSPECTIUNI Commercial Enterprise for Seismic Data Acquisition & ProcessingPAL Adjustment LoanPSAL (2) Private Sector Adjustment Loan Project (2)RA Regie Autonome - State-owned EnterpriseROMGAZ RA for Natural GasSAL Structural Adjustment LoanSCADA Supervisory Control and Data AcquisitionSEA Sectoral Environmental AssessmentUSAID United States Agency for International Development

Vice President: Shigeo KatsuCountry Director: Anand K. Seth

Sector Director: Hossein Razavi Task Team Leader: William R. Porter

ROMANIAPETROLEUM SECTOR REHABILITATION PROJECT

CONTENTS

Page No.1. Project Data 12. Principal Performance Ratings 13. Assessment of Development Objective and Design, and of Quality at Entry 24. Achievement of Objective and Outputs 55. Major Factors Affecting Implementation and Outcome 146. Sustainability 167. Bank and Borrower Performance 178. Lessons Learned 189. Partner Comments 1910. Additional InformationAnnex 1. Key Performance Indicators/Log Frame Matrix 43Annex 2. Project Costs and Financing 44Annex 3. Economic Costs and Benefits 46Annex 4. Bank Inputs 49Annex 5. Ratings for Achievement of Objectives/Outputs of Components 51Annex 6. Ratings of Bank and Borrower Performance 52Annex 7. List of Supporting Documents 53Annex 8. Environmental Objectives and Environmental Assessment 54

Project ID: P008777 Project Name: Petroleum Sector RehabilitationTeam Leader: William R. Porter TL Unit: ECSIEICR Type: Core ICR Report Date: December 22, 2003

1. Project DataName: Petroleum Sector Rehabilitation L/C/TF Number: CPL-37230; TF-20314

Country/Department: ROMANIA Region: Europe and Central Asia Region

Sector/subsector: Oil and gas (96%); Central government administration (4%)Theme: Infrastructure services for private sector development (P); Regulation

and competition policy (P); Pollution management and environmental health (P); Other financial and private sector development (P)

KEY DATES Original Revised/ActualPCD: 04/06/1992 Effective: 08/29/1994 08/29/1994

Appraisal: 02/11/1993 MTR:Approval: 04/05/1994 Closing: 12/21/1999 06/30/2003

Borrower/Implementing Agency: GOVERNMENT OF ROMANIA/MOI; GOVERNMENT OF ROMANIA/PETROM; GOVERNMENT OF ROMANIA/ROMGAZ; GOVERNMENT OF ROMANIA/CONPET; GOVERNMENT OF ROMANIA/TRANSGAZ; GOVERNMENT OF ROMANIA/ROMGAZ II; GOVERNMENT OF ROMANIA/DISTRIGAZ Nord and DISTRIGAZ Sud

Other Partners:

STAFF Current At AppraisalVice President: Shigeo Katsu Michael H. WiehenCountry Director: Anand K. Seth Franco BatzellaSector Director: Hossein RazaviTeam Leader at ICR: William R. Porter Akin O. OduolowuICR Primary Author: Kyran O'Sullivan

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: S

Sustainability: HL

Institutional Development Impact: SU

Bank Performance: S

Borrower Performance: S

QAG (if available) ICRQuality at Entry: S

Project at Risk at Any Time: Yes

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective:The original objectives of the project as stated in the Staff Appraisal Report dated March 14, 1994 were: "to (a) assist GOR in achieving the objectives of its petroleum sector strategy to promote private sector investments in the petroleum sector, strengthen institutional capabilities and establish a suitable regulatory framework to facilitate the development of an efficient and commercially-oriented petroleum sector; (b) assist each of PETROM, ROMGAZ and CONPET in improving its operational efficiency and financial management; and (c) assist in implementing abatement measures to address environmental pollution in the sector."

The objectives were aligned with the Bank’s assistance strategy which at appraisal was geared to support the macroeconomic stabilization effort, particularly in the areas of price liberalization, achieving budgetary stability and in creating the institutions for a market economy. The loan was focused on the upstream petroleum sector because of oil and gas imports having a large impact on balance of payments, the unavailability of foreign exchange to acquire modern technology for the upstream sector to counter the decline in domestic production, and the impediments to private sector investment arising from an unsuitable legal framework and contract terms and inappropriate producer pricing policies. The declining rate of Romania’s remaining producing reserves was exacerbated by the country’s legacy of infrastructure and institutions from the Communist era i.e. operations in the sectors were characterized by low investment, poorly maintained infrastructure, unclear and poorly defined institutional responsibilities, micro-management of energy agencies by government, absence of financial accountability, over employment, poor efficiency, and severe negative environmental impacts.

The issues facing the sector and proposals for future action were assessed in a sector assessment, the Petroleum Sector Restructuring Study carried out by the GOR which provided the basis for the Petroleum Sector Restructuring Strategy adopted by the Government. The Bank had approved the TOR of the Study and had been involved in development of the Strategy for the development of an efficient and commercially-oriented petroleum sector and had ensured that the objectives of the project were consistent with this Strategy.

Going into the project, it was recognized that the project was complex and wide ranging and therefore not a simple project to implement for the beneficiaries. As was anticipated, the most difficult part turned out to be the automation of CONPET's pipeline system where the plan was to modernize an 100-year old pipeline system. Going into the project, the Bank had confidence that the beneficiaries would meet the challenge and project implementation has confirmed that this assessment was well founded. It was also a complex project for the Bank to manage because it dealt initially with four Project Implementation Units (PIU) in three cities and then with seven PIUs in four cities after Romgaz was unbundled into four new and separate entities.

3.2 Revised Objective:Not Applicable

3.3 Original Components:The original description of the project components in the SAR were as follows: The original cost of the project financed by the World Bank was US $175.6 million split among the various beneficiaries as shown below. At the request of the Government, two reallocations from the Ministry of Industry (MIND) and National Agency for Mineral Resources (NAMR), to PETROM and CONPET were approved by the Bank. Furthermore, when the original ROMGAZ was unbundled, the remaining undisbursed funds on this component were then split between the four successor companies by the Government on the basis of the activities. (e.g., gas distribution activities went to DISTRIGAZ Sud and DISTRIGAZ Nord).

(a) for GOR/MOI: Original cost - US$ 7.2 Million. Cost after reallocation - US$3.7 million.(1) Carrying out of a program to strengthen the policy making functions of MOI, including: (a) the

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development and implementation of: (i) a fuel policy; (ii) a pricing policy for oil and gas transmission and distribution; (iii) a strategy for restructuring and optimizing the refinery subsector operations; (iv) establishment of a regulatory framework for the petroleum sector; and (v) a strategy for upgrading the operations of the oil services subsector; and (b) the establishment and operation of an independent agency (the National Agency for Mineral Resources, NAMR) to function as the Borrower's regulatory authority for the petroleum sector;(2) Carrying out, through NAMR a petroleum exploration promotion program to facilitate the participation by international oil companies in oil and gas exploration and development and production investments, including the preparation of model exploration and production contracts for such participation;

(b) for PETROM: Original cost - US$ 35.0 Million. Cost after reallocation - US$36.9 million.(1) development and implementation of a corporate restructuring and development program with the objective of improving PETROM's organization, streamlining its operations and improving its financial condition and management;(2) upgrading selected production facilities, introducing modern production technology and workover of wells to improve their productivity; (3) implementing enhanced oil recovery techniques for the production of oil and gas on selected fields through cooperative arrangements between PETROM and international oil companies; (4) carrying out an environmental pollution abatement action plan for upgrading the waste water treatment plant at Suplacu and the environmental laboratory at Cimpina; and (5) provision of technical assistance, staff training, equipment, spare parts, materials and chemicals;

(c) for ROMGAZ: Original cost - US$ 70.3 Million. Cost allocation after restructuring - ROMGAZ II (US$17.91 million), TRANSGAZ (US$ 7.77 million), DISTRIGAZ Nord (US$16.14 million), and DISTRIGAZ Sud (US$ 28.48 million).(1) development and implementation of a corporate restructuring and development program with the objective of improving ROMGAZ's organization, streamlining its operations and improving its financial condition and management;(2) upgrading selected production facilities and introducing modern production technology; (3) implementing enhanced recovery techniques in selected gas fields through joint ventures between ROMGAZ and international oil companies; (4) carrying out a program for the rehabilitation of the gas distribution system through the replacement of about 1,000 km of severely corroded pipelines; (5) installation of a supervisory control and data acquisition system (SCADA) and telecommunications system to be utilized in monitoring, analyzing and determining the optimized operational mode of gas flow in the gas transmission system; (6) carrying cut an environmental action plan to introduce environmental abatement measures in gas production fields and in the transmission anddistribution systems; and (7) provision of technical assistance, staff training, equipment spare parts and materials; and

(d) for CONPET: Original cost - US$ 63.1 Million. Cost after reallocation - US$64.7 million.(1) development and implementation of a corporate development program with the objective of improving CONPET's organization and streamlining its operations as a common carrier of crude oil; (2) rehabilitation, modernization and automation of the crude oil transmission systems, including the replacement of about 300 kms of corroded pipelines and the installation of a SCADA system and of a telecommunications system;(3) carrying out an environmental action plan to introduce environment and abatement measures in the management of sludge in the oil transportation systems; and (4) provision of technical assistance, staff training, equipment, spare parts and materials.

The design of the components was clearly linked to the objectives described above. The components for GOR/GOI introduced Government agencies to principles and methods of economic regulation in the petroleum sector and helped it implement sector restructuring. The petroleum exploration promotion program carried out by NAMR was essential to promoting private sector investments in the sector. The components for PETROM, ROMGAZ, DISTRIGAZ SUD, DISTRIGAZ Nord and CONPET were designed

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to transform them into enterprises run on commercial principles and boost their operational efficiency through transfer of skills, equipment and methods of best practice in petroleum production and transmission. The components brought about the transfer of skills in petroleum operations, procurement, financial management, accounting and environmental management thus strengthening their institutional capacity. The design took into account the strong commitment of the GOR and the implementing agencies to the goals of the project. The design also took into account the relevant lessons learned in the only prior loan in the sector the Videle Balaria Enhanced Oil Recovery Project that closed on 12/31/84 i.e. (a) that the Enhanced Oil Recovery (EOR process) is an effective and efficient method for recovering large oil reserves which would otherwise have to be abandoned in the reservoir and (b) the Bank should focus on critical items which can promote procurement efficiency and lead to improved project design and operations.

Environmental institutional development aspects were incorporated into the project design and properly reflected the project objective of strengthening institutional capabilities. Loan conditionality included obligations for PETROM, ROMGAZ, and CONPET to establish environmental management units responsible for implementing their respective requirements to be defined in the environmental action plan of the SEA.

The loan agreement for the project set time-bound targets for the implementing agencies to reduce their accounts receivable and for the borrower to maintain producer prices for crude oil and natural gas at internationally comparable levels. The conditions with respect to accounts receivable were achieved by PETROM, CONPET, DISTRIGAZ SUD and DISTRIGAZ NORD, albeit with delay, and liberalization of crude oil prices took place. The condition with respect to natural gas producer prices was partially achieved when the project closed on June 30, 2003. In this connection, the Bank used part of its FY03 supervision budget for this Project to fund a consultant study in June 2003 on the affordability of gas to householders and taxation of gas production in order to provide advice to the Government on a proposed schedule of price increases. The recommendations of this study were generally accepted by the Government and increases in domestic gas prices occurred in September and November 2003 and further increases will be conditions of the new IMF stand-by arrangement and the proposed PAL 1. In any case, Romania will have to raise wellhead gas prices to economic levels by 2007 when it is expected to join the EU. A lesson learned, is that investment projects do not always provide sufficient influence to effect pricing and nonpayment policy issues. This also has been the experience in similar projects in Russia and Azerbaijan - experience however that was not available at the time this project was designed. It is now clear that the Bank's PSAL 2 and the stand-by arrangement with IMF were needed to address the accounts receivable problem because nonpayments by SOEs was a systemic problem affecting many sectors and not one that was particular to the petroleum sector. The accounts receivable target for DISTRIGAZ NORD and DISTRIGAZ SUD have been met for over one year since it is a core condition for the second tranche release of PSAL 2.

3.4 Revised Components:Not Applicable

3.5 Quality at Entry:The quality at entry is assessed as satisfactory. There was no formal Quality at Entry review of this project at initiation. Indications that care was taken to ensure that the project could be implemented effectively are the consistency of the project objectives with the Government's priorities as set out in its Petroleum Sector Restructuring Strategy. The Bank assessed that the Government's commitment to seeing the Strategy implemented was strong.

Compliance with World Bank Safeguard PoliciesThe project was rated "Category B", in accordance with OD 4.01 (Environmental Assessment) the effective safeguard policy at loan approval. Furthermore, World Bank procedures defined in that policy did not require a formal environmental impact assessment prior to appraisal. However, an environmental assessment report was required and a Sectoral Environmental Assessment (SEA: one of the first for a World Bank project in the ECA region) was prepared with EBRD grant financing. Since the project focus was inherently beneficial from an environmental perspective (shut down uneconomic,

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inefficient and polluting wells, rehabilitate economic wells with nonpolluting technology, rehabilitate leaking oil and gas pipelines) the SEA was more appropriately a Sector Environmental Audit. It focused on identifying priority environmental issues associated with existing and past sector operations, and defining a priority based environmental action plan to mitigate these issues. Furthermore, it identified chief environmental institutional development needs to assure improvements anticipated under the loan would be sustainable.

4. Achievement of Objective and Outputs

4.1 Outcome/achievement of objective:The achievement of project objectives was overall Satisfactory. The objectives were substantially achieved albeit in some cases with delay.

(a) Assist GOR in achieving the objectives of its Petroleum Sector Restructuring Strategy (PSRS) including promoting private sector investments, strengthening institutional capacities, establishing a suitable regulatory framework to facilitate efficient and commercially oriented development of the sector.

One of the initial major tasks carried out by NAMR with the assistance of international advisers was to establish which acreage holdings should be retained by ROMGAZ and PETROM and which acreage could be offered by concession arrangements to new operators. At the same time, international advisers assisted NAMR to develop model concession contracts. A national geological data base was developed that is used by NAMR in its exploration promotion program and NAMR has updated the database with data from the ongoing exploration programs. NAMR has conducted four rounds of bidding from project inception through 2002. When Enterprise Oil launched the first stage of exploratory drilling in Romania's Black Sea waters in 1994, it was an event of enormous significance as it was the first foreign exploration to take place in Romania since before the Second World War. NAMR has supervised the obligations of the holders of concession agreements with respect to minimum exploration program and it has produced presentation materials for use in the bidding rounds. 11 concession agreements were finalized with foreign oil companies who completed US$200 million of exploration work. Five new concession agreements are expected to be signed following the 4th bidding round in 2002. The 5th bidding round is underway and includes both production and exploration concessions (hitherto the earlier rounds included only exploration acreages). By increasing (in January 2003) the wellhead price of gas produced under joint ventures through a revised pricing formula that sets the price for gas produced under JVs at 80% of the gas import price, the Government has shown itself responsive to maintaining private sector interest. As a result, there is increased private sector interest in the 5th bidding round.

Legal constraints to private sector entry were addressed through promulgation of the Petroleum Law in 1995 and its subsequent amendments that provided for (i) the basis for environmental and safety regulation, and (ii) the remit of NAMR as an autonomous government body subordinated to the Prime Minister.

The institutional capacity of the sector entities was improved under the project through transfer of technical skills at all levels of operations - accounting, financial management, environmental management and in operation, maintenance and rehabilitation of production, transmission and distribution facilities. This has helped to advance the privatization process by improving the operational efficiency and commercial orientation of the companies operating in the sector. Privatization of PETROM, DISTRIGAZ Sud and DISTRIGAZ Nord that is now scheduled in 2004 (as conditions of the second tranche of PSAL 2) will be a milestone in the restructuring of the Romanian economy. With a turnover of US$3.5 billion, PETROM is Romania's largest company and accounts for roughly 10 percent of the economy. Although, the project, when it was designed, did not have as an objective the privatization of these companies, this outcome is indeed an important achievement of the project because the supervision team for this Loan were (and still are) also key members of the PSAL project team.

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The project team was instrumental at several junctures of the project in ensuring the development of a sound industry structure and regulatory framework. Advice that was provided to the Government agencies and the industry on many occasions affected restructuring and regulatory decisions of both major and minor importance. An example of an important restructuring decision concerns the proposal in 1999 whereby a company operating a refinery would have taken control over the supervisory board of CONPET. Bank representations at a high level were instrumental in convincing the GOR that this would have compromised CONPET's ability to act as a "common carrier" providing non-discriminatory access and tariffs to all its clients. The CONPET component of the loan was suspended until the issue was resolved when NAMR issued a regulation that prohibits control of CONPET via ownership or administration links by any company with production, refining or crude oil supply activities in Romania and a Presidential decree was issued that removed PETROM's claim of 51 percent ownership in CONPET. As a condition of PSAL 2, a similar regulation was issued to ensure that the oil importing facilities at Constanza would also stay independent by prohibiting ownership or administrative links by any company with production, refining or oil supply activities in Romania. The Bank was also asked to review the draft Natural Gas Law and the draft law to establish the gas regulatory agency (ANRGN). Although not a project component, the project team provided detailed review of both laws and was invited to present its recommendations to the Government thereby ensuring that the final form of the laws promoted a business environment attractive to private investors.

(b) Assisting each of PETROM, ROMGAZ and CONPET in improving its operational efficiency and financial management.

Corporate development programs under the project have led to a new commercial orientation in the activities of PETROM, ROMGAZ, CONPET, DISTRIGAZ Sud and DISTRIGAZ Nord.

On commencement of the project ROMGAZ was a vertically integrated company. The unbundling of this company that took place in 2000, led to separate companies for exploration and production, transmission (including transit), storage and distribution being established. The successor companies are ROMGAZ for exploration and production (that is sometimes referred to as ROMGAZ II), two distribution companies, DISTRIGAZ Nord and DISTRIGAZ Sud and TRANSGAZ. The unbundling of the original ROMGAZ is seen as a highly satisfactory outcome of the project as the structure that emerged represents industry best practice and is in line with the Gas Initiative of the EU.

A corporate restructuring study for PETROM was completed. Recommendations covering corporate organization and staffing, accounting & MIS were implemented as noted above. During the course of implementation, reintegration of PETROM with its acquisition of refineries and a retail distribution network took place. Positive restructuring measures occurred during project implementation when PETROM divested itself of oil field services (the private sector company Petroserv now provides mechanical and electrical services to PETROM on a contract basis) and when Petrotrans, that transport oil products from refineries to distribution centers mainly by pipeline, was separated from PETROM.

CONPET's corporate development program under the project saw the introduction of international accounting standards and the introduction of MIS. The installation of a new SCADA system and telecommunications equipment will contribute greatly to improving CONPET's operational efficiency. This new system was partially completed by June 2003. As of 1 November 2003, over 50 per cent of the telecommunications system to support the automation project is commissioned and the balance will be completed in March 2004. Approximately 30 per cent of the SCADA system is operational and the balance will be commissioned in June 2004. Pipeline losses on CONPET's system arise from corrosion of pipelines, inadvertent damage to pipelines and theft. To counter these, CONPET has rehabilitated pumping stations, tanks and replaced 370 km of badly corroded pipeline using both Bank and CONPET resources. Security has been improved with the use of police to counter pipeline theft.

The financial management arrangements for the Petroleum Sector Rehabilitation Project were satisfactory throughout the implementation of the project. The entities involved were: ROMGAZ, CONPET, TRANSGAZ, DISTRIGAZ Sud, DISTRIGAZ Nord, ROMGAZ and NAMR. The audit reports were received for all entities involved in the project by their due dates or with some minor delays.

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As noted above, although not an objective of the project when it was designed, implementation of the components has helped to advance the privatization preparation process by improving the operational efficiency and commercial orientation of the companies. This is an important achievement of the project.

The project successfully upgraded production facilities and introduced modern production technology in the operations of PETROM and ROMGAZ. Under the project PETROM acquired technology that permits it to create 3D models for use in simulation studies aimed at identifying and recommending optimum injection strategies, as well as conventional and horizontal infill drilling. This together with sand control equipment for gravel pack operation and more reliable and efficient subsurface pumps have enabled PETROM to obtain incremental oil production from existing wells and to bring into production, wells that would not have been economic without the enhanced oil recovery techniques introduced under the project. This enhanced production represents approximately 600 thousand tons of oil between 1995 and 2002 (about 2% of annual production on average over the period) in line with the projection in the SAR of 650 thousand tons. Technology for enhanced recovery of gas (e.g. use of gravel packing) by both PETROM and ROMGAZ is now common practice following introduction of this under the project. As a result Romgaz has been able to double the flow rate of gas in underground storage. This is significant as improved flow rate offsets the drilling of new wells to increase delivery rates. Use of so-called 'intelligent pigs' for pipeline testing and identification of faults by CONPET was introduced under the project and has enabled CONPET to greatly improve its diagnostic analysis for pipeline rehabilitation.

(c) Assist in implementing abatement measures to address environmental pollution in the sector.

The following objectives were achieved in environmental management. Environmental units were established in the headquarters offices of PETROM, CONPET and each of the four companies previously part of ROMGAZ. Furthermore, regional environmental units were also established in PETROM, CONPET, and each of the ROMGAZ successor companies to provide environmental management on a day to day basis. Broadly speaking, the chief functions of the environmental units are: (a) assuring all permits and licenses are valid, (b) implementation of ISO 14001 requirements, (c) compliance with EU standards and, in some cases, (d) source monitoring. Staff at headquarters and at the regional environmental units all received training. Training was done in Romania, either with local institutes or with foreign consultants, and abroad. Generally, courses focused on environmental management (ISO 14001 compliance), environmental permitting and monitoring and environmental impact assessment. Some of the training was supported directly by the World Bank loan, other training was provided under a Canadian grant program which developed from the SEA study after project implementation, and some was supported directly with the companies' own resources. Additionally, PETROM has acquired a mobile environmental laboratory for the Cimpinas Research Center which is used to do source monitoring at various installations. The mobile laboratory was a priority recommendation of the SEA. TRANSGAZ has also purchased a mobile laboratory. All these measures have contributed to strengthening institutional capabilities in environmental management and are judged to be a highly satisfactory outcome of the project as prior to the project this capacity was nonexistent in the companies and as a consequence petroleum operations were characterized by severe adverse environmental impacts.

4.2 Outputs by components:Delivery of the project components was overall Satisfactory. Detailed comments for the components and sub-components follow.

For GOR/MOI: This component comprised carrying out of a program to strengthen the policy making functions of the MOI including (a) the development and implementation of (i) a fuel policy (ii) a pricing policy for oil and gas transmission and distribution (iii) a strategy for restructuring and optimizing the refinery subsector operations (iv) establishment of a regulatory framework for the petroleum subsector (v) a strategy for upgrading the operations of the oil services subsector (b) the establishment and operation of an

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independent agency (the National Agency for Mineral Resources, NAMR) to function as the regulatory authority carrying out through NAMR a petroleum exploration promotion program.

The overall results of this component is rated as satisfactory with most items as highly satisfactory.

Under (i) a fuel policy study was undertaken. The recommendations of the study were implemented with respect to crude oil pricing which are now market based and are not regulated. Controls on oil product prices were abolished in 1997 and these now track international prices albeit with some lag. Natural gas prices continue to be administered rather than being market based but the Government's fuel policy "The Road Map for Energy Field in Romania, 2003" confirms the Government commitment to free market principles and lays out a timetable for full liberalization of the gas market by 2007 when consumers will freely negotiate prices free of Government interference. As mentioned previously, the Government's commitment will be monitored by the IMF's Stand-by arrangement and the proposed PAL 1.

Under (ii) NAMR now regulates the tariffs for pipeline transportation of crude oil and ANRGN those for natural gas. Oil transport tariffs are regulated on a cost of service basis and NAMR has demonstrated its capacity to implement regular reviews and revisions of the tariff policy such as clarification of responsibilities for technical and non-technical losses and treatment of linefill. The methodology was established as the result of a tariff study funded under the loan. ANRGN also regulates gas transport tariffs on a cost of service basis for both transmission and distribution but is reviewing a change to 'price cap' regulation.

Under (iii) the required study on the refining sector was carried out. Today the only state-owned refineries are operated by PETROM and these should be privatized in early 2004.

Under (iv), as mentioned previously, the regulatory framework establishing NAMR was accomplished through promulgation of the Petroleum Law in 1995 and its subsequent amendments. The Natural Gas Law was passed as was another law to establish ANRGN as the regulatory agency.

Under (b) the remit and autonomy of NAMR has been established. It is an autonomous government body subordinated directly to the Prime Minister and coordinated by the Minister (and not the Ministry) of Industry and Resources.

Under (v), PETROM divested itself of such non-core activities as its oil well drilling operations, seismic acquisition and processing teams, mechanical and electrical maintenance activities (PetroServ) and its refined product pipelines (PetroTrans). These now provide services to PETROM and others for a fee.

Under (2) in view of Romania's long history as an oil and gas producer, the potential for significant new discoveries is limited. Thus the greatest potential for enhanced production is from existing producing fields rather than from new fields. Consistent with this, the objectives of the project were to promote private sector investments by encouraging participation of IOCs under joint venture agreements with PETROM and ROMGAZ in existing fields that would enhance production using modern extraction techniques and to farm out to foreign investors those classified depleted fields but which could be revived with modern technologies. During the course of the project, four bidding rounds were conducted and 11 concession agreements were finalized with foreign oil companies who completed US$200 million of exploration work. Five new concession agreements are expected to be signed following the 4th bidding round in 2002. The 5th bidding is underway and includes both production and exploration concessions (hitherto the earlier rounds included only exploration acreages). Pricing policies in the sector have specific provisions aimed at encouraging foreign investment. Crude oil prices have been liberalized and all producers (domestic and foreign) may freely negotiate prices with refining companies and traders. With respect to natural gas, a Government order in January 2003 stipulates that incremental gas from joint ventures will be sold at 80% of the gas import price. In addition, the GOR has announced its intention in its Energy Roadmap to have all prices reach economic levels by 2007 when it wishes to join the EU. These actions are expected to encourage foreign investment as hitherto this gas would have been sold at the same regulated price that PETROM and ROMGAZ obtain for gas at the wellhead. In a further measure to encourage foreign investment, legislation was adopted in 2002 that replaced the

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general agreement with PETROM covering all fields with agreements for individual fields. This has resulted in PETROM relinquishing fields that will be offered in the 5th bidding round.

Sustainability of the petroleum exploration program is clearly demonstrated by NAMR having on its own (without assistance of the project) conducted the 2nd, 3rd, 4th and 5th bidding rounds licensing land holdings which previously were controlled by ROMGAZ and PETROM.

A national geological data base was developed that is used by NAMR in its exploration promotion program. NAMR has updated the database with data from the ongoing exploration programs. It has supervised the obligations of the holders of concession agreements with respect to minimum exploration program and it has produced presentation materials for use in the bidding rounds.

Under the Rates and Tariffs component a methodology was established for establishing the price of domestically produced oil and natural gas, with a view to establish the budgetary liabilities (payment of royalty and exploration tax) and transportation tariffs. The methodology was subsequently adopted in legislation concerning reference prices for the payment royalty and exploration tax. Regulation of the transportation tariffs for the common-carrier pipelines (operated by CONPET) was adopted in legislation in 2000.

For PETROM

(1) corporate restructuring and development (2) upgrading selected production facilities(3) implementing enhanced oil recovery techniques for the production of oil and gas(4) carrying out an environmental pollution abatement action plan; and (5) provision of technical assistance, staff training, equipment, spare parts, materials and chemicals;

Under (1) PETROM with the help of consultants developed five phases for corporate restructuring; Phase I- Corporate organization and staffing, Phase II- Familiarization, Phase III- Accounting process and reporting and Management Information and IT Strategy, Phase IV- Corporate Planning, Phase V- Privatization. As noted above the last phase (privatization) is now scheduled for 2004.

The entities involved in the project (PETROM, CONPET, and the four successor companies to the original ROMGAZ) have benefited during project implementation in the financial management area on several important aspects which are discussed below. This section discusses financial management issues for all the entities and is not repeated in subsequent sections for the other companies.

Producing Financial Statements in accordance with International Accounting Standards (IAS). All entities (except NAMR, which is a State Agency) were required to produce their financial statements in accordance with IAS. While this was in some cases difficult in the early years of the project, it has led to greatly enhanced capacity in each entity, and the subsequent compulsory application of IAS (as statutory requirement per the Order of Ministry of Finance - OMF 94) starting with the year 2000 was achieved easily by all entities, as they were already familiar with IAS. All entities have developed internal departments staffed with several accountants and economists knowledgeable of IAS, able to prepare financial statements in accordance with IAS, and that have received extensive training over the past years (from the MoF, the audit firms, the Academy of Economic Studies and other professional training bodies). Some of the entities involved in the project (e.g. PETROM) were among the first 13 commercial companies in Romania that have applied IAS on a pilot basis in 2000.

Auditing in accordance with International Standards on Auditing (ISA). All entities (except NAMR) were required to furnish to the World Bank financial statements audited in accordance with ISA, by independent audit firms, acceptable to the World Bank. The costs of these audits were supported in all cases by the entities from their own sources. This is a major achievement, given its sustainability, as the entities will continue to have their annual financial statements audited in accordance with ISA, by independent audit firms, after the end of the project. The audit opinions received were both unqualified and qualified, but there is a clear trend towards receiving mostly unqualified (clean) opinions for the

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entities in the final years of the project, thus showing a significant improvement over time.

Development of financial management, accounting and reporting software systems. All entities involved have developed during project implementation modern management information systems (MIS), have improved significantly the systems or are in the process of contracting suppliers for this purpose. DISTRIGAZ Sud is finalizing the upgrades of its Fox based MIS with a reputable software supplier. TRANSGAZ is currently in the final test stages in their Bank-funded project, with the data being migrated to the newly implemented Oracle based MIS. ROMGAZ is also implementing an Oracle based MIS that will go live at the end of 2003. For PETROM, the full development of an integrated MIS is a covenant in the loan agreement with EBRD and its implementation will be completed by end 2003. The other entities are in various stages of implementing an integrated MIS or further developing their existing systems.

Strengthening the economic, financial and accounting function. The entities have improved their existing arrangements, internal control procedures and management accounting systems throughout the project implementation. Their specialized staff enhanced their experience of working with IFIs, foreign commercial banks, specific instruments such as letters of credit and various foreign currency transactions. Several staff from each entity underwent training for IAS and other professional training. Training of trainers has been done in several entities therefore ensuring sustainable dissemination through the organizations. The auditors have also helped in capacity building of the financial and accounting departments.

Under (2) and (3) equipment and technologies were purchased with highly satisfactory results to improve the exploitation process, increasing production and reserves, as follows:- sand control;- bottomhole and surface production equipment;- drilling equipment for completion and production of the depth wells on reservoirs with high resources and reserves potential;- equipment for evaluation of the steam injection reserve potential as an alternative recovery technology to underground combustion; and- equipment and technologies necessary to improve field evaluation.

Software and data analysis purchased under the project permits PETROM to carry out the activities listed below in a highly satisfactory manner:- Review and re-analysis of available data in order to improve reservoir characterization and create 3D models capable of describing the flow units and their saturation conditions.- Use of 3D models in simulation studies aimed at identifying and recommending the optimum injection strategies, as well as conventional and horizontal infill drilling.- Use of composite teams assigned to set up development projects, working in an integrated system and getting supervision for the process application and monitoring program, by supervisors with specific tasks.

Under (4) an environmental department was established at headquarters and each of the 62 subsidiaries. All of the staff (over 300 professionals) were trained and the units are all operational. A mobile environmental monitoring laboratory has been secured to provide source monitoring at all company operations on an as needed basis. Pollution control equipment has been installed at priority operations (Suplacu), facilities have been built and are successfully operating to clean up accumulated sludge wastes, and a pilot soil remediation program has been successfully completed. An oily sludge treatment facility at Moinesti has been constructed to treat oily sludge and extract useful by-products. The unit is based upon state of the art Canadian technology. The results of this activity are rated as highly satisfactory.

In addition to the inherent measures of pollution control associated with replacement of leaking pipes and equipment, and new non polluting production technology, a number of other measures to remediate pollution from past practices and control pollution from current operations were initiated. Some of the more significant measures are listed below:

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(i) The first phase (primary treatment) wastewater treatment plant at Suplacu which was also identified as a priority in the SEA was built and is operating, the second phase (biologic treatment) is in the planning stage.(ii) A sludge treatment facility has been built by PETROM and is successfully operating. It treats oily sludge and recovers oil for recycle.(iii) A soil remediation pilot program supported by the Canadian grant was successfully completed (PETROM)

(c) for ROMGAZ: (1) corporate restructuring and development (2) upgrading selected production facilities; (3) implementing enhanced recovery techniques in selected gas fields;(4) carrying out a program for the rehabilitation of the gas distribution system; (6) carrying cut an environmental action plan; and (7) provision of technical assistance, staff training, equipment spare parts and materials; and

Under (1) at the time of project approval, Romgaz (a state owned enterprise) was a vertically integrated company, which, in that form, should not be privatized. The Corporate Restructuring and Development Program was designed to help streamline ROMGAZ's activities and make the company more efficient. The CRDP included the restructuring of ROMGAZ into a holding company, coordinating the activities of three Strategic Business Units (SBU's): one for exploration/production, one for gas transmission and one for gas distribution. Subsequently the unbundling of ROMGAZ in 2000 that led to separate companies for exploration and production, transmission (including transit), storage and distribution being established is a highly satisfactory project outcome as the industry structure now in place represents industry best practice. The successor companies are ROMGAZ for exploration and production (that is sometimes referred to as ROMGAZ II), two distribution companies, DISTRIGAZ Nord and DISTRIGAZ Sud and TRANSGAZ.

The measures carried out under the project to improve financial management in ROMGAZ were successful and have been noted above (under PETROM) and are not repeated in this section.

Under (2) and (3) gravel packing technique introduced under the project became common practice at ROMGAZ production facilities at Ploesti affected by sand incursion. Recovery from these wells has improved as a result and the flow rate from underground storage caverns was doubled as a result. This has offset the need for ROMGAZ to drill additional wells to increase the rate at which gas can be withdrawn. The results of these activities are rated as highly satisfactory. Under (4) the beneficiaries were DISTRIGAZ Nord and DISTRIGAZ Sud in the case of gas distribution rehabilitation and TRANSGAZ in the case of gas transmission rehabilitation. The project provided for the replacement of up to 1000 km of distribution pipelines with new Polyethylene (PE) pipelines, and, with regard to the natural gas transmission system, for the acquisition and implementation of a SCADA system. Both DISTRIGAZ Nord and Distrigaz Sud replaced old steel pipelines with new PE pipelines with assistance of the project and with their own funds (thus demonstrating sustainability). Rehabilitation of the low pressure gas distribution systems are rated as highly satisfactory. In the case of TRANSGAZ, consultancy services for acquisition of a SCADA system were completed and the transfer of know-how strengthened capacity of TRANSGAZ to implement acquisition. Installation of the SCADA system designed under this project was meant to be carried out under a separate project funded by the European Investment Bank (value estimated at $50 million) but this was not in fact implemented when the Government's aspiration to include other activities (besides gas transmission) in a national grid system could not be organized. However, TRANSGAZ now plans to implement the SCADA system using other resources.

Under (6) the outputs listed below were achieved with satisfactory results.

For DISTRIGAZ NORD

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An environment, health and safety unit was established at their headquarters office with four staff - one each responsible for environment, fire, worker health and worker safety, respectively. Units were also established at each of their twelve subsidiary offices with one or two people (a total of twenty staff). Headquarter staff report to the General Manager, and subsidiary staff report to the headquarters department head. All staff were trained (environmental permitting requirements, environmental regulations etc.), the company used their own resources. The company has an environmental action plan which consists primarily of meeting regulatory requirements for permits and licensing. There are no major environmental issues. Minor ones consist of gas leaks during equipment repair or leaks from faulty equipment.

For TRANSGAZ

An environmental department was established at their headquarters office staffed with three people. Environmental units consisting of one person have also been established at each of their nine regional offices and an environmental unit has been established at their transmission subsidiary with three people (fifteen people in total). Headquarters staff are involved with policy aspects and training of regional staff in permitting and licensing requirements and procedures. Regional staff are responsible for monitoring during construction and operation activities. All staff have been trained. Headquarters staff have been trained by companies and various Romanian institutes, and as mentioned above, the staff then train their regional counterparts. A mobile environmental monitoring laboratory was to have been purchased under the World Bank loan. While the monitoring equipment was secured, delivery of the van could not be achieved prior to the Closing Date and it was subsequently funded by TRANSGAZ. The mobile laboratory is currently being made operational. TRANSGAZ wishes to utilize it both for their own needs as well as contracting monitoring services on a commercial basis. The company has an environmental action plan which it reformulates every year.

For ROMGAZ II

An environment, health and safety unit has established at their headquarters office with four staff: one each responsible for environment, fire, worker health and worker safety, respectively. Units were also established at each branch office with four people (a total of sixteen staff). At each branch office one staff is responsible for fire, worker health, worker safety and environment respectively. All staff were trained with company resources (one went to Canada on a grant). Staff responsibilities and areas for which they were trained included environmental permitting procedures, environmental regulations, and environmental management for ISO 14001 compliance. The company is working on their environmental action plan. Currently, they do have an environmental investment plan which is part of their overall investment plan.

For DISTRIGAZ Sud

An environmental department was established at headquarters and each of the 12 company branches. This department is now completely functional and has 5 professionals at the headquarters and one representative in each company branch (17 professionals in total). The staff was trained and certified by the Environmental Management Auditors under ISO 14000 and Quality Management under ISO 9000. The main tasks of the department are (a) creation of environmental policies, objectives and targets and their implementation, (b) compliance with Romanian environmental regulations and with the European Directive for environmental protection and waste management. The department has set up an Environmental Management System according to SR EN ISO 14001 that is now under implementation and pre-auditing. The System should be certified by the end of 2003.

(d) for CONPET: (1) corporate development program;(2) rehabilitation, modernization and automation of the crude oil transmission systems, (3) carrying out an environmental action plan (4) provision of technical assistance, staff training, equipment, spare parts and materials.

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Under (1) a restructuring plan has been prepared with implementation planned in 2003.

The measures carried under the project to improve financial management in CONPET, have been noted above ( under PETROM) and are not repeated in this section.

Under (2) the purchase of new pipelines, pumping units including the rehabilitation of most of the pumping stations under the project are now all completed. The use of 'intelligent pigs' - modern technology to detect pipeline corrosion and faults- was pioneered in CONPET under the project and the outcome has been highly satisfactory in enabling CONPET to carry out rapid and accurate diagnostic of sections of the pipeline in priority need of rehabilitation. As a result its investment on remedial works is much more cost effective. The procurement of the equipment for the new SCADA and telecommunication systems is all complete and the SCADA is now operational but, as discussed above, not completely commissioned. CONPET cannot complete the project now because it needs to wait until the refineries it serves will be shut down for their annual maintenance thus providing opportunities for the meters and other measurement equipment to be installed. Overall, this component is rated as Satisfactory.

Under (3) the following output was achieved with satisfactory results. An environmental department was established at headquarters and at each of the 7 regional units. All the staff were trained (11 professionals) and the units all are operational. Equipment and materials to control/contain emergency oil spills are being procured, and the company is procuring a sludge treatment system to extract and recycle useful materials using its own resources. The initial project design was purchase of an incinerator for the sludge, but the recycling system was determined to be a better alternative.

In addition to the inherent measures of pollution control associated with replacement of leaking pipes and equipment, and new non polluting production technology, a number of other measures to remediate pollution from past practices and control pollution from current operations were initiated e.g. equipment to deal with emergency oil spill response (absorbent, skimmers, booms) was procured. In addition, CONPET's new SCADA system incorporates the latest technology available in leak detection and this system is expected to be extremely important in minimizing spills and theft from their pipeline system.

4.3 Net Present Value/Economic rate of return:To date, the quantifiable benefits of the project include: (i) an increase in both oil and gas production as a result of production enhancement investments by PETROM; (ii) increased gas production by ROMGAZ, also as a result of production enhancement activities; (iii) reduced crude oil losses from the CONPET pipelines as a result of pipe replacement and rehabilitation; and (iv) reduced gas losses in the DISTRIGAZ Sud and DISTRIGAZ Nord systems, also as a result of pipe replacement.

As of the end of 2002, the project’s ERR was already positive based on the benefits accrued at 8.6 percent. Assuming that these benefits continue at the same levels for an additional 10 years, the ERR is estimated to be 32.4 percent. All components show ERR’s in excess of the opportunity cost of capital. The highest estimated returns are from the production enhancement activities of PETROM and ROMGAZ (52 percent and 41 percent respectively). The estimated ERR from gas distribution pipe replacement is 22 percent, while the ERR from oil pipeline rehabilitation is 15 percent.

The benefits of environmental initiatives, institutional strengthening and sector restructuring are difficult to measure, and in some cases may not be manifested in the short term. Nonetheless, their impact should be noted. The development plans developed for environmental impact abatement in both the production and transport of oil and gas reduce the risk of serious accumulations of pollutants. New technology assists not only in the enhancement of production from existing wells but can be (and is being) applied to new fields. Modern planning and management techniques will assist the pipeline companies in optimizing the capacity of their networks and allow the companies to postpone new investments in capacity. Sector restructuring has made the individual enterprises more competitive, and has opened opportunities for greater private sector participation and investment in oil and gas

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production.

4.4 Financial rate of return:This was not included in the SAR.

4.5 Institutional development impact:The institutional development impact has been highly satisfactory. This may be attributed to the legislative and regulatory system that was put in place, the restructuring of PETROM, CONPET, ROMGAZ, DISTRIGAZ Nord and DISTRIGAZ Sud and the adoption of best practices in environmental management and mitigation.

Petroleum Legislation and Sector Regulation

The Petroleum and Natural Gas Laws embody market principles of competition and regulation. Under the Laws, Romanian and foreign companies are treated as equal and the rights of title holders is established according to international norms. Model concession and production sharing agreements are in place. NAMR has proved itself highly competent in conducting four bidding rounds for petroleum concessions and the response of foreign investors reflects confidence in the licensing procedures. Both NAMR and ANRGN have qualified technical staff and their institutional capacities to discharge their mandates is not questioned. Accession negotiations with the EU and the transposing of EU Council Directive into Romanian legislation will sustain and consolidate the legislative and regulatory reform program.

Restructuring of PETROM, CONPET, ROMGAZ, DISTRIGAZ Nord and DISTRIGAZ Sud

These have been transformed from entities all of whose operations were the subject of Government directives into autonomous companies run on commercial principles. Under the project they have adopted international accounting standards for financial management, implemented modern management information systems, and acquired expertise in procurement. Modern technology in all aspects of petroleum operations acquired under the project has modernized their operations to reach world standards. This should come as no surprise as Romania has a long history in petroleum activities with very capable personnel who were anxious to learn new technologies. The companies have sustained investments in new technology made with project funds with investments from their resources. As a result of these measures the impact on the institutional development of the companies has been considerable and will be consolidated and enhanced when the companies are privatized.

Adoption of best practices in environmental management and mitigation.

Although not designated with any environmental responsibilities in the project design. NAMR played a key role in the development of environmental regulations for not only the oil and gas sector, but the mineral extractive industries in general. The project resulted in the creation of environmental units at each of the gas and oil companies both in their headquarters and their regional operational units. It also resulted in the training of staff in all of these units in areas of environmental compliance, permits regulations and monitoring. In some cases (PETROM and ROMGAS II) the project also provided environmental monitoring equipment to support environmental management programs. The initial project design included resources for these institutional development activities. Results of the SEA provided a framework for companies to develop their environmental action plans and it acted as an attraction for grant financing to each of the Borrowers for the institutional development, pollution remediation, pollution control etc. Thus the institutional development was accomplished in large measure from Canadian grants, and the project resources were used for other activities. The incentive to comply with EU requirements as part of the Romanian accession process was an extremely potent driving force for insuring institutional development with respect to environment.

5. Major Factors Affecting Implementation and Outcome

5.1 Factors outside the control of government or implementing agency:

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The degree of private sector interest in oil and gas exploration needs to be seen in the context of Romania being a mature region due to its early development as an oil and gas producer. There is little potential for large new discoveries. Joint ventures with foreign companies in producing fields and new concessions in marginal fields relinquished by PETROM and ROMGAZ offer the most potential to increase recoverable reserves through deployment of enhanced recovery techniques.

Extreme weather delayed implementation of works on occasion. Most affected by this was CONPET whose schedule of works under the project was impacted by the extreme cold during the 2002/2003 winter which delayed implementation of the automation program and the pipeline and pumping station rehabilitation.

5.2 Factors generally subject to government control:To discipline and upgrade the sector, the World Bank and IMF repeatedly pushed for rises in end user gas prices, to bring them closer to world levels. Increases at the end user level are necessary to send the correct pricing signals to consumers and to ensure economic prices for gas producers so that they may generate funds to invest and find new reserves. The problem of low prices was exacerbated by nonpayment with accounts receivable at the level of the two gas distribution companies sometimes exceeding 130 days of sales compared to 30 to 60 days of sales for efficient commercial organizations. The loan agreement set time bound targets for the implementing agencies to reduce their accounts receivable and for the borrower to maintain producer prices for crude oil and natural gas at internationally comparable levels. While the conditions with respect to accounts receivable were achieved albeit with delay and liberalization of crude oil prices took place, the condition with respect to natural gas producer prices were only partially achieved prior to the Closing Date. However, after the Bank funded a study on the affordability of gas prices for householders, the Government committed itself to increase prices to economic levels by 2007 and this progress will be monitored by the IMF and the Bank under its proposed PAL Loans.

Romania's application for EU membership in 1995 and the start of accession negotiations in 2000 positively impacted the project as the project components were consistent with the provisions of several of the EU acquisition chapters.

The original ROMGAZ company would have finished its component before the end of 2002 if the company had not been unbundled because two construction seasons (2000 and 2001) were lost while the Loan was being restructured. The Bank strongly supported the unbundling but unfortunately, the restructuring took a lot longer than originally anticipated because of new Government approval procedures for Loan Amendments, and when the Government decided to rebundle storage with the exploration and production activities which required the agreements to be revised again.

5.3 Factors generally subject to implementing agency control:Implementation of the project was carried out at the pace established by the PIUs in the various beneficiaries. NAMR and PETROM carried out their components quickly. Original ROMGAZ, as mentioned above, would have finished before the end of 2002 if the company had not been unbundled. CONPET's component suffered a delay when disbursements under the component were suspended and, according to them, also when it encountered cash flow problems resulting from a dispute with one of its shippers over invoices.

5.4 Costs and financing:The original cost of the Bank-financed Project was $175.6 million, allocated to the various beneficiaries as shown below:

MIND/NAMR $ 7.2 millionPETROM $35.0 millionROMGAZ $70.3 millionCONPET $63.1 million

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At the request of the Government, two reallocations from the MIND/NAMR component, to PETROM and CONPET were approved by the Bank. Furthermore, when the original ROMGAZ was unbundled, the remaining undisbursed funds on this component were then split between the four successor companies by the Government on the basis of the activities. (e.g., gas distribution activities went to DISTRIGAZ Sud and DISTRIGAZ Nord). The subsequent allocation by beneficiary was as follows:

MIND/NAMR $ 3.7 millionPETROM $36.9 millionCONPET $64.7 millionTRANSGAZ $ 7.8 millionROMGAZ II $ 17.9 millionDISTRIGAZ Nord $ 16.1 millionDISTRIGAZ Sud $ 28.5 million Total $175.6 million

PROJECT COSTS

The Bank's Budget to support this project has been adequate and is shown below:

During Lending Phase $ 650,533 During Supervision Phase $1,418,252

It addition, Trust Funds to support the project were also used during the preparation and supervision phases as shown below:

During Lending Phase $ 85,986During Supervision Phase $616,100

6. Sustainability

6.1 Rationale for sustainability rating:The project's sustainability rating is rated as "Highly Likely". The assessment of the project's sustainability is consistent with that noted earlier under Institutional Development Impact (4.5 above). In addition it may also be noted; that because the project's objectives are complementary to the requirements for the sector under EU accession, the commitment of the Government to the project objectives is not in doubt; the policy environment (promoted by the project) is supportive to sustaining project achievements; institutional and management effectiveness to sustain the project outcomes will be strengthened and consolidated by privatization of PETROM, DISTRIGAZ Sud and DISTRIGAZ Nord which will positively impact on the remaining SOEs in the sector; the investments in improved technology for petroleum operations implemented by the agencies under the project have demonstrated their economic, technical, financial and environmental viability making it likely that the companies will continue similar investment program.

The capacity of NAMR to sustain the Petroleum Exploration Promotion Program has been amply demonstrated when it organized and supervised four licensing rounds after the 1st in 1992 without Bank or foreign assistance.

In the area of environmental management there were several aspects of the project that provided sustainable results: The SEA which was prepared for the petroleum sector was a landmark in Romania. Subsequently, SEAs in Romania have been prepared for the electric power sector and the mining sector. The mining sector SEA was managed by NAMR further demonstrating the sustainability of this institution created under this project. The environmental units in the entities at both headquarters and regional

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subsidiaries are all fully staffed and operational. The oily sludge treatment facility which PETROM constructed at Moinesti has proved to be so successful, that the company built another two such units, and has immediate plans to build an additional two units (five in total). Although it is based upon Canadian technology, the relation with the Canadian firm has allowed a greater portion of the facility elements to be fabricated in Romania. The first phase (primary treatment) of the wastewater treatment plant at Suplacu was constructed and is operating. This was identified in the SEA as a priority action. Although funds were set aside in the project for this plant, the company decided to finance it from their own resources. The second phase (biological treatment) is in the planning stage.

6.2 Transition arrangement to regular operations:The Bank is currently working with the Government in preparing a series of programmatic loans. The intention is to include conditions in the PALs which will continue reforms in the gas sector which were started under the PSAL 1 and PSAL 2. Specifically, the Bank will monitor that the Government's roadmap to establish a modern natural gas sector consistent with EU market liberalization principles will be followed and such things as the raising of domestic gas prices to economic levels and privatization of ROMGAZ will be pursued.

7. Bank and Borrower Performance

Bank7.1 Lending:Overall performance was satisfactory.

The Bank's performance in project identification was satisfactory. The project was consistent with the GOR's objectives for macroeconomic stabilization, price liberalization, achieving budgetary stability and in creating the institutions for a market economy

The Bank's performance in preparation was satisfactory. During preparation the Bank fielded multi-disciplinary teams of specialists in technical, environmental, financial , and procurement matters. Technically, the project was well prepared with an extremely detailed implementation workplan and terms of references for major reports were thoroughly reviewed. Project targets were clear.

The Bank's performance at appraisal was also satisfactory. Procurement and financial management capacities were well reviewed. Linkages with other donors were incorporated, e.g., the EIB funded SCADA acquisition by original ROMGAZ.

The project was classified as "Category B" for environmental assessment, and one of the first Sectoral Environmental Assessments (SEAs) was prepared. The priority sectoral environmental issues and associated mitigation actions were identified in the SEA.

7.2 Supervision:A number of factors determined that supervision of the loan would be demanding. First it was a complex project with both policy provisions and several large investment components to be implemented by several agencies. The number of implementing agencies grew to seven agencies following the unbundling of ROMGAZ in 2000. The project required intensive supervision when the Bank objected to a proposal whereby a company operating a refinery would have taken effective control over the supervisory board of CONPET and this led to the suspension of the loan. In addition, given the importance of policy provisions under the loan particularly with regard to reducing the accounts receivable of sector entities, close involvement by the same staff members with the Bank's counterpart teams working on adjustment operation (PSAL2) and with the IMF team was necessary.

The Bank was instrumental at several junctures of the project in ensuring the development of a sound industry structure and regulatory framework in the oil and gas sectors. Advice was provided to the Government agencies and the industry entities on innumerable occasions and affected restructuring and

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regulatory issues decisions of both major and minor importance.

The Bank met its formal supervision requirements during project implementation: providing timely responses and action letters to requests, meeting internal reporting deadlines, selecting supervision team members with appropriate skills, etc. There was a Quality of Supervision audit carried out by QAG in the Fall 2002 and it gave a satisfactory rating to the Project for supervision during the previous 3 years, and the Panel highlighted as 'best practice' the prompt actions taken when the CONPET component was going 'off track'.

7.3 Overall Bank performance:The Bank's overall performance was satisfactory.

Borrower7.4 Preparation:The Borrower's performance is assessed as satisfactory. There was close cooperation at the time of preparation between the Government and the Bank. Representatives from the implementing agencies were involved in the preparation of the loan.

7.5 Government implementation performance:The Government's implementation performance is assessed as satisfactory due to the reasons outlined in Section 4. Nearly all the key conditions of the loan were fulfilled, and in the areas of private sector involvement and restructuring of the gas sector, the Government has gone much further than had been anticipated.

7.6 Implementing Agency:The Implementing Agency's performance is assessed as satisfactory due to the reasons outlined in Section 5.3. While there were substantial delays, most were for reasons beyond the capacity of the PIUs to influence.

7.7 Overall Borrower performance:The overall performance of the Government during the project is assessed as satisfactory. It implemented reform measures that were not envisaged at the time the project was designed. Chief among these was the decision to unbundle ROMGAZ and to launch the privatization process for PETROM, and the two gas distribution companies. The only reservations are with respect to the Government's reluctance to fulfill the loan conditions for pricing of natural gas prior to the Closing Date of the Loan. However, as stated previously, the Government is now committed to prices reaching economic levels by 2007.

8. Lessons Learned

The main lessons concern the leverage that the IBRD loan instrument can reasonably exert on Government policy making in the sector. The loan instrument by itself does not provide influence on Government to take the most difficult restructuring and pricing policy decisions. Conditionalities attached to IMF stand-by agreement and in the Bank adjustment loans were effective in getting the Government to tackle some of the most difficult sector issues such as that of nonpayment in the gas sector. Another important observation is that supervision of the loan provides a very effective way of gaining intimate knowledge of sector issues and this knowledge translates into sound advice to the Bank (and the IMF) on conditions for adjustment loans (and stand-by arrangements).

Another lesson is to be ready to take advantage of all opportunities to push the reform agenda. Following the start of Romania accession negotiations with the EU in 2000, harmonization of sector policies with EU requirements have taken on greater urgency. The Bank team supervising this project were able to provide the Government with advice on how to accommodate the EU's goals for the sector as outlined in their Gas Initiative. Although the Bank knew that unbundling ROMGAZ would delay the implementation

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of the component, the Bank decided to support the move because of the long term importance of creating a sound industry structure.

World Bank teams working in Romania should take great care in assuring that any studies developed, information generated etc. is shared by all parties involved in a particular project. Particular efforts should be exercised by Task Teams to insure all parties who could or should benefit from information generated during project preparation and implementation, in fact, receive this information.

9. Partner Comments

(a) Borrower/implementing agency:S.C. DISTRIGAZ NORD S.A. Tg. – Mures ROMANIA

Romania Petroleum Sector Rehabilitation Project ( Ln.3723 )

Implementation Completion Report

S.C. DISTRIGAZ NORD S.A. Tg. – Mures ROMANIA

2003

1. The Objectives of the Project

Stage 1: ( 1996 – 1997 ) – Pilot project ( Beneficiary : ROMGAZ RA Medias , Romania )

Replacement of about 75 km of steel pipes with PE pipes structured in the following locations : Copsa Mica ( Sibiu County ) , Troita , Bedeni , Valea , Vargata , Vadu and Mitresti (Mures County) . The works totaled USD 2,200,000 .

Stage 2 : ( 1996 – 1999 ) – ( Beneficiary : ROMGAZ RA Medias Romania) Replacement of about 115 km of steel pipes with PE pipes structured in the following locations : Cornesti and Berchesu (Cluj County) , Valea Larga and Zau de Cimpie (Mures County) , Lunca Muresului (Alba County) . The works totaled USD 2,900,000 .

Stage 3 : (2000 – 2002) – (Beneficiary : S.C. DISTRIGAZ NORD S.A. Tg. – Mures) The Rehabilitation of the Natural Gas Distribution System by Replacing the old steel pipes with Polyethylene Pipes, having a total length of 354 kms.

The structure of the project consists of two contracts, WBP1/99 and WBP2/99, as follows :Ceuaºu de Câmpie 11.385Acãþari 7.781Crãciuneºti 9.362Nicoleºti 6.112Tirimia 9.886Blãjel 16.341Moºna 12.261

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Agnita 35.586Axente Sever 15.085Agârbiciu 11.307Total WBP 1 135.106

Frata 36.96Poiana Frãþii 13.976Ceanu Mare 56.023Boian 3.114Boldut 20.559Urca 13.947Turda 7.552Cãlãraºi 23.020Gligoreºti 5.007Total WBP 2 219.158

2. The Fulfilment of the Project Objectives

The main objectives of the project were :- The reduction of gas loss- The reduction of the operational costs- Better safety conditions during operations- New possibilities of connection to the network for other clients- More care for the environment- The increase in energetic efficiency- The losses which had been observed before in the network, prior to the activity of

replacement, which was necessary because of the pipes being too old and of the advanced degree of corrosion, decreased considerably (between 50 – 60 %).

- The operational costs have decreased through the reduction of the expenses alotted to the activities of detection of the faults in the network and for the fixing of these.

- According to the provisions of the contract of execution, there were attached several elements of security to the newly placed pipes (e.g. tracer wire, warning tape), elements which guarantee an increase in the operational safety, excluding to an extent of 100% the accidental damaging of the pipes in case of interventions in the security area of the network.

- Taking into consideration the fact that the networks which have been replaced were designed and built about 25 – 40 years ago, the dynamic parameters, which had been calculated for the requests of that period and for a period of 15 – 20 years, did not allow that new consumers be connected to the network. Together with the replacement of the network, one also had to rethink and update the parameters according to the stage of development of each region, thus creating the possibility of supplying gas to other potential consumers.

- As far as the protection of the environment is concerned, the main positive results of

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using the polyethilene pipes are:- No more waste material on the work sites, resulted from the traditional welding and

isolation procedures of the steel pipes.- The reduction of soil pollution, generated by the conventional isolation materials of the

steel pipes.

By applying the new technology of replacement in the network by using polyethylene, the life expectancy of the network increases, therefore the main objectives of the project are fulfilled at the moment the project is completed.

SC DISTRIGAZ – NORD SA , TG. MURESTHE STUCTURE OF THE WORKS FOR WBP1

G A S L I N E S

( T O T A L M E T E R S )

S E R V I C E C O N E C T I O N S (T O T A L N R .)

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L O C A T I O N G A S D I S T R I B U T I O N

I T I S T E S T E D ( Y E S / N O ) I N I T I A L

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i n s t a l l e d I N I T I A L

p r o j e c t F I N A L

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1 A C A T A R I Y E S 8 . 0 4 9 , 0 0 8 . 4 9 7 , 1 6 2 9 4 3 0 3 2 C E U A S U L D E

C A M P I E Y E S 1 1 . 4 7 1 , 0 0 1 2 . 2 0 5 , 5 0 3 8 1 3 8 1

3 T I R I M I A Y E S 9 . 8 8 8 , 0 0 1 0 . 1 9 0 , 6 0 3 0 1 3 0 4 4 C R A C I U N E S T I Y E S 9 . 3 6 8 , 0 0 9 . 9 0 2 , 5 2 2 8 7 3 9 3 5 N I C O L E S T I Y E S 6 . 1 5 3 , 0 0 5 . 9 3 2 , 1 5 2 3 4 2 3 5 6 A G N I T A Y E S 3 5 . 5 7 5 , 0 0 3 6 . 1 2 2 , 0 7 1 4 1 7 1 4 3 6 7 A G A R B I C I U Y E S 1 2 . 0 9 2 , 0 0 9 . 7 9 5 , 5 5 4 7 0 4 7 0 8 A X E N T E S E V E R Y E S 1 5 . 0 5 5 , 0 0 1 3 . 3 3 3 , 4 0 6 2 8 6 5 0 9 M O S N A Y E S 1 2 . 2 8 1 , 0 0 1 2 . 5 2 1 , 6 0 5 2 3 5 2 2

1 0 B L A J E L Y E S 1 6 . 3 3 4 , 0 0 1 6 . 0 9 3 , 5 0 5 9 0 5 9 4 T O T A L 1 3 6 . 2 6 6 , 0 0 1 3 4 . 5 9 4 , 0 5 5 1 2 5 5 2 8 8

SC DISTRIGAZ – NORD SA , TG. MURESTHE STRUCTURE OF THE WORKS FOR WBP2

GAS LINES

(TOTAL METERS)

SERVICE CONECTIONS (TOTAL NR.)

Nr. Crt.

LOCATION

GAS DISTRIBUTION

IT IS TESTED (YES/NO) INITIAL

Project FINAL

installed INITIAL

project FINAL

installed

1 GLIGORESTI YES 7.903,30 7.651,70 188 188 2 CALARASI YES 21.826,00 21.644,80 535 552 3 TURDA YES 7.416,00 7.528,00 372 389 4 FRATA YES 34.419,00 39.241,44 735 751 5 POIANA FRATII YES 12.986,00 12.738,90 125 146 6 TRITENII DE JOS YES 51.653,00 51.626,04 642 727 7 BOIAN HODAI YES 2.982,50 2.974,10 80 82 8 BOLDUT YES 9.451,00 9.828,10 260 256 9 URCA YES 13.196,00 13.620,43 326 337

10 CEANU MARE YES 59.216,00 58.691,30 655 626 TOTAL 221.048,80 225.544,81 3918 4054

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THE STRUCTURE OF THE PAYMENTS EFFECTED FOR THE TWO PROJECTS

Month Period of time for

invoicing WBP1 WBP1 WBP2 WBP2 No. of Invoice $ Lei $ lei

Date of invoice(s)

F1 April 01,04,2002 - 31,04,2002 248157.35 8316497.271 406422.91 13620450.98 16,05,2002 F2 May 01,05,2002 - 31,05,2002 587769.88 19704985.23 311683.98 10449205.43 31,05,2002 F3 June, - 1 01,06,2002 - 15,06,2002 374328.75 12530654.91 194074.24 6496635.184 17,06,2002 F4 June, - 2 16,06,2002 - 30,06,2002 462358.87 15488559.79 208592.37 6987635.803 28,06,2002 F5 July, - 1 01,07,2002 - 14,07,2002 444553.14 14671142.73 171462.73 5658613.015 16,07,2002 F6 July, - 2 15,07,2002 - 31,07,2002 619220.01 20360573.15 509088.99 16739355.08 31,07,2002 F7 August, - 1 01,08,2002 - 14,08,2002 339976.06 11216830.15 337523.34 11135907.56 14,08,2002 F8 August, - 2 15,08,2002 - 30,08,2002 420225.57 13996453.06 331184.11 11030749.15 30,08,2002 F9 Sept, - 1 01,09,2002 - 14,09,2002 0 0 683630.72 22733455.96 20,09,2002 F10 Sept, - 2 15,09,2002 - 30,09,2002 0 0 540818.99 17869200.25 30,09,2002 F11 Oct. - 1 01,10,2002 - 14,10,2002 0 0 460755.99 15309539.28 18,10,2002 F12 Oct. - 2 15,10,2002 - 30,10,2002 0 0 293908.99 9835076.532 31,10,2002 F13 Nov. - 1 01,11,2002 - 15,11,2002 850728.51 28541090.78 0 0 15,11,2002 F14 Nov. - 2 16,11,2002 - 02,12,2002 255326.24 8571046.551 0 0 02,12,2002 F15 Dec. - 1 03,11,2002 - 15,11,2002 101576.38 3434805.29 0 0 18,12,2002 F16 Febr. - 1 06,12,2002 - -11,12,2002 20033.32 660638.7936 0 0 06,02,2003

4724254.08 116285696.3 4449147.36 147865824.2

WBP1 + WBP2 9173401.44 $ WBP1 + WBP2 264151520.5 MIL. $ LEFT IN ACCOUNT WBP1+1,550,000 4794197 69942.92 WBP2 4454328 5180.64

3. The Registering of the Implementation and the Major Events Influencing the Project

During the whole period of the project, given the efficient coordination between the project teams of the Bank, the Borrower, the Consultant and the Executioner, there were no major events affecting the project.

4. Acquired Knowledge

The implementation of the project 3723 RO represented for SC DISTRIGAZ NORD SA Tg. Mures the shift to a new technology of rehabilitation for the natural gas networks, by using polyethylene.

Doru BORDAProject Manager

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____________________________________________________________________________________CONPET

Input to the Implementation Completion Report

1. Objectives and Effects of the Project

The Project aims to improve CONPET’s organisation and financial management, to rehabilitate, modernise and automate the crude oil transmission system, to introduce environment and abatement measures to address pollution resulted from crude oil transport and to provide technical assistance and training for CONPET’s personnel.

It is expected that through implementation of the project, the system efficiency will increase along with the following expected benefits:

- improvement measurement of crude oil quantity and quality.- reduction of crude oil and petroleum product losses.- minimising energy, fuel and lubricants consumption.- minimising system operational difficulties and cost.- improving system reliability and flexibility.- improving environmental impact.

also Corporate Development Program implementation is intended to improve the institutional efficiency by:

- reorganisation of the company.- implementation of a modern accrual-based accounting record system.- implementation of a new management information system.

We expect that all the above objectives will be succesfully met by having the project completed. Some of the benefits of implementing the project can be already noted. Thus, completion of the first step of Pipeline Rehabilitation Package has significantly reduced the number of pipeline accidents that reflects on decreasing the oil losses and improving the environmental impact.

1. Project Execution

The initial implementation schedule has provided for December, 1999 as completion of the project (see Annex 1). Four consecutive extensions have been approved for the loan and project, in 1999, 2000, 2001 and 2002. The new cloasing date for the loan is June 30, 2003 (see the new project implementation schedule – Annex 2). These changes to the project implementation schedule have also caused changes to the disbursement schedule (Annexes 3 and 4).

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Extension of the project till year 2003 has been requested due to the difficulties encountered in the implementation of the project, as follows:

- a need for a new work package to rehabilitate the pumping stations has been identified after starting the project. In the site survey phase of the project, our Consultant has concluded that automation of the IPLS and DPLS pumping stations would be impossible unless rehabilitation of piping, thanks, pumps and other facilities of the pumping stations will take place first. This became a new work package not forseen at the moment of the prefesability studies and appraisal report that established end of year 1999 as project completion milestone and introduced a major change to the implementation schedule. Financing of this new package was almost entirely in Conpet’s account.

- the lack of drawings, plans, procedures and records related to the pipeline transport system operated by Conpet. The extend of missing documents has been determined only after Consultants started to work and to define the data needed for the project.

- the long period needed for clarification with the World Bank in order to finalize the bids for Automation/SCADA and Communications packages.

- frequent changes of the petroleum sector configuration during the period 1996 – 2000 that requested several alterations of the project philosophy and extensive revision of documents already prepared.

- suspension of the loan by the World Bank during 2000 after the State Ownership Found decision to sign the management contract for CONPET administration with a company involved in the petroleum business. This decision has been considered by the World Bank as a violation of the Loan Agreement provisions (Section 3.01) and of the common carrier status of CONPET. Anew legal framework has been then prepare for the definition of a crude oil common carrier.

- significant difficulties in implementing the project in parallel with maintaining the system capacity for crude oil transportation. These difficulties appeared mainly on the Import Pipeline System as here all the rehabilitation works have to be performed while keeping the pumping stations operational to ensure the crude oil supply to refineries. This situation has imposed supplementary safety measures to be taken, temporary by-passing works and new operational scenarios to an extend impossible to the predicted in the beginning of field activity.

- Such an approach of the installations and construction activities is not only slower than working on the entire system in the same time but also stops various contractors to work continuously and in an optimal manner.

- implementation of the project has been carried out in a very difficult financial and

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economical environment during the entire period of the project and ensuring of the local portion for the project has been jeopardized by illiquidity of the economy.

- the long time spent in order to obtaind construction permits for the project components due to the burocracy.

- decrease of the quantitie of crude oil transported caused by reduction of the crude oil imports that generated less finacial resources for the project.

- delays in issuing of the Government Decisions to extend the loan in 2001 and 2002. No payments to our contractors have been approved until such Decisions have been in place.

3. Borrower’s Performance

Conpet met the covenants under the Loan as follows:

- CONPET keeps and maintains records and accounts reflecting its operations and financial condition, as requested by the Project Agreement (PA) Section 4.01 (a).

- CONPET had over the entire period since 1994 its accounts, records and financial statements audited, as requested by PA provisions - Section 4.01 (b).

- apart from the World Bank loan, CONPET has no long-term debt (PA, Section 4.02).

- a new five-year rolling business plan including projected financial statements and all investments CONPET plans to undertake is under preparation. This new business plan will have to take into consideration the debt restructuring plan agreed with Petrom and also should reflect the situation of the loan extension. Under those circumstances the new five years rolling business plan will be concluded and submitted to the Bank until March, 2003 (PA - Section 4.03).

An implementation unit has been created since 1994.___________________________________________________________________________________Transgaz:

PETROLEUM SECTOR REHABILITATION PROJECTLOAN NO. 3723 – RO-Transgaz component –

IMPLEMENTATION COMPLETION REPORT

Introduction

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In 1994 the IBRD and the Romanian Government signed a Loan Agreement for the rehabilitation of the Romanian petroleum sector. Part C of this loan, in the amount of 70.3 million USD was dedicated to the former Romgaz R.A. for a number of projects jointly identified and defined within the Project Agreement concluded between the Bank and Romgaz R.A. Due to the reorganization of Romgaz pursuant to the Governmental Decision 334 / 2000, the Loan and the projects financed by it have been split among the new established gas companies, depending on the specific project beneficiaries.

Transgaz Component – Project Implementation

Further to the above mentioned Transgaz is responsible for the following projects:

1. Corporate Restructuring and Development Progam2. Internal audit3. Engineering, Management and Supervision for the PE pipelines and SCADA (PEMS)4. Acquisition and Implementation of a Management and Accounting Informational System5. Procurement of Environmental Protection Equipment

Projects’ description:

1. At that time (1994), Romgaz was a regie autonome, a vertically integrated company, which, in that form couldn’t be privatized. In order to prepare the privatization of the national gas company, Romgaz had to undergo a restructuring process based on a study developed by a specialized consultant. The Corporate Restructuring and Development Program was meant to help streamline Romgaz’ activities and make the company more efficient. The CRDP included the restructuring of Romgaz into a holding company, coordinating the activities of three Strategic Business Units (SBU’s): one for exploraton/production, one for gas transmission and one for gas distribution.

The Corporate Restructuring and Development Study was performed by Arthur Andersen. The details regarding the implementation of this project are presented in the attached Procurement Monitoring Table. Although the restructuring program of the former National Gas Company ROMGAZ did not exactly follow the recommendations presented within the Arthur Andersen study, however, the project helped the decision makers within the gas industry develop a sound reorganization of the sector and it represented the basis for the further development of the Management and Accounting Informational System.

2. The internal audit was performed in 1996 (see attached Procurement Monitoring Table) by Coopers & Lybrand and it represented the first sound audit report of Romgaz.

3. Part C of the Petroleum Sector Rehabilitation Project also included the rehabilitation of the natural gas transmission and distribution systems. Basically, the project provided for the replacement of up to 1000 km of distribution pipelines with new PE pipelines, and, with regard to

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the natural gas transmission system, for the acquisition and implementation of a SCADA system. In order to prepare the implementation of such complex projects, a consultancy services contract was concluded (PEMS: Engineering, Management and Supervision). This consultancy service was meant to provide a complete engineering and project management package starting with a review of existing data to a fully operational facility. The consultant has promptly planned and rendered all necessary advice for causing the project to be executed expeditiously and economically, in conformity with highest industry practices and standards. The consultant provided tender documents, assisted in bid evaluation, contract negotiations and on-site supervision of factory inspections. The consultancy contract was executed by the joint venture between BC GAS & KENONIC CONTROLS, from Canada. The contract amounted 5.1 million USD, out of which the amount of 1.5 million USD is due to be reimbursed by Transgaz for the consultancy services performed by Kenonic Controls for the preparation of the SCADA system. Kenonic Controls helped to the development of the necessary technical specifications for the implementation of a SCADA system.

4. The project regarding the acquisition and implementation of a Management and Accounting Informational System was based on the technical specifications and bidding documents developed by Arthur Andersen as part of the Corporate Restructuring and Development Program. The two stage bidding was won by the British company International Computers Limited

(recently changed their brand name into Fujitsu Ltd.). The main objective of the project was the implementation of modern management tools such a state of the art information system with subsystems for material handling and inventory control, personnel management and corporate planning. The project was recently finalized, but the benefits will only come out after the data migration, which is a complex process in addition to the MAIS project, and which is financed by Transgaz.

5. The acquisition of environmental protection equipment consisted in the purchasing of modern equipment for the measurement of several environmental parameters which to allow their monitoring in accordance with the international specific standards. All equipment were purchased from the German company Intereng Messtechnik and are helping Transgaz do their one measurements which are required by the national regulations for the environmental protection.

Conclusions regarding the Project’s Outcome and Bank’s Support

The projects under the Transgaz component of the Loan have been successfully implemented. Even though some of them did not meet entirely their objectives (ex. The Corporate Restructuring and Development Program, the consultancy services for the SCADA project), their main purposes have however been achieved. The implementation of these projects meant, beneath all other material benefits, a lot of experience and know-how transfer.

We do appreciate the Bank’s support all over the project’s implementation period, especially from it’s representatives in Washington. However, we have to note also some negative aspects during the implementation of the projects, which are mainly due to bureaucracy, and a

- 27 -

very complicated chain which almost every document has to follow from the company, via Ministries, Bank’s Mission in Bucharest and finally to the Bank. An important issue to be mentioned in this report is the delay recorded with the last two projects (MAIS and Environmental Equipment). Due to the reorganization of the former Romgaz, and the establishment of the new gas entities, the Loan Agreement and Project Agreements had to be amended. The issuance of such an addendum which to allow us continue the projects took, unfortunately, one and a half year, which delayed all procurements and disbursements until the last days before the deadline of the loan.

____________________________________________________________________________________Petrom:

IMPLEMENTATION COMPLETION REPORTon

PETROLEUM SECTOR RAHABILITATION PROJECT IBRD LOAN No 3723 - Ro, PART B OF THE PROJECT

PETROM ROMANIA

I. Objective Of The Project

PETROM has received a Loan from The International Bank for Reconstruction and Development amounting initial to US $ 35,000,000 and finally US $ 36,900,000 to finance Petroleum Sector Rehabilitation Project with the following main objectives:

1. achievement of objectives of Petroleum Sector Strategy to promote private sector investments in the petroleum sector and to strengthen institutional capabilities and facilitate the development of an efficient and commercially oriented petroleum sector;

2. assist in improving operational efficiency and financial management;3. assist in implementing abatement measures to adress environmental oriented petroleum sector.

The Loan Agreement was signed on 1 June, 1994 with the guarantee of Romanian Governement and became effective during 1994.

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II. Description Of The Project

Development and implementation of a corporate restructuring and development program with 1.the objective of improving PETROM organisation, streamlining its operations and improving its financial condition and management.Upgrading selected production facilities, introducing modern production technologies and 2.work over of wells to improve their productivity;Implementing enhanced oil recovery techniques for the production of oil and gas on selected 3.fields through co-operate arrangements between PETROM and international oil companies.Carrying out of an environment action plan for upgrading the waste water treatment plant at 4.Suplacu and the environmental laboratory at Campina.Provision of technical assistance, staff training, equipment and spare parts, chemical and 5.materials to be utilised in the carrying out of this part of the Project.

III. Structure Of The Loan

In accordance with the Appendix 1of the Loan Agreement the initial allocation for the part B 1.of the Project, on categories, was the following:

Category Allocated amount, US $(a) Goods 25,000,000(b) Consulting services and training 5,000,000(c) Unallocated 5,000,000

Total 35,000,000

During the Project implementation some reallocations have been operated, having in view PETROM's needs for various equipment, approved by the Bank.Moreover, Petrom has agreed to undertake the unused balance of US$ 1.7 million from NAMR'S allocation, in order to procure additional equipment for production enhancement and services under its production enhancement program.The final structure of the loan as agreed with the IBRD is the following:

Category Current allocation(A) Goods 35.6(B) Consulting service and training 1.3(C) Unallocated - -

Total 36.9

IV. ORGANISATIONAL ASPECTS

Project implementation was carrying out by a team (P.I.U.) established by PETROM's management under Decision no.127 dated May 3, 1994, complying with the terms satisfactory to the Bank, responsible of the said Project.

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Responsible for the carrying out of the environmental action plan, for the formulating and implementing environmental assesments with qualifications and terms of reference is an Environmental Management Unit established already by PETROM management during 1994.

V. PROCUREMENT

In accordance with the Bank's Guidelines for Procurement, Petrom organised the corresponding competition approved by IBRD for the procurement of various production equipment, components, spare parts, services, technical assistance, etc. In this way, Petrom has signed 33 contracts (approved by the Bank), under the following methods of procurement:

(1) PRODUCTION ENHANCEMENT

- ICB dated 17.03.1999: 8 contracts, equipment, amounting US $ 15,478,602- ICB dated 27.09.1996: 12 contracts, equipment, spare parts, consumables for sand

control, amounting US $ 10,439,957- ICB dated 22.05.1997: 4 contracts, Mud logging, pumps, drill pipes, amounting US $

2,525,226- ICB dated 20.03.1998: 2 contracts, Truck mounted pumping, special thread tubing,

amounting US $ 2,625,514- ICB dated 10.03.1999: 1 contract, Power units, amounting US $ 2,204,409- ICB dated 20.06.2001: 1 contract, special pumps, amounting US $ 150.905- International Shopping dated 15.03.1995: 1 contract- spare parts for Tatra trucks,

amounting 1,000,000.- Limitted International Bidding (LIB) dated 30.06.1995: 1 contract- Operations of sand

control, amounting US $ 685,652- Limitted International Bidding (LIB) dated 21.08.1995: 1 contract Software and

Hardware for petroleum activity, amounting US $ 496,539.

(2). ENVIRONMENTAL MEASURES

- ICB dated 22.05.1997: 1 contract- Equipment and Technology for Environmental Protection, amounting US $ 837,000

(3). TECHNICAL ASSISTANCE

- Limitted International Bidding: 1 contract- Corporate development, amounting US $ 1,300,000

Total committed amounts under contracts..............................................US $ 37,743,804

More details about the status of Procurements is presented herewith attached (Appendix 1).

The list of equipment, under Appendix 1, were set up taking into account the most urgent needs of Petrom and the characteristics of the up to date equipment available in the international

- 30 -

market, suitable for Petrom's oil fields.

Therefore, the status of procurement and committment under the structure of the Project is presented as follows:

Category Current allocation Committed amounts(signed contracts US $)

Ballance

(A) Goods 35,600,000 36,443.804 + 843,804(B) Consulting service and training

1,300,000 1,300.000 -

(C) Unallocated - - -Total 36,900,000 37,743,804 + 843,804*

*The balance US $ + (plus) 843,804 is determinated by:(1) positive influence of the rates of exchange between US $/other currency and various

reduced amounts paid to the signed contracts (aprox. US $ 543,000 US$)(2) For Consulting Service Contract, Petrom has paid in local currency (LEI) the equivalent

of US$ 300,000 and the corresponding amount US$ 300,000 has been reallocated from Consulting Services category toward Goods category.All the reallocation of the amounts have been agreed by the IBRD in order to increase the efficiency and achieve the purpose of the Project.

VI. STATUS OF IMPLEMENTATION

(1) CORPORATE RESTRUCTURING AND DEVELOPMENT PROGRAM (CRDP)

On October 6, 1995, the contract with Coopers & Lybrand has been signed under the above heading being approved by the World Bank on November 29, 1995 and commenced on January 10, 1996. Petrom designated a counterpart team which performed its activity together with Coopers & Lybrand consultants in order to develop the 5 (five) phases of the project:

· Phase I- Corporate organisation and staffing· Phase II- Familiarisation· Phase III- Accounting process and reporting+ Mangement information and IT Strategy· Phase IV- Corporate Planning· Phase V- Privatisation

The contract was amounting US$ 1,300,000.A Steering Committee was designated to conduct the project, any proposal from Coopers & Lybrand consultants being submitted to the Steering Committee for approval.Until July 1997, 6 (six) Steering Committee meeting have taken place and two workshops have been held to all directors of the subsidiaries and headquarters as well.

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The World Bank comments have been reviewed during the Steering Committee meetings and both Petrom and Coopers & Lybrand have taken into consideration and applied World Bank observations and proposals.Petrom started to apply the results of Coopers& Lybrand restructuring programme study, since 1997 and we can see actually excellent condition of Petrom its mostly due to these consultance, even if with the acquisition of rafineries and downstream retail network Petrom move forward from the organisation formulated by CRDP.

(2) PRODUCTION ENHANCEMENT

Equipment and technologies were purchased to improve the exploitation process, increasing of the production and reserves, as following:

- sand control;- bottomhole and surface production equipment;- drilling equipment for completion and production of the depth wells on reservoirs with

high resources and reserves potential;- equipment for evaluation of the steam injection reserve potential as an alternative recovery

technology to the underground combustion;- equipment and technologies necessary to improve the fields evaluation process.

The constitution of the production enhancement section, the main components and influences specific for production, reserves and operating cost are presented in the Appendix no. 3.A summary of these aspects will be made further on the utility and profitability.

Software and hardware for petroleum activities.This software products have contributed to attain few important targets in appling the Reservoir Management concept to the most of our reservoirs, as follows:- Review and re-analysis of available data in order to improve reservoir characterization and create 3D models capable of describing the flow units and their saturation conditions.- Use of 3D models in simulation studies aimed at identifying and recommending the optimum injection strategies, as well as conventional and horizontal infill drilling.- Use of composite teams assigned to set up development projects, working in an integrated system and getting supervision for the process application and monitoring program, by supervisors with specific tasks.

Sand control equipment material and services

Bottomhole assembly and the technology purchased have determined:

- number of well completion in gravel pack system, 356 wells;- supplementary production, 253 thousand tons and 74 million ST cm;- supplementary number of production days, 38,000;- economic effect, Mill. USD 67.1, materialised in an effective technology transfer.

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The three surface equipment for sand control purchased allows over 1,300 gravel pack operation with romanian bottomhole assembly, a part of gravel packing screens were made from the stainless steel wire bought in the project.

The advantages were:- supplementary production, 119 thousand tons- supplementary number of production days, 18000- economic effect, 23 mil.$

Over the economic effect mentioned, the progress in sand control and the new downhole pumps have achieved a rise of production life of the wells and operation cost decreasing, effects which allows the development through infill drilling for four main fields: Independenta, Preajba, Ticleni, Otesti. Based on the infill drilling achieved and planed for the future, the crude oil reserves due to these four fields have recorded a rise over 2.5 mil.tons.

Subsurface pumps and spare parts

A number of 1427 subsurface pumps were purchased, 427 of them helical pumps. Most of them, especially the helical ones, were used for the gravel pack completion. The benefits gained:

- overproduction of 85.9 thousand tons- lower exploitation costs – 14 – 45 %;- Profit: 18.1 mil. $550 pumps of the total, (199 helical) are operational which it is expected

to generate a profit growth.

Based on the economical and technical effect, PETROM acquired 500 additional helical pumps from its own sources, which proved similar performances with the first ones.

Equipment for steam injection

Steam generators , 2 units

Used for steam injection tests on the fields:

- Otesti, 5 pilot test,- Cocu, 1 pilot test,- Videle, 1 pilot test.

At present, the steam injection potential is being tested on the field Dealu Batran-Dradder, and the pilot tests on Videle and Balaria fields will be resumed according to a program containing 7 extra pilot tests.

Depending on the market price of oil, the reserves associated with the steam injection are estimated at a range of 1-7 mil.tons, most of it acquired from the Videle field where the process was abandoned due to econimic reasons.

Casing steel drill pipes and special tubing

This part was meant for drilling and completion of high depth wells, over 4500 m, for exploration and development of the gas - condensate fields with high level of H2S.

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Ten wells were drilled on Turburea Bibesti, Mamu and Slavuta fields, the new reserved discovered exceeding 2 billions St cum gas and 300 thousand cum condensate. There are 4 wells on line, the daily production being 170 cum condensate and 550 thousand St.cum gas.

It is remarkable the very good behaviour of the material, which made the objectives be accomplished.

Power units

Acquired 30 Caterpillar – Allison power units directed to refit out and upgrade 30 workover units.

There are in operating 27, additional 3 are to be finalized at the end of March.

Based on the existing data it is estimated a reliability raise of 300%, a better security exploitation and improved handling.

The new installations are intended especially for difficult well workover, including casing and reentries.

Spare parts for Tatra trucks

This part was the first acquisition of the project. The spare parts acquired maintained the Tatra engines running for a period of 15 months. These engines fit workover units and squeezes. There are operational at the moment 115 Tatra engines, PETROM has imported this year an important amount of spare parts to fix and maintain their running.

(3) ENVIRONMENTAL ACTIVITY

- An important project under World Bank co-ordination was the Environmental Study for the Offshore Black Sea. The study has been completed on December, 1996.

- An environmental equipment Mobile equipment for chemical washing of sludge and contamined soil, 1 unit was procured during 1998.

- The unit is based on APEX technology and consists of separating of the hydrocarbons contained in petroleum sludge by washing with a chemical solution which is determined by sludge characteristics, together with heating and centrifuging.

- The commissioning made in April 1999, at Targu Jiu branch, Ticleni Schela, the unit is processing the sludge from the pit of Ticleni.

- The unit processing capacity is 4 cm/h. Until now, 61,550 cm of sludge were processed, about 6,600 cm of crude oil were recovered. In this way the environmental problems were settled and, more than that, some revenues were obtained from this activity.

- The good results obtained by the unit from Ticleni Schela encouraged to develop other four similar units with a double processing capacity, due to a good cooperation between Petrom’s and Canadian Company specialists.

- Two of these units were commissioned in 2002, one of them in March at Moinesti branch, which processed about 37,400 cm of sludge, and the other in June at Videle branch. The quantity of crude oil recovered here is 2,770 cm.

- The finalizing of the others two units is foreseen in 2003. At this moment one unit is 80% ready and the other one 50%.

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VII. COMMITMENTS AND DISBURSEMENT

PETROM has signed contracts amounting to US $ 37,743,804 and disbursed a total amount of US $..36,899,722 as follows:

Category Current allocation Disbursement US$

Committed amount US$

(A) Goods 35,600,000 35,994,570 36,443,804(B) Consulting and training

1,300,000 905,151 1,300,000

Total 36,900,000 36,899,722 37,743,804

More details of the disbursement are presented in Appendix no.2 (attached).

VIII. CONCLUSIONS AND RESULTS ABOUT THE PROJECT IMPLEMENTATION

1. In terms of production we may consider a minimal additional production of 600 thousands tons oil and 200 millions St.cum gas, for the end of 2002.

2. In terms of economical effects, the project benefit exceeds 110 mil.$.3. In terms of transfer of technology, it is to appreciate that PETROM owns today, sand

control equipments and technology at international standards. At the same time it considerably improved the wells and fields operation practices, the effects being shown by the operation costs charts steadily markdown and strong diminishing of the production decline.

4. In terms of reserves, the project allowed a supplementary volume of reserves of more than 2 billions St.cum gas, 300 thousand tons condensate from new fields, respectively about 2.5 mil. tons of oil from few technologically rehabilitated mature fields. An increase from 1 to 7 mil. tons oil is to be expected from steam injection, the reserve extent depending on the market price of oil in the future.

5. In terms of environment, project component: mobile equipment for chemical washing of sludge permits to Petrom a very important progress in diminishing of the sludge quantities accumulated during the long history of petroleum activity in Romania.

IX. COLLABORATION WITH THE IBRD

As is known, several missions of the Bank have visited Romania during 1994-2002 to supervise the Project and review the progress made for each component of the Loan at the different stages.

It can be noted that Bank's Management and the staff of the Bank visiting Romania supported Petrom to understand exactly the requirements of the Bank as stated under Loan and helped staff of Petrom to identify the best ways and giving some recommandations in order to achieve the main objectives of the Project.Finally, Petrom is appreciating the supervision of the Project by the Bank inclusive the relations

- 35 -

ship with Petrom, having the purpose to maximise the efficiency of the Project. CHIEF EXECUTIVE OFFICER

GHEORGHE CONSTANTINESCU

____________________________________________________________________________________Distrigaz Sud

Romanian Petroleum Sector Rehabilitation Program, IBRD Loan 3723-RO, Component “C”, Replacement of corroded steel pipes and services with polyethylene networks

IMPLEMENTATION COMPLETION REPORTING

I. Background

Distrigaz Sud SA Bucharest manages a natural gas distribution network 13,500 km long. Of this total length, about 6,000 km (44%) pipes and services are expired and therefore lead to a decreased efficiency of our activity and a real danger in operations (explosions due to gas leaks).

The financing sources provided from the company funds are insufficient for a rehabilitation of the corroded gas distribution systems at the desired rhythm (about 500 km/year).

Therefore, starting from 1994, SN ROMGAZ RA Medias has benefited from the IBRD Loan 3723-RO, Component “C” amounting to USD 70.3 million for the completion of objectives provided in Appendix 2, Part C: ROMGAZ in the Loan Agreement concluded in Washington between Romania and IBRD on 1 June 1994:

1. Making-up and implementation of a restructuring and development program to improve the ROMGAZ organization, making its activities efficient and improving its financial and managerial condition.

2. Performance ofa. a program to improve the existing production facilities and introduce new production

technologies, andb. a program to implement techniques to raise the recovery factor in the selected gas fields

through joint-ventures between ROMGAZ and international oil companies3. Development of a program to rehabilitate the gas distribution system through the replacement

of about 1,000 km very corroded pipes.4. Installation of a surveillance, control and data acquisition (SCADA) system and a telecomm

system to be used for the surveillance, analysis and determination of an optimal way to manage the gas flux in the transmission and distribution system.

5. Setting up an action plan for the environmental protection, which would introduce environmental protection measures in the gas extraction fields and transmission and distribution system.

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6. Provision of technical assistance, staff training, equipment, spare parts and materials to be used for the development of this Project part.

The first objective was carried out through the reorganization and division of ROMGAZ into 5 companies corresponding to the main activities (under HG 334/2000).

Resulted upon this reorganization, SC DISTRIGAZ SUD SA Bucharest took over through the Protocol entered on 13/6/2000 the rights and liabilities of former SN ROMGAZ RA, including the completion of the Rehabilitation Program that consisted in the replacement of about 500 km corroded steel pipes and services with polyethylene networks and totaled USD 28.4 million.

The documents that ground the IBRD-financed Program between 1994-2002 are:

· OG 42 of 12 August 1994 (sanctioned by Law 126/1994) regarding the approval of the Loan Agreement concluded between Romania and IBRD and amounting to USD 175.6 million for the rehabilitation of the petroleum sector;

· HG 604 of 6 July 2000 regarding the approval of the amendment to the Loan Agreement concluded between Romania and IBRD and amounting to USD 175.6 million for the rehabilitation of the petroleum sector;

· HG 882 of 6 September 2001 regarding the approval of the amendments concluded on 26 December 2000 and 17 July 2001 at Washington and 7 August 2001 at Bucharest, to the Loan Agreement concluded between Romania and IBRD and amounting to USD 175.6 million for the rehabilitation of the petroleum sector;

· HG 156/2002 regarding the approval of the amendment concluded between the Romanian Government and the IBRD by exchange of letters signed at Bucharest on 21/11/2001 and Washington on 21/12/2001, to the Loan Agreement concluded at Washington on 1 June 1994 between Romania and IBRD and amounting to USD 175.6 million for the rehabilitation of the petroleum sector;· ROMGAZ Project Agreement between IBRD and ROMGAZ RA, dated 1 June

1994;· Subsidiary Loan Agreement concluded between the Ministry of Finance and

Romgaz RA;· Notification to Borrower of Extension of Closing Date dated 31/12/2001;· Amendment to ROMGAZ Project Agreement dated 17 July 2001;· Subsidiary Loan Agreement concluded between the Ministry of Public Finance and

Distrigaz Sud SA;· Declaration of Effectiveness dated 6 November 2001;· Legal Opinion on the Amendment dated 17 July 2001 to the Project Agreement;· No Objection from the World Bank for Contracts WBP 3,4,5/1999 WBC 1/2000

dated 14/12/2001;· Notification to Borrower of Extension of Closing Date (31/12/2002);· No Objection from the World Bank for Contract WBC 1/2000 dated 4/03/2002;

II. Rehabilitation Program Structure

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From the total loan amount, the company used for the first two stages of the Project USD 13.9 million to install 240 km polyethylene pipes and services.

Stage 1 (1996-1997) – Pilot Project (beneficiary: ROMGAZ RA)· Replacement of about 18 km steel pipes with PE pipes for DISTRIGAZ SUD SA –

Berceni neighborhood Bucharest.· The works were carried out between May 1997 - April 1998 and totaled USD 1,123,000.

Stage 2 (1996-1998) beneficiary: ROMGAZ RA· Replacement of about 220 km steel pipes with PE pipes for DISTRIGAZ SUD SA

distributed as follows:- WBP-1/1997-125 km in Bucharest (Berceni neighborhood) and Breaza (Prahova

County).- WBP-2/1997- about 95 km in Brasov, Codlea, Fagaras, Ucea de Sus, and Craiova.

· The works were carried out between June-December 1999 and totaled USD 11,600000.The consulting provided by BC Gas of Canada for the first two stages amounted to USD

1,217,000.

Stage 3 (2000-2002) (beneficiary: DISTRIGAZ SUD )· This was the final Program stage and the works were carried out in 2002, consisting in the

replacement of 245 km distribution networks in the cities under Distrigaz Sud SA jurisdiction, distributed as follows:

· WBP-3/1999 – 93 km in Bucharest (Pantelimon, Colentina, Titan, and Dr. Taberei neighborhoods) and Craiova (South-East zone).

· WBP-4/1999 – 73 km in Ploiesti (Soimesti-Suditi, Blejoi-Ploiestiori, Breaza), Galati, Targoviste (Micro 5,6,9 neighborhoods)

· WBP-5/1999 – 79 km in Pitesti, Tg. Jiu, Brasov (Astra, Bartolomeu, and Codlea neighborhoods), Fagaras.

· The selection of the Contractor and Consultant was carried out through an international tender according to the World bank procedures.

· The works were carried out by the joint-venture made by ITALCOGIM s.p.a. of Italy, C.P.L. CONCORDIA of Italy and TMUCB SA of Romania with a total construction amount of USD 12,780,000.

· The consulting services for this stage were provided by Italgas Spa of Italy and totaled USD 121,760.

· The works under the IBRD-financed Romanian Petroleum Sector Rehabilitation Program completed in December 2002.

· The Annex hereto shows the relevant data for the IBRD Loan 3723-RO between 1997-2002.

III. Internal organization and relation with the World Bank

In order to have a good performance of the Rehabilitation Program, Distrigaz Sud SA set up a Project Implementation Unit headed by a Project Manager.

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This PIU was the interface between:

· Distrigaz Sud SA and the World Bank;· Distrigaz Sud SA and the Contractor;· Distrigaz Sud SA and the Consultant;· Distrigaz Sud SA and the Ministry of Public Finance,

And had tasks related to the tracking of works (both quantitatively and qualitatively) and administration of construction & consulting contracts.

The relation with the World Bank specialists was fine as they have a sound expertise in making up and managing contracts, organizing Procurements and monitoring Programs. The invoices issued by the Contractor were paid in due time in 2002.

The only issue we would like to stress out is a difficult communication with the World Bank starting from January 2003, when the delay between asking and receiving an answer increased.

The Loan ended on 31 December 2002 and we would like to have the assistance of the WB specialists by the end of April (final date for withdrawals) so that we could complete the Program optimally.

IV. Conclusion

We may say that the Program objectives have been entirely carried out within SC DISTRIGAZ SUD SA.

________________________________________________Romgaz:

IMPLEMENTATION COMPLETION REPORT GAS SECTOR REHABILITATION PROJECT

performed with World Bank loan Nr. 3723/RO

Gas Exploration and Production Company ROMGAZ II Component

In the PETROLEUM SECTOR REHABILITATION PROJECT -ROMANIA - The World Bank Evaluation Report from 1993, Annex 3.1, C, Art. 39 the strategy for enhancement of oil and gas production has been presented.

The following problems affecting ROMGAZ production were identified at that time: (we quote from the above mentioned document)

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Article 40. “Only 20% of ROMGAZ annual production is being replaced by new reserves. In 1992, the total ROMGAZ gas production was 15.1 bcm and the new gas added reserves was only 3 bcm. The estimated total ROMGAZ reserves are about 300 bcm. The new reserves resulted mostly from revision of previous estimates based on new data from development wells. It is, however, important to step up exploration activities and find new fields which will sustain ROMGAZ’s long term production.” “ However, while ROMGAZ is looking to discover new reserves which will adequately supplement current production, it is important to derive maximum benefits from existing fields.”

Article 41.“The major problems affecting ROMGAZ gas production include water encroachment in gas wells, and sand control problems:

(a) Water problems affect 20% to 25% of the producing wells and have resulted in prematurely killing several wells. The water originates from a number of sources including:(i) Operational errors resulting from improper log interpretation, and depth shifting which

inadvertely lead to locating perforations in water zones.(ii) Water entry from behind the casing due to poor cementing. (iii)Accumulation of condensed water vapor in the bore hole.

(b) In order to correct this problem, the mission agreed that ROMGAZ would need to identify the sources of the water using production logging. It will also be necessary to conduct proper workover to repair each affected well. The workover operation may also require squeeze cementing and remedial cementing of production casing. Coiled tubing services will be required to clean-out and to kick-off production in these wells.

(c) Sand control: Major sand production problem exist in Moldova, Muntenia and Oltenia regions, which affects gas production and well performance. This problem has not been adequately controlled because ROMGAZ lacks equipment and adequate gravel packing placement technology, especially in deeper wells of Boldu fields.

Project Implementation

Project implementation started in 1995. The procurement process was divided in equipment and services. The initial program of procurement was modified during the implementation of the project, some positions from the procurement list were removed and some others were added reallocating the funds, based on the findings and on the results of the first contracts.

The contracts funded from World Bank loan are shown in Table 1. Contracts Financed from IBRD Loan No. 3723 -RO

Crt. CONTRACT CONTRACT SCOPE DATE OF AWARD OF

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No. CONTRACT or SIGNING I. Procurement of equipment

1. WBE 1/95 – Stewart Stevenson Services Inc. (USA)

Nitrogen pump with coiled tubing

7/14/95

2. WBE 3/95 – Geoservices (France)

Bottom hole pressure measurement equipment -4 aparata + 4 laptop computer +4 interactive software programs

26/10/95signed October 27, 1995

3. WBE 5/96 – Dowell Schlumberger Int’l, Inc. (Panama)

Filtration Units skid mounted and spare parts for two years Signed September 17,

19964. WBE 6/97 – Metrolog SARL

(France)10 tensiometre

Signed September 29, 1997

5. WBE 6/96 – Dresser Rand Ltd. (UK)

Alternative Compressors; ng electro compressors de gn Signed October, 1997

6. WBE 7/97 - Friederich Leutert (Germany)

Slickline units, truck mounted –5 pcs. Signed October 2, 1997

7. WBEPIS 2/97 - Geoquest Hannover der Schlumberger

System equipment –1 server, 5 single working stations, 1 double working station etc.

Signed March 3, 1998

II. Procurement of Services 8. WBS 1/95 – Halliburton

Company GmbH (Austria)Sand control - 5 wells (159 Bilciuresti, 180 Hurezani, 194 Urziceni, 432 Rosioru, 164 Bilciuresti)

Awarded 30.06.95Signed August 1, 1995

9. WBS 2/95 – Schlumberger Logelco (Panama)

Complex investigation services – 3 wells (432 Rosiori, 18 Ghindari, 250 D Targu Mures)

Awarded 30.06.95Signed July 14, 1995

10. WBS 3/96 – Halliburton Company GmbH (Austria)

Gravel packing

11. WBS 4/96 – Schlumberger Logelco (Panama)

Complex investigation services Signed –July 26, 1996

Project results assessment

A) Sand control and gravel packing operations assessment.

The operations were performed under the contracts WBS 1/95 and WBS 3/96 signed with

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HALLIBURTON.Important increase of flow rates has been obtained in the underground storage wells (in

average 30-50 thousand cm/well day and over 100 thousand cm/well day in some new open hole consolidated wells in initial phase of production cycle, when the reservoir pressure is maximum).

The increase of flow rates in the production wells from Hurezani and Rosioru are less significant (about 4-5 thousand cm/well day) and are maintained for a shorter period of time (6-7 months) but it is estimated that an increase of recovery factor is obtained through sand control operations under.

B) Geophysical investigation in open hole and cased hole wells were performed under the contracts WBS 2/95 and WBS 4/96 signed with SCHLUMBERGER.

From these operations more accurate information were obtained on the reservoir parameters, fluid content of production layers, and for establishing the gas saturated layers that will be opened, reducing the number of inefficient operations.

C) Procurement of Equipment

All the procured equipment (Table 1) proved to be very useful in our activity.

We encountered a delay in the procurement of Compressor units under contract no. WBE 6/96. The delays were caused first by DRESSER –RAND’s restructuring and afterwards by the successive restructurings of the National Gas Company ROMGAZ.

The reports referring to operations and investigation results were presented to the World Bank when the contracts were finalized and are available at ROMGAZ Headquarters.

Cooperation with the World Bank.ROMGAZ had the full support of World Bank group all along the tender preparation

process (for the bidding documents) and for the implementation of the projects.

The only problem we had during the implementation of Dresser Rand Contract No. WBE 6/96 was that the World Bank didn’t sign the Subsidiary Loan Agreement with DEPOGAZ, for the period 2000-2001, when no payments could be made to Dresser Rand.

(b) Cofinanciers:

(c) Other partners (NGOs/private sector):

10. Additional Information

Not applicable.

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Annex 1. Key Performance Indicators/Log Frame Matrix

Outcome / Impact Indicators:

Indicator/Matrix

Projected in last PSR1

Actual/Latest Estimate

1. Increased participation of private sector investors in the petroleum sector.

No Log Frame was included in the SAR A new Petroleum Law adopted; b/model concession and production sharing agreements are in place; c/oil producer prices are at parity with prices for similar oil from the Mediterranean region; gas price for industry is at parity with border price.

2. Increased domestic production of oil and gas and reduced dependence on imports.

CONPET's corporate development plan is implemented; ROMGAZ is restructured; PETROM is privatized.

3. Reduced pollution from the petroleum sector.

Implemented adequate pollution-reduction measures in the petroleum sector.

Output Indicators:

Indicator/Matrix

Projected in last PSR1

Actual/Latest Estimate

NAMR becomes fully operational as a regulatory authority for the petroleum sector.

Adequate tariff policies are in place; petroleum exploration promotion program is accomplished; private companies participate in the oil & gas sectors.

MOI designs and implements adequate fuel policy, along with a strategy for upgrading the operations of the oil services sub-sector and refineries restructuring.

Refineries are restructured; areas for private investments in oil & gas industries are demarcated.

Improved organization and streamlined operations of PETROM.

Restructured and efficiently operating company.

Improved financial conditions and management of PETROM.

Financially viable, market-oriented entity.

Implemented PETROM's programs for reducing the contamination of agricultural lands and drinking water from crude oil & brine.

Implemented priority-based environmental action plan, designed out of the EBRD environmental study.

1 End of project

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Annex 2. Project Costs and Financing

Project Cost by Component (in US$ million equivalent)AppraisalEstimate

Actual/Latest Estimate

Percentage of Appraisal

Component US$ million US$ millionA MOI 9.20 3.60 0.39B Petrom 55.00 36.75 0.67C Romgaz 122.00 40.28 0.55D Conpet 89.80 52.53 0.58Physical Contingencies 41.40Price Contingencies 28.20C1 Transgaz 3.60C2 Romgaz II 0.80C3 Distrigaz Nord and Sud 22.00

Total Baseline Cost 345.60 159.56Total Project Costs 345.60 159.56

Total Financing Required 345.60 159.56

Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent)

Expenditure Category ICBProcurement

NCB Method

1

Other2 N.B.F. Total Cost

1. Works 168.70 0.00 0.00 99.00 267.70(123.30) (0.00) (0.00) (0.00) (123.30)

2. Goods 24.70 0.00 0.00 0.00 24.70(16.70) (0.00) (0.00) (0.00) (16.70)

3. Services 53.60 0.00 0.00 0.00 53.60(35.60) (0.00) (0.00) (0.00) (35.60)

4. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

5. Miscellaneous 0.00(0.00)

0.00(0.00)

0.00(0.00)

0.00(0.00)

0.00(0.00)

6. Miscellaneous 0.00(0.00)

0.00(0.00)

0.00(0.00)

0.00(0.00)

0.00(0.00)

Total 247.00 0.00 0.00 99.00 346.00(175.60) (0.00) (0.00) (0.00) (175.60)

Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent)

Expenditure Category ICBProcurement

NCB Method

1

Other2 N.B.F. Total Cost

1. Works 22.93 0.00 0.92 0.00 23.85(22.91) (0.00) (0.61) (0.00) (23.52)

2. Goods 121.56 0.00 20.56 0.00 142.12

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(100.62) (0.00) (20.04) (0.00) (120.66)3. Services 0.00 0.00 20.59 0.00 20.59

(0.00) (0.00) (15.38) (0.00) (15.38)4. Miscellaneous 0.00 0.00 0.00 0.00 0.00

(0.00) (0.00) (0.00) (0.00) (0.00)5. Miscellaneous 0.00

(0.00)0.00

(0.00)0.00

(0.00)0.00

(0.00)0.00

(0.00)6. Miscellaneous 0.00

(0.00)0.00

(0.00)0.00

(0.00)0.00

(0.00)0.00

(0.00) Total 144.49 0.00 42.06 0.00 186.56

(123.53) (0.00) (36.03) (0.00) (159.56)

1/ Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies.2/ Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff

of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units.

Project Financing by Component (in US$ million equivalent)

Component Appraisal Estimate Actual/Latest EstimatePercentage of Appraisal

Bank Govt. CoF. Bank Govt. CoF. Bank Govt. CoF.MOI 7.20 1.90 2.00 3.60 50.0 0.0 0.0Petrom 35.00 32.50 36.75 105.0 0.0Romgaz 70.30 32.70 51.20 40.28 57.3 0.0 0.0Conpet 63.10 49.70 52.53 83.2 0.0Transgaz 3.60Romgaz 0.80Distrigaz Nord and Sud 22.00

Data on amount financed by local entities (MOI, Petrom, Romgaz, Conpet, Transgaz, Romgaz II, Distrigaz Nord and Distrigaz Sud) could not be provided by the entities, so actual costs reflect on the Bank-financed amounts.

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Annex 3. Economic Costs and Benefits

Basic Assumptions

Project Investments: The value and timing of project investments is based on the disbursement data in the Integrated Controller’s System. Unfortunately, the beneficiaries were unable to provide data on their own contributions to the project costs.

Value of Incremental Production/Loss Reduction: Romania is a net importer of crude oil and natural gas, and while domestic production is increasing, the country is not expected to become self-sufficient in oil and gas over the next 10 years. Accordingly, incremental production and avoided pipeline losses were valued at import prices, including transport. Crude oil prices for 1997 – 2002 were based on the weighted average OPEC price in each year, plus an assumed $7.00 per ton for transport. Average natural gas prices per toe were assumed to be 64 percent of crude oil prices. The resultant price per MCM is similar to the price of Russian gas at the Ukraine border ($55 – 60/MCM) plus transit to Romania. Projected crude oil prices were based on forecasts prepared by the Energy Information Administration of the US Department of Energy Annual Energy Outlook 2003 with Projections to 2025, DOE/EIA Report #0383, January 9, 2003

The Table below shows the historic and projected border prices for crude oil and natural gas.

Crude Oil GasUS$/ton US$/MCM

1997 141.8 77.71998 94.1 51.61999 134.2 73.62000 207.9 113.92001 178.4 97.82002 181.7 99.62003 199.4 109.32004 185.8 101.8

2005 - 2012 182.1 99.8

Crude Oil and Gas Volumes: The major pipeline rehabilitation efforts were aimed at pipelines serving domestic markets. The corresponding volumes of oil and gas moving through the pipeline networks were assumed to be equivalent to total annual domestic consumption of crude oil, and to total annual household consumption of natural gas. The latter assumption was based on the presumption that most deliveries of gas to industry and power plants were through the high-pressure transmission network. Historic crude oil and natural gas consumption figures were taken from national statistics. These were conservatively estimated to remain constant through to the end of 2012.

Benefits:Petrom Component: According to Petrom, the project had allowed them to increase oil production from existing wells by a total of 412,400 tons between 1997 and 2002. These increments occurred in approximately equal amounts each year. The same level of incremental production was assumed through to 2012. While these same wells may not be able to maintain increased production at this rate, Petrom advised that they are applying the same technology to other fields and seeing similar increases in

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production. Similarly, Petrom advised that the project had resulted in increased gas production from existing wells totaling 200 million cubic meters over 6 years. Again, the same level of average annual production increase was assumed to continue through 2012. The average value of the future benefits stream is approximately US$ 16 million per year. Total investments on this component were US$ 35.6 million. To date, this component has yielded an ERR of 43.8 percent. Estimated ERR through 2012 is 52%.

Romgaz Component: According to Romgaz, investments in production enhancement have increased the average flow rates at 6 rehabilitated gas wells by 30 – 50,000 m3/day. In two other wells, the response has been lower – 4 – 5,000 m3/day – and has only been sustainable for 6 - 7 months. Using an average of these values, total incremental gas production from Romgaz wells is estimated to be 87,600 MCM/year. Investments in this component totaled US$ 17.1 million, and the estimated average annual value of benefits is US$ 8.9 million. The ERR to date for this component is 26.7 percent, and the estimated ERR to 2012 is 41 percent.

DGS/DGN Component: DGS and DGN lack a comprehensive network of meters and were accordingly unable to provide statistics on the current level of gas losses in the distribution network. However, the companies advised that they estimated that pipe replacement had reduced technical losses by 90 percent in the case of DGS and 50 percent in the case of DGN. Technical losses in the network were estimated at between 3 and 4 percent of total flow before the project. The benefit was therefore estimated to be 50 percent of the historic average loss figures – or 1.75 percent of total flow to households. This resulted in an average annual benefit of approximately US$ 10.6 million on a capital cost of US$ 39.8 million. Since roughly half of the pipe replacement took place in 2002, this component currently has a negative ERR. However, it is estimated that the ERR to the end of 2012 will be 22 percent.

Conpet Component: A similar assumption with respect to loss reduction was made for the Conpet component of the project. Prior to the project, losses were estimated to be 0.6 – 0.7 percent of flow in the domestic oil pipeline network and 0.1 percent in the international network. It was assumed that, as a result of the pipe replacement program, oil pipeline losses would be reduced by 50 percent on the domestic network – i.e. to 0.325 percent of flow. The average annual value of this benefit is estimated at approximately US$ 9 million, as compared with a total investment of US$ 45.3 million for this component. The ERR through to 2012 is estimated to be 15 percent.

Consolidated Project: The attached Table summarizes the total investment cost and the project benefits by source. The estimated ERR through 2012 is 32.4 percent. Net present value (discounted at 10% to 1996) is US$ 140 million. The present value of benefits is approximately US$ 240 million. Of these, 40 percent derive from production enhancement at Petrom, 20 percent from production enhancement at Romgaz, 19 percent from reductions in gas distribution network losses, and 17 percent from loss reduction in the crude oil pipeline system.

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Romania Petroleum Sector Rehabilitation ProjectEconomic Analysis - Consolidated Project

(US$ million equivalents) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2012 NPV at 10%

Total Investments 27.01 17.18 43.92 9.09 6.47 8.67 25.44 - - - - $99.92- - - - - - - - - - -

Benefits - - - - - - - - - - - Increased Oil & Gas Production - Petrom - 12.33 8.19 11.68 18.08 15.52 15.81 17.35 16.17 15.84 15.84 $103.22Increased Gas Production - Romgaz - - - 6.58 10.18 8.74 8.90 9.77 9.10 8.92 8.92 $48.91Reduced Oil Pipeline Losses - Conpet - - 0.75 1.80 3.87 7.05 8.97 9.84 9.17 8.99 8.99 $41.59Reduced Gas Pipeline Losses - DGN/DGS - - - 3.93 6.08 5.22 5.32 11.67 10.87 10.65 10.65 $46.29

Total Benefits - 12.33 8.94 23.98 38.22 36.53 38.99 48.63 45.31 44.40 44.40 $240.01

Net Cash Flow (27.01) (4.84) (34.99) 14.89 31.75 27.86 13.55 48.63 45.31 44.40 44.40 $140.08

ERR to 2012 32.4%ERR to 2002 8.6%

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Annex 4. Bank Inputs

(a) Missions:Stage of Project Cycle Performance Rating No. of Persons and Specialty

(e.g. 2 Economists, 1 FMS, etc.)Month/Year Count Specialty

ImplementationProgress

DevelopmentObjective

Identification/PreparationMay 22, 1992

Appraisal/Negotiation03/15-4/9/1993 14 Pr. Energy Specialist (TTL)

(1); Consultant (6); Financial Analysts (2); Environmental Specialist (1); Sr. Gas Specialist (1); Procurement Specialist (1); Unidentified Specialists (2)

06/30-7/10/1993 3 Pr. Energy Specialist (TTL) (1); Principal Gas Specialist (1); Project Advisor (1)

10/4-9; 11-15/1993 2 Pr. Energy Specialist (TTL) (1); Project Adviser (1)

2/6-12/1994 2 Pr. Energy Specialists3/19-24, 1994 4 Pr. Energy Specialist (1); Gas

Specialist (1); Project Officer (1); Principal Environmental Specialist (1)

Supervision

04/07/1995 6 PR. ENERGY SPECIALIST (1); CONSULTANT (3); SR. GAS SPECIALIST (1); SR.PETROLEUM SPECIALIST (1)

S S

06/28/1995 3 TASK MANAGER (1); ECONOMIST (1); OPERATIONS ANALYST (1)

S S

00/00/0000 3 TASK MANAGER (1); ECONOMIST (1); OPERATIONS ANALYST (1)

S S

02/10/1996 5 PRIN. ENERGY SPEC. (1); SR. GAS SPECIALIST (1); PRIN. PETROLEUM ENG. (1); EN. SPECIALIST (1); PROJECT OFFICER (1)

S S

10/04/1996 3 FINANCIAL ANALYST (1); PR. ENERGY SPECIALIST (1); NATURAL GAS SPECIALIST (1)

S S

05/16/1997 3 FINANCIAL ANALYST (1); PR.ENERGY SPECIALIST (1); NATURAL GAS SPECIALIST

S S

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(1)05/17/1998 1 TEAM LEADER&ENERGY

SPE (1)U U

10/07/1998 1 OPERATIONS ANALYST (1) U S05/29/1999 2 PTL (1); PIPELINE

SPECIALIST (1)U S

10/04/1999 3 TEAM LEADER (1); PIPELINE SPECIALIST (1); PROJECT OFFICER (1)

U S

11/23/1999 2 PTL (1); PRIVATE SECTOR SPECIAL (1)

U S

05/31/2001 3 PTL (1); SENIOR OPERATIONS OFF. (1); PIPELINE ENGINEER (1)

U S

03/16/2002 2 TTL (1); LEAD ENERGY SPECIALIST (1)

S S

03/16/2002 1 TTL (1) S S

ICR

(b) Staff:

Stage of Project Cycle Actual/Latest EstimateNo. Staff weeks US$ ('000)

Identification/PreparationAppraisal/Negotiation 737Supervision 2034ICRTotal 2771

SAP does not provide a breakdown of costs by staff week. It does not distinguish between Identification/Preparation and Appraisal/Negotiations, or between Supervision and ICR. Therefore, all costs related to lending are included in the Appraisal/Negotiations entry above, and all costs related to ICR are included in the entry for Supervision. Cost includes trust funds which amounted to US$85,986 for Lending and US$616,100 for Supervision.

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Annex 5. Ratings for Achievement of Objectives/Outputs of Components(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)

RatingMacro policies H SU M N NASector Policies H SU M N NAPhysical H SU M N NAFinancial H SU M N NAInstitutional Development H SU M N NAEnvironmental H SU M N NA

SocialPoverty Reduction H SU M N NAGender H SU M N NAOther (Please specify) H SU M N NA

Private sector development H SU M N NAPublic sector management H SU M N NAOther (Please specify) H SU M N NA

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Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating

Lending HS S U HUSupervision HS S U HUOverall HS S U HU

6.2 Borrower performance Rating

Preparation HS S U HUGovernment implementation performance HS S U HUImplementation agency performance HS S U HUOverall HS S U HU

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Annex 7. List of Supporting Documents

Staff Appraisal Report - Romania: Petroleum Sector Rehabilitation Project, dated March 14, 1994.Agreed Minutes of Negotiations, between the World Bank and Romania.Loan Agreement - Romania Petroleum Sector Rehabilitation Project (Loan No. 3723-RO), dated June 1, 1994.Project Agreements - Romania Petroleum Sector Rehabilitation Project, between World Bank and: PETROM, ROMGAZ, and CONPET, dated June 1, 1994.Amendments to the Loan Agreement and Project Agreements as a result of the unbundling of ROMGAZ.Back-to-Office Reports, aide-memoires, and mission follow-up letters from supervision missions.Audited Financial Statements for the Project and for the implementing entities.Procurement Audit Report

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Additional Annex 8. Environmental Objectives and Environmental Assessment

Environmental ObjectivesThe projects' chief environmental objectives were to:· strengthen institutional capabilities· assist in implementing abatement measures to address environmental pollution

These objectives were substantially achieved : viable and sustainable environmental units were established in each of the companies. All staff received training and are fully operational. All companies have some form of environmental action plan. In some cases, as included in project design, environmental monitoring equipment was secured. A variety of abatement measures were introduced for controlling current pollution sources (e.g. leaks in pipelines, pumps and other equipment, sludge treatment plants, wastewater treatment plant Suplacu etc.), remediating accumulated pollution (contaminated soil cleanup, accumulated sludge treatment), and minimizing future pollution risks (oil spill containment and cleanup systems).

Environmental AssessmentThe project would not result in any additional environmental impacts. On the contrary, its fundamental objective was to eliminate the pollution created by past and current practices in the sector. The SEA was in fact an environmental audit which provided a framework for identifying priority environmental issues, institutional needs to address these issues (training and equipment), and provided a basis for attracting further donor support. All of these aspects were substantially achieved.

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