Document of

The World Bank

FOR OFFICIAL USE ONLY r

Report No. P-3834-BEI

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED DEVELOPMENT CREDIT

OF SDR 17.2 MILLION

TO THE

PEOPLE'S REPUBLIC OF BENIN

FOR THE

SEME OIL FIELD PHASE II DEVELOPMENT PROJECT

May 30, 1984

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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Currency Equivalents

Currency Unit - Franc CFA. (FCFA)

US$1.00 = 418 FCFAFCFA Million = US$2,392

Weights and Measures

Bbl = Barrels of 42 US gallonsBD = Barrels per dayha = Hectare (10,000 sq. meters)GWh = Gigawatt hour (1 million kWh)km = Kilometer (0.62 miles)kWh = Kilowatt hourkVA = Kilovolt amperelr = liter (0.26 US gallon)m = cubic meterMW = Megawatt (1,000 kW)MMB = Million barrels

Abbreviations and Acroryms

ECGD = Export Credits Guarantee Department (UK)EIB = European Investment BankERR = Economic Rate of ReturnGIEK = Guaranti-Instituttet for Eksportkreditt (Norway)IDA = International Development AssociationOIP = Oil in PlaceSaga = Saga Petroleum, A.S.SPB = Saga Petroleum Benin, A.S.

Fiscal Year

January 1 to December 31

FOR OFFICIAL USE ONLY

PEOPLE'S REPUBLIC OF BENIN

Seme Oil Field Phase II Development Project

Credit and Project Summary

Borrower; People's Republic of Benin

Amount: SDR 17.2 million (US$18.0 million equivalent)

Terms: Standard IDA terms

Project Description: The purpose of the project is to assist the Governmentto optimize the development of the Seme oil field. Thefield is being developed by Saga Petroleum Benin (SPB),a Norwegian oil company, under a service contract withthe Government of Benin (Phase I). Specifically, theproject will permit further development of the provenreserves and delineation of possible extensions to thereservoir (Phase II). The project includes thefollowing components:

(i) the drilling of five development wells andtwo confirmation wells;

(ii) the installation of three monopodstructures and an integratedwellhead/production platform;

(iii) modifications to Phase I installations;

(iv) consultancy services for detailedengineering and supervision duringconstruction. Specialized consultants willalso be hired to assist the Government inmonitoring SPB's activities, evaluating gasreserves and studying the economics oftheir utilization; and

(v) training of Beninese professionals in thepetroleum sector.

Project Benefitsand Risks: The project will permit the Government to produce

an incremental 5.2 MMB from the field and make theoverall Seme development project profitable. Therisks associated with the project are thoseinherent in petroleum priduction. These concernparticularly the dritlir,g of dry wells, operatingproblems such as malfunction of downhole pumps,water and sand production, and possible improperreservoir management. These risks are acceptable

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

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as development and operating experience hasalready been gained on the field since June 1982,and appropriate steps have been taken to minimizethem. They include a 3-D seismic survey to betterlocate wells, an independent reservoir engineeringstudy, technical assistance from pumpmanufacturers, and provision of consultants'services for close technical supervision of SPB.There is a financial risk in the short termevidenced by the relatively low debt servicecoverage ratio of the project.

(US$ Millions)Estimated Project Costs Local Foreign Total

Drilling of seven wells 1.1 11.4 12.5Three monopods 0.3 5.5 5.8Integrated production platform and equipment 1.4 15.0 16.4Modifications of Phase I installations 0.2 1.2 1.4Consulting services - 2.6 2.6Training - 0.2 0.2Base Cost 3.0 35.9 38.9

Physical contingencies 0.3 3.6 3.9Price contingencies 0.2 2.3 2.5Total Project Cost 3.5 41.8 45.3

Financing Plan

IDA - 18.0 18.0EIB - 15.0 15.0Other co-financing - 7.5 7.5Government contribution 3.5 1.3 4.8

3.5 41.8 45.3

Estimated Disbursements (US$ Millions)FY85 FY86 FY87

Annual 11.1 5.0 1.9Cumulative 11.1 16.1 18.0

Economic Rate of Return: 60% for Phase II project11% for overall Senne development project

Staff Appraisal Report: No. 5011-BEN, dated May 30, 1984

INTERNATIONAL DEVELOPMENT ASSOCIATION

REPORT AND RECOMMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT

TO THE PEOPLE'S REPUBLIC OF BENINFOR THE SEME OIL FIELD PHASE II DEVELOPMENT PROJECT

1. I submit the following report and recommendation on a proposedDevelopment Credit to the People's Republic of Benin for an amount in variouscurrencies equivalent to Special Drawing Rights 17.2 million (US$18.0 millionequivalent) on standard IDA terms to help finance the Seme Oil Field Phase IIDevelopment Project.

PART I - THE ECONOMY

2. The latest economic report on Benin (Report No. 4686-BEN) was cir-culated to the Executive Directors in April 1984. The paragraphs below arebased upon that report and other information that has since becomeavailable. Annex I provides basic country data.

Political Background

3. After independence in 1960, a period of instability characterized byfrequent changes in Government prevailed in Benin until the revolution in1972, which brought to power the military Government of Lieutenant-ColonelKerekou. The country has since then enjoyed a comparatively long period ofpolitical stability under a one-party system. Following the adoption of a newcorstitution, President Kerekou was confirmed in 1980 as head of a largelycivilian Government.

Structure of the Economy

4. Benin is a small, poor nation with a population of 3.5 million and anestimated 1982 per capita CDP of US$280. Agriculture, the most importantsector of the economy, employs three-fourths of the active population andaccounts for 40 percent of GDP and 36 percent of foreign exchange earnings.There is a small industrial sector consisting of a few import substitution andagricultural processing plants. It contributed an estimated 11 percent to GDPin 1982. The tertiary sector is dominated by trade and transit activitiesthat link economic activity in Benin to conditions existing in neighboringeconomies.

5. The agricultural sector is predominantly foodcrop oriented, producingmaize, sorghum, yams, cassava, beans and small quantities of rice. Benin, atpresent, enjoys an overall food surplus; it is estimated that a significantportion of domestic foodcrop output (perhaps as much as 20 percent) isexported unofficiaLly to Nigeria and Niger. This offsets Benin's foodgrainimports which have been rising in recent years. The main export crops arepalm oil, cotton and peanuts. Cotton, which is well-suited environmentally to

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conditions in northern Benin, is rising in importance while oil palm in thesouth is in relative decline because of insuff-icient rainfall.

6. The production of petroleum, cement and sugar which have significantexport potential began recently. For cement and sugar, however, majormarketing hurdles will need to be cleared to permit export sales to takeplace, particularly to Nigeria.

Recent Economic Developments

7. Real GDP growth during 1978-1982 averaged about 5 percent per annum,up substantially from the 0.7 percent annual average during the 1972-76period. Growth appears to have been strong in 1977, 1981 and 1982 when therewere sharp increases in construction, manufacturing, trade activity and publicadministration. This growth was linked to the heavy public investment programand to strong growth in commercial activities due to the oil boom in Nigeriaand the uranium boom in Niger. Agriculture, on the other hand, consistentlygrew at less than one percent per annum between 1970 and 1975, and grew at anaverage rate of 2% between 1976 ancd 1981. Agricultural performance improvedsubstantially in 1982 and 1983 with a sharp rise in cotton output attributableto higher producer prices and the availability of modern inputs.

8. During the mid-seventies, the Government expanded its presence in themodern sector of the economy by nationalizing the major industrial enterprisesas well as extending its involvement in the agricultural sector. The FirstDevelopment Plan (1977-1980) went further by irnvesting in three largeprojects; Seme Petroleum (see para. 29), Save Sugar and Onigbolo Cement. Thispolicy of greater Government involvement has determined the course of therecent evolution of public finance, external debt, and external balance.

9. Until the late seventies, the Government maintained a conservativepublic finance posture. Tight control over expenditure resulted in currentbudget surpluses, which averaged 31 percent of revenues between 1977 andl979. Modest foreign borrowing financed the limited public investmentprogram. More recently, the public finance current surplus has beendeclining, partially because of rising current expenditures, about three-fourths of which are wages and salaries. The other factor contributing tothis decline is the weakened revenue base. Over half of public revenues arederived from import duties, of which a significant proportion is levied onimports re-exported (officially or unofficially) to Nigeria and Niger. Thedownturn in economic activities in these neighboring countries has reduceddemand and limited the inflow of dutiable goods that transit through Benin.In consequence, the current budget surplus fell to about 5 percent of revenuesin 1983.

10. Public enterprise financing also poses a problem for Governmentfinances. Two-thirds of the 60 public enterprises in Benin are in financialdifficulties. Losses have been financed by the state-owned banks, rather thanthrough transfers from the budget. As many of these advances cannot now berepaid, the Government, either as shareholder or as banker, will have to coverthese deficits. Public enterprise l fficulties have stemmed from poor initialproject design, undercapitalization, inexperienced business management,inadequate Government pricing and personnel policies, and otherinefficiencies. In 1982, the Government announced a series of measures to

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strengthen the public enterprises, including more realistic pricing policies,better incentives for managers and workers, tougher controls, and theliquidation of non-viable units. A program is now being prepared (see para.20) to support these decisions.

11. In the external sector the growth of exports has been modest whileimports have grown rapidly, mainly because of capital imports associated withthe major public investments. In 1981, the resulting current account deficitreached 34 percent of GDP as the investment ratio reached 35 percent of GDP.Financing came mainly from external loans, principally supplier credits andlong-term official lending.

Policy Changes and Future Prospects

12. Confronted by many problems, the Government has begun to eliminateeconomic distortions and to lay the foundation for growth. The Government hassought to strengthen its ability to manage its public finances includingexternal debt and to improve planning functions. Agricultural producer pricesare being raised, and input subsidies are being eliminated in a plannedfashion. Major reforms have been decided in the pricing, personnel andmanagement policies affecting the public enterprises, and some marginalenterprises have been closed. In addition, the Government has decided thatits direct involvement in productive activities will be reduced and privatecapital will be accorded a greater role in the development process. Thesepolicy changes, which are reflected in the new medium-term Development Plan(1983-1987) should lay the basis for more vigorous growth in the longer term.

13. Benin's growth performance will be limited by several constraintswhich make it unlikely that GDP will grow by more than an average of 3 to 4percent per year during the 1982-90 period, even taking the Seme oil outputinto account. Key constraints include the slowdown in demand in neighboringcountries and the poor initial performance of the cement and sugar projects.

14. The public finance situation is likely to remain difficult in theyears ahead due to the recurrent cost implications of recent majorinvestments, the need to re-finance a number of public enterprises, and theexternal debt problem. On the revenue side, the buoyancy in import dutiesover the last few years associated with goods re-exported to neighboringcountries is not likely to continue in the mid-1980s. The exploitation ofSeme oil is not expected to make even a modest contribution to fiscalresources until 1986. Import duties are projected to continue providingslightly over half of total Central Government revenues.

15. Benin's balance of payments is difficult to project because of thelarge size of unrecorded exports. It is estimated, however, that the currentaccount deficit in relation to GDP will decrease during the rest of the1980s. This results from expected new exports of petroleum, cement and sugarby 1985 and from a decline in the real value of capital imports from the highlevels of 1981-82, following completion of the cement and sugar projects. Asa result of a more modest leveL of public investment, fewer loans will berequired in the near-term. There-ore debt service ratios should begin tostabilize, although at a higher level than in the past. The ratio isprojected to remain at about the 25 percent level through 1990. To addressthe financial disequilibrium in general, the Beninese authorities have begun a

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dialogue with the IMF in the hope that this will result in an IMF-supported

stabilization program.

16. Benin remains a very poor country with large needs for directlyproductive investment and supporting infrastruct;ure. Its increased debtburden due to heavy foreign borrowing in support of public investments willconstrain future access to commercial loans. The Government has recognizedthe need to mobilize increased concessionary financing from bilateral andmultilateral sources, as reflected in the Donors' Roundtable Conference

convened in March 1983. In view of Benin's poverty and the inability ofpublic savings to finance more than 5-10 percent; of the future publicinvestment program, the country will continue to need foreign financing onconcessionary terms. Foreign donors should provide a large share of totalproject costs, including, if possible, the financing of local costs.

PART II - BANK GROUP OPERATIONS IN BENIN

17. To date there have been 19 IDA credits to Benin, including twosupplementary credits, totalling US$182.47 million. Five of the credits werefor agriculture, seven for road construction and maintenance, two for

education, two for energy, and one each for port expansion, urban water supplyand development of small- and medium-scale enterprises. Annex II contains asummary statement of Bank group operations in Benin as of March 31, 1984. Inthe past, the Bank Group's dialogue with Benin was limited and based on acase-by-case approach to lending operations. More recently, however, thepolicy and lending dialogue has intensified and Government has displayedconsiderable interest in and responsiveness to Bank advice and policyassistance.

18. A large proportion of Bank assistance to Benin's development so farhas been in the agricultural sector. IDA's earlier operations in this sectormet with mixed success and, in fact, during the execution of an IDA-FAC Zou-Borgou credit for cotton development made in 1972, cotton production actuallyfell. In 1977, a technical assistance credit was approved to help theGovernment better prepare rural development projects. The assistance providedby this credit was instrumental in preparing the Borgou, Zou and Atacoraprovincial rural development projects. Under the Borgou project, for which aUS$17 million IDA credit was approved in April 1981, cotton production in theBorgou province doubled in the 1982-83 season and sharply increased again inthe 1983-84 campaign. The Zou Project (FY83 IDA US$20 million) is noteworthyfor the fact that it includes financing of fertilizer import's on a decliningscale as a response to the Government decision to phase out fertilizersubsidies and reduce pesticide subsidies. The rural development project inAtacora Province, appraised by the Bank, was financed by a US$6 million creditfrom the International Fund for Agricultural Development (IFAD).

19. In the tranzport sector, Bank involvernent began with a Land TransportStudy which led to tIne financing of a four-year Highway Maintenance Projectbeginning in 1969-1970. Since then, the Bank Group has financed three highwayprojects, two feeder roads projects and a port extension project. In general,these projects were satisfactorily completed with actual economic rates of

return comparing favorably with appraisal estimates. In the case of the ThirdHighway Project, however, the project completior. report notes thatinstitutional development objectives were only partially met. A third FeederRoads Project was approved on May 29, 1984.

20. Following the Government's decision in 1982 to proceed with thereform of public enterprises, it requested Bank group support in the publicenterprise sector. Discussions in progress are expected to lead to agreementon specific policies for this sector. An IDA credit to finance detailedstudies needed to prepare individual enterprise rehabilitation programs, andto finance the execution of these programs, is under preparation. A secondproject under preparation is a technical assistance effort designed tostrengthen Benin's macroeconomic planning and public finance management.Other assistance to Benin is expected to continue in the transport, education,urban and energy sectors. In the energy sector, the Nangbeto HydroelectricProject, to be implemented jointly by Benin and Togo, will be presented forBoard consideration shortly.

21. Benin's performance with respect to project implementation anddisbursement is generally satisfactory, and the Government is quite familiarwith the Bank's procurement and disbursement procedures. Delays are sometimesencountered, however, because of the Government inability to make timelycontributions of counterpart funds, a problem which has been exacerbated bythe difficult budgetary situation.

PART III - THE ENERGY SECTOR

Energy Demand and Supplies _/

22. Because of low per capita income (about US$280 in 1982) and anundeveloped industrial sector, Benin's energy consumption--230 kg of oilequivalent per capita in 1982--is among the lowest in the world. Traditionalfuels, primarily wood and charcoal, satisfy 87% of energy needs, the restbeing met by imported petroleum products (11%) and imported hydropower (2%).The country's major energy sources are dense forests and savannahs, coveringabout 78,000 km2, but their indiscriminate use is leading to rapiddeforestation near cities and villages. The Government has taken steps topromote small- and medium-scale forestry industries and to reduce uncontrolledexploitation of natural woodland by establishment of plantations. Fiveprojects are under implementation or preparation with financing from variousaid agencies including a US$13 million forestry project to be financed by IDAand the Federal Republic of Germany. The hydrocarbon resources are not yetfully appraised. A small offshore oil field, Seme, is under exploitation bythe Government with the assistance of a Norwegian oil company. The rest of

1/ The energy data base in Benin is poor and incomplete. The Bank EnergyAssessment mission, which visited Benin in August 1983, prepared an energybalance and evaluated the issues and options in the sector. This sectionrelies primarily on this information.

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the basin has yet to be explored and the Government plans to promote acreageto foreign oil companies within the next six months under an explorationpromotion program financed under Credit 1207-BEN (see para. 28). Benin'shydroelectric potential is estimated at 750 GWh per year in addition to thejoint 65 MW Nangbeto hydroelectric scheme with Togo which is under an advancedstage of preparation with financing from Credit 1189-BEN.

23. The demand for petroleum products which was growing at about 12% p.a.in the late 1970's decreased sharply in 1980 following a 50% increase in theprice of products. Since then, consumers have resorted to unrecorded importsfrom neighboring countries which are estimated to represent 30% of theofficial imports. The official consumption totalled 139,000 tons in 1982 (theequivalent of 3,000 BD), representing an import bill of US$48 million, or 20%of the value of merchandise exports and 8.4% of total merchandise imports inthat year. The Seme field has been producing crude since October 1982. Beninhas no refinery, all petroleum products are imported (mostly from Algeria),and the Seme crude is exported. The production from Seme is forecasted toplateau around 7,000 BD in the years 1985-87 and decline thereafter, so Beninis expected to again become a net importer in the petroleum subsector around1989 unless other fields are discovered and developed by then.

24. Electric energy consumption, which totalled 148 GWh in 1982, wasmostly supplied (92%) by the Akosombo hydroelectric plant in Ghana. Theinstalled thermal capacity in Benin--about 40 MW plus two 8-MW diesel units tobe commissioned soon--comDares favorably with a peak demand which totalledonly 27 MW in 1982. The thermal plants, used historically mostly as standbyunits, are now operating with much higher load factors since the late 1983decision by Ghana to curtail by 50% its delivery of hydropower because ofcritically low water levels in Volta Lake. The consumption of petroleumproducts for thermal power generation is therefore expected to increasesignificantly until hydro energy is again available.

Energy Pricing

25. Prices for traded fuelwood (only 15% of total consumption) haveincreased more than ten-fold in current terms d[uring the last decade and thecost of fuelwood supplies is quite high compared to the average monthly income(about 10%), although fuelwood prices are about 50% below kerosene prices.Electricity prices have just been increased by about 80% to reflect the long-term marginal cost of electricity, as recommended under a tariff studyfinanced under Credit 1189-BEN. Retail prices of petroleum products are onthe average set above border prices. The price of gasoline is US$1.75/galequivalent, 27% above the economic cost of US$1.38/gal.- Kerosene is theonly product which is subsidized (about 10% below the economic cost) forsocial reasons, as is the case in most African countries. The prices ofpetroleum products could not be increased much higher because of the readyavailability of these products from a low-cost source across the Nigerianborder which places Benin in an atypical situation where demand forofficially-imported petroleum products is very price-elastic.

1/ Based on a March 1983 exchange rate of FCFA 350/US$, and includinghandling, transportation, distribution and profit margin.

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Sector Institutions

26. A number of government institutions participate in energy policymaking. The Ministry of Industry, Mines and Energy (MIME) supervises thestate-owned power and water utility and the entity in charge of supervisingthe search for hydrocarbon resources in the country. It also oversees Saga, aNorwegian oil company, which is developing and operating the Seme field onbehalf of the Government. The Ministry of Commerce supervises the stateenterprise which has a monopoly on petroleum products imports, transport anddistribution. The Ministry of State Farms, Livestock and Fisheries supervisesthe state enterprise responsible for developing forestry resources, promotingmore efficient production of traditional fuels, and distributing wood andcharcoal. The Ministry of Finance and the Ministry of Planning play a role inenergy matters by administering fuel taxation and participating in decisionson the public investment program. Energy prices are set by a Price Committeecomposed of representatives of various ministries and political organizations.

Oil Exploration History and Government Strategy

27. Benin's main sedimentary area covers about 15,000 kmi2, of which onlysome 2,000 km2 on the continental shelf (up to 200m water in depth) seem tohave a fair hydrocarbon potential. Benin's coastal basin belongs to theDahomey Embayment, a small geologic province different from neighboring basinsin its stratigraphic sequence and tectonic features. Two foreign oilcompanies, Union Oil (1965-1972) and Shell Oil (1971-1975), have explored forpetroleum in offshore Benin, shooting 6,000 km of seismic lines and drillingnine exploratory wells. In 1968, Union Oil discovered the Seme field 15 kmoff the coast in water depths ranging from 20 m to 54 m. In late 1973, itproposed a development plan to the Government but negotiations fell throughand Union Oil relinquished its exploration acreage, given the expectedmarginal internal rate of return of the development scheme by industrystandards. Subsequent negotiations with several oil companies did not bringabout an agreement to develop the Seme field on a concession basis, becausethe economics of the field, even after the 1974 oil price increase, remainedmarginal and the oil companies could not offer terms attractive to theGovernment. The Government decided in 1978 to develop the field on its ownwith the support of the Norwegian Government. In May 1979, the Governmenthired as operator under a service contract Saga Petroleum, A.S. (Saga), a

J private Norwegian oil company. Financing was obtained from Norwegian banksand guaranteed by the Norwegian Government. Work on the project was initiatedin April 1980 (see para. 29 for further discussion on the Seme field).

28. Since 1977 no oil company has held exploration rights in Benin. AsBenin's sedimentary basin outside Seme was little-known, the Governmentdecided to get more data to see if it could promote exploration by foreign oilcompanies. Thus, the IDA technical assistance project to the petroleum sector(Credit 1207-BEN approved in February 1982 - see para. 37) included apetroleum exploration promotion component. Under this financing, 1,500 km ofoffshore seismic lines were acquired and processed in 1982-83. The basinevaluation report concludes that the Seme field appears to be unique in

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Benin's offshore basin, and a similar combination of traps is unlikely to befound. The western half of the offshore basin and the onshore basin areconsidered to have low prospectivity. However, various prospects have beenidentified in the eastern part of the basi.n. They can be divided into twocategories: (i) structural traps which appear too small to attract most ofthe foreign companies, but could still interest the Government as an additionto the Seme field; and (ii) subtle traps (unconformity, stratigraphic andpaleogeomorphic traps) which might interest foreign oil companies, providedthe terms of the contract reflect the high risks involved. The Government hashired a consultant to prepare the economics of a model contract, and plans toinvite bids for acreage acquisition in the second half of 1984.

Phase I of the Seme Oil Field Development Project

29. Implement: tion and Production History. Seme oil reserves werediscovered in two ndependent fields: the main one, North Seme, and a smallerone, South Seme. Saga envisaged the development of the fields in twophases: Phase I, where 9.8 MMB would have been recovered by natural depletionwith six wells (four in North Seme), and Phase II, originally envisaged as asecondary recovery project, where an additional 11.9 MMB would have beenrecovered by water injection. Phase I included mainly the construction of ajack-up platform for drilling and workovers, three wellhead platforms, one ofthem being also a production platform, and an onshore tank farm. Allinstallations were ready for the spudding of the first well in June 1982,within the time frame and budget established by Saga. However, the drillingand initial operating phase suffered from several technical setbacks whichdelayed production: (i) the first well proved to be dry, and a side-trackingundertaken a year later also proved to be dry; (ii) the jack-up platform hadan accident to one of its legs which required a lengthy repair; and, (iii) thedownhole pumps broke down frequently thus limiting production. The fieldstarted producing commercially on October 31, 1Si82, the first crude shipmenttook place on April 15, 1983, and accumulated production was about 2 MMB as ofMarch 1, 1984. Production averaged 7,300 BD in the months of January-March1984. Five wells are now in production and the sixth well of Phase I isexpected to be drilled in November 1984. The production history and reservoirsimulation studies indicate the existence of a partial water drive, thus theimplementation of the above-referenced secondary recovery project has beenpostponed and may not be required at all. A step-out confirmation well,drilled in July 1983, has proven a western extension of the field which willbe developed under the proposed Phase II project. Other potential fieldextensions have been identified to the north and northwest of the field whichwill be delineated under the proposed project. A deep production well drilledin March 1983 penetrated a gas strucLure in the deeper zone of the reservoirwhich will be tested under the proposed project.

30. Costs and Financing. Phase I investments, when com eted, areexpected to cost NKr 780 million (US$121 million equivalent)- , with a costoverrun of 5% over the budget due mostly to the drilling of two dry wells.The Beninese Government is the sole owner of the project assets. It initially

1/ Excluding capitalized training and Phase II preparation costs financedunder IDA Credit 1207-BEN (about US$5 rnillion).

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invested US$13 million equity in the project in 1980. Saga is not aninvestor. A blend of commercial loans and export credits totalling aboutUS$120 millio and covering 90% of the initial project financingrequirements- (including about US$19 million of interest during construction)was secured from Norwegian banks (US$112 million equivalent) with theguarantee of the Norwegian Export Guarantee Institute (GIEK) and a UK bank(US$8 million equivalent) with the guarantee of the British Export CreditGuarantee Department (ECGD). The loans and export credits are repaid through

N, a security arrangement, whereby all sales proceeds are deposited in a trusteeaccount managed by a Norwegian Bank.

31. The financial performance of Phase I has been unsatisfactory becauseof delays in production and a drop in oil prices. In late 1982 and in 1983,Saga was operating the field on a precarious cash-flow basis, delaying some ofthe suppliers' payments until the first sales revenues came in May 1983 asPhase I loans were totally drawn down. Moreover, the Phase I debt service wasestablished on a tight schedule which left little room for delays and/or adecrease in revenues. Although the first interest payments due onDecember 31, 1983, were paid on time, sufficient funds were not generated bythe project to cover the first US$10 million principal payment due on thatdate. In December 1983, the Phase I lenders and the Beninese Governmentagreed in principle to reschedule this principal payment and the one due onJune 30, 1984 to be repaid in five semi-annual installments starting onDecember 31, 1984. The formalization of the rescheduling agreement would be acondition of credit effectiveness (Section 6.01(b) of the draft DevelopmentCredit Agreement). The financial structure of the project will bestrengthened by the provision of equity through the proposed IDA credit. Thepossibility of increasing the equity base of the project through investmentsby private partners was envisaged. This approach was not pursued due to therelatively low profitability of the overall project and the commitment oflarge parts of the cash flow to service the debt of Phase I.

32. Institutional Arrangements. The Government, which owns directly allassets of the project, has not created a national oil company. Saga, underits service contract, became the Government's authorized agent for all fielddevelopment, production and marketing operations, as well as for securingfinancing for the project. Saga has created a wholly-owned subsidiary, SagaPetroleum Benin A.S. (SPB), registered in Norway, with a branch office inBenin. SPB employs both the expatriate (70)2' and Beninese (310) staff

P working on the project. Saga appoints, subject to approval of the BenineseGovernment, a general manager for SPB who makes all operating decisions in thefield. Under Phase I institutional arrangements, the Beninese Government hasbeen supervising SPB's activities with four "co-managers," employed by SPB who

1/ The balance of financing requirements, US$7 million (Investments $121million + interest during construction US$19 million - Equity US$13million - Loans US$120 million), has been financed from the project cashflow.

2/ Including the 20 expatriate staff of the drilling contractor. The numberof expatriate staff for Phase I operations would be reduced to 50 by end-1984.

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have therefore a dual role: (i) as employees of SPB they perform their ownday-to-day activities, as would any other manager, and (ii) as Governmentrepresentatives they supervise the activities of SPB and advise the Governmenton Beninese decision making. While this arrangement has allowed theGovernment representatives in SPB to receive effective on-the-job training, itlimited their time available to effectively monitor SPB's activities andcreated a potential conflict of interest. This issue has been resolved forPhase II by the creation of a small independent project unit in charge ofmonitoring SPB's activities which will report directly to the Minister ofIndustry, Mines and Energy (see para. 50).

33. Salaries for Beninese staff are in line with neighboring countries'industry practices and are significantly above average Beninese salaries forsimilar jobs in other sectors. There has been no Beninese turnover sinceproject start. The Beninese staff of SPB will be subject to a framework forsalary policy (Convention Collective) that will regulate salaries in thesector. It was agreed upon during negotiations that the Government would paythe petroleum sector staff according to the above arrangements (Section 3.04of the draft Development Credit Agreement) and the signature of the ConventionCollective would be a condition of credit effectiveness (Section 6.01(d) ofthe draft Development Credit Agreement).

Actions To Be Taken for Phase II Implementation

34. The implementation of Phase I has been constrained due to thespecific arrangements made initially (tigh project financial structure, tiedfinancing, limiting cost competitiveness,- and management by a relatively newoil company). The technical setbacks described above have endangered thefinancial viability of the project. However, the outlook for recovery appearsfavorable. The western extension of the field has been proven and additionalpossible reserves have been identified. There is evidence of a partial waterdrive which will allow a higher recovery than anticipated without need ofwater injection. The operating efficiency, principally downtime due to pumpbreakdown, has improved. The drilling efficiency has also improved.

35. The Beninese Government has decided to continue to entrust SPB withdeveloping and operating the field. This arrangement is acceptable as theGovernment has agreed to take the following actions:

(a) set up the above-referenced project unit, to be assisted by anexpatriate petroleum engineer-consultant, to closely monitorSPB's activities;

(b) strengthen the financial structure of the project by providingadditional equity through the proposed IDA Credit;

1/ At least 72 percent of the goods and services had to be procured fromNorway.

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(c) introduce international competitive bidding procurementprocedures to minimize the Phase II investment costs;

(d) make its best efforts to minimize operating costs byintroducing competitiveness when contracts with existingservice suppliers expire;

(e) amend the service contract with SPB to reflect the revisedinstitutional arrangements; and

(f) have independent auditors acceptable to IDA perform a detailedfinancial audit of the project accounts.

The Government's Strategy and IDA's Role in the Energy Sector

36. The Government's strategy in the energy sector is sound andcautious. Its major goal is to develop the country's limited energyresources. In the power sector, IDA has been helping the Beninese Governmentprepare the Nangbeto hydroelectric project and an electricity master plan, andimplement appropriate tariffs (Credit 1189-BEN). A forestry project,including a fuelwood plantation component, that would assist the Government toalleviate fuelwood shortages is under consideration for IDA financing (seepara. 22).

37. The Government's investment and pricing policy in the petroleumsubsector is adequate. Prices are above international levels and plans tobuild a refinery have been abandoned. The Government's strategy fordeveloping the petroleum resources of the country is two-fold: to develop theSeme oil field on its own while at the same time to promote the rest of thesedimentary basin to the private oil industry. IDA has assisted the BenineseGovernment in this strategy, under Credit 1207-BEN approved in February 1982,which had three major objectives: (a) training Beninese personnel to beemployed on the Seme field; (b) promoting exploration acreage to privateindustry; and (c) preparing Phase II of the Seme development project. Thetraining component is almost completed: (a) 104 Beninese-trained techniciansare employed on the Seme field, replacing costly expatriate manpower (e.g.,certified welders, mechanics, roughnecks, derrickmen and wireline operators);and (b) 15 Beninese professionals (drilling, production and reservoirengineers, geologists and geophysicists) have responsibilities within SPB andthe Government unit in charge of supervising the promotion of exploration byprivate companies. The Government has prepared a second-phase trainingprogram for the Beninese to be promoted to replace expatriates and foradditional staff to be recruited for Phase II and replace the Beninese staffpromoted. This program will be financed from the remaining uncommitted fundsof Credit 1207-BEN until mid-1985 and thereafter through the proposed IDACredit (see para. 40). The progress of the exploration promotion component isdiscussed in para 28. The engineering studies financed under Credit 1207-BENhave been the basis for the preparation of the proposed Phase II developmentproject.

38. IDA's participation in financing Phase II of the Seme project will:(a) assist the Government to develop the field in a technically andeconomically efficient manner. This will continue what has already been

- 12 -

accomplished under Credit 1207-BEN, not only in terms of financingconsultants, but also through direct advice from Bank Project Staff (e.g.,Project Staff recommended a 3-D seismic survey to reduce risks of drilling drywells); (b) attract co-financing for the project. The World Bank Grouppresence provides support for the project both in terms of technical andfinancial risks. World Bank Croup involvennent is an incentive for otherlenders (European Investment Bank and possibly export credit agencies) to

participate in the financing of a project which originally suffered severaltechnical setbacks. The provision of IDA funds as equity injection to theproject will permit a financial restructuring to strengthen the debt repayingcapability of the project. This is particularly important as the short-termfinancial outlook for the project remains uncertain; and (c) improve theproject's institutional arrangements by assisting the Government in moreefficiently supervising the development of the field by SPB.

PART IV - THE PROJECT

Project Objectives and Background

39. The proposed project is the logical continuation of the first-phasedevelopment of the Seme field. Its basic objective is to fully develop theproven reserves, including the western extension proven in July 1983 (seepara. 29), and to delineate possible additional reserves to ensure optimumdevelopment of the field. The Government officially requested IDA assistancein financing Phase II in July 1982, but, due to a change in reservoir behaviorand interpretation, the definition of the final project scope was delayeduntil the last quarter of 1983. The project was appraised in December 1983.Credit negotiations were held in Washington, D.C. in mid-May 1984. TheBeninese Government was represented by a delegation headed by Mr. BarthelemyOhouens, Minister of Industry, Mines and Energy. The Staff Appraisal Report(No. 5011-BEN), dated May 30, 1984, is being distributed separately to theExecutive Directors. A Supplementary Data Sheet appears as Annex III.

Project Description

40. The proposed project comprises the following components:

(a) Drilling of five development welLs. Five development wellswill be drilled to fully develop the proven reserves of thefield. An estimated incremental 5.2 YMB would be recoveredover the next eight years. The first well will be drilled fromthe existing platform, P-1, the second completed as a monopod,and the last three completed from an integratedwellhead/production platform (component (e));

(b) Drilling of two confirmation wells. Two confirmation wellswill be drilled to prove the possible north and northwesternextensions of the field. If these reserves are proven, theproposed project could be followed by a Phase III project todevelop them;

- 13 -

(c) Modifications to Phase I installations. The existingproduction platform (P-3) will be modified to handle moreliquid volume by installing emulsion treatment equipment,booster pumps and electrical power generation. On the onshoretank farm, an electrostatic heater will be installed to furthertreat emulsion problems. The existing communication systemwill be expanded to have a two-way line of communicationbetween all offshore and onshore installations;

(d) Monopod platforms. Three monopod platforms will be constructedand installed. One will be installed on a development well torapidly put it in production. The two other monopods will beinstalled on the confirmation wells, to put them in production;

(e) Construction and installation of an integrated well andproduction platform. The platform will be constructed toaccommodate the last three development wells of the Phase IIinvestment program, and other additional wells that may berequired in a possible Phase III development project. Theplatform will also include incremental production and livingfacilities; and

(f) Engineering and consultancy services. Engineering studies andbid preparation will be performed for the platform P-3modification and monopod and integrated platforms, includingsupervision (project management) during construction andinstallation. Specialized consultancy services will becontracted to assist the Government in-monitoring SPB'sactivities. The natural gas resources encountered in the Semefield (see para. 29) will be tested to assess reserves anddeliverability. Consultants will be contracted to study thedetailed economics of their utilization.

(g) Training program. This component will finance specializedtechnical courses overseas for Beninese professionals (mostlydrilling, production and reservoir engineers and geologists) toimprove their technical capabilities so that they could replaceexpatriates.

41. The project will be implemented in stages. The first stage willinclude the drilling of the first two development wells and the twoconfirmation wells. The second stage will be the drilling of the last threedevelopment wells from the integrated production platform. The installationof the platform is justified mostly on the assumption that the possibleadditional reserves will be proven. If the results of the confirmation wellsare negative, it could be more economical to use monopods rather than anintegrated well and production platform to put the last three developmentwells of the project in production. The project scope would be modified andits cost reduced (see para. 47). It was agreed during negotiations that theint-grated platform would be constructed and installed only if the Governmentand IDA have determined that, based on the results of the first confirmationwell and an updated feasibility study, the installation of the integratedplatform is economically justified (Schedule 2 to the draft Development CreditAgreement).

- 14 -

Project Costs and Financing

42. The project is estimated to cost US$45.3 million, including physicaland price contingencies. The foreign component is estimated at US$41.8million. Physical contingencies were determined on the basis of a 10% rateand price contingencies on the basis of a 3.5% inflation rate in 1984, 8% in1985, and 9% in 1986.

43. The proposed financing plan for the project is as follows:

US$ Million Percent,%

IDA Credit 18.0 40EIB Loan 15.0 33Other Co-Financing 7.5 17Government Contribution 4.8 10

Total 45.3 100

44. The proposed IDA Credit will finance about 40% of the estimated costsof the project. It will finance engineering, supervision (project management)and consultant services, training, drilling and completion services, materialsand equipment for the five development wells, construction and installation ofone monopod platform, and power generation systems and production faciiitiesto be installed on the integrated platform. The provision of IDA funds isjustified both on project and country grounds. As indicated in para. 41, theproject has suffered from financial problems in the past and the short-termoutlook is still uncertain. The project definitely needs an equityinjection. As Benin is itself in a strained financial situation, the equitycan be provided only through concessionary financing. It should be notedthat, when the US$5 million disbursed for trai;ning and preparation of theproject under Credit 1207-BEN is added, the ov(erall IDA contribution to theentire Seme development scheme would represent only 13% of its total cost(i.e., including Phase I).

45. The European Investment Bank (EIB), wlhich participated in IDA'sappraisal mission, would lend ECU 18 million (US$15 million equivalent).US$3.7 million equivalent would be at preferential sates ("risk capital") tocover the financing of the two confirmation weLls.! The balance of EIBfinancing, covering mostly the financing of production structures (twomonopods and part of the integrated platform) would be under the ratesstipulated in the Lome II Convention (interest rate of about 10.5%, ten-yearmaturity, including four years of grace). The EIB loan is scheduled to besubmitted to its board in mid-June 1984. It would be a condition ofeffectiveness of the proposed Credit that IDA be notified by the EIB that anyconditions precedent to the first disbursement under the EIB Loan Agreement,except for the effectiveness of this proposed credit, have been fulfilled(Section 6.01(c) of the draft Development Credit Agreement). As the EIB

1/ The interest rate is 1% until the well is declared productive and 7%thereafter, the principal to be repaid in ten years. If the well is dry,the debt would be cancelled.

- 15 -

wishes to have its loan (i.e., excluding risk capital) repaid from the trusteeaccount (see para. 30), it has been agreed upon in principle between Phase Ilenders and the Beninese Government that the EIB, and other institutions whowould request it, would be included in the existing security arrangements on a

pari passu basis.

46. The Government will provide an equity contribution of US$4.8 million,

about 10% of the project costs, from the internal cash generation of the Semeproject. The principle of allowing disbursements from the trustee account tofinance the above expenditures has been agreed upon between Phase I lendersand the Beninese Government and the finalization of the agreement would be acondition of credit effectiveness (Section 6.01(b) of the draft DevelopmentCredit Agreement).

47. The proposed IDA credit and EIB loan together with the US$4.8 million

cash flow contribution will cover 83% of the financial requirements of theproject. On the likely assumption that the results of the confirmation wells,to be drilled in the first stage of the project (see para. 41) prove positive,the Government of Benin and SPB have contacted suppliers and export creditagencies for financing of the remaining 17% (US$7.5 million) required tocomplete the construction of the integrated platform. Under thesecircumstances, due to the type of equipment involved, it is expected thatexport credit financing would be forthcoming. However, as a prudentcontingency, it has been agreed upon in principle between the Government ofBenin and Phase I lenders that any shortfall in export credit financing wylldbe met from the trustee account, if additional reserves have been proven._The finalization of this agreement would be a condition of crediteffectiveness (Section 6.01(b) of the draft Development Credit Agreement). Inthe less likely event that the results of the confirmation wells are negative,the project scope would be modified. The integrated platform would not beconstructed but be replaced by additional monopod platforms and relatedequipment. Project costs would be reduced to US$34.5 million. The reducedinvestment requirements, accompanied by less proven reserves and a reducedgeneration of revenues, would make it less appropriate for the Government ofBenin to seek export credits in such an eventuality. Despite the reduction inrevenue in such a case, it would still be expected that a cash flowcontribution to project costs of about US$3.5 million, 10% of the projectcost, should be feasible, and if so, about US$1.0 million may not have to bedisbursed from each of the external funding source commitments.

Procurement and Disbursements

48. The IDA-financed components for works, materials and equipment willbe procured under ICB in accordance with World Bank guidelines. This willinclude the procurement of: (a) cement and chemicals, mud chemicals, corebits, drilling bits, tubular goods, and downhole equipment to drill the five

1/ In this case, additional production would be available from theconfirmation wells, thus making possible a higher contribution from thecash flow (financial projections shown in para. 52 are based on provenreserves and therefore exclude the potential contribution of theconfirmation wells).

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development wells; (b) construction and installation of one monopod platform;and (c) power generation systems and production facilities to be installed onthe integrated platform. Drilling and completion services (cementing,directional drilling, electrical logging, and drilling contractor (laboronly)) will be procured by extending the existing contracts available underthe ongoing Phase I development project. The selection process and the termsof the contracts, estimated to cost US$4.5 million or 25% of the proposed IDACredit, have been reviewed and are acceptable to IDA. Consultants will beselected according to World Bank guidelines. Some consultants have alreadybeen selected according to World Bank guidelines under Credit 1207-BEN, andtheir contracts will be extended. The EIE would finance under its owninternational competitive bidding procurement procedures the productionfacilities (two monopods and part of the integrated platform). The tablebelow summarizes the procurement arrangements.

Procurement Method (US$ Million)

Extension ofProject Element ICB Existing Contracts Other Total Cost

1. Drilling and Completionof Wells

a) Services - 7.0 - 7.0_ (4.cj)d/ _ (4.5)

b) Materials/Equipment 7.7 - 7.7(5.0) - (5.0)

2. Modifications to Phase IInstallations 1.6 1.6

3. Production Facilitiesa) Monopod Structures 6 .5c/ - - 6.5

(2.3) - - (2.3)b) Integrated PLatform

(i) Well/ProductionPlatform 5.5./ - 8.2 13.7

(ii) Equipment andProductionFacilities 2.9 - 2.6 5.5

(2.9) - - (2.9)

4. Engineering, Supervisionand Consulting Services - 3.1 3.1

(3.l)b/ (3.1)

5. Training 0.2 0.2- - (0.2) (0.2)

TOTAL 24.9 7.0 15.7 45.3(10.2) (4.5)) (3.3) (18.0)

a/ Figures in parentheses ar- the amounts financed by IDA.b/ Selected in accordance with Bank Guidelines.c/ Including international competitive bidding procedures of the European

Investment Bank.

- 17 -

49. It is proposed to allow advance contracting for US$2.0 million andretroactive financing up to the amount of US$1.5 million, 8% of the IDAcredit, for drilling and completion services and consulting servicescontracted after March 31, 1984. A condition of disbursement for the powergeneration systems and production facilities to be installed on the integratedplatform would be that the Government and IDA have determined that, based onthe results of an updated feasibility study, the installation of theintegrated platform is economically justified (Schedule 1, para. 4(b) to thedraft Development Credit Agreement). The project is expected to be completedby December 31, 1986. The closing date will be June 30, 1987.

Project Implementation

50. The project will be implemented over the period mid-1984 to end-1986by SPB under close Government supervision. The Government will set up aproject unit composed of three professionals assisted by at least oneexpatriate petroleum engineer/consultant on a regular basis, and otherspecialized consultants as needed. The unit will report directly to theMinister of Industry, Mines and Energy. The role of the Project Unit will beon the one hand to supervise SPB's service contract and activities, includingdiscussions of budget proposals, drilling locations, and reservoir management,and on the other hand, to serve as a liaison between the Government and SPB,financial institutions, and consultants. The precise functions andresponsibilities of the Project Unit were agreed upon during negotiations.The establishment of the unit, and hiring of the staff with qualifications andexperience satisfactory to IDA and of the expatriate petroleumengineer/consultant would be a condition of credit effectiveness (Section6.01(a) of the draft Development Credit Agreement). The Government considersthat the above arrangements will permit it to exercise its control over thedevelopment and exploitation of the field. Should the Government decide laterto create a national oil company, it would consult with IDA on its proposedorganization, financial management and operations, in particular on theproposed methods for the transfer of assets and liabilities, as agreed uponunder Credit 1207-BEN (Section 3.07 of the draft Development CreditAgreement). Amendments to the service contract with SPB to cover the Phase IIdevelopment are being negotiated. They include, in particular, a definitionof Phase II activities and a clarification of decision-making responsibilitiesunder the revised Phase II institutional framework (i.e., the creation of theProject Unit). The Government has also decided to renegotiate SPB'sremuneration formula. A consultant is assisting the Government in thesematters under financing of Credit 1207-BEN. It would be a condition ofdisbursement for the engineering and supervision (project management) servicesthat the above-referenced service contract has been amended in a mannersatisfactory to IDA. (Schedule 1, para. 4(c) to the draft Development CreditAgreement). It was agreed upon during negotiations that the Government wouldcontinue to employ a project management company under a service contractsatisfactory to IDA (Section 3.03(a) of the draft Development CreditAgreement).

Accounting, Auditing and R-porting

51. SPB has developed a commercial accounting system for the Semeproject. The 1980 and 1981 project accounts and the accounts as ofFebruary 28, 1983 (date of official "project completion" according to Phase I

- 18

loan agreements) have been audited by Saga's Norwyegian external auditor. TheGovernment has hired an international audit company to undertake a detailedaudit of the project's account as of Decernber 31, 1983. This audit isfinanced under Credit 1207-BEN and the auditor will also train Beninese staffto audit petroleum sector accounts. The 1983 audit report would be submittedto IDA by September 17 1 984e It was agreed upon during negotiations that thefuture Seme project accounts and audiit report would be submitted to IDA notlater than six months after the close of the fiscal year (Section 4.01(b) ofthe draft Development Credit Agreement). It was also agreed upon that theGovernment would continue to prepare the mnonthly operational reports for theSeme Project which are telexed tC all lenders and submit quarterlyconsolidated progress reports to IDA3 rSect:ion 3.06(c)(i) of the draft

Development Credit Agreement)c

Financial Evaluation

52. As indicated in para. 30, the project suffered initially from severaltechnical setbacks which have led to a rescheduling of Phase I loans. Theunsatisfactory financial performance of Phase I requires injection of equity,which will be provided by the Government through the proposed IDA credit, toDut the project back on a sound financial footing. The financial evaluationof the project depends mostly on the production assumptions. SPB and anindependent consultant- Franlab, have prepared production projections based onthe proven reserves k'.e., excluding possi.ble reserves to the north andnorthwest of the field) which show t:hat the project would generate a sizeablesurplus to the Government. The appraisal mission estimated that a much morecautious attitude is required at this stage, as experience with pumpefficiency and water intrusion is insufficient to guarantee that theproduction rates estimated by SPB could be achieved (total recovery of about22.5 MMB by 1992). Financial projections based on a conservative productionprofile prepared by the appraisal mission (total recovery of 17.7 MMB by 1992)and the price of oil remaining constant in real terms at US$26.451 indicatethe project's financial condition will remain uncertain in the short term(1984-1986). The debt service coverage ratio would average 1.3 in thatperiod. A sensitivity analysis indicates that if the price of oil remainsconstant in nominal terms in the years 1984-1986 the projected cash surplusesafter servicing the debt would be reduced from about US$22 million to US$5million in this period. The uncertainty on production and prices clearlyjustifies the injection of equity th-rough the proposed IDA Credit. Thelonger-term outlook is more favorable, with debt service coverage reaching asatisfactory level in the 1.8-2.0 range. The table below summarizes theproject's main financial indicators.

1/ Net FOB price for the three shipments from November to February 1984.The Government of Benin has signed a one year sales contract with anAmerican oil company. A longer term contract would be difficult to obtainunder current oil market conditions.

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(US$ million in current terms)

1984 1985 1986 1987 1988-1992

Net sales 63 69 80 79 253Operating Costs (23) (25) (28) (28) (146)Internal Cash Generation 40 44 52 51 107Investments (14) (24) (10) - -Borrowings 6 10 6 -

Equity Injection (Proposed IDACredit) 3 12 3 - -

Debt Service (27) (40) (39) (29) (54)Net Cash Flow 8 2 12 22 53Debt service coverage 1.5 1.1 1.3 1.8 2.0

53. As it is of primary importance to follow closely the project'sfinances, and particularly to control operating costs, it was agreed uponduring negotiations that the Government would submit to IDA for its review andcomments (i) the annual operating and investment budgets at least two monthsbefore the beginning of each fiscal year; and (ii) the drilling program,including recommendations for detailed drilling locations at least one monthbefore the drilling of each well (Section 3.06(c)(ii) of the draft DevelopmentCredit Agreement). Moreover, it was agreed upon during negotiations that theGovernment would introduce competitiveness when contracts with existingservice suppliers expire with a view to minimize project operating costs(Section 4.03 of the draft Development Credit Agreement).

Benefits and Risks

54. The economic benefits of the project are measured in terms ofincremental exports of crude (about 5.2 MMB) resulting from the implementationof Phase II. On the assumption that crude prices would remain constant inreal terms at US$26.45/Bbl, the economic rate of return (ERR) for the projectis about 60%. This high rate of return results from the fact that most of therequired production infrastructure already exists, which allows rapidproduction from the first wells to be drilled, and from the fact that a greatpart of the operating costs are fixed. The Phase II project would make theoverall Seme oil field development project more economical to the Government(ERR of 11%). An analysis of the sensitivity to alternative pessimisticassumptions (15% decrease in revenues, 15% increase in costs) indicates thatunder all such scenarios the ERR of the Phase II project would remain abovethe cost of capital in Benin. If the project scope is modified (see para.47), the ERR would be slightly higher (73%). While production projectionswould remain identical (they are based on proven reserves only), theinvestment requirements would be reduced by about US$11 million.

55. The risks associated with the project are those inherent in petroleumproduction. These concern particularly the drilling of dry wells, operatingproblems such as malfunction of downhole pumps, water and sand production, andpossible improper reservoir management. These risks are acceptabLe asdevelopment and operating experience has been gained on the field since June1982, and steps have been taken to minimize further uncertainties. Theyinclude a 3-D seismic survey to better locate wells, an independent reservoirengineering study, technical assistance from pump manufacturers, and provision

- 20 -

of consultants for close technical supervision of SPB. There is a financialrisk in the short term evidenced by the relatively low debt service coverageratio of the project. The short-term risk depends mostly on production andoil prices hypotheses and a careful monitoring of the project finances will berequired to prevent financial difficulties.

Environmental Considerations, Safety and Insurance

56. All precautions will continue to be taken to avoid undue damage tothe natural environment. Minor, nonpermanent effects cannot be avoidedcompletely, e.g., some small amounts of well cuttings and mud would likely bedispersed in the sea water. Substantial environmental damage can only occurin the event of a serious oil spill resulting from a well blow-out. Such anoccurrence is unlikely as the wells would be drilled under close control atall times. SPB has been training all its staff in fire prevention andsecurity matters and will continue to do so on a regular basis, in accordancewith industry practices. The overall safety record on the project has beengood. The project carries adequate comprehensive insurance on all itsfacilities and equipment against fire, blow-outs and other kinds of damage andthe insurance policies will be extended to cover the Phase II development.All offshore facilities have been certified for commercial operation by DetNorske Veritas.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

57. The draft Development Credit Agreement between the People's Republicof Benin and the Association and the Recommendation of the Committee providedfor-in Article V, Section l(d) of the Articles of Agreement of the Associationare being distributed separately to the Executive Directors.

58. Features of the draft Development Credit Agreement of specialinterest are referred to in the text of this report and are listed in SectionIII of Annex III. Special conditions of credit effectiveness would be:(i) that the Phase 1 lenders would have concluded agreements, acceptable toIDA, on debt rescheduling, including provisions to allow disbursements fromthe trustee account for the financing of some of the Phase II expenditures;(ii) that the Government would have established and staffed the project unitand hired an expatriate petroleum engineer; (iii) that IDA be notified by theEIB that any conditions precedent to the first disbursement under the EIB LoanAgreement, except for the effectiveness of the IDA Agreement, have beenfulfilled; and (iv) that the Convention CoLlective regulating salaries in thepetroleum sector has been signed (Section 6.01 of the draft Development CreditAgreement). Special conditions of disbursements would be (i) for powergeneration systems and production facilities to be installed on the integratedplatform, that IDA and the Beninese Government have determined that, based onthe results of an updated feasibility study, the installation of theintegrated platform is economically justified; and (ii) or project managementservices, that the service contract with SPB has been amended in a mannersatisfactory to IDA (Schedule 1, paragraphs 4(b) and (c) to the draftDevelopment Credit Agreement).

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59. I am satisfied that the proposed Credit would comply with theArticles of Agreement of the Association.

PART VI - RECOMMENDATION

60. I recommend that the Executive Directors approve the proposed credit.

A. W. ClausenPresident

AttachmentsWashington, D.C.May 30, 1984

-22- ANNEX 1Page I of 4

BENINBENIN - SOCIAL INDlCATORS DATA SKEETBENIN REFERENCE GROUPS (WEIGHTED AVERAGES) la

HOST (MOST RECENT ESTIMATE) lbb RECENT b LOW INCOME hIDDLE INCOME

1960/1b 1970'k ESTIMArE/- AFRICA S. OF SAHARA AFRICA S. OF SAHLARARA (TELOUSAMD SQ. Di)

TOTAL 112.6 112.6 112.6AGRICULTURAL 19.8 20.4 22.4

GNP PEE CAPITA (USS) 100.0 140.0 320.0 254.6 1147.9

ENERGY CONSUMPTION MR CAPITA(KILOGRAMS OF COAL EQUIVALENT) 38.0 55.0 7J.0 79.8 724.2

POPULATION AND VITAL STATISTICSPOPULATION,MID-YEAR (THOUSANDS) 2U50.0 2659.0 3595.0URBAN POPULATION (X OF TOTAL) 9.5 12.6 14.b 19.5 28.5

POPULATION PROJECTIONSPOPULATION IN YEAR 2000 (MILL) 6,8STATIONARY POPULATION (MILL) 24.6YEAR STAIrONARY POP. REACHED 2135

POPULATION DENSITYPER SQ. KQM. 18.2 23.6 30.9 29.5 56.5PER SQ. EY. AGRI. LAND 103.4 130.2 155.5 94.1 131.8

POPULATION AGE STRUCTURE (2)0-14 YRS 44.1 45.3 46.1 45.0 45.9

15-64 YRS 53.3 52.0 51.1 52.1 51.265 AND ABOVE 2.6 2.7 2.8 2.9 2.8

POPULATION GROWTH RATE (X)TOTAL 2.2 2.6 9 .7 2.8 2.8URBAN 5.8 5.4 4.1 6.2 5.3

CRUDE BIRTH RATE (PER THOUS) 50.6 49.3 49.0 47.9' 47.6CRUDE DEATH RATE (PER THOUS) 26.8 22.1 17.1 19.2 15.2GROSS REPRODUCTION RATE 3.3 3.3 3.2 3.2 3.2

FAMILY PLANNINGACCEPTORS, ANNUAL (TROUS)USERS (2 OF MARRIlD WOMEN) .. ..

FOOD AND NIUTRITIONINDEX OF FOOD PROD. PER CAPITA(1969-71-100) 95.0 101.0 92.0 87.8 95.7

PER CAPITA SUPPLY OFCALORIES (X OP REQUIREMLENTS) 100.0 97.0 103.0 88.0 97.1PROTEINS (GRAMS PER DAY) 55.0 54.0 54.0 51.2 56.0OF WH8CII ANIMAL AND PULSE 15.0 15.0 13.0/c 18.1 17.2

CIIILD (AGES 1-4) DEATH RATE 49.0 41.2 33..2 25.7 23.6

HEALTHLIFE EXPECT. AT BIRTH (YEARS) 37.2 42.1 49,9 47.4 51.9INFANT MORT. RATE (PER TLOUS) 205.6 179.4 152.1 126.5 117.6

ACCESS TO SAFE WATER (%POP)TOTAL .. .. 2L.U 24.7 25.4URBAN .. .. 52.0 56.B 70.5

RURAL ,. .. 16.0 18.3 12.3

ACCESS TO EXCRgTA DISPOSAL(X OF POPULATION)

TOTAL '' 14.0 ,, 2d.1URBAN .. 83.U .. 65.7RURAL .. I.U .. 21.9

POPULATION PER PEYSICIAN 23030.0 28590.o 17050.U 2742U.6 12181.oPOP. PER NURSING PERSON . 2700.O/d 2870.0 1670.0 3456.2 2292.U

POP. PER HOSPITAL BEDTOTAL 150.0 850.0

73O.O/c 1183.2 1075.4

URBAN 540.0 230.0 390.(7E 380.6 4U2.3RURAL 780.0 2200.0 1120.0/c 3177.5 3926.7

ADMISSION'S PER HOSPITAL BED .. 30.2 17.7/e

ROUSINGAVERAGE SIZE OF HOUSEHOLD

TOTAL .. ..

URBAN .. ..

RURAL .. ..

AVERAGE NO. OF PERSONS/ROOMTOTAL .. ..URBAN .. .. ..

RURAL .. ..

ACCESS TO ELECT. (. OF DWELLINGS)

TOTAL .. ..

URBAN .. ..RURAL ' '_

-23~ANNEX 1Page Z uf 4

BENIN - SOCIAL INDICATORS DATA SHEETBENIN REFERENCE GROUPS (WEIGHTED AVERAGES) /a

MOST (MOST RECENT ESTIMATE) lb/b 1 Lb RECENTIb LOW INCOME MIDDLE INCOME

1960./- 197 ESTIMATE' AFRICA S. OF SAHARA AFRICA S. OF SAHARA

muuc&rouADJUSTED ENROLLMENT RATIOS

PRIMARY: TOTAL 27.0 40.0 62.0 63.9 97.2MALE 38.0 55.0 84.0 - 73.6 103.1FEMALE 15.0 25.0 39.0 51.6 88.5

SECONDARY: TOTAL 2.0 6.0 16.0 12.5 17.2MALE 2.0 8.0 23.0 16.7 23.5FEMALE 1.0 3.0 8.0 8.1 14.2

VOCATIONAL (T OF SECONDARY) 12.9 4.1 8.1 7.3 5.2

PUPIL-TEACHER RATIO5' PRIMARY 41.0 44.0 48.0 46.4 42.9

SECONDARY 23.0 25.0 3

1.0/e 25.1 23.7

lADULT LITERACY RATE (1) 4.6 11.0/i 27.9 36.5 37.1

C8T 0IiOuPASSENGER CARS/THOUSAND POP 1.4 4.6 5.5/f 3.3 18.8RADIO RECEIVEKS/THOUSANU POP 12.2 32.0 71.9 45.3 97.8TV RECEIVERS/THOUSAND POP .. .. 0.1 2.2 18.6NEWSPAPER (-DAILY GENERALINTEREST-) CIRCULATIONPER THOUSAND POPULATION 1.5 0.8 0.3 4.7 18.2

CINEMA ANNUAL ATTENDANCE/CAPITA 0.2 0.5 0.3/f i.0 0.6

LA-9 iOMTOTAL LABOR FORCE (fHOUS) 1049.0 1292.0 1621.0

FEMALE (PERCENT) 45.4 45.1 45.3 34.5 36.1AGRICULTURE (PERCENT) 54.0 50.0 46.0 76.9 56.8INDUSTRY (PERCENT) 9.0 12.0 16.0 9.8 17.5

PARTICIPATION RATE (PERCENT)TOTAL 51.2 48.6 45.1 40.9 37.0MALE 57.1 54.3 51.4 53.0 47.1FEKALE 45.5 43.1 39.3 28.9 27.0

ECONOMIC DEPENDENCY RATIO 0.9 1.0 1.1 1.2 1.3

IK= DISTUIWTTIOPERCENT OF PRIVATE INCOMERECEIVED BY

HIGHEST 5Z OF HOUSEHOLDS 31.4/R ..

HIGHEST 201 OF HOUSEHOLDS 51.7.LOWEST 2ZO OF liOUSEHOLDS 5.5./.LOWEST 401 oF HOUSEHOLDS 15.87j ..

POVT T&in GROUPSESTIMATED ABSOLUTE POV£KTY IliCOMlELEVEL (US$ PER CAPITA)

URBAi .. .. .. 165.9 534.2RURAL .. .. 84.0/h 87.4 255.9

ESTIMATED RELATIVE POVERTY INCOMELEVEL (USS PER CAPITA)

URBAN .. .. .. 100.8 491.5RURAL .. .. 82.0/h 64.6 188.1

ESTIMATED POP. BELOW ABSOLUTEPOVERTY I:COME LEVCL (2)

Uit3AN .. .. .. 39.5RURAL .. .. 65.0 69.0

NOT AVAILABLE.NOT APPLICABLE

N 0 T F. S

/a The group averages for each indicator are population-weighted arithaetic means. Covtrage of countries among theindicators depends on availability of data and is not uniform.

/b Unless otherwise noted, Data for 1960" refer to any year between 1959 and 1961; "Data for 1970" between 1969 and1971; and data for 'Host Recent Estimate" between 1979 and 1981.

/c 1977; /d 1962; /e 1975; /f 1976; ig Population; /h 1978; /i 1973.

May 1983

24- ~~~~ANNEX 1Pa g e3 ~of 4

ZIEntal?IOeh IF SO-Ito INDCotATOR

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at tittita to re reerenc ara dat tee recade arc royalotta cI-rtgord oriote-t1r 'ecac.. far~ eahltboralatetat ar .h-tyo h outttgrryha drefo ta td roor Soc tecoergeatcrarir ctr hetrttooo. eyrta r I aauah l:vtOdtara I rt raa-c 000toIcs-harert.etoreettg atragr afoottrdc.ecc Iceroher,frreaorarr atealcrfoloooeeetOsOras•rottrlatrrrrerttca_r_th.auoty.o

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25- ANNEX 1

Page 4 of 4

BENIN

ECONOMIC INDICATORS

GROSS DOMESTIC PRODUCT IN 1981 ANNUAL RATE OF GROWTH9%(1978 constant prices)

US$ Million % of GDP 1976-81

GDP at Market Prices 951.8 100.0 3.1Gross Domestic Investment 333.6 35.0 14.1Gross Domestic Saving 12.5 1.3 9.5Current Account Balance -328.9 -34.6 14.2Exports of Goods, NPS 298.9 31.4 11.5Imports of Goods, NFS 658.0 69.1 7.2

OUTPUT, LABOR FORCE ANDPRODUCTIVITY IN 1981 Value Added Labor Force Value added per Yorker

US$ Million X Thousand % US$ _

Agriculture 369.8 44.5 1,220.0 73.6 303.1 59.9Industry, Constructionand Public Works 102.5 13.4 100.3 6.1 1021.9 201.8

Services 367.6 42.1 338.2 20.3 1086.9 214.6GDP at Factor Cost 839.9 100.0 1658.5 100.0 506.4 100.0

GOVERNMENT FINANCECentral Government

(CFAF Billion) % of GDP1981 1981 1976-8l a!

Current Revenue 52.6 20.6 16.6Current Expenditures 34.8 13.8 11.3Investment Expenditures 25.1 9.8 4.7Transfers 0.4 0.2 0.4Net lending 2.8 1.1 2.0

Overall deficit (-) -10.5 -4.1 -1.2External Borrowing 13.9 5.4 2.4

MONEY, CREDIT AND PRICES 1976 1977 1978 1979 1980 1981(Bfllion CFAF Outstanding End Period)

Money and Quasi Money 30.6 34.9 39.0 46.7 61.4 71.3Net Claims on Central Government -7.1 -9.4 -12.9 -11.8 -17.5 -20.9Bank Credit to Private Sector a/ 32.1 38.6 47.1 59.4 85.0 87.0

(Percentage or Index Number)

Money and Quasi Money as % of GDP 22.5 23.2 23.2 23.9 28.5 27.6General Price Index (1978=100) 83.8 86.8 100.0 113.3 131.1 159.2

Annual Percentage Change in:General Price Index .. 3.6 15.2 13.3 15.7 21.4Net Claims on Central Gov't. .. -32.4 -37.2 8.5 -48.3 -19.4Bank Credit to Private Sector .. 20.2 22.0 26.1 43.1 2.6

a/ AveraZe,

b/ Includes Public Enterprises.

- 26 -

AINNE IIPage 1

Status of Bnk Grop Oreations in BENIN

A. Statement of IDA Credits (as of Mach 31, 194)

tUS$ mirnonAmmut (less cancellations)

Credit No. Year Borrower ose Bnk DA Undisbursed

Nine credits fUlly distzrsed 44.01

746-i 1977 Bnin Third Highway 10.0X .0186-BEN 1978 Bnin Cotonou Port 19.30 .35997-BEN 19e enin Industrial Developnent 10.C0 6.84

10990-BE 1981 Benin Feeder Roads 7.00 .9011Z7-BEN 1981 Benin Borgou Prov. Rural Developnent 20.00 12.061142-EN 1981 Benin Fourth Highway 11.30 5.071171-EN 1981 Benin Cotonou Water Sanitaticn 5.00 2.271189-BEN 1981 Benin Power Engineering and TA 1.82 .691207-BEN 1c 2enin TA in Petroleun Sector 8.00 4.331246-BEN 192 Benin Second Education 14.00 11.891314-BEN 1963 Benin Zou Rial. Develognent 20.00 18.72

Total 170.47 63.13Of which has beer. repaid .' 9.78

Total now outstanding 16o.69Total now held by IDA 160.69Total undisbursed 63.13

B. Statenent of Regional I Bk Loans and Credits to Banin, Ivory Coast, Niger, Senegl,Togo, Upper Volta

US$ millionloan or Amount (less cancellations)Credit No. Year Borrower Pupose k IDA Undisbursed

969-F 1989 BOAD Project Preparation Credit 3.0 2.032242/lIF 3/ 1983 BAD Regional Developnent 6.1 - 6.051331-W 1983 BOAD Regional Developnent 14.0 1/ 13.63

1/ Beginning with Credit 1090-BEN, credits have been denoruinated in Special Drawing Rights.The doUar amouLnts in these colunns represent th1e dollar equivalents at the time of creditnegotiations for the IDA amounts and the dollar equivalents as of March 31, 1964, for theunlisbursed amounts.

27

ANNEX IIIPage 1 of 2

PEOPLE'S REPUBLIC OF BENIN

Seme Oil Field Phase II Development Project

Supplementary Project Data Sheet

Section I: Timetable of Key Events

(a) Time taken to prepare project: 6 months(b) Project prepared by: Beninese Government and SPB(c) Initial discussions with IDA: July 1982(d) Departure of appraisal mission: December 1983(e) Completion of negotiations: May 1984(f) Planned date of effectiveness: October 1984

Section II: Special IDA Implementation Action

None

Section III: Special Conditions

1. Conditions of Effectiveness

(a) Phase I lenders would have concluded agreements,acceptable to IDA, on debt rescheduling (para. 31),including provisions to allow disbursements from thetrustee account for the financing of some of Phase IIexpenditures (paras. 46 and 47);

(b) the Government would have established and staffed theProject Unit and hired an expatriate petroleum engineer(para. 50);

(c) that IDA be notified by the EIB that any conditionsprecedent to the first disbursement under the EIB LoanAgreement, except for the effectiveness of the IDAAgreement, have been fulfilled (para. 45); and

(d) that the Convention Collective regulating salaries in thepetroleum industry sector has been signed (para. 33).

2. Conditions of Disbursement

(a) Disbursements for oower generation systems and productionfacilities to be installed on the integrated platform areconditional on agreement between IDA and the BenineseGovernment that, based on the results of an updated

- 28 -

ANNEX IIIPage 2 of 2

feasibility study, the installation of the platform iseconomically justified (para. 49); and

(b) disbursements for engineering and supervision (projectmanagement) services are conditional on the signature ofan amended service contract with SPB in a mannersatisfactory to IDA (para. 50).

3. Other Conditions

The following agreements were reached diuring negotiations:

(a) the Government would submit to IDA for its review andcomments the annual operating and investment budgets andthe drilling program, including recommendations fordetailed drilling locations (para. 53);

(b) the Government would introduce cornpetitiveness whencontracts with existing service suppliers expire with aview to minimize project operating costs (para. 53);

(c) the Government would continue to employ a projectmanagement company under a service contract satisfactoryto IDA (para. 50);

(d) the Government would pay the Beninese staff employed bySPB, and the staff of the project unit, in accordance withthe "Convention Collective" applicable to the petroleumindustry sector (para. 33);

(e) in the case where the Government would decide the creationof a national oil company, the Government would consultwith IDA on its proposed organization, financialmanagement and operations, in particular on the proposedmethods for the transfer of assets and liabilities (para.50); and

(f) the integrated platform would be constructed and installedonly if the Government and IDA have determined that, basedon the results of the first confirmation well and anupdated feasibility study, the installation of theintegrated platform is economically justified (para. 41).

IBRD17720

M A L I N I G E R a2 oo 2030 JANUARY1984

-7303>1 '

~ AO 4 -X0/ "

0UPPER ~*

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IVORYI

COAST /GHANA~ 4Ao~o

/ X ~~~~~~, .. Za

7 XO_ - SOFRS NN

$1 UASOReAFbome

Seismic suvey carried under Credit-1207BEN ' ,(' , ,Lm

- ~ ~ ~ ~ 0 / Ries'1E 0 03

T~~~~~~~~~~~~~

Porto- 3 .t n i e

1°30'~~~~~~~~~~~~~~~~~~~~~~~~~~Nv 6'30'2-30

I' ~~~~~~~~~~~~~~On-Shoren8> ~~~~~~COTONOU Tn Fr*

LOME nh__I

6~~~~~~~~~~~~~CO' 8~~~~~~~~~~~~~~~~~~~~~~~~~~~6000

\ \ ~SEME OIL FIELD SECOND PHASE- Limit of sedimentary basin DEVELOPMENT PROJECT

Basement GENERAL LOCATION OF SEME FIELDFault zone AND BENIN 5EDIM[NTARYW( A NSemne Field KLMTR p~ p~Seismic survey carried un,der Credit- 1207 BEN IOEES9 1 29 3 4 5

-, Rivers MILES 0 ib Tb T0-- Depth conEour in meters

.- International boundaries 1obO0000.,0,y r 40.0SII011*010yrrey 0

030 ~~~~~~~~~~2000 282

I