Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 3887a-IN

STAFF APPRAISAL REPORT

INDIA

KRISHNA-GODAVARI PETROLEUM EXPLORATION PROJECT

September 10, 1982

Energy DepartmentPetroleum Projects, Division I

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

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CURRENCY EQUIVALENTS

Currency Unit = Rupee (Rs)Rs 1 Paise 100

US$ 1 = Rs 9.0Rs 1 = US$ 0.11111

Rs I million = US$ 111,111

MEASURES AND EQUIVALENTS

1 Metric Ton (mt) - 1,000 Kilograms (kg)1 Metric Ton (mt) = 2,204 Pounds (lb)1 Meter = 3.28 Feet1 Kilometer (km) 3 0.62 Miles1 Cubic Meter (m3) = 35.3 Cubic Feet (cft)1 Barrel (Bbl) = 0.159 Cubic Meter1 Metric Ton of Oil (390 API) = 7.60 Barrels

1 Normal Cubic Meter (NmJ) = 33.42 Standard Cubic Feet ofNatural Gas

1 Kilocalorie (kcal) = 3.97 British Thermal Units (Btu)MW = 1,000 kilowattskWh = kilowatt-hour

Bbl/d = Barrels per day

MMCMD = Million Cubic Meters per DayTCE = Metric Ton of Coal EquivalentTCF = Trillion Cubic Feet

toe = Ton of Oil Equivalenttpy = Ton per year

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

BOP - Bombay Offshore ProjectCFP - Compagnie Francaise des PetrolesD-P - Dynamically Positioned

GOI - Government of IndiaIOC - Indian Oil CorporationLPG - Liquefied Petroleum Gas

OIDB - Oil Industry Development BoardOIL - Oil India LimitedONGC - Oil and Natural Gas CommissionWGEP - Working Group on Energy Policy

FISCAL YEAR

April 1 - March 31

FOR OFFICIAL USE ONLY

INDIA

KRISHNA-GODAVARI PETROLEUM EXPLORATION PROJECT

STAFF APPRAISAL REPORT

Table Of Contents

Page No.

I. THE ENERGY SECTOR..........................................1

Background .......... , . ................... 1

Energy Supply and Consumption. 2Energy Resources. 6Energy Prospects. 8

II. THE PETROLEUM SUBSECTOR. 9

Introduction .. 9Petroleum Consumption, Production and Prices. . 9

a. Consumption and Production Trends. 9b. Pricing Policies .11

Petroleum Resources, Past and Future Development 12a. Petroleum Resources .12b. The Role of the Private and Public Sectors

in the Development of India's Petroleumpotential .13

c. Development Prospects and Investment Strategy 15The Bank's Role and Lending Strategy in the

Petroleum Subsector .. 17

III. THE PROJECT .19

Introduction .19Exploration Activity in the Krishna-Godavari Basin 20The Project .21

a. Objectives .21b. Description .22

Execution .23Implementation Schedule .25Estimated Cost .25Items Proposed for Bank Financing .27Financing Plan .28Procurement and Disbursements .30Ecology and Safety .31

This report is based on the findings of a mission that visited India inNovember 1981 and was prepared by Messrs. T. Fitzgerald, D. Carpio, K. Palmer,and Ms. S. Lazar of the Energy Department, J. Wall of the South Asia CountryPrograms Department, and M. Heitner (Consultant).

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

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Table of Contents (Cont.) Page No.

IV. PROJECT RISKS AND JUSTIFICATION .......................... . 32

V. THE OIL AND NATURAL GAS COMMISSION. .. ... 34

General...... 34Organization and Management ..... 34Staffing and Training....... 35Management Information Systems .... . .35

Accounts and Auditt........ 36Insurance..... 36ONGC's Investment Program (1982/83 - 1987/88) . .36

VI. FINANCIAL ASPECTS. 38

Introduction ....... 38Past Performance ....... 38Financial Prospects ....... 41

VII. AGREEMENTS REACHED AND RECOMMENDATION ...... 43

ANNEXES

1.1 Production, Trade and Consumption of Primary Energy1.2 Sectoral Distribution of Energy Consumption2.1 Crude Oil Supply2.2 Production and Consumption of Oil Products3.1 Geology of the Krishna-Godavari Basin3.2 Implementation Schedule3.3 Project Cost Estimate3.4 Details of Cost Estimate3.5 Phasing of Expenditures3.6 Disbursement Schedule4.1 Economic Analysis4.2 Comparison of Original ONGC Project Scope and

Project Agreed with the Bank5.1 Organization Chart - ONGC5.2 Organization Chart - Madras Division5.3 ONGC-s Investment Program6.1 Financial Tables6.2 Assumptions Underlying Financial Projections7.1 Documents Available in Project File

MAPS IBRD 16185 and 16186 R

I. THE ENERGY SECTOR

Background

1.01 Commercial primary energy (coal, oil, gas, h Yro and nuclear)accounts for about 46% of total primary energy supply- in India, with thebalance (54%) coming from noncommercial energy (mainly firewood, agriculturaland animal wastes). Coal, hydro and nuclear power have important roles inmeeting commercial primary energy requirements and in 1981/82 accounted forapproximately 67% of total supply; the share of petroleum is relativelymoderate in comparison with other developing countries and accounts for about33% of total commercial primary energy supply. The supply of commercialenergy has been growing faster (about 5.3% per year), than that ofnoncommercial energy (between 1.7% and 2.5% per year), thus resulting in asteady decline in the share of noncommercial energy in total energy supply.

1.02 India has consistently followed energy policies that limit the use ofpetroleum to sectors where economic substitution by other energy resources,particularly coal, is not possible. Despite the recent development ofoffshore petroleum resources, the country remains dependent on imported oil tomeet part of its primary energy requirements, particularly the growing demandin transport, fertilizers and petrochemicals, as well as in the modernagriculture sector where substitution by electricity continues to be limitedby insufficient power generation and distribution. The impact of the increasein world oil prices after 1973 on India's balance of payments is evident fromthe following: while the volume of petroleum imports grew by 30%, from 16 to21 million tons of oil equivalent (toe) between 1972/73 and 1981/82, the costof imports over the same period grew about 23 times from $269 million to US$6billion, equivalent to about 70% of India's estimated merchandise exportearnings. Well identified domestic energy resources such as coal andhydroelectricity are large enough to supply most of India's future commercialenergy requirements for industry and power generation. However, proven oiland gas reserves are not sufficient to meet the demand for oil in sectorswhere further substitution by other fuels is limited.

1.03 In 1981/82, out of a total oil supply of 36.8 million toe, 16.2million (or 44%) came from local production while the remainder (20.6 milliontoe) had to be imported. Current projections based on production from knownpetroleum reservoirs indicate a potential petroleum deficit of up to 34million toe by the end of the 1980s. The high cost of petroleum imports willremain a serious constraint to economic development unless new reserves arediscovered in the near future to compensate for the depletion of existingreserves as well as to meet anticipated growth in demand. India's potentialoil and gas resources are significant, but many of the prospective areas are

1/ Supply is defined as production plus imports less exports. When changesin stock levels are not taken into account, then supply equals apparentconsumption.

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largely unexplored. Therefore, the exploration for new, and development ofexisting, petroleum reserves is one of India's most pressing priorities.

1.04 It is against this background that India is making a concerted effort

to accelerate hydrocarbon exploration and development by the national oilcompanies (i.e. ONGC and OIL) and also by foreign oil companies which wereinvited in late 1980 and again in August 1982 to submit bids for explorationand production sharing on many blocks offshore and onshore. The success ofthese efforts, together with an active public sector program in developingnatural gas resources over the next three to four years, will be a key factorin determining whether indigenous hydrocarbon supplies can be increasedsufficiently above current forecasts to meet a major portion of theanticipated growth in demand during the present decade.

Energy Supply and Consumption

1. 5 In 1975/76 (the last year for which overall figures are available),prirmary energy supply in India was 182 million tons of oil equivalent. Thebreakdown by primary energy source is shown in Annex 1.1 and is summarized asfollows:

Primary Energy Supply in India(million tons of oll equlvalent)A/

Average AnnualGrowth Rate (%)

Actual Estimate 1960/61- 1970/71-Fiscal Year 1960/61 1970/71 1975/76 1980/81 1981/82 1970/71 1980/81

Commercial Primary

Energy

Coal & lignitek1 27.8 37.1 50.6 58.2 63.7 2.9 4.7Petroleum c/ 7.9 19.0 24.1 34.7 38.7 9.2 6.2Hydro & NuclearPower d/ 1.9 6.6 8.6 11.9 13.7 1.30 7.2

Subtotal 37.6 62.7 83.3 104.8 116.1 5.2 5.3

Noncommercial PrimaryEnergy :5

Firewood 48.8 57.8 65.2 N.A. N.A. 1.7 2.5 -/Agricultural waste 13.2 15.6 17.6 N.A N.A. 1.7 2.5 e/Animal dung 12.0 14.2 16.1 N.A. N.A. 1.7 2.5 e/

Subtotal 74.0 87.6 98.9 N.A. N.A. 1.7 2.5 e/

Total 111.6 150.3 182.2 N.A. N.A. 3.0 3.9 e/

a/ Based on the following conversion factors: one ton of oll equlvalent (toe) is equal to 2 tonsof domestic coal; 5.88 tons of lignite; 0.94 tons of refined petroleum products; 1,235 cubic

meters of natural gas; 4,166 kWh of hydro and nuclear power; 2.04 tons of firewood; 2.33 tonsof agricultural waste; and 4.54 tons of animal dung.

b/ 98.5% coal and 1.5% lignite In terms of toe In 1980/81.

c/ Natural gas excludes quantities flared and used In field operations.

d/ About 94% hydro power and 6% nuclear power in 1980/81. The figures are gross powergeneration.

e/ Growth rate from 1970/71 to 1975/76 only, Is assumed for the 10-year period.

f/ Non-commercial energy figures are for consumption which are taken as equal to supply.

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1.06 Trends in commercial energy consumption by various economic sectorsduring the period 1960/61-1980/81 are shown in Annex 1.2 and summarized asfollows:

Sectoral Breakdown and Growth of Commercial Energy Consumption(Percent)

Average AnnualGrowth Rate (%)1960/61- 1970/71-

1960/61 1970/71 1980/81 b/ 1970/71 1980/81

Households 14.9 13.7 11.2 4.6 4.8Agriculture 1.9 3.4 6.3 11.8 11.2Industry 43.4 48.9 55.5 6.7 5.8Transportation 36.9 29.8 23.4 3.2 2.0Other 2.9 4.2 3.6 9.3 2.8

Total % 100.0 100.0 100.0 5.4 4.5Total (In million toe) 30.9 52.4 81.6

a/ Coal, lignite and oil used for power generation are excluded from theseconsumption trends; however, all electricity (i.e. primary andconventional thermal) consumption is included but on a delivered basis toconsumers (i.e. gross generation less internal power plant uses, as wellas transmission and distribution losses). Furthermore, oil consumptionexcludes non-fuel uses (i.e. petrochemical feedstocks).

b/ Provisional.

Source: Working Group on Energy Policy (see para. 1.16); Ministry ofPetroleum, Chemicals and Fertilizers; and Department of Coal.

The household sector accounts for a relatively small share of commercialenergy consumption (7% of coal, 19% of petroleum and 10% of electricity).However, consumption of noncommercial energy in this sector is high,particularly in the rural areas where electricity and kerosene are mostly usedfor lighting. Although the substitution of commercial energy for non-commercial energy will continue, noncommercial energy will remain asignificant source of supply for rural households. Measures are howeverneeded to maintain and even increase production from noncommercial sources(particularly firewood) as well as improve the efficiency of cooking stoves inorder to conserve commercial energy for applications where non-commercialenergy is not possible or practicable.

1.07 Energy needs in agriculture are mainly for land preparation, waterlifting, threshing and transportation. They are met mostly by animal power or

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by the use of liquid fuels (mainly diesel oil) and electricity. Commercialenergy consumption in agriculture accounts for only about 6.3% of commercialenergy use but has been growing rapidly between 1960/61 and 1980/81 (about7.8% p.a. for oil products and 16.2% p.a. for electricity), reflecting theefforts made to modernize the sector. This trend towards increased use ofcommercial energy in agriculture will continue with the efforts to furthermodernize the sector and increase the standard of living of the ruralpopulation.

1.08 The industrial sector is by far the largest user of coal andelectricity. In 1980/81, it accounted for 75% of coal consumption (excludingpower generation), about 63% of electricity consumption and 19% of oilconsumption. In contrast to other developing countries the share of indus'ry

in total oil consumption is still relatively modest but has graduallyincreased (it was only 11% in 1970/71). Over the past twenty years the energyintensity of the industrial sector has increased from 0.12 to 0.17 tons of oilequivalent per thousand rupees of gross domestic product originating fromindustry (at factor costs in 1980/81 rupees) due primarily to the increaseduse of electricity. In the future, the growth in the energy intensity ofindustry is expected to slow down as a result of better capacity utilizationand use of appropriate technologies. The future industrial demand for energyis difficult to predict since the sector has been affected by recurrentshortages of power and raw materials as well as transport bottlenecks, so thatrecent trends may not be representative. In addition, part of the industrialcapacity was built when energy was relatively cheap, and less attention waspaid to energy efficiency. It is believed that there is considerablepotential for energy savings in the industrial sector by improving theefficiency of existing plant and equipment, improving the design of futureplants, and introducing energy efficiency standards, but this will require alarge investment effort.

1.09 The transport sector 11 is the largest user of petroleum products andthe second largest user of coal. Over the past twenty years the structure ofdemand has changed considerably as a result of the rapid growth of roadtransport and the substitution of diesel-electric for steam locomotives. In1980/81 oil products accounted for 66% of the commercial energy consumed inthe sector compared to 47% in 1970/71 while the share of electricity remainedsmall at about 3% in 1980/81. Current projections in the transport sectorindicate continuing decline in coal consumption as road transport increases inimportance and as railways continue to shift to more efficent diesel electriclocomotives, thereby contributing to a growing demand for petroleumproducts. The transport sector is an area where significant energy savings,especially in petroleum products, could be achieved over time if measures weretaken to increase the capacity of the railways and to electrify main lines,improve their operating efficiency, encourage the use of railways for long- -

distance freight and passenger hauls, improve the efficiency of road vehicles(mainly trucks), and optimize the location of industrial plants. The

1/ The railways, power and coal subsectors are the critical infrastructurebottlenecks in India and are reviewed in Economic Situation and Prospects inIndia, April 1982 (Report No. 3872-IN).

performance of the railways improved substantially during 1981/82 as a resultof several innovations introduced in 1980/81. The Sixth Plan provides formany investments for the railways that are expected to ease some of theequipment problems in the medium term although the Plan allocation for thissector appears to be inadequate to make up for the under-investment during thetwo previous plan periods.

1.10 In 1980/81 the power sector used about 38 million tons of coal (about33% of coal production). Of the power generated (including self-generation byindustry), about 42% came from hydroelectric and nuclear plants, 46% from coaland 12% from oil. Over the past ten years the share of coal in conventionalthermal generation by utilities has fluctuated between 85% and 90% and this isexpected to continue in the future. The share of hydro and nuclear energy hasvaried between 40% and 50% of total power generation. It is expected that by1987/88 the consumption of oil in the power utilities will be limited to whatis required to ensure the efficient operation of coal-fired plants. Totalelectricity consumption has been growing at an average of 6.5% p.a. between1970/71 and 1980/81, a rate significantly lower than previously. However, asthe power shortages which developed during the 1970s demonstrated, the growthof demand for electricity has been and will continue to be supply-constrained.

Energy Resources

1.11 Coal l/ is the main domestic source of commercial primary energy inIndia with reserves (in seams greater than 1.2 meters thick and at depths lessthan 600 meters) estimated at about 85 billion tons, of which about 25 billiontons are proven reserves. Most of the coal is of low to medium quality (3,500to 5,500 kcal/kg). The 1981/82 coal production is estimated at 124.7 milliontons, making India the sixth largest coal producer in the world, with anoutput three times that of any other developing country. Between 1975/76 and1979/80, coal production stagnated at about 100 million tons per year becauseof extensive flooding in 1978, serious power shortages, delays incommissioning new mines, lack of explosives, labor unrest, and transportationbottlenecks. During both 1980/81 and 1981/82, coal production increased by 10million tons per year, a remarkable achievement, although, at present, coalproduction is still about 10 million tons per year less than demand. Most ofthe production and transport problems are being addressed. For example, theSixth Plan embodies further measures to overcome the infrastructure-relatedconstraints, and labor relations have improved in the past year. The Planalso includes significant investments to bring new mines into operation. Inorder to increase productivity, a high proportion of these new investmentswill be in open-pit mining. Since in the past most of the delays in bringingnew mines into operation were experienced in underground projects, the shiftto open-pit mining is expected to help in reducing delays in project executionand commissioning. About two-thirds of the planned increase in production (40to 45 million tpy) between 1980/81 and 1984/85 is to come from open pitmines. However, about 47% of this increase is to come from projects still tobe approved. Various demand projections for coal by 1984/85 range between 165

1/ A detailed review of the coal sector is contained in the Bank reportIndia-s Coal Sector, April 1982 (Report No. 3601-IN).

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to 185 million tons while production is expected to range between 155 and 165million tons. Of the expected 1984/85 coal demand, power generation wouldaccount for about 42%, steel would utilize about 23%, the railways 6% andcement about 4% of the total. In order to achieve the production targets, thecoal industry has to overcome the problems referred to above, and will need toavoid delays in project preparation and implementation. Improvements in theability of local equipment manufacturers to provide new equipment and spareparts in a timely manner will also be needed.

1.12 India's hydroelectric potential is estimated at about 400,000 GWh ofannual energy generation which might sustain an installed hydro power capacityof 100,000 MW at a 45% load factor. But almost 70% of this potential is inremote areas in the north and northeast and difficult to access. About 12,600MW (13% of potential) is already developed and represents 36% of the totalinstalled generating capacity of approximately 35,000 MW (including 2,736 MWof non-utility capacity). An additional 4,700 MW of hydro power capacity is

scheduled for commissioning by 1984/85, and a further 23,000 MW is under studyfor development. India also has sufficient reserves of uranium (34,000 tonsequivalent of U308 , of which 15,000 tons is considered economicallyexploitable at current international prices) and thorium to meet theforeseeable requirements of its nuclear power program. The existing nuclearpower plants have a capacity of 860 MW. In addition, four units with acombined capacity of 940 MW are under construction.

1.13 Demand for power has consistently exceeded supply in the last

decade. The gap has widened in recent years and the shortage in 1980/81 isestimated to have reached about 13%. The basic reasons for the gap betweendemand and supply are the strong growth in demand, delays in completingplanned thermal generation capacity and low capacity utilization. Capacityutilization of thermal power plants declined from about 55% in 1976/77 to 45%in 1980/81 but increased to 47% in 1981/82. The low capacity utilization ispartly due to difficulties in plant commissioning, delayed maintenance ofboilers and turbogenerators, lack of spare parts, shortages of appropriatelytrained manpower, problems relating to design and fabrication of domesticallyproduced equipment and continuing difficulties in the supply and quality ofcoal. A high-level commission has recently carried out a comprehensiveanalysis of the situation and has submitted its findings to the Government.Several measures are being introduced to improve the efficiency of thermalplants, including: (a) improved preventive and planned maintenance; (b) betteravailability of spare parts; (c) improved training; (d) adequate coal suppliesof acceptable quality; and (e) more effective management. The results ofthese measures are already having an impact in the sector. In 1980/81 and1981/82, power generation increased by 9% and 10% respectively. With theimplementation of the above measures more progress is projected for the mediumterm. Power generation capacity is planned to reach 50,900 MW by 1984/85,(including about 2,750 MW of non-utility capacity). The increase will comefrom thermal power plants (70%), hydroelectric units (25%) and nuclear plants(5%). The country-s overall average electrical energy requirements areexpected to be met by 1988/89 onwards, although a peak capacity deficit wouldmost likely continue until the mid-1990s and regional capacity differenceswill continue to impose shortages in some areas.

1.14 India-s remaining proven and probable recoverable reserves ofpetroleum are currently estimated at 800 million tons of oil equivalent, of

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which 470 million tons is oil and the remainder natural gas. Domestic oilproduction has increased from 0.5 million tons in 1961 to 16.2 million tons in1981/82 and currently meets about 44% of India's domestic oil requirements.Gas production is currently estimated at about 3.1 million tons of oilequivalent, of which about 60% is used as fuel or feedstock, and the balanceis flared (mostly in Assam), mainly because there is no market withinreasonable distance. The petroleum sub-sector is discussed in more detail inChapter II.

1.15 Renewable energy represented 59% of total primary energy supply in1975/76 but this share has been declining. Wood, charcoal, dung and vegetablewastes made up an estimated 92% of the total with the remainder provided byhydroelectric power. Renewable energy (especially traditional fuels) willcontinue to play an important though decreasing role in rural energy suppliesas the agriculture sector is further modernized and the living standards ofthe rural population improve with a corresponding increase in the use ofcommercial energy.

Energy Prospects

1.16 Several studies of India's future energy demand and supplyalternatives have been carried out. The most comprehensive is the Report ofthe Working Group on Energy Policy (WGEP), published in 1979, whichassesses: (i) whether the availability of energy may become a seriousconstraint to India-s economic development; and (ii) what would be the likelyimpact of an active energy conservation program on India-s future energybalances. Although WGEP recognizes the limitations of such an exercise, giventhat historical data may not be indicative of future developments, itconcludes that:

(i) commercial energy availability may become a serious constraintto economic development, either because domestic resources wouldbe insufficient to meet the anticipated demand or because theeffort required to develop domestic resources would imply humanand financial inputs which are not likely to be available;

(ii) a coordinated and all-encompassing energy conservation/demandmanagement program would have a significant impact beyond thelate 1980s and could possibly reduce commercial energy demand'byas much as 20% (the main reduction being in the demand for powerand in the demand for petroleum and petroleum products acrossthe entire economy, but especially in the transport sector); and

(iii) the most critical aspect of India's future energy policy will beto contain (within economic limits) the demand for oil at as lowa level as possible.

1.17 The policy measures it recommends are: (i) improvement in theefficiency of energy utilization; (ii) introduction of fuel-efficienttechnologies; (iii) reduction of transportation demand through improvedplanning of production and consumption locations; (iv) reduction of the energyintensity of industries; and (v) inter-fuel substitution from commercialenergy to noncommercial and renewable energy. The Working Group considers

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that such measures, supplemented by appropriate pricing policies, would permitIndia to reduce commercial energy consumption without affecting economicgrowth. It is hoped that the ratio of energy use to GDP would decline by 50%between the late 1970s and the early 1990s. The energy saving measuresoutlined above supported by detailed implementation plans and an appropriatepricing policy, could substantially reduce waste and improve energyavailability in the future.

II. THE PETROLEUM SUBSECTOR

Introduction

2.01 Despite rapid development of its largest oil field (Bombay High),India currently imports about 56% of its petroleum requirements. By 1984/85,the year of expected peak production from Bombay High, imports will stillaccount for about 33% of domestic supply as production reaches 30 million tonscompared with anticipated consumption of 45 million tons.

2.02 Much of India's potential petroleum-bearing areas are stillrelatively unexplored and production is concentrated only in a few regions.Historically, the pace and scope of exploration activity has been uneven andscarce resources have had to be concentrated on a few promising areas. Sincethe discovery and development of the giant Bombay High Field off the WestCoast of India in the mid-1970s, India has not established any new majorcommercial discovery. Ongoing exploration efforts of ONGC, however, have beenencouraging and have identified several petroleum-bearing areas which needfurther exploratory drilling to determine their commercial potential. Withproduction from presently known oil reservoirs able to meet just under one-half of the expected demand by the end of the decade, the Government of Indiahas recognized the urgency of accelerating the pace of petroleum explorationand has adopted new policies to bring this about.

Petroleum Consumption, Production and Prices

a. Consumption and Production Trends

2.03 Crude oil consumption grew steadily from about 8.0 million tons in1960/61, to 22.4 million tons in 1972/73. Following the first oil crisis in1973, oil consumption was held between 23 and 24 million tons per year from1973/74 through 1975/76. Consumption again started to gradually increase in1976/77 reaching an estimated 32.3 million tons by 1981/82. While domesticproduction accounted for only 6% of consumption in 1960/61, this proportionhad reached 36% in 1970/71 before falling to between 30% to 33% through1974/75. As production from Bombay High started in 1976/77 and continued toincrease, domestic crude oil accounted for 36% to 41% of consumption during1977/78 through 1979/80 and 44% in 1981/82.

2.04 The accelerated development (para 2.19) of the presently knownpetroleum reservoirs is expected to increase domestic crude oil productionsubstantially, from about 16.2 million tons in 1981/82 to a projected 30

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million tons in 1984/85. Thus, domestic oil can be expected to provide atleast 60% of total oil consumption by the mid-1980s (Annex 2.1) but less than50% by the end of the decade. In addition, the development of the offshoreSouth Bassein gas field will provide the equivalent of about 0.6 million toeof gas by 1984/85, rising to 6 million toe by 1989/90, making gas asignificant energy resource in the late 1980s. This is summarized below:

Petroleum Production and Consumption Trends

Actual Est. Forecast/aCrude Oil (million tons) 1960/61 1970/71 1979/80 1980/81 b/ 1981/82 1984/85 1989/90

Domestic Production 0.45 6.82 11.77 10.51 16.19 30.20 30.00Net Crude Oil Imports 5.71 11.68 16.12 16.25 15.36 11.69 23.70Net Product ImportsE./ 1.80 0.40 3.90 6.90 5.23 4.05 10.00

Supply 7.96 18.90 31.79 33.66 36.78 45.94 63.70% Self-Sufficiency 6 36 37 31 44 66 47

Natural Gas (million toe)

Field Production N.A. 1.17 2.24 1.92 3.40 5.34 8.61Less: Field Uses N.A. 0.16 0.26 0.21 0.29 0.52 0.71

Flared Gas N.A. 0.60 0.76 0.63 1.23 0.61 0.85

Consumption N.A. 0.41 1.22 1.08 1.88 4.21 7.05

Total PetroleumConsumption (million

toe) N.A. 19.31 33.01 34.74 38.66 50.12 70.75

a/ Production forecasts are based on development of presently known petroleum reservoirs and donot assume new discoveries from the accelerated exploration program.

b/ Domestic crude oil production in 1980/81 was adversely affected by political unrest in Assamc/ Crude oil equivalent of petroleum products converted at 1.0638 tons of crude per ton of

products.

2.05 These forecasts are realistic provided the accelerated developmentprogram of ONGC and OIL, as well as the transport and downstream facilities

for the use of the projected gas production, are implemented in a timelymanner. However, it is also clear that a substantial exploration programshould be maintained if domestic oil production in the late 1980s is to bemaintained or increased. Petroleum imports could reach about 33.7 milliontons in 1989/90, compared to 20.6 million tons actually imported (net) in1981/82, unless additional petroleum discoveries are made.

2.06 Almost all natural gas produced in India at present is associatedgas. The quantities produced are relatively small, however, and about 40% isflared, particularly in Assam where the fields are small and dispersed,consumers are far away, making it uneconomic to utilize the small quantities

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produced. The role of gas as an energy resource is therefore minor so far,with consumption in 1981/82 at only about 2.3 billion Nm3 (1.9 million toe),equivalent to 1% of commercial primary energy consumption and 5% of crude oilconsumption. With the development of the South Bassein gas field just aboutto begin (1982/83-1984/85), and prospects for commercial quantities of eitherfree or associated gas from the Krishna-Godavari basin, the role of gas in thecommercial energy sector is expected to increase rapidly and becomesignificant in the late 1980s.

b. Pricing Policies

2.07 India, in recent years, has consistently followed a policy ofmaintaining composite retail prices of oil products at international levels,with a cross-subsidy from gasoline towards kerosene (on social andenvironmental grounds) and naphtha (for fertilizers). The price of areconstituted barrel of petroleum products is $46.721/ at the retail levelbased on prices in effect since July 11, 1981. In spite of the cross-subsidyfrom gasoline to kerosene, the latter's consumption growth has been relativelyslow at 2.5% per year during 1970/71-1980/81 compared to 5% per year for alllight distillates and 6.5% per year for all middle distillates. Most of thegrowth in consumption has been for naphtha, diesel oil, LPG and fuel oil.Prices are as follows for the main products:

Prices as of July 1981

Rs per Liter US$ per US GallonRetail a/ India Turkey France

cif imports Retail a/ Retail RetailGasoline 6.07 1.07 2.55 2.02 2.83Kerosene 1.81 1.14 0.76 1.39 -Diesel Oil 3.02 1.10 1.27 1.40 2.10Fuel Oil 2.79 0.75 1.20 0.88 1.50

a/ Prices in New Delhi, about average for India.

Taxes and royalties on crude oil and its products constitute substantialsources of revenues for the Government of India and State Governments. In1979/80, GOI received through excise duties, customs duties, corporate incometaxes, dividends, cess and royalties on offshore oil altogether Rs 20 billion(US$2.2 billion). In addition State Governments receive a royalty and a salestax on onshore oil, but overall proceeds are not known.

2.08 Natural gas, unlike crude oil, is sold directly by the producers (OIL

I/ The cost of a reconstituted barrel was calculated by weighting the priceper barrel of each product by its proportion in consumption, using 1980/81weights.

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and ONGC) to the consumer, on the basis of long-term contracts (which requiregovernment approval). Offshore gas is priced on the basis of the end-use;onshore gas prices can vary considerably from one consumer to the next as theyare affected, for instance, by the year in which the contract was enteredinto, local surpluses of gas being flared, etc. ONGC's gas prices arediscussed further in paras. 6.06 and 6.07. Domestic crude oil is sold to therefineries at Government-regulated prices which were raised substantially inJuly 1981. Although below international levels, the current domestic crudeoil prices (para 6.05) ensure a satisfactory financial performance for theproducers as well as allow them to finance from internally generated funds a

major portion of their investment programs. Finally, exploration anddevelopment decisions are based on international oil prices, rather than therelatively lower domestic price, and the latter price does not act as a

disincentive to invest in oil exploration or development. The average leveland structure of petroleum prices in India are considered satisfactory atpresent.

Petroleum Resources, Past and Future Development

a. Petroleum Resources

2.09 Petroleum reservoirs are found in sedimentary basins. In India,there are 27 sedimentary basins with a total area of approximately 1.72million km2 of which aboumillion km2 (81%) is onshore with theremainder, offshore (to a water depth of 200 meters). Commercial petroleumproduction has been established in only two sedimentary basins. The first isthe Assam-Arakan basin in parts of Assam and extending to Nagaland, Meghalaya,Tripura, Manipur and Mizoram in the eastern part of the country. The secondis the Cambay basin comprising an area in Gujarat and also including theBombay High offshore fields. However, indications of petroleum have beenfound in six other basins: Konkan, Krishna-Godavari, Cauvery, Rajasthan,Andaman Islands and the Tripura fold belt. The Ratnagari oil field in theKonkan basin is being developed and is expected to start production in late1982. The Krishna-Godavari and Cauvery basins are by far the most promisingnew areas today with the Krishna-Godavari particularly standing out as thenext likely major discovery after Bombay High. Magnetic and gravimetricsurveys have been undertaken for most of the potential petroleum bearingareas. However, the more critical modern geophysical surveys have coveredless than 50% of the prospective areas; and no exploratory drilling has beencarried out in more than 65% of the areas.

2.10 As of March 1981 cumulative oil production in India totalled 141.8million tons of oil; and from 1970/71 to 1980/81 some 19.3 million toe of gaswere produced. The Government's estimate of remaining recoverable proven and

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probable reservesi/ from existing fields is as follows:

Estimate of Remaining Recoverable Proven and ProbableReserves as of January, 1981

Onshore Offshore Total

Oil (million tons) 140 330 470Natural Gas (billion m3) 80 330 410

In million toe a/ 65 265 330

Total Petroleum(million toe) 205 595 800

a/ 0.81 toe per 1,000 cubic meters of gas.

Source: Ministry of Petroleum, Chemicals and Fertilizers.

2.11 The long-term view of the total geological petroleum resources (i.e.initial oil or gas in-place), and the recoverable resources of a country arebased on prognostic studies, using geological extrapolations andinterpolations, as well as many technical and economic assumptions. The

results of such studies are highly speculative and subject to wide divergenceof opinion. Nonetheless, they provide a broad indication of potentialpetroleum resources and a framework for developing long-term energy sectorpolicies and petroleum subsector exploration and development strategies. Arecent study has estimated the total potential Indian geological resources ofpetroleum at about 15 billion tons of oil equivalent, of which about 30% isconsidered recoverable. About two-thirds of the potential recoverablepetroleum resources are estimated to be located offshore, and about three-quarters of the potential reserves are gas. While these estimates may beconsidered very optimistic, they are indicative of the substantialundiscovered potential.

b. The Role of the Private and Public Sectors in the Development ofIndia-s Petroleum Potential

2.12 Commercial quantities of petroleum were first discovered in India in1889 at Digboi, Assam, by the Assam Oil Company, a private firm. In 1915 the

1/ The estimates of recoverable petroleum reserves from fields alreadyproducing or just recently discovered are generally classified into: provenreserves, probable reserves and possible reserves. Proven reserves have thehighest degree of certainty and are based only on areas delineated by actualdrilling and successful testing. Probable reserves are those inferred fromthe full lateral extent of the reservoir structure, that is, beyond the limitsdefined by existing wells. Possible reserves include the additional recoverythat could reasonably be expected from the known reservoirs if enhanced oilrecovery schemes are implemented.

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Burmah Oil Company (UK) also began exploration in Assam and in 1921 acquiredfull control of the Assam Oil Company. Until the 1950s, petroleum explorationwas concentrated in the northeastern part of the country, namely in Assam,Tripura and Nagaland. In 1954, ONGC1/ began as a department of the GeologicalSurvey of India, and it was established in its present form by an Act ofParliament in 1959. Oil India Limited (OIL) was established in 1959 followingan oil discovery in Assam by Burmah Oil Company (UK). The Government of Indiainitially took a one-third equity interest in OIL, then increased its equityinterest to 50% in 1961, and in October 1981, purchased the entire Indianassets of the Burmah Oil Company, covering its interest in OIL and in theAssam Oil Company. Starting in 1959, ONGC discovered petroleum reserves inCambay (1959), Ankleshwar (1960), Kalol (1961), and Sanand (1962), all inGujarat. Later, ONGC discovered oil in Lakwa (1964) and Galeki (1968) inAssam.

2.13 Following the oil crisis of 1973, exploration activities acceleratedparticularly offshore, resulting in the discovery by ONGC in 1974 of the giantoffshore field of Bombay High and a number of significant but smaller fieldsin its vicinity. Assam was the major petroleum producing area (4.2 milliontpy) in the country until the early 1970s when production from Gujarat alsoreached just over 4 million tpy. By 1979/80, production from Bombay High hadalso exceeded 4 million tpy and by 1981/82 reached 8 million tpy.

2.14 International oil companies have been involved in petroleumexploration in India intermittently. Prior to 1950, the Assam Oil Company andthe Burmah Oil Company were the only firms active in petroleum exploration.In 1954, the Indo-Stanvac (Standard Oil and Socony Vacuum, now Exxon andMobil, U.S.A.) agreement with 2a 25% GOI interest, was signed, providing for anexploration area of 10,000 km in West Bengal. The venture was abandoned in1959, after drilling 10 (dry) wells. From 1974 to 1977, three joint-ventureagreements each covering 25,000 km2 of offshore area, were also concluded withAsamera (Canada), Natomas (USA), and Reading and Bates (USA) but the companieswithdrew following completion of the minimum work requirements because theresults were discouraging. In the following years, the Government did notencourage participation of foreign oil companies in petroleum exploration.

2.15 In late 1980, recognizing the urgent need to accelerate the pace ofexploration but aware of the technical and financial constraints on ONGC's ownexploration activities, the Government decided to actively promote open areasfor exploration by forei n firms. Thirty-two blocks, each ranging in sizefrom 10,000 to 30,000 km offshore and onshore, were offered to internationalbidders. The total area offered, almost 0.9 million km2, represented about50% of the country s sedimentary basin area. Although 34 foreign oilcompanies were invited, only seven submitted bids and offers were concentratedon just two offshore blocks in the vicinity of oil producing areas. Thisresponse was somewhat disappointing but can be partly explained by theprobable concern of some companies that India would want and would likelyexercise its option to buy back their oil share. Undoubtedly, the companieshave so far adopted a "wait and see" attitude and still view India's newexploration strategy with caution after a substantial period in which private

1/ ONGC-s organization is reviewed in Chapter V.

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industry involvement has been minimal. Thus, it is not surprising that theinitial round of bidding involving relatively unknown areas with what can beregarded as modest geological potential, as well as untested governmentpolicies, attracted only a few bids which concentrated on the most promisingblocks offered (i.e. contiguous to producing areas). One production-sharingagreement2has so far been signed with a consortium led by Chevron (USA) for an18,500 km block offshore Gujarat, north of the Bombay High field. The termsof the production sharing agreement provide for Chevron to drill at leastthree wells, spending a minimum of US$29 million over a three-year period, atits own risk. Upon commercial discovery, ONGC may assume up to 50% jointventure in future development (without payment of exploration costs) andproduction will be split according to a scale which escalates with fieldprofitability. Until India achieves self-sufficiency in oil, GOI has theoption to purchase Chevron's share of the oil produced at internationalprices. Chevron started its seismic survey after contract signing and it wascompleted in July 1982; drilling is expected to start late 1982 after themonsoon season. Meanwhile, invitations to bid on a second round of offeringswere issued end-August 1982 to 37 foreign oil companies. The second offeringincludes 50 blocks both onshore and offshore, including new areas such as westof the Bombay High field (in 200 m of water), and the outer-shelves of theKrishna-Godavari and Mahanadi deltas. In view of that fact that: (i) ONGChas recently made a discovery in one of the blocks previously offered (PalkStraits) but not bid upon by companies; and (ii) the contractual framework hasenabled one major oil company to enter into an exploration contract, theresponse to the offering in this second round is expected to be much better.Therefore, one may conclude that a process has been initiated which, ifsupported by further discoveries, will, over time, lead to a substantialincrease in private sector activities and an acceleration of exploration workto levels commensurate with India's prospective acreage.

2.16 In the public sector two companies, ONGC and OIL, have traditionallyundertaken exploration activities. ONGC has had, and will continue to have,by far the largest involvement in the petroleum sector as the principal entityin charge of petroleum exploration and development. OIL is much smaller thanONGC and produces about 3 million tpy of oil, all from Assam. Until recently,it had a licence covering only about 2,500 km2 in Assam and ArunchalPradesh. The company has explored its licensed area extensively and hasreplenished its reserves through steady but small discoveries. Since late1981, OIL obtained exploration rights in Orissa (the Mahanadi basin), bothonshore and offshore, and in areas in Rajasthan.

2.17 The Ministry of Petroleum, Chemicals and Fertilizers is in charge ofpolicy making in the petroleum sector. It monitors activities in the sectorclosely and, inter alia, has to vet all the programs and budgets proposed bypublic sector enterprises. The Oil Industry Development Board (OIDB), apublic body created in 1974, provides financing to public sector enterprisesin the petroleum production and refining sectors. Its only source of revenuesis a cess levied on domestic oil production. The attached map (IBRD Map No.16185) describes the main features of India's petroleum subsector.

c. Development Prospects and Investment Strategy

2.18 The petroleum subsector program of the Government has four principalcomponents: to increase production from existing fields, primarily byaccelerating development programs by ONGC and OIL in areas where petroleum has

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already been discovered; to accelerate exploration for yet undiscoveredresources both by the national and foreign oil companies; to modernize theexisting refineries and construct new ones; and to develop the gas pipelinesystem and construct additional gas-using plants (e.g. fertilizer andpetrochemical plants) to use more effectively the significant gas reservescurrently untapped.

2.19 Following the successful implementation of the initial four phases ofdevelopment of the Bombay High field as well as the encouraging results ofrecent exploration activities, GOI has authorized both ONGC and OIL toaccelerate their petroleum exploration and development programs. Thus, whilethe current Plan (1980/81-1984/85) originally earmarked about Rs 33.3 billionin 1980/81 prices for petroleum exploration and development, representing a47% real increase above the actual expenditures during the previous five-yearperiod (1975/76-1979/80), ONGC and OIL have responded with a much higherrevised budget proposal of about Rs 53.8 billion in 1980/81 prices forexploration and development, most of which has already been approved. Thefocus of this revised program is the accelerated implementation of the fifthand sixth phases of the development of Bombay High, the development of theoffshore South Bassein gas field and further exploratory drilling in theKrishna-Godavari basin. As mentioned earlier, several other areas areexpected to be explored by foreign firms on a production-sharing basis duringthe current Plan period.

2.20 The accelerated petroleum exploration and development program wouldalso mean larger investments in petroleum refining and d:^bu., 2;clitiesas well as investments for downstream processing plants (e.g. fertilizer indpetrochemical plants). In particular, the development of the South Basseingas field will require the rapid implementation of six new gas-basedfertilizer plants and related gas pipelines. A comparison of the actualexpenditures for the petroleum sector during 1975/76-1979/80 as well as theoriginal budget provisions and the revised estimate for the current Plan(1980/81-1984/85) is shown below:

Petroleum Sector Investments (Public Sector)(In Rs billions and 1980/81 Prices) a/

As % of Total PlanTotal Expenditures

Exploration & Refining & Petroleum Expl. & Total Pet.Period b/ Development Marketing Sector Dev. Sector

ONGC OIL Total

1975/76-79/80 A 20.1 2.5 22.6 8.0 30.6 3.3 4.31980/81--3/4/85 B 30.0 3.3 33.3 8.6 41.9 2.9 4.3

E 47.9 5.9 53.8 N.A. N.A. N.A. N.A.

a/ Based on the implicit price deflator of gross domestic capital formation.'b/ A stands for actual, B for original budget, and E for revised estimate.

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The Bank-s Role and Lending Strategy in the Petroleum Subsector

2.21 Most of the Bank's lending operations to India in energy have been inthe power subsector (27 Bank/IDA operations for a total of US$3,059.0 million)and spans a period of 32 years. However, the Bank-s involvement in thepetroleum subsector has grown substantially. Two loans have been made to ONGC

(US$550 million total) for the development of the Bombay High field, 1/, and aUS$200 million loan was made in April 1982 for the modernization of several

refineries2 /.

2.22 The Bank-s role in the Indian petroleum sub-sector continues to

address several inter-related aspects with varying degrees of emphasisdepending on the specific projects. These aspects are; (i) providing policy

advice on hydrocarbon exploration, development, processing and utilizationstrategy through Bank involvement in key projects; (ii) assisting the domesticpetroleum companies develop their technical expertise and capability in eachmajor phase of hydrocarbon exploration, development and processing; (iii)contributing to improve the technical design and implementation arrangementsof major projects; and (iv) strengthening the profitability and financialstructure of project entities so that they can self-finance a substantialportion of their investments and attract more commercial financing for suchinvestments.

2.23 The Bank has been associated with Bombay High development since the

early stages, and was instrumental in ensuring that all the required reservoirand field development studies have been carried out in accordance withindustry practice before the huge development program was launched.Subsequently GOI requested Bank financing for the Bombay High development.The development of that field has proceeded largely according to plans, withONGC implementing more complex and larger phases, after reservoir studies andactual production performance have confirmed the initial expectations. Inline with modern oil industry practices, ONGC has planned early for the

introduction of reservoir pressure maintenance through water injection, whichshould constitute the bulk of the next development phase. Throughout the

development of Bombay High, ONGC has used experienced foreign consultants andcontractors, to optimize the oil recovery and the technical design, as well asto supplement ONGC-s own capabilities. A Project Performance Audit Report forthe first Bombay High Project is currently being reviewed by GOI and will besubmitted to the Board during the last quarter of 1982.

2.24 ONGC's efforts in the Bombay High development were supported by the

Bank through the two loans mentioned earlier which included undertakings byGOI regarding the formulation and adoption of oil and gas pricing policies

which would enable ONGC to earn satisfactory profits, thereby improving itscreditworthiness, and increasing its commercial borrowing capability to helpfinance its large investment program. In this regard, the Bank encouraged GOI

1/ Loan No. 1473-IN approved in June 1977, and Loan No. 1925-IN approved in

December 1980.

2/ Loan No. 2123-IN approved in April 1982.

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and ONGC to seek external commercial financing for the Bombay Highdevelopment. The first Eurodollar borrowing (US$50 million) was obtained in1977 with highly favorable terms in connection with the first Bombay HighProject, which paved the way for subsequent larger recourse to privateexternal sources in support of the Bombay High program. From 1977/78 through1981/82, ONGC obtained commitments for approximately US$409 million fromcommercial sources, compared to nil prior to that period. Though most ofthese borrowings cannot be categorized as cofinancing, they can be credited,to some extent, to the Bank's advise and catalytic role in securing commercialfinancing. More recently, GOI adopted a policy of using ONGC as a privilegedvehicle for commercial financing; under a new policy, all eligible items putto competitive bidding are offered with a request for commercial financingproposals (para. 3.18). Under this new policy, ONGC has obtained, so farduring 1982/83, about US$245 million of commercial loans/credits. Thus ONGCis currently one of the largest Indian borrowers on the international capitalmarkets.

2.25 While ONGC has acquired considerable expertise in offshoredevelopment during the past seven years, it still faces substantial technicaland financial challenges during the next decade in undertaking a large andambitious investment program on its own as well as in any joint-venturedevelopment efforts that would hopefully materialize with international oilcompanies. Technically, ONGC will need to concentrate its capabilitiesprimarily on those areas were discoveries have already been made.Financially, ONGC will need to continue mobilizing large amounts of foreignexchange. So far, ONGC has successfully borrowed increasingly larger amountsto help to finance its investment requirements from foreign commercialloans/credits, as discussed in paras 3.18 and 6.11; the Bank will continue toencourage GOI and ONGC to increase recourse to foreign commercial borrowing.

2.26 During the 1980's, the complexity and scope of ONGC's operations willcontinue to increase as more efforts will have to be devoted to exploration,while the pressure for accelerated development of known fields is unlikely todiminish. ONGC is about to embark on the first large-scale gas developmentproject in India involving the South Bassein offshore gas field. This projectpresents new challenges concerning the project design and the development of amarket for natural gas, whose use at present is very small. Since 1980, theBank has been discussing with the Government the potential supply andalternative uses for gas.

2.27 With regard to oil exploration, India's policy of having parallelefforts by national and international oil companies is fully justified and iswell focused. During the preparation of the proposed Project, the Bank hadtwo primary objectives. The first is to support India's acceleratedexploration strategy. As part of this, the Bank is helping to implement the"open door" policy which India has recently adopted and also to promote andundertake exploration efforts. Through the Bank's involvement (since 1980) inthe conceptual design and preparation of the proposed Krishna-GodavariProject, it has helped the Government undertake the initial steps towards alarger and more immediate role for the private sector in petroleumexploration. In the case of the previous international offering ofexploration acreage (para 2.15), the Government, after discussions with theBank, increased the average block size, and furthermore, added blocks to theoffering. Two of these blocks attracted all the bids received. The Bank also

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provided advice to ONGC and GOI regarding (i) approach to negotiations withforeign oil companies; (ii) contractual matters (e.g., fiscal terms, minimumwork program, form of GOI/ONGC participation); and (iii) monitoring of theforeign oil companies exploration and development activities after contractshave been signed. More specifically, Bank staff provided information andcomments about standard international practices related to production-sharingagreements and minimum work commitments which helped the Government formulatecontract terms in line with industry trends. The Bank intends to continueproviding such informal technical assistance in the future, as requested bythe Government.

2.28 The second Bank objective concerning exploration is to improve thequality, in terms of both design and implementation arrangements, of largeexploration projects in the country through Bank support or advice. TheKrishna-Godavari Project is important in this regard since it constitutesapproximately one-quarter of ONGC-s exploration efforts over the next threeyears. Following discussions with the Bank, ONGC agreed to: (i) concentratethe exploration efforts on a smaller area and scale down the project sizereflecting both ONGC's technical capabilities and economic considerations;(ii) reduce the considerable risks in the drilling program by introducingtechnical assistance, experienced foreign contractors and technicalprecautions; and (iii) improve the cost effectiveness of the project bymaximizing the use of information through an integrated onshore, inner-shelf,outer-shelfl/ geological evaluation and by introducing a balanced drillingprogram in these three environments in terms of potentially large discoverieswith high cost and technical risks on one hand, and potentially modestdiscoveries with lower cost and technical risks on the other hand(para 4.05).

III. THE PROJECT

Introduction

3.01 The Krishna-Godavari basin, located on the east coast of India about375 km north of Madras, has the potential to become a major new oil province.The principal geologic feature of the basin is a very thick deltaic sequenceresulting from the seaward progradation (outbuilding) of the ancestral Krishnaand Godavari river systems. On the basis of present information the basin isknown to contain good source rocks and reservoirs and numerous well definedstructures. The stratigraphy and structure of the basin resemble those of a

1/ The offshore margin of a continent is subdivided into the ContinentalShelf (coastline to approximately 200 m isobath) and the Continental Slope andRise (from edge of shelf to deep ocean abyssal plan, at depths usually of,3000 m or more). In this report the term outer shelf refers to the offshorearea from about 165 m water depth to the very upper part of the slope at 300 mwater depth. The term inner shelf refers to the offshore area in less than165 m water depth. This subdivision is convenient since it indicatesdifferent offshore drilling conditions and equipment required, as well assomewhat different types of petroleum prospects.