for official use only czj.oov :3 iiva/€¦ · to the entreprise tunisienne d'activit6s...

Document of

The World Bank

FOR OFFICIAL USE ONLY

CZJ.ooV :3 iIVA/

Report No. P-4924-TUN

MEMORANDUM AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

IN AN AMOUNT EQUIVALENT TO US$5.5 MILLION

TO THE

ENTREPRISE TUNISIENNE D'ACTIVITES PETROLIERES (ETAP)

WITH THE GUARANTEE OF THE GOVEUNMENT OF THE REPUBLIC OF TUNISIA

FOR A

PETROLEUM EXPLORATION PROMOTION PROJECT

December 19, 1988

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

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CURRENCY EQUIVALEN'TS

Currency Unit = Tunisian Dinar (TD)US$1.00 = TD 0.8885 (September 20, 1988)TD 1.00 = US$1.130TD 1,000,000 - US$1,130,000

WEIGHTS. MEASURES AND CONVERSION FACTORS

BD u barrels per dayCM = cubic meterst = tonstoe = tons of oil equivalentCF a cubic feetCFD a cubic feet per dayNV = megawattkWh = kilowatt hourkm1 = square kilometers1 barrel = 42 US gallons

= 159.0 liters100,000 BD of crude a 5MMT per year (approx.)1,000,000 CFD of gas 10 MMCM per year (approx.)

ABBREVIATIONS

CTF Compagnie Tunisienne de ForageESMAP Energy Sector Management Assistance ProgramETAP Entreprise Tunisienne d'Activites Petrolieres8.0.M.T. Houston Oil and Minerals of TunisiaSITEP Soci6t& Italo-Tunisienne d'Exploitations P6trolieresSNDP Societ6 Nationale de Distribution des P6trolesSOTUGAT Soci6t6 de Transport du Gaz en TunisieSTEG Soci6t6 Tunisienne d'Electricite et de GasSTIR Societe Tunisienne des Industries de RaffinageTMP Trans-M6diterranean Pipeline

FISCAL YEAR

January 1 - December 31

FOR OMCIAL USE ONLY

REPUBUC OF TUNIIA

PETROLEUM EXPLORATION PROMOTiON PROJECT

Loan ad Project

Borrower Entreprise Tunisienne d'Activit6s P6trolieres (ETAP)

Guwarmtwr Government of Tunisia

Amount: US$5.5 million equivalent

Tenlm Seventeen years, including a five-year grace period, atthe Bank's standard variable interest rate

FbionedDR PiUL ETAP US$3.5 millionIBRD USS5.5 millionTOTAL US$9.0 million

Map No.: IBRD 21067

Staff ADmibs! Ruort: Not applicable

This document has a resticted distribution and may be used by recpints only in the peronnmanceof their official duties Its contents may not ohierwise be disclosed without World Bank autxhoaon.

MEMORANDUM AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORSON A PROPOSED LOAN

TO THE ENTREPRISE TUNISIENNE D'ACTIVITES PETROLIERES (ETAP)WITH THE GUARANTEE OF THE REPUBLIC OF TUNISIAFOR A PETROLEUM EXPLORATION PROMOTION PROJECT

1. The following memorandum and recommendation on a proposed IBRD loanto the Entreprise Tunisienne d'Activit6s Petrolieres (ETAP), with theguarantee of the Government of Tunisia, for US$5.5 million is submitted forapproval. The proposed loan would be at the standard variable interest ratewith 5 years of grace and 17 years maturity and would help finance a PetroleumExploration Promotion Project.

Backaround

2. Although modest by global standards, oil production is an importantpart of Tunisia's economy: it accounted for 92 of GDP and 202 of exportearnings in 1987. Commercially recoverable oil reserves are estimated at440 million barrels (about 64 million tons), enough to provide another 10 to12 years of production at current rates. However, most reserves are locatedin relatively old oil fields, with about 882 of production coming from two ofthese: El Borma and Ashtart. Production at these fields is entering itsdecline phase, despite efficient secondary recovery programs. There is alsogas production at El Borma (0.5 million toe) which, since it is associatedwith oil, will decline in parallel with oil production. Total oil productionhas decreased at an average annual rate of 3.21 since 1984 and this rate ofdecline is expected to continue in the short term. The anticipated outcome ofreduced petroleum production combined with the expected 5.41 per year averagegrowth in domestic oil demand is that Tunisia could become a net oil importerin 1991-92.

3. With concerted action to maximize the output from fields whichalready have been discovered and to prove reserves in other fields, thedecline in domestic oil production can be slowed, resulting in majormacroeconomic benefits. In the short term, the national oil company ETAP, andsome of the international oil companies (IOCs) operating in the country arebeginning to explore the possibility of bringing on stream small fields whichhave displayed the greatest prospects for success. However, for a sustainedimprovement in domestic oil production, increased exploration activity is alsoneeded to identify and evaluate reserves in other small existing fields.Recent changes in the Tunisian petroleum law (March 1987), which providespecial incentives for small field development as well as a more liberal taxregime, have enhanced the attractiveness of these marginal fields to IOCs.

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Project Obiectives

4. The main objective of the proposed project is to provide the basisfor increasing the rate of discovery and development of Tunisia's hydrocarbonresources through: (i) attracting further private sector participation inexploration of prospective open areas; (ii) strengthening ETAP's technicalcapabilities to assess hydrocarbon potential; and (iii) providing, throughstate-of-the art exploration data acquisition techniques, "leads" which wouldinduce IOC activity in open areas currently left unexplored. The Governmentof Tunisia (GOT) has requested Bank assistance to attain the above objective,given the Bank's past experience with similar promotional activities in otherdeveloping countries. Exploration work will be carried out in compliance withthe country's environmental protection requirements and sound practices of theoil industry. These objectives fit well within the Gc"ernment's overallpolicy for oil exploration which is to rely primarily on private risk capitalfor the financing of exploration and development with its own role beingessentially one of promotion and regulation. This policy is fully supportedby the Bank.

Rationale for Bank Involvement

5. The Bank has been directly involved in Tunisia's energy sectorthrough lending operations in power and gas that were satisfactorilyimplemented. The Bank assisted also ETAP in formulating Tunisia's newpetroleum legislation and in petroleum exploration planning under themultisectorial Technical Assistance Loan (Loan 2197-TUN). The proposedproject would be a timely follow-up to this loan and would allow the Bank tocontinue its active, cooperative role to assist the GOT and ETAP in addressingenergy policy and strategy issues in the petroleum subsector. The Bank plansto follow this operation with a more comprehensive energy project to helpassess and implement energy policies in the post-oil era. The present loanwill provide part of the groundwork for this larger project.

6. Through continued financial and technical support, the Bank can helpETAP to become a technically efficient partner of the oil companies and toattract participation of IOCs, thereby providing additional risk capital fordeveloping the petroleum sector. ETAP could use its enhanced data base tofacilitate the operations of IOCs, especially newcomers, and to help themdetermine further exploration investments. ETAP would also provide a numberof technical services not available elsewhere in the country which wouldpermit more precise evaluations to assist GOT in its policy decision making.This is already the case in the simulation of Ashtart reservoir, conducted incooperation with international services firm specialists under the previousBank financed project.

Project Description

7. The proposed project consists of three components: (i) explorationpromotion technical assistance and training; (ii) geological and geophysicaldata acquisition, processing and reprocessing; and (iii) procurement oflaboratory equipment and material. The components are summarized as follows:

(a) Exploration Promotion Technical Assistance. Joint preparatory workhas led to the identification of six specific areas which are ofpotential interest to IOC's. These six geologic provinces will bepromoted in accordance with the preparedness and progress of thestudies related to each province. ETAP will be assisted by highlyspecialized, external experts to prepare quality promotion packagesmeeting oil industry standards. The country's hydrocarbon prospectsare to be presented to the oil industry in a series of meetings heldin one or two major oil capitals, such as Houston and London,followed by a third presentation in Tunis. After the lastpresentation, the blocks will be opened for bids from interestedIOC's. The first bid round will cover as a priority the Gulfs ofVamtanet and Gabes offshore areas, where adequate data already isavailable. This round is planned to take place before April 1990.The promotional work on the other areas is expected to be completedby end 1992. A Project Unit established in ETAP will supervise theImplementation and progress of the promotion activities.

(b) Data Acquisition, Processing and Reprocessing. This componentincludes new seismic data acquisition, processing and reprocessing ona limited basis. Acquisition of new data and their processing usingmodern techniques will fill in gaps and contribute to the solution ofcomplicated geological and geophysical problems. An airmag surveywill be conducted in the north, where data are non-existant. Theproject will provide a specialized consultant to define theobjectives and modality of the airmag survey, and to interpret thedata. The project will also use new techniques to clean andreprocess old and incomplete seismic data for more reliableinterpretation.

(c) Equipment and Material. The project includes acquisition of:(i) geochemistry laboratory equipment; (ii) computer hardware; and(iii) software packages for reservoir engineering and logprocessing. Procurement of all goods and services, as well as hiringof consultants financed under the Bank loan would be in accordancewith Bank guidelines (see schedule B). An implementation scheduleand map are attached to the Technical Annex. Some of the equipmentwill complement data base software purchased under T.A. Bank Loan No.2197.

Proiect Cost Estimates

8. The total project cost is estimated at about US$9.0 million, ofwhich US$2.5 million are in local costs and US$6.5 million in foreign costs(722). The proposed loan of US$5.5 million will finance 612 of the projectcost. A detailed breakdown of the project's cost estimate is given inAnnex A. Amounts and methods of procurement and of disbursements, and thedisbursement schedule are shown in Annex B. A timetable of key projectprocessing events and the status of Bank group operations in Tunisia are givenin Annexes C and D respectively. The Technical Annex and a map are alsoattached. The proposed loan would cover 852 of the project foreign cost andwould allow for retroactive financing of US$500,000 (82 of the loan amount)for hiring a system analyst specialist and acquiring additional softwarepackages. All of the local costs (US$2.5 million) and US$1.0 million of theforeign cost would be financed by ETAP's internal funds.

-4-

Agreed Actions

9. ETAP has agreed to the following actions: (a) establish and staff aProject Unit (PU). The Unit will serve as the principal focal point forensuring effective project implementation and will have the delegatedauthority to act on all project matters to liaise with and use the services ofall ETA* divisions; (b) procure all services, equipment and software needed inaccordance with Bank guidelines; and (c) organize an airmag survey team forthe northern part of the country prior to preparation of the data package.

Benefits

10. Development of small fields plus new discoveries would allow Tunisiato extend the life span of its total oil reserves and improve itsreservelproduction ratio (currently estimated at 12 years). During the pasttwo years, the level of exploration activities has shown a certain stability(10 to 13 wells per year) despite the enormous slowdown in the worldwide oilindustry; many of these wells were drilled because of previous commitments.Seismic activity in Tunisia decreased by about 372 between 1986 and 1987 andthis level will probably remain unchanged in 1988. There has been a downwardtrend in perm!t relinquishments since 1984. Attracting new companies wouldhelp reverse tais downward trend. It would not be unreasonable to expect inthe short term that additional exploration investments would commit at leastUS$30 million in new areas following the promotional activities, althoughgiven the inherent nature of the project, its full benefits are impossible toquantify in advance.

11. GOT is negotiating new exploration permits with IOCs, both newcomersand already established companies. The newcomers are small- to medium-sizedEuropean and American companies interested in expanding their field ofactivity outside the US or the North Sea. However, due to the absence of asystematic approach in granting exploration permits, negotiations are lengthyand cumbersome. The project will provide technical advisory expertise to ETAPthat will help reduce the delays and ensure that equal information is providedto all interested IOCs.

Risks

12. The principal risk associated with this project, as with allexploration promotion projects, is that oil industry response to the promotionefforts would be weak due to an unfavorable international climate or poorerthan anticipated geology. This risk is considered acceptable; the alternativeis either that IOCs activity will be held back for lack of information or thatIOCs expenditure based on poor information may itself have negative resultswith an even less desirable demonstration effect. The proposed course ofaction is more appropriate than either of these alto-natives.

Recomoendation

13. I am satisfied that the proposed loan would comply with the Articlesof Agreement of the Bank and recommend that the Executive Directors approvethe proposed loan.

Barber ConablePresident

Attachments:

- Technical Annex- Map IBRD 21067

Washington, D.C.December 19, 1988.

-6-

Annex A

TUNISIA - PETROLEUM EXPLORATION PROMOTION PROJECT

Project Estimated Costs and Financing Plan(US$ '000)

Estimated Costs /a

ForeignLocal IBRD ETAP Total

(A) Exploration Promotion and TechnicalAssistance

(1) Consultancy 400 400(2) Training 200 200(3) Special Services 200 200(4) Exploration Promotion 100 600 700

Subtotal (1) 100 1,400 1,500

(B) Data Acquisition and Processing(1) Seismic Survey and Processing 800 1,600 2,400(2) Gravity and Airmag 500 300 800(3) Data Reprocessing 3700 Km 700 700

Subtotal (2) 2,000 1,900 3,900

(C) Eauipment and Material(1) Geochemistry Laboratories 320 320(2) Software Seismic + Hardware 250 250(3) Equipment Reservoir Engineering 130 130(4) Software Reservoir Engineering 180 180(5) Software Logs Etc. 120 120(6) Software Geological/Geophysical/

Including Modeling forComputerization of Geophysicaland Geological Mapping 600 600

(7) Sedimentology Laboratories 400 400Subtotal (3) 1,290 710 2,000

Total Base Cost (1988 US$) 2,100 4,600 710 7,400Physical Contingencies 200 410 130 740Price Contingencies 200 500 160 860

TOTAL COST (current US$) gQ 50 l.

Financing Plan(US$ Million)

Local Foreign TotalIBRD - 5.5 5.5ETAP 2.5 1.0 3.5

TOTAL 2.5 6.5 9.0

/a net of taxes and duties

-7-

Annex B


I. PROCUREMENT

Project Element Procurement Method TotalICB LID Other Cost

(US- Million)

Studies and ConsultancyServices and Training 0.40 1.00 1.40

Seismic Surveys and Processing 1.60 1.60Gravity and Airmag 0.30 0.30Computer Packages Equipment a: dand Material 0.97 0.97

Laboratory Equipment 0.33 0.33Contingency 0.90.

TOTAL 1.90 1.70 1.00 5.50

II. DISBURSEMENTS

Category Amount Percentage-(us$ million)

1. Consultancy, Training and Special Services 3.3 100S of ForeignExpenditure and802 of LocalExpenditure

2. Equipment and Material 1.3 1002 of ForeignExpenditure and

0.9 901 of LocalExpenditure

3. UnallocatedTOTAL 5.5

1II. ESTIMATED IBRD DISBURSEMENTS

Bank 1Y 89 90 91 92- (US$ million)

Annaal 1.6 0.4 2.8 0.7Cumulative 1.6 2.0 4.8 5.5

Annex C


Timetable of Key Project Processing Events

(a) Time taken to Prepare: eight months

'b) Prepared by: ETAP with IBRDAssistance

(c) First IBRD Mission: January 1988

(d) Appraisal Mission Departure: June 1, 1988

(e) Negotiations: November 1988

(f) Planned Date of Effectiveness: March 1989

9Annex DPage- 1 of 2

DAt JStAs oFr RO UTION IN TUNMIsA

A- 5 I m L5 IS C ITS (As 2 r 1p ul

Loan Or 15illion AuntCredit l&n s _WNhK L Zin bR IM Udihurzhegforty-tour Loans and Credits fully Disbursed 728.93 75.16

1797 1930 Ottico dosPorts NationOUX Third Port 35.20 1.S2

1961 1961 Rpblic of Tunisia Fourth Education 21.00 8.7419t 196) Repltic of Tunisia Small-Scale tIdustry Devlolpnt 30.00 4.471997 1981 Republic of Tunisia Rorthmest Rural Development 17.54 3.27200S 1981 Rpublitc of Tunisia Health and Population 8.50 3.2020S2 1941 Republic of Tunisia Grain Distribution and Stor*ge 38.00 5.652108 1982 Republic of Tunisia fifth ighway (Rural Roads) 3S.S0 10.992134 19OU S031 Sixth Water Supply 30.SO .102157 19" Reulic of Tunisia Irrigation Oevelop t 15.30 3.412197 192 Republic of Tunisi Technical AssistaneC 4.50 .E82223 1943 Repubiic of Tunisia Urban Delopnt Itt 2S.00 17.362230 19U3 RepOlic Of Tunisia Education V 27.00 17.362234 1983 Reublic of Tunisio Central Tunisia Irrigation 13.70 5.78225S 1983 Republic of Tunisia Urban Swerae t 34.00 22.532289 1963 Republtc of Tunisia Sfan Flood Protection 25.0 3.942301 1983 SOFOMECA Industry (IV) foundry 16.80 .782346 1984 Repblic of Tunisia Mining Technical Assistance 13.40 8. S32368 1984 Republic of Tunisia Seventh Water Supply s0.o0 28.922429 1984 Repblic of Tunisia Second Urban Transport 33.00 2S.0124S 1984 SoCidti Tunisienne de

Plglectricitd et du Oat Fourth Power 21.52 8.522502 1935 Republic of Tunisia Northwest Agricultural Production 1500 13.912S22 1985 Republie of Tunisia Export Industries 322.0 23.612SS4 1985 Republic of Tunisia Second Electrical

and Mechanical Industries 32.50 23.502573 1965 Rpublic of Tunisia trrigation Managnt Improvewmnt 22.00 18.20260S 1985 R"ublic of Tunisia Gabes Irrigation 27.70 20.26273S 1986 Republic of Tunisia Energy conservation 4.00 3.992736 196 Republic of Tunisia fourth Urban DeveloP_t 30.20 29.882754 19" R"ublic of Tunisia Agricultural Sector Adjustment 150.00 58.732781 1967 Reub ic of Tunisia Industrial & Trade Policy Adjust. 150.00 62.41285 1967 WT t tv 30.00 26.272870 1987 Re1lic of Tunisia Agriculture 20.00 17.962896 1 Reubl ic of Tunisia Hi_ Maintenance

8 Rehabilitation /a 63.00 63.002911 1968 Reublic of Tunisia Secod Small & Mdim Scale

nd. Devlop. /a 28.00 28.002962 1966 Reublic of Tunisia SAL t /it .5*068 - _5LA

TOTAL 1,979.29 75.16 720.71Of Wtich has be_n rpaid .44SL.M 12M

Total Mo Outstanding 1.S31.9 62.61Amunt Sold 37.86

ot which has ben repaid 2 15.18Total now hold by Sank and tDA 1JZLiA 5141

1,516.80

total Undisbursed 720.71

/a Not yet effective.

2831L/o0ec_r 19. 1986

- 10 -

Annex DPage 2 of 2

B. ~TtEMIfFCT OF !fe !UVEITNIMTC XE TuMZas tAt of £ItDrEIe 20. 1OMsl

Fiscal Amount at uSS millionyear IStAlluM LAM T YAL

1962 NPK fnsra1s Fertilizers 2.0 1.5 3.S1966 dci4td Mat10nale dInvestissmnt

(now 681T) Oov. Finanee Co. 0.6 0.61969 COFSt Tourism (now NOT) eov. Finance Co. 8.0 2.2 10.21970 Soctitt Nationale do nvestissement

(now 3O9t) Oev. Finance Co. 0.6 0.1973 Sociti Touristique et N6teliire

RY SA Tourism 1.6 0.3 1.91974 tndustries Chimiques du Fluor Chguicals 0.6 0.61975 Soctiti d'ltudes et de

O6voloppmnt de Sousso-Nord Tourism i 2.5 0.6 3.11978 301T Oev. Finance Co. 1.2 1.219" Socdtd Tunisienne do Leasing Leasing Co. - 0.5 0.51984 Soctiti Winlire de Spath Fluor

et de Sarytine (Fluobar) mining Co. 0.2 0.21986 Socidti Tunisionne de Leasing Leasing Co. 2.5 - 2.S1986 Sociitd Industrielle des Textiles

(SiTmX) Textiles and Fibers 5.0 3.4 8.41987 Adwya S.A. Pharmceuticals 2.0 0.3 2.31987 Rozi EdiIdilima Industrializata

CRE1T S.A.) Prefabricated Panels 1.3 0.4 1.7196i COW£T1 engiering gn0gne.ring Services - 0.4 0.4198U Socidtd des Industries Textiles S

Riunies S.A. (SITER) Textiles & fibers JC Z .

Total Gross Comitments 27.4 15.0 42.4

Less cancellations. Terminations.Repayments and Sales 1 .z 11

Total Commitments Meld by IFC MA L2 L

of which Undisbursed 10.1 0.4 10.5

4798/p8from IFC/Septem_r 1988

- 11 - Annex E

TECHNICAL ANNEX

- 12 -

Technical AnnexPage 1 of 18

TUNISIA


Table of Contents

Pageof Technical Annex

I. The Setting

Energy and the Economy .. ..... 2Energy Supply and Demand and Pricing . . .... ........ 2

II. The Petroleum Subsector

Institutions .............................. ................... 6Exploration and Production .. . .............. ............ .... 7Refining and Supply of Products ........ ................. 7Sector Strategy and the Role of the Bank ................... 8

III. The Borrower

Organization, Management and Staffing . . 9Accounts and Audit ... ....... .... ..... ............... . 11Insurance ............ ..... 11Financial Performance and Prospects .... 12Financial Strategy .. . ........... ............. . 14

IV. The Project

Objectives ........................................ . ........ 14Description ........... ... .................................... 14Project Implementation ......................................... 15Implementation Schedule ..... ............................. . .. . 16Project Cost and Financing Plan .. ........................... 16Procurement, Disbursement and Retroactive Financing .......... 17Environmental Aspects ........................................ 17Reporting .................................................. 17Benefits ..................................................... 18

Attachments:la. Historical Petroleum Production (1984-87) and Forecast (1987-91).lb. Energy Demand Forecasts (primary energy, 1987-2001)2. Brief History of Petroleum Exploration in Tunisia3. ETAP Organization Chart4. Implementation Schedule5. Map

- 13 -


L THE SETTING

Energy and the EconomO

1. The evolution of the Tunisian economy is very sensitive to petroleumproduction and prices. During the Sixth Plan (1982- 86) petroleum exportsaccounted for an average 362 of total Government revenues. Tunisia nowconfronts an adverse combination of declining hydrocarbon resources, lowerprices for oil exports and rising domestic energy demand. Despite thesetrends, oil still accounts for about 9% of GDP and 201 of export earnings.

2. The Seventh Plan (1987-91) aims for 41 annual growth in GDP whichimplies inter alia 82 annual growth in non-oil exports. The implications ofthese targets for the energy sector are numerous including particularly anaccelerated exploration program and the implementation of energy conservationmeasures for the different segments of the energy market (Tunisia energy/GDPelasticity at 1.4 is unusually high). Unless new discoveries are made and putinto production, Tunisia will become a net oil importer in the early 1990's,which requires already at this stage a careful assessment of the energy supplyoptions, and the initiation of appropriate measures.

Energy Supply and Demand and Picing

a. Energy Supply

3. Tunisia's indigenous resources comprise essentially crude oil andnatural gas. Other resources, such as lignite and hydro-power, areinsignificant. Among the non-conventional energy resources, Tunisia enjoysgood solar energy prospects and winds of fair velocity for a considerable partof the year. However, these resources have just started to be exploited andare not expected to play an important role in the foreseeable future.

4. Tunisia's proven and probable oil reserves are estimated at 70million tons, of which 64 million tons are recoverable. Most eserves are inrelatively old fields. Over 1976-83, production of crude oil increasedsteadily from 4.8 to 5.5 million tons; production started to decline in 1984,reaching only 5.0 million tons in 1987. The two main fields, Ashtart and ElBorma (see Map IBRD 21067), with a production of 4.3 million tons in 1987accounted for 872 of domestic production; their output is expected to declineto 3.6 million tons in 1991. Small fields discovered at Gremda, Ezzaouia andMahanes and reserves shared with Libya at El-Bouri, offshore of Gabes, mayeventually push output upwards marginally.

5. Tunisia's gas reserves (proven and probable) are estimated at 93billion cubic meters (80.5 million toe); the Miskar field, offshore of Gabes,accounts for two thirds of these reserves (26 million toe proven and another26 million probable). The development of this field discovered in 1974 willinvolve technical challenges (complex geology, gas quality), 1/ as well aseconomic ones (market size, competitiveness with alternate fuels). As aresult, although reserves are much greater than those of crude, the productionof gas was only 0.4 million toe in 1987, all of it associated El Borma gas).

1/ The gas is sour; nitrogen and carbon dioxide represent 1/3 of itscomposition.

- 14 -


6. Tunisia also has access to Algerian gas as the 2,500-kmTrans-Mediterranean Pipeline (TMP) which connects the Hassi R'Mel field inAlgeria with Italy across the Tunisian territory. The arrangements withAlgeria and Italy entitle Tunisia to royalty gas (a percentage of throughput)and, for additional quantities, provide for Tunisian gas purchases under takeor pay type arrangements. The actual quantities of Algerian gas delivered toTunisia increased from 380 thousand toe in 1984 to 900 thousand toe in 1987;as gas largely substitutes fuel oil, the actual intake essentially depends onthe relative prices of the two.

b. Energy Demand

7. Tunisia's energy consumption has increased from 1.0 million toe in1970 to 3.9 million toe in 1987 - an average annual growth of 102. Growth was

particularly high over 1970-80 (112), and tapered off over 1980-84 (52).Tunisia's energy needs are met almost exclusively from hydrocarbons; in 1987,petroleum products accounted for 681 of total demand and natural gas foranother 30X - hard coal, coke and hydropower accounted for the 21 balance.

8. On a sectoral basis, industry represents the largest share of energyuse (421), followed by transport (281), households (151), agriculture (101)and the tertiary sector (51). Since it became available in Northern Tunisiain 1984 (para. 6 above), Algerian gas has been largely used to substitute fueloil, and to a smaller extent diesel oil in power generation. 1/ As theeconomic prices of imported gas and fuel oil are very close, the consumptionof this gas can fluctuate considerably from one quarter to the next, the powerplants being dual fired and aiming at the use of the cheapest fuel at anypoint in time.

9. Despite the slowdown in energy consumption growth in the past fewyears, energy demand is expected to grow rapidly during the Seventh Planperiod (1987-91) as shown in the demand forecast (Attachment lb). If noenergy conservation measures are taken, demand is anticipated to increaseduring the Plan period by 5.41 annually to reach 4.6 million toe in 1991.

c. Energy Pricing

10. Petroleum products, natural gas and electricity prices are fixed byGOT, taking into account their economic cost and the Government's fiscalrequirements.

1/ Algerian gas is also used, although in much smaller quantities, as a fueloil substitute in industry, and as an LPG, and diesel oil substitute insmall industries, hotels and the commercial and residential sectors.

- 15 -


11. Regarding petroleum products, the prices can be summarized as follows:

Actual and Relative Prices of Products(US$/MT) /a

Retail Ex-Refinery CIF Bizerte DifferentialActual Relative Actual Relative Actual Relative 2 /b

LPG 278 0.52 109 0.38 183 1.21 -40.4Super Gasoline 554 1.04 303 1.05 167 1.07 82.1Regular Gasoline 531 1.00 290 1.00 151 1.00 92.5Kerosene 181 0.34 126 0.44 150 0.99 -15.7Jet Fuel 181 0.34 126 0.44 150 0.99 -15.7Diesel Oil 328 0.62 243 0.84 145 0.96 67.9Fuel Oil 114 0.21 82 0.28 80 0.59 1.9

/a Official price structure: April 29, 1988. CIF prices based on FOB Genova(mid-1988) plus freight, ocean loss and insurance.Exchange rate: US$1 - 0.885TD

'b Differential between CIF and ex-refinery prices.

Source: Ministere de l'Economie Nationale; World Bank Estimates.

Heavy subsidies of most petroleum products were eliminated in 1987,when the GOT raised retail prices in a major effort to generate revenues. Thedrop in international prices during 1986 contributed to adjustments at theex-refinery level: gasoline and gasoil are now priced above their opportunitycosts. LPG remains subsidized at both the ex-refinery and retail levels. LPGrepresents about 7.5% of Tunisia's consumption of petroleum products, and thenet subsidy (minus tax revenues from LPG sales) amounts to about US$8 millionannually.

12. Regarding natural gas, a distinction has to be made between the Southof Tunisia which is supplied largely with El Borma associated gas and theNorth which is supplied with imported Algerian gas, and the end use:

1. For power generation in the South, gas is obtained by the utilityfree of charge. Since this gas accounts for 302 of the primary fuelrequirements of the utility, the financial impact on the utility'selectricity production costs is significant. However, any economicdistortion is limited by the fact that electricity prices themselvesare generally in line with economic costs. In any event, the use ofthis free gas will diminish substantially by mid 1990's when El Bormaproduction is itself anticipated to taper off. In the North,

- 16 -


the current policy is to price the gas at its fuel oil equivalent(official price less lOS production tax from which the utility isexempted).

2. Regarding other uses (both in the North and in the South), theinformal policy until June 1987 had been to price natural gas at theposted price of fuel oil to reflect its cost of supply and toencourage substitution in the industrial market, while maintainingtariffs already in effect for town gas to tertiary markets. A newstructure for gas prices decreed in 1987 provides for three tariffs(high, medium and low pressure), a fixed charge, a capacity charge(not applicable to low pressure customers), and an energy charge.The structure is appropriate in that it separates the fixed andvariable costs of supplying gas to different consumer categories, andprices are all above their opportunity costs to the economy.

13. The electricity tariffs in effect in 1986 reflected long-run marginalcosts of supply (LRMC) at that time. This was the result of GOT decisionstaken to achieve this objective, combined with lower international oil pricesat that time. I/ Tariffs were increased by 5.22 in July 1987, enough to coverSTEG's fuel costs and financial obligations and still generate a positive cashflow until 1989. Initial Bank estimates suggest that a tariff increase of atleast 32 will be necessary at that time to cover new generating andtransmission costs. Based on the findings of the ongoing interfuelsubstitution study and fuel options retained for future power generatingunits, LRMC will be calculated to allow for tariff level adjustments after1989.

d. Supply Demand Balance

14. By 1991, Tunisia's consumption of oil products and natural gas isexpected to reach 4.4-4.6 million toe (para. 9 above). Against thisbackground, and as shown in Attachment la, production of oil and gas(including associated El Borma gas) will only be of the order of 4 milliontons. Tunisia will thus become a net energy importer. The main challenge forthe Government is to adapt the economy to this new environment includingparticularly the implementation of measures aimed at encouraging non-oilexports. Regarding the energy sector, on the supply side, the Government hastaken two main measures thus far: (i) an interfuel substitution studysupported by the Bank is presently underway which aims to define Tunisia'sfuture fuel options, including imported coal for power generation and theindustrial sector; and (ii) the implementation of new exploration legislationaimed particularly at attracting oil industry interest, which is beingfollowed by a renewed promotional effort to be supported by the proposedProject. On the demand side, a number of measures have already been takenincluding: (i) the adoption of pricing policies aimed at discouraging the

v/ They were used to measure the fuel cost component of the marginal cost.

- 17 -Technical AnnexPage 6 of 18

consumption of petroleum products (para. 11 above); (ii) the introduction ofenergy conservation legislation and the establishment of an adequately staffedand equipped energy conservation agency which is inter alia entrusted with theenforcement of the conservation law; and (iii) an ESMAP supported energyefficiency study for the household and tertiary sectors. All these measureswill help the Tunisian economy cope better with the status of a net petroleumimporter.

U. THE PETROLEUM SUBSECTOR

Institutions

15. The policy making body in the energy field in Tunisia is the Ministryof Energy and Mines. It also oversees the activities of the publicenterprises in the sector. The main companies are as follows:

a. ETAP (Entreprise Tunisienne d'Activit6s Petrolieres) is the mainpublic enterprise in petroleum exploration and production. ETAP isthe designated national partner of all new exploration ventures inTunisia, commercializes the State's share in the producingconcessions and coordinates and arranges for imports of petroleumproducts. As ETAP's would be the borrower under the proposedProject, its operations are examined in Chapter III.

b. STIR (Societe Tunisienne des Industries de Raffinage) owns andoperates the only refinery in the country located at Bizerte.

c. SNDP (Societ6 Nationale de Distribution des Petroles), distributespetroleum products - its market share is of the order of 402. Therest of the market is shared amongst 7 private distribution companieswhich are linked with major international oil companies.

d. STEG (Societe Tunisienne de l'Electricite et de Gaz) is responsiblefor the generation and public supply of power as well as theacquisition, transport and distribution of natural gas.

A 90X-owned subsidiary of ETAP is involved in drilling, 1/ and another one,99.8S-owned, operates gas pipelines (Sotugat). In addition a relatively largenumber of companies have been set up by the 4 companies above (together orseparately), with domestic banks and/or foreign entities to operate oil

11 CTF (Compagnie Tunisienne de Forage) owns and operates five drillingrigs. Two rigs are essentially used in workover operations on Ashtart(offshore) on a permanent basis, and the other three in workoveroperations at El Borma, and occasionally in exploratory drilling. Therigs are operated on a competitive basis with the private ones as there isno obligation to use CTF's services.

- 18 -


fields 1/, to own the Tunisian portion of TIP, to own and operate whiteproducts pipelines, to provide offshore support services, to recyclelubricants etc.

16. Exploration is essentially undertaken by foreign oil companies, andlargely by the bigger multinational ones, although there has been someinterest demonstrated by the smaller independents. Seven companies, mostlyaffiliates of the majors, are involved in petroleum products distribution,where they compete against each other and with SNDP. In addition, small,privately owned Tunisian companies have been successful in the provision ofservices notably for the offshore. In all, the policy framework in place haspromoted the coexistence of the private and public sectors, and the twooperate well together.

ExdloraLion and Produetion

17. A new legal framework was introduced in Tunisia in March 1987 whosemain objective was to provide adequate incentives to industry for thedevelopment of medium and small fields, particularly for gas deposits. Thefinancial terms were improved by accelerating the payback through a moreadvantageous fiscal regime, gradually increasing royalties, lower customduties and taxes and a better regime for the taxation of residentexpatriates. In addition, simplified procedures were introduced to obtainpermits, and to seek extensions of old ones. ETAP's share is carried throughexploration - in the event of a commercial discovery it has the option to takea share, usually of the order of 50-552. When this occurs, ETAP has toreimburse its share of the exploration expenditures and finance on a pro ratabasis its share of development. The framework appears reasonable underTunisia's circumstances, as it offers better than average terms, and at thesame time, allows the Government, through ETAP, to monitor the activities inthe sector without investing in exploration.

18. When exploration was at its peak, in 1980, areas under permit covered165,000 km2; as of end-1987, the 23 exploration permits in effect covered anarea of only 86,000 kma. Similarly from an average of 14 exploration wellsdrilled per annum over 1983-85, over the past two years, only 11.5 wells weredrilled on average. The decline reflects essentially the worldwideconsequences of the drop in oil prices in recent years. A history ofexploration activities in Tunisia is attached as Attachment 2.

Rerninl and SuIMly of Products

19. The refinery at Bizerte is a simple hydroskimming facility with acapacity of about 1.5 million tons. Overall, the refinery can satisfy about60S of the domestic demand, so that the balance of products is imported.Furthermore, fuel oil represented in 1987 about 302 of the domestic demandagainst 402 of the refinery's output so that the refinery's excess fuel output

1/ SITEP owns and operates El Borma, SEREPT, a 50-50 venture of ETAP and ElfAquitaine (France) operates the offshore Ashtart field, and SODEPS whereETAP holds 50S and Agip (Italy) and Fina (Belgium) 252 each operates aconcession referred to as MLD.

- 19 -

Tochnical AnnexPage 8 of 18

is exported. In practice straight run low sulfur fuel oil is exported andhigh-sulphur fuel oil is imported for domestic use. STIR Is proposing toorder a topping plant to increase the primary distillation capacity at Bizerteto three million tons.

20. Approximately 2.7 million toe of refined products are imported intoTunisia annually. This task has been entrusted, since 1974, to ETAP. At amonthly meeting, each distributor makes its requirements known, and ETAPplaces orders accordingly, under the supervision of a Procurement Board. l1These arrangements were established at a time when shortages prevailed, andthere were benefits in consolidating procurement through a Governmentcompany. Furthermore, they still present the advantage of facilitating thecollection of taxes and duties on petroleum products. However, in today's oilmarket it is not clear that these arrangements still represent the least costand a simplest way of ensuring the country's imported petroleum needs.Consequently, the Government has set up a task force to examine alternativeinstitutional arrangements for oil products imports and the results of thiswork are expected in early 1989.

SeetorStrategY and Role of the Bank

21. In the short run, the most pressing priority is to accelerate oilexploration. In this respect GOT's strategy is to attract risk capital frominternational oil companies. Measures introduced so far include the adoptionof a new legal framework for petroleum exploration which has been reasonablysuccessful in maintaining industry interest, but additional efforts will berequired to bring back the exploration activity to the levels of the early1980's. Complementary Government measures include diversifying the country'sexport base and developing alternatives to oil for domestic energyconsumption. On the demand side, GOT has undertaken a series of measuresaimed at rationalizing energy use through both regulatory measures and aprogram of energy conservation.

22. The Bank has been directly involved in Tunisia's energy sectorthrough seven lending operations. Two loans were made for gas transport anddistribution; 2/ and four loans were made for power generation, transmissionand distribution. 3/ In general, project implementation has beensatisfactory. Difficulties were encountered mostly in compliance withfinancial covenants; however GOT was able to comply with a broader covenantrequiring it to adjust the prices of the main petroleum products sold

11 Commission des Marches.2/ Loan 724-TUN of February 1971 (PPAR no. 1078 of March 12 1976) and Loan

1864-TUN of May 5, 1980 (PPAR under preparation).31 Loan 815-TUN of March 19, 1972; loan 1355-TUN of December 23, 1976; loan

2003-TUN of May 26, 1981; loan 2455-TUN of June 27, 1984. ProjectPerformance Audit Reports have been issued for the first three (Report2521 of May 24, 1979; Report 4456 of April 22, 1983; Report 7326 of June23, 1988). The last loan is still being disbursed.

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domestically to international levels - this is an important achievementconsidering the heavy subsidies which prevailed until the mid-1980's. Morerecently, a loan was made towards energy conservation, 1/ whose implementationis now progressing well after a slow start. Furthermore, a technicalassistance loan 2/ also benefited the energy sector, since it provided forenergy audits and computer facilities for ETAP.

23. The Bank is also providing technical assistance to the Government incarrying out future interfuel substitution studies of options and of thepotential for energy efficiency. Both these studies are being carried outunder the aegis of the joint UNDP/World Bank Energy Sector ManagementAssistance Program (ESMAP) (para. 14 above). Furthermore Bank staff hasadvised the Government in the establishment of the legal and institutionalframework for energy conservation which is now being supported by theconservation project referred to above.

24. The proposed Project is the outcome of a dialogue, over the past twoyears, between the Bank and the Government, which has resulted inter alia in anew framework governing oil exploration. Through its involvement in thisProject, the Bank will be in a better position to assist ETAP in its petroleumpromotion efforts, a high priority activity, and to ensure that promotionexpenditures are limited to the minimum required to enhance the atractivenessof the selected geological areas to the oil industry. Furthermore, the Bankhas initiated a dialogue with the Government on the institutional role ofETAP, which aims particularly at weaning ETAP from Government subsidies andconverting it to a more autonomous petroleum company. In the coming years,the Bank will continue to place priority on the restructuring of the sector,with a special emphasis on the performance and accountability of the publicenterprises involved in petroleum exploration, refining and distribution.

D. THE BORROWER

Organization, Management and Staff

25. ETAP was established under Law 72-22 of March 10, 1972 complementedsubsequently by Decree 73-173 of April 16, 1973. It is subject to commerciallaw and is empowered to enter into financial transactions with third parties.Its initial mandate was (i) to carry out studies involving petroleum; (ii) totrain domestic petroleum personnel, and even foreign personnel coming toTunisia for this purpose; and (iii) enter into different kinds of transactionsrelated to the hydrocarbons sector. In practice, ETAP has been acting on theGoverament's behalf whenever transactions of a commercial nature involvinghydrocarbons were taking place and conld not be carried out directly by aGovernment Department.

26. The main focus of ETAP's activities at present is petroleumexploration and development. Within the policy framework laid down by the

1/ Loan 2735-TUN of July 3, 1986.2I Loan 2197-TUN of 1982.


Ministry of Energy and Mines and under the guidance of that Ministry, ETAP isentrusted vith the negotiation of petroleum exploration agreements with IOCs.Most of the agreements in effect, and all of those entered into since 1978,provide that ETAP is carried through exploration and entitled to a share ofproduction under the joint venture agreements with oil companies. ThereforeETAP participates ab initio in the joint venture operating committee as a fullnon-operating, voting partner.

27. Four of ETAP's ventures have lead to discoveries as follows:

ETAP - Main Producing Concessions

Production (thousand tons)

Area ETAP (2) Operator 1985 1986 1987Ashtart 50% Serept 1,210.1 1,160.1 1,011.4Tazerka 202 Shell 34'.7 258.9 239.0M.L.D. /1 502 Sodeps 123.0 129.0 163.8H. Guebiba 51S ETAP /2 35.3 70.1 40.9

In 1987, these four concessions accounted for nearly 302 of Tunisia's oilproduction. Three concessions where ETAP holds shares are now beingdeveloped:

ETAP - New Producing Areas

Area ETAP (X) Operator Expected ProductionGrenmda 51S H.O.M.T. /3 50-60,000 tonsEsztouia 552 Marathon (US) 250-300,000 tonsMahanes 50% Total (France) 60-70,000 tons

1/ Makhrouga-Laarich-Debbech.2/ During the first two years, the opertor was Tenneco.3/ Houston Oil and Minerals of Tunisia, a Tenneco affiliate.

ETAP's involvement in exploration and development, and its exposure toindustry practices has enabled the company to develop a solid body ofknowledge and experience, so that it now operates one field (H. Guebiba), andETAP personnel on secondment assists foreign companies in carrying out theirprograms. Therefore ETAP is strengthening its capability to carry out limitedpetroleum operations on its own account. ETAP is focussing its initialefforts on areas which do not present excessively complex problems and whereits efforts are likely to complement these of the IOCs. This may includeapplying for concessions in the same manner as private companies, particularlyin areas with small fields (which are common in Tunisia) and gas proven areasrelinquished by IOCs. It may also include operating "sole risk" under theterms of existing con essions where the IOC partner is unwilling to act asoperator for sole ris&c operations.

- 22 -


28. In addition, ETAP is entrusted with the marketing of theGovernment's share in the old discoveries (particularly El Borma crude) andarranges for the importAtion of the national requirements in petroleumproducts (para. 21 above). These activities entail no risk, being carried outon a commission basis.

29. ETAP is organized in six departments, three of which are of atechnical nature (exploration, production, and studies) and three arenon-technical (administration, commercial, and finance). An organizationchart of ETAP appears in Attachment 3. ETA? staff is about 320, of which 126are engineers (about 30 engineers are on secondment with other oilcompanies). The staff is competent and participates in technical activitiesincluding geological survey, geophysical data acquisition, datainterpretation, and drilling monitoring.

Aecoilts and Audi

30. ETAP maintains its books in accordance with the Tunisian accountingcode of 1968, which in general conforms to generally accepted accountingpractice. The exploration and development activities are separated from thosecarried out on the Government's behalf; for the latter, ETAP acts essentiallyso a broker and normally does not take possession of the products 1/.Unfortunately, ETAP carries high levels of arrears on account of late paymentsby STIR and SNDP, the public enterprises, which are financed by ETAP'sinternal funds. In order to better assess the financial position andprospects of the exploration and production activity, it will be necessary toseparate those accounts from those concerned with oil trading. As a result,during negotiations assurances were obtained that from FY 1988 onwards, ETAPwill prepare on a Pro-forma basis distinct Income Statements, Balance Sheetsand Sources and Application of Funds Statements for the two activities.ETAP's accounts are usually prepared within three months from the end of thefiscal year, and, in accordance with Tunisian regulation, are subjected to anindependent external audit. Assurances were obtained at negotiations thatETAP will continue to have its accounts audited by independent auditorssatisfactory to the Bank, and submit those to the Dank within six months fromthe end of the year under review; furthermore from FY 1988 onwards, theauditors will formulate an opinion about the pro forma accounts of the twoactivities referred to above.

31. ETAP has a special unit in charge of internal audit and the audit ofthe conecessions. It is staffed by two accountants assisted by fixed contractstaff. Considering that the external auditors, under Tunisian Law, arerequired to carry out the audit on a permanent basis, the arrangements forinternal audit are satisfactory under the circumstances.

bcAne

32. ETAP follows the policy of insuring its assets against all risks(fire, earthquake, accidents etc.) and not only against fire as required under

1/ When the contractual arrangements so require, ETAP does acquire products,but then, only for short periods. This is not speculative in any waysince ETAP only acquires products on the basis of the specificrequirements of the distributors.

- 23 -


Tunisian Law. Assets are insured in accordance with oil industry practicesagaist major hazards. When its joint venture partners prefer differentdegrees of coverage, separate policies are entered into in accordance witheach party's share in the venture. The insurance policies are underwritten byTunisian firms (a requirement under the law), which reinsure themselves abroadas appropriate. In addition, ETAP has other insurance policies coveringpetroleum products trading, its buildings and personnel. During negotiations,assurances were obtained that ETAP will continue to maintain insurancepolicies for its producing assets in accordance with industry i.ractice.

FlbamIa Pleformiame and Pras!ecta

33. The financial significance of ETAP's results is limited as, underthe present framework, the company has limited financial autonomy as follows:

(i) all its cash surpluses are transferred to the Treasury twice permonth (and are treated as pre-paid dividends);

(ii) its net profits (after depreciation) are also transferred to theTreasury; and

(iii) the Treasury makes funds available to ETAP in accordance with itsapproved operating and investment budgets.

This financial framework is anchored in Government Instructions, a Five YearProgram Contract, the annual national budget, and the approved company budget.

34. With these caveats in mind, ETAP's financial results over the pastthree yeas can be sunm-rized as follows:

ETAP-SummarY Income Statements(US$ million)

1985 1986 1987

Revenues from Sales 147.7 64.8 87.6Commissions 4.1 3.2 3.8

Total 151.8 68.0 91.4

ExpensesProduction 18.0 13.5 19.3Salaries 2.3 2.6 2.7Direct Taxes 19.1 10.3 12.3Depreciation 11.7 13.3 20.0

Total 51.1 39.7 54.3

Operating Income 100.6 28.3 36.9

Other Revenues (net) 5.5 3.7 (0.7)Financial Charges 9.6 14.2 9.3Income Tax 70.9 25.9 22.1

Net Income 25.6 (8.1) 4.8

Average Exchange Rate 0.82 0.80 0.81Operating Ratio 332 572 582


STAP's sales of crude from its concessions represent the bulk of itsrevenues, the balance being a 0.5% commission levied on crude exports andproduct imports carried out on the Government's behalf. The operating costsof the four concessions account for most of its outlays; furthermore, it payslarge amounts of taxes (about 50-602 of its gross revenues). The loss in1986 can largely be attributed to the large corporate income tax due, whichexceeded income before tax 1/. The loss had no material impact sinceinstead of paying dividends during that year, as explained above, it receivedfull compensation for the loss from the Government.

35. ETAP's 1987 balance sheet can be summarized as follows:

ETAP December 31 1987 Balance SheetMillion

T. Dinars US$ Percent

Net Fixed Assets 80.4 102.9 542Other Assets 10.3 13.2 71Working Capital (net) 57.1 73.1 39%

Total 147.8 189.2 100%

Financed by:Long Term Debt 41.9 53.6 28aEquity 106.0 135.6 72%Reserves 0.0 0.0 02Total 147.9 189.2 100X

Current Ratio 1.9Debt: Equity 29S

ETAP's balance sheet is strong with a high level of working capital and lowindebtedness 2/. Since the full profits are paid to the Government asexplained above, ETAP has no reserves. On the other hand, the Governmentinjects equity into ETAP on a regular basis as a compensation.

36. Clearly, ETAP operates in an highly protected environment since:Mi) it only "pays" exploration expenditures following a discovery, so that itdoes not incur the high financial risks associated with oil exploration; (ii)it is compensated for crude oil exports and product imports on a commissionbasis irrespective of performance; and (iii) should it still incur a loss, aswas the case in 1986, it is compensated in full by the Government. Shouldthe present framework for ETAP's operations be maintained in the future, itsfinancial situation will remain satisfactory essentially because itsfinancial mode of operations resembles more to a Government Department thanto that of an oil company.

1/ Under Tunisian law, foreign exchange losses can only be deducted duringthe period in which principal payments are made.

21 Long term debt is overstated to the extent that interest free Governmentloans account for nearly 402 of the total.


fina Ste

37. The financial framework for ETAP's operations was probablyappropriate at a time when the company had no income from operations and wasessentially fulfilling certain functions on the Government's behalf. Now thatETAP has access to crude, this framework is difficult to justify, particularlytaking into account the urgency in accelerating oil exploration under thepresent circumstances in Tunisia. Discussions hav. already taken placebetween ETAP and the Government on the possibility of giving ETAP some degreeof financial autonomy for the concessions being developed (para. 28 above).The Government is addressing these issues under an on-going overall review andupdating of the strategy and the structure of the energy sector. The findingsand recommendations of this review will be available in early 1989. It hasbeen agreed that the Bank will review these recommendations before they arefinalized.

IV. THE PROJECT

Obiectivs

38. The main objectives of the proposed Project are: (i) to attractprivate sector investments for exploration in Tunisia; and (ii) to strengthenETAP's technical capabilities in the management of the petroleum resources;

39. The Project essentially involves in the first phase an evaluation ofthe petroleum potential of the prospective areas in Tunisia based essentiallyon the evaluation of geological and geophysical data. Most of the raw datarequired for this phase already exist from past exploration activities, andare available from ETAP; necessary additional geological and geophysical datawill also be acquired. The evaluation of the data will require laboratoryanalyses, computer reprocessing of seismic tapes and data interpretation.During the first phase, ETAP will have at its disposal: (i) compatible seismicand isopach maps; (ii) geological and stratigraphic correlations andsedimentology studies; (iii) structural setting and defined tectonicframework; (iv) paleographic, facies, expansion maps and reservoircharacteristics; (v) geochemical data, source rocks analysis and, hydrocarbonplays maturation, generation and migration. These data will be synthesizedand presented to the oil industry in a second phase in order to draw theirinterest in negotiating exploration agreements in Tunisia.

40. The main components of the Projects are as follows:

a. Seismic Studies: Since the existing seismic data was generated bypermit holders which subsequently relinquished those areas at variouspoints in time, the data are necessarily fragmented and of unevenquality. Therefore, the main objective of the seismic program wouldbe to organize this fragmentary information into continuous andcomposite exploration seismic coverage and to complete a regionalgrid which would provide an underpinning for an overall geologicalinterpretation of the selected area. New seismic acquisition andreprocessing techniques will test modern techniques to show possibleimprovements in quality. This program specifically involves: (i) the


reprocessing of about 3,700 km of existing seismic lines to improvetheir quality and obtain homogeneous results; (ii) the acquisitionand processing of about 1,000 km of new data to fill in the gaps inthe already existing grid; and (iii) possibly, the undertaking ofsome detailed seismic surveys, using very recent seismic techniquesin the most difficult and complex areas of the country.

b. Gravity and Airmag Studies: in the complex northern part of thecountry, geophysical data is nonexistent. The loose gravity gridcurrently available will be complemented with gravity and airmagsurveys, which will be interpreted using modern techniques (modeling,stripping, etc.). Specialized foreign consultants experienced inairmag and gravity data interpretation will be required for thistask. Since ETAP lacks experience in this area, this component willalso include the services of an outside expert who will determine thescope of work and will provide quality enhancement.

c. Geology and Geochemistry Studies: a comprehensive geological andgeochemical study of selected areas will be prepared by EiAP. Theimplementation of this component requires additional equipment forthe recently built geochemical laboratories and about 20 man-monthsof technical assistance.

d. ComPuter Software and Assistance: ETAP has recently acquired a VAX11/780 computer and data base software. 1/ It needs additionalsoftware for seismic data processing, and geological and engineeringstudies. It also needs the assistance of a system analyst specialistto help introduce use of new software packages in ETAP's day-to-dayactivities.

e. Technical Assistance for Promotion: ETAP will have to compile apromotional package based on the results of the studies. Services ofconsultants will be required to: (i) produce reports according to oilindustry standards; (ii) organize promotion meetings in cities suchas Houston and London; and (iii) arrange contacts with potentiallyinterested companies.

f. Training. ETAP's technical staff will participate in (i)specialized short-terms seminars (about 2 seminars per year),organized at headquarters by external consultants, and (ii)conferences abroad on advanced technologies in petroleum exploration.

Prohect inplementation

41. The Project will be implemented by ETAP's Exploration Department inwhich a Project Unit (PU) will be created and staffed by qualified personnel.The PU will be headed by the manager of concessions, assisted by three seniorgeologists/geophysicists and three junior geologists.

1/ The computer was financed under the Technical Assistance Project (Loan2197-TUN in 1982).


Specifically the PU will: (i) hire, supervise and coordinate consultants;(iU) control the quality, costs and schedules of services and goods; (iii)supervise the preparation of promotional packages and data which will be madeavailable to the oil industry; (iv) coordinate and supervise studies on newexploration leads and continue to evaluate risks related to these leads; and(v) prepare the documentation required for disbursements under the Bank loan,maintain the necessary project records, monitor progress and prepare periodicstatus reports for review by the Bank. The Unit will be maintained throughoutthe entire project as an independent group, but will liaise and use theservices of other Departments of ETAP as appropriate.

hImpementatio Schedhle

42. The prospective territory has been divided (see Map IBRD 21067) intosix hydrocarbon provinces to be promoted. Each of them is homogeneous in itsgeomorphic and geologic setting and its tectonic framework. In view of theavailability of sufficient data in the offshore and interest expressed by theindustry, the offshore areas E and F (Gulfs of Hammamet and Gabes) will bepromoted in the first bid round. Tentative timing for the first bid round ismid-1990, followed by successive promotions in 1991 and 1992, depending on theprogress of the project and development of new exploration "playst. However,the whole Tunisian territory will remain open to companies wishing to acquirenew permits. Each round will cover the region selected for promotion.

Proect Cost and Financing Plan

43. The total cost of the proposed project is estimated at US$9.0 millioncomp-ising US$6.5 million in foreign exchange of which US$5.5 million will befunded by the Bank and US$1.0 million will be provided by ETAP along withUS$2.5 million in local expenditures. It can be broken down as follows:

Estimated Costs

Local Foreimn Total(US '000)

Exploration PromotionTechnical Assistance and Training 100 1,400 1,500

Data Acquisition Processing 2,000 1,900 3,900Equipment and material - 2,000 2,000

Total Base Cost (1988US$) 2,100 5,300 7,400Contingencies 400 1,200 1,600Total Cost (current US$) 2QQ L2Q 21M

Onshore seismic costs, inclusive of interpretation and processing have beenestimated at US$6,000/line-km for the difficult southern areas and betweenUS$3,000/line-km and US$6,000/line-km for the other more accessible areas.The cost of foreign consultant's services has been estimated at US$20,000 perman month (all inclusive) which is considered realistic taking into accountthe prevailing rates for petroleum experts. Physical contingencies are at 10l(for all components) and price contingencies for local and foreign costs areat 32 for 1989 and 1990 and 42 for 1991 and 1992.


44. The proposed Bank loan of US$5.5 million would cover 612 of the totalfinancing requirement, and 85S of the foreign exchange cost of the Project.The loan would be made to ETAP for 17 years including five years of grace, atthe Bank's standard variable interest rate. Since ETAP would bear the foreignexchange risk of the Loan, and since it is for exploration promotion, theGovernment would not require a guarantee fee from ETAP. This is satisfactoryunder the circumstances. The local costs would be financed by ETAP which, inview of the amounts involved, should not cause particular problems (para.36). Assurances were obtained during negotiations that sufficient funds willbe made available in a timely manner to carry out ETAP's activities under theproposed project.

Pkoeurement, Disbursement and Retroactive FinaneinR

45. The seismic survey and the processing and gravity airmag will beprocured through ICB, in accordance with Bank guidelines. Studies andconsulting services will be procured in accordance with the Bank'sconsultant's guidelines. The specialized computer packages. laboratory andcomputer facilities will be acquired through LIB given the degree ofspecialization of these materials and equipments, and the limited number ofwell established suppliers. Other specialized services will be procured underthe Bank's guidelines, and international shopping on the basis of comparisonof price quotations. All contracts above US$100,000 would be subject to priorreview by the Bank.

46. The loan would be disbursed as follows: (a) 100 percent ofexpenditures in foreign exchange and 80% of expenditures in local currency foritems procured locally for Technical Assistance, Consulting Services andTraining; and (b) 100 percent of foreign exchange expenditures and 902 ofexpenditures in local currency for items procured locally forequipment/material. Disbursements would be supported by full documentationexcept for contracts valued at less than US$100,000 for which disbursementswill be made against statement of expenditures with the supportingdocumentation being retained by ETAP for subsequent review by Bank supervisionmissions. The closing date of the loan would be June 30, 1993.

Environmental Aspects

47. The Petroleum Law enacted by the Parliament in 1987 requires that allthe oil operating companies and service contractors observe the country'senvironmental protection requirements. Exploration work will be carried outin compliance with the above mentioned law and current regulations and thesound practices of the oil industry particularly as stipulated in itsArticle 12 "with regard to the conservation of natural resources, theprotection of the environment and the security of staff and plant".

ReportmX

48. ETA" will maintain records to monitor pr-gress in projectimplementation, and a routine quarterly progress report will be prepared by PUboth for ETAP's management and the Bank. A copy of consultants' progress andfinal reports will be supplied to the Bank. Within six months after the

- 29-Technical AnnexPage 18 of 18

closing date, ETAP will prepare a project completion report in accordance withthe Bank's format. Assurances to that effect were obtained at negotiations.

Benefxts

49. Unlike past efforts in exploration promotion in the country, theproposed project will be a coordinated, comprehensive action program coveringthe whole Tunisian territory. This project would enhance the quality andlevel of exploration activity with the objective of bringing after appropriateevaluation, new oil discoveries on stream more rapidly and systematically. Itis impossible to make any reliable quantitative estimates of the benefits thatmay be expected from a Project of this nature. Based on experience elsewhere,one could anticipate that the level of exploration investments by the oilindustry would increase by at least US$30-40 million as a result of theProject. The Project would be of special interest to newcomers to Tunisiawhich are now often small to middle-sized European and American companiesinterested in expanding their field of activity outside the U.S. or the NorthSea; these companies generally require good technical information to carry outtheir evaluation prior to taking a permit.

50. The Project is also expected to improve the knowledge of thecountry's hydrocarbon potential through the utilization of modern techniquesin data processing, laboratory, geological and geophysical studies.Furthermore, the Project will provide ETAP with state-of-the art, syntheticstudies and exploration data acquisition techniques and would strengthen itstechnical capabilities.

51. The main risk of the Project is that oil industry response to thepromotion efforts would be weak due to an unfavorable internationalexploration climate or poorer than anticipated geology. However, these risksare considered small in view of the general attraction of Tunisia in the pastand its good geographical position. The main challenge of the Project will beto unveil new prospects and/or to review old prospects: the geology of Tunisiais such that this goal is attainable. Considering the amounts involved, therisks of the Project are small and manageable, and in view of Tunisia's recordand the potential benefits, worth taking.

TUNISIA

PETUOLEU EXPLORATION PROMOTON PRoJECT

Hiatorical Petrolmin Productian 11980-871 and Forecast (1987-911

TAKLE X: PAST PETfULBI EN=O=KT!Q F0rECASTS FDR FUTIRE PENNUUJMOU

Year of Y ly i Pro tion ( n Thou ma e r1c tons) Initial EstiasteField discovery 1980 1981 1982 1982 19 198 1965 1986 1987 1988 1989 1990 1991 1995 recoverable reservesEl Bona 1964 3240 3301 5382 3441 3447 5484 3408 3308 1015 2089 2445 2282 95000Oovleb S _mma 1966 90 80 70 61 60 S5 35 21 18 16 - 1008S.7.T. 1970 181 146 134 121 123 133 140 130 120 106 95 86 4500Ashtart 1971 2092 1848 1S10 1308 1284 1211 1160 1011 1250 1250 1160 990 40000Taseska 1979 _ - 45 S1 440 346 259 239 170 170 142 116 3500M.L.O. 1979 _ - - 63 107 .122 129 164 128 126 116 104 1400Others 38 35 33 12 24 57 90 81 122 122 103 63

Total 5641 5410 5181 5530 5486 413 5241 4972 4773 4483 4077 3661 2000?

El srma Gas in Mil-lions cubic meters S00 500 500 500 450 450 40 430 420 400 360 320 150?(Approx. values)

t

TABLE 11: TtUISIA SUMARY OF EXPLORATION ACTIVITIES

Year 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988ForecastNumber of exploration permits 16 17 19 20 27 27 27 31 29 27 23

Total surface of explorationpermits (in square kilometers) 145669 146309 137088 132630 164700 148500 139456 152507 123774 103050 83186Kilometers of seismic profiles 2935 9940 10738 12257 8677 20400 12367 7935 13108 6284 6690 2977Amount of Exploratory wells 13 12 11 25 20 38 24 15 15 14 10 17 11 to 16Total amount of meters dril-led in exploratory drilling 3SS29 31235 23118 53895 52480 809 7439 42854 35027 41492 30383

,DOft

1ft

li-

TUM

DoWm FoECn 1987-2001(prinzy _erg)

(milli" tons of oil equtwaleat)

6mmci' Fain 1986 iUV99B lS9 1990 1992 1993 1 i.m' 19% l997 1998 1999 2 001

tbeml "egy 1.5 IS 1,6 1,6 1,7 1,7 1,9 1,8 1.9 1.9 2.0 2.1 2.2 2.3 2,5 2.6

towe. 0,9 1.0 1.1 1.2 1.2 1.3 1,4 1.4 1.S 1.6 1.6 1.? 1.8 1.9 2,0 2.1

rests 1.0 1,1 1.2 1.3 14 1,6 1.6 1.7 1.7 1.7 1.8 1.9 2,0 2.1 2.2 2,3 w

TOTAL 3,4 3.6 3.9 4.1 4.3 4,6 4,8 4,9 5.1 5,2 5,4 5.7 6,0 6.3 6,7 7,0

e'

sores& Agence de NaltrIme de I En.rgle. D6ParI.SUeIb des Etwies

- 32 - Attachment 2Page 1 of 2

TUNISIA


Brief History of Petroleum Exploration in Tunisia

1. Oil exploration in Tunisia began as early as 1930 and the firstwell was spud in 1932 by SEREPT. Since then and up today 400 explorationwildcats were drilled onshore and offshore Tunisia, over an open totalacreage of about 200,000 km2. This represents a well density of oneexploratory well per 500 km2/or per 300 sq miles. Thus Tunisia can beconsidered an underexplored country for its kind of geology. Over the past50 years, exploration activities spurred in five phases which spanned eacha little over one decade.

2. In the thirties exploration drilling was essentially executed onthe basis of surface geology i.e., on anticlines of surface expression, andtherefore, was limited to rugged areas with an average of about 1 well peryear. In the early forties that activity was reduced to almost zeroparticularly during the second world was when Tunisia as most of NorthAfrica was a battlefield for numerous and large scaled militaryconfrontations between allied armies and their protagonists.

3. In 1948, the first discovery was made in a high altitude anticlinein Cap-Bon, north-eastern Tunisia; it was natural gas. This discovery hasspurred interest in further exploration on surface anticline features allover the country and particularly in north and north-west Tunisia, wereseveral oil seepages were and still are recorded. In the absence ofreliable geophysical surveys several of these wells were either too shallowor encountered unpredicted tectonic and geological complications. By theend of the fifties exploration has slowed down to about 3 wells per yearfrom an annual average of about 6 wells/year.

4. In 1964, after the introduction in Tunisia of new geophysicaltechniques particularly seismic, EI Borma field was discovered in Triassicsandstone at a depth of about 2,400 m. This major find has drawn theattention of oil companies on the stable saharian platform and other areasstructurally similar to it such as oriental onshore and offshore Tunisia.Exploration activities resumed again at a pace of about 7 wells/yeartargeting Triassic objectives in particular. Unfortunately there were norepeat to El Borma major find during that phase a part from some smallaccumulations of oil. The major difficulty in the area is lack of goodseismic resolution for defining the closure of structures; the presence ofa thick and hydrite section prevents seismic penetration. Explorationslowed down again towards the end of the sixties.

- 33 -Attachment 2Page 2 of 2

5. Early in the seventies, in 1971, Tunisia second major oil find wasmade in offshore Sfax at Ashtart nunmulitic limestones of lower Eoceneage. The field of Sidi El Itayem was discovered in the same lower Eocenereservoir. For several years this objective became oil companies favoriteonshore and offshore of Tunisia where nummulitic limestones extended at adepth of a little over 2,000 m. Two marginal fields were furtherdiscovered. As a consequence of this intense activity the depositionaltrend of these limestones was relatively well defined but not exhausted.However, in the mean time many other objectives were over looked. Indeed,already in the middle of the seventies drilling in the Gulf of Gabesrevealed significant gas accumulations in upper Cretaceous carbonates at adepth of about 4,200 m (Miskar field). Unfortunately, this new objectivebeing deep and in offshore did not attract enough interest from oilcompanies and remained up to now easentially under axplored. Againexploration slowed down at the end of the seventies.

6. In 1976, oil was discovered in middle Miocene sands in the Gulf ofHammamet. One year later oil gas concentrate were discovered in Ordoviciansandstones in southern Tunisia (Chott area). In the mean time moreflexibility was introduced in permit granting and acreage was opened up toindependent and smaller oil companies. On the other hand oil pricesreached their peak. All those factors brought exploration activities to anall time record, with 32 wells drilled in 1981. Several discoveries weremade in the Gulf of Hammamet, of which Tazerka was put under productionsince 1984 the others appear to be marginal although in many casesdelineation wells (3) did not provide a clear understanding of thedepositional mechanism of those sands. Their rapidly varying thickness andextent seem to suggest that they may have been deposited in a verycomplicated (anostomose) type of channel system. A more detailed effortand closer look still have to be done on Miocene and Ordovician sandreservoirs to comprehend their distribution and to pool their production ina cluster development system appropriate to offshore environment for theGulf of Hammamet and to Saharian environment for the Chotts areas.Unfortunately, the collapse of oil prices in 1986 did not help maintainthis effort and exploration, like any where else in the world, slowed downdramatically.

7. In late 1986 early 1987 oil was discovered in upper Cretaceouscarbonates and upper Jurassic sand in the Zarzis area. Test wells flowedbetween 3,000 and 4,000 BOPD. This discovery came in time to confirmTunisia good hydrocarbon potential by adding for the first time, theJurassic and upper Cretaceous as serious potential targets for oil.

| Prisident Directeur Gbn6ral |

Directeur.Cargi de la jSear6tariat lCoordination Technscu |

J bpartoent l D1recteur, Charg de to -Infwntiorr n Concertation C doopration rechnieC

Oirection de Contr6lel de Gest10nli

I I I ~~I I I Direction 0irection Oirection D1rect10n Direction OirectionAdministrative Financiere Comerciale des Etudes Production Exploration

TUNISIA


Prolect Implementation Schedule

Months a/ 0 12 24 36 48

(A) Technical Assistance andExploration Promotion l l l

(B) Data Acquisition andProcessing

(i) Seismic Acquisition

(ii) Processing New Data

(iii) Reprocessing of Old Data l l l I l

(C) Equipment and Material

(i) Laboratory Equipment l l l

(ii) Computer Software

(iii) Computer Hardwareet

a/ Implementation assumed to start in January 1989.

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