FILE COPY R E S T R I C T E D. R e p o r t N o. P-210

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized FILE COPY R E S T R I C T E D R e p o r t N o. P-210 This report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATI]ONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMIENDATIOP OF THE PRESIDENT TO THE ftxecutive DIRECTORS ON A PROPOSED LOAN TO THE SOCIETE PETROLIERE DE GERANC November 27, 1959

2 REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE SOCIETE PETROLIERE DE GERANCE 1. I submit the following report and recommendations on a proposed loan of $50 million to the Societe Petroliere de Gerance (SOPEG) to assist in finallcing a project to construct an oil pipeline from the Hassi Messaoud field in the Sahara to the Algerian port of Bougie. PART I - HISTORICAL 2. Oil was discovered at Hassi Messaoud in August The field was foind to extend on both sides of the boundary of areas being explored by the Societe Nationale de Recherche et d'exploitation des Petroles en Algerie (SN REPAL) and the Compagnie Francaise des Petroles (Algerie)(CFP(A)),who agreed that further development of the field and arrangements to transport the oil should be carried out in association. Construction of the pipeline was started towards the end of The Bank was first approached at the end of 1958 and subsequent discussions led up to missions to study the project in Algeria the Sahara and Paris between July and October, Negotiations with representatives of the companies began in Wiashington in the middle of November. 3. The Bank has already made loans amounting to ts302.1 million to borrowers in the Republic of France and the Community. As of October 31, 1959, the status of individual loans was as follows: Year Borrowzer Purpose Amount ($ million equiv.) 1947 Credit National Reconstruction $ Office Central des Chemins de Fer de la France d 1 Outre-Mer Railway improvement Electricite et Gaz dtalgerie Electric power development Compagnie Niniere de l10gooue Manganese project 35.0 Total net of cancellations of which repaid 25.7 Total now outstanding Amount sold of which repaid 25.1 Net amount held by third parties 10,3 Net amount held by Bank Not including participations in the 1959 loan amounting to $21 million sold in November 1959,

3 - 2 - PART II - THE PROJECT 4. A report "Appraisal of the Hassi MIessaoud Pipeline Project", TO 227b, (No. 1) was distributed on 1ovTraber 25, The project consists of the construction and operation of a pipeline about 660 km. long for the transport of crude oil from the Hassi MIessaoud field in the Sahara desert to the port of Bougie in Algeria. The project includes all necessary pumping, storage, housing and other facilities. The pipe itself has been laid and the entire system is due to become operational with an initial capacity of about 4 million tons early in December The completion of additional pumping and storage facilities should raise annual capacity to about 9 million tons by June 1960 and to 14 million tons, the full design capacity, a year later. 6. Consultants retained by the Bank have estimated the primary recoverable reserves of Hassi Messaoud at 300 million tons on the basis of data made available to the Bank as of July It is expected that this estimate will be raised as the limits and characteristics of the field become mare D3y 1nwwn. 7. The pipeline is being constructed and will be operated by the Societe Petroliere de Gerance which was set up for that purpose by CFP(A) and SN REPAL who own its entire capital in equal shares. CFP(A) is a subsidiary of the Compagnie Francaise des Petroles (CFP), which owns 85% of its share capital. The French Government is the largest single shareholder (35%) of CFP and directly and indirectly holds 81% of the capital of SN REPAL. 8. The completed cost of the project, including interest during construction, is estimated at 52 billion francs (about 105 million). Construction has so far been financed on an interim basis. The permanent financing plana is as follows: Francs (billions) $ equivalent (millions) Share capital Shareholders' loans 12,5 25 I.B.R.D. and participants Funds from operations The shareholders7 loans shown above and any future loans from shareholders would be subordinated to the proposed Bank loan. 9. SOPEG should normally be able to meet its financial obligations without difficulty at a throughput as low as 6 million tons a year. CFP(A) and SN REPA1 are entering into contracts with SOPEG to ship at least that amount. CFP(A) will sell its share in Hassi Messaoud production to its parent company, CFP, which has an extensive and expanding marketing organization in France and elsewhere. SN REPAL is making arrangements to dispose of its production to international oil companies with refinery and distribution facilities in France.

4 Throughput contracts with SN REPLr and CFP(A) provide that, except in specified circumstances, payments to SOPEG would cover the cost of transporting six million tons a year even though less may actually be transported. The Bank would in addition receive from SN REPAL and CFP(A) direct financial guarantees of principal, interest and other charges on the proposed loan, each being liable. for half any amount outstanding and unpaid. In view of the close relationship between them, CFP will be jointly and severally bound with CFP(A). ll. Bids were called on an international basis. Orders were largely placed with French contractors, who, although given some priority in the allocation of orders, were commonly able to offer the lowest prices delivered on site and the shortest delivery dates. PART III - DESCRIPTION OF TIM FROPOSED L[AN 12. The main characteristics of the proposed loan would be as follows: Borrower: Societe Petroliere de Gerance (SOPEG) Guarantors: (a) The Republic of France; (b) Societe Nationale de Recherche et d t Exploitation des Petroles en Algerie and Compagnie Francaise des Petroles (Algerie) (jointly and severally bound with Compagnie Francaise des Petroles) each for one half. Amount: The equivalent in various currencies of $50 million made up of: Bank tranche $25 million; N4arket tranche $25 million (see Part IV below). Interest rate: 6% including 1% commission CDmmitment charge: 3% Maturity: 12 years in 22 equal semi-annual payments of principal beginning Nay 1, 1961 and ending on November 15, Purpose: The proceeds of the loan would be used to finance expenditures on the Hassi Messaoud-Bougie oil pipeline. PART IV - FROPOSED PARTICIPATION 13. Discussions on the proposed loan have been based from the start on the understanding that the Bank would not itself contribute more than ;25 million, leaving to the parent companies the responsibility for raising

5 - 4 - $25 million from other investors. To facilitate their task, the Bank agreed to consider setting up a loan in the total amount of Q50 million, of which the companies would make arrangements to sell $25 million before the loan was presented for the approval of the Dcecutive Directors. 14. The imminent issue of $50 million for Credit Foncier of France in the New York market has made it impracticable to arrange participations at the present moment. It is, therefore, proposed to allow the Borrower another five months in which to do so, on condition that at least $15 million is forthcoming by that time. At the end of five months from the date of signaturle of the proposed loan, the Bank would simply terminate the loan and guarantee agreements in respect of any amounts of the market tranche for which satisfactory participations had not been secured. If participations could not be arranged for at least $15 million, the entire market tranche would be cancelled. 15. To make certain that the project will be appropriately financed in all circumstances, the French Government has given the Bank an undertaking that all necessary steps will be taken to ensure that the equivalent in francs of any amounts not forthcoming from the proposed participations will be made available to the Borrower on terms which would not impose on the Borrower a heavier burden of debt service than those of the Bank's loan, if satisfactory arrangements for participations shall not have been arranged vithin five months of the date of signature. PART V - LEGAL 1STRTPENTS ANMD AUTHORITY 16. The following legal documents are attached: (a) Draft Loan Agreerment between SOPBJ and the Bank (No. 2); (b) Draft Companies Guarantee Agreement between the Bank and SN REPAL, CFP(A) and CFP (No. 3); (c) Draft Guarantee Agreement between Republic of France and the Bank (No. 4) and the following draft letters from the French Government regarding: (i) The assets of the Bank of France (No. 5); (ii) The commitment of the French Government regarding the market tranche of the loan (No. 6).

6 The following features of the Loan Agreement are of particular interest: (a) The loan would become effective in respect of the first tranche in the usual manner of Bank loans (Sections 6.01 and 6.03); the market tranche would become effective only if the Bank tranche were effective and the Borrower would have made participation arrangements satisfactory to the Bank in an aggregate amount of not less than $15 million (Section 6.02); (b) The commitment charge would accrue in respect of the Bank tranche, as is usual, from a date sixty days after the date of the Loan Agreement and, in respect of the market tranche, from the date or dates on which the Bank shall have approved participation arranggments (Section 2z.03); (c) Separate provisions have been set forth for the termination of each tranche of the loan (Section 6.o0); (d) Schedule 3 to the Loan Agreement amends the Loan Regulations principally to take account of the existence of the various guarantors and the division of the loan into two tranches. The following have been included as additional events of default: (i) Any action by the French Community which would interfere with the carrying out of the Project or the performance by the Borrower or the Guarantors of their respective obligations (Section 5.02(i)); (ii) Action by any of the parties to amend, suspend or terminate the transport authorization, the trarsport contract, or the temporary explorat.ion permits or the concessions (Section 5c02(j); and (iii) Failure bw the guaranzt-;eeing companies to make any payment required or to perform thedr obiligations under the Companfies Guarantee Agreeaent (Sections 5,02(k) and 5,02(l))j 18. Under the terms of the Companies C-uarantee Agreement, SIN RERAL on the one side and CFP(A) and CFP jointly and severally on the other side wrould undertake: (a) To guarantee independently of each other as primary obligors vith the Borrower the principal amount, interest and other charges on the loan and the bonds, the liability- of each being limited, however, to one half of ary amounts outstanding and unpaid on a due date (Section 2.01);

7 -6- (b) To pay in additional capital or make additional advances if required to finance the completion of the project. (Section See also Section 4.04 of the Loan Agreement); (c) To subordinate all shareholderst advances to the proposed loan (Section 2,02(b). See also Section 4,,05 of the Loan Agreement). 1$. OCFP would undertake not to part wi:th effective control of CFP(A). CFP(A) and SE REPAL would undertake not to part with effective control of SOPEG (Companies Guarantee Agreement, Section 3,03). 20. The French Guarantee Agreement is substantially the same as previous agreements with the Republic of France. A new section (3.06) has been added to provide that the Guarantor would grant in due course appropriate concessions to the Borrower and the sharelholders and would maintain in effect all temporary authorizations so long as recqired. PART VI - ECONOMIC BACKGROUND A report on the economy of Algeria (No. EA-l10!a), which also discusses economic developments in the Saharan territories (No. 8), was distributed on November 25, A report on the economy of France (EA 98a dated June 22, 1959) was submitted in connection with the proposed Bank loan to the Compagnie ]Ainiere de l1ogooue. Developments in the French economy since that time are described below. Thle Economy of Algeria 22. The economy of Algeria has developed in close association with that of Metropolitan France. There are no restrictions on the movement of goods, persons, and capital between the two areas and Algeria is wlithin the French cuastoms system. The Algerian franc is freely convertible into the French franc and Algeria has no foreign exchange reserves of its own. Banking, insurance and commercial institutions are similar to those in Metropolitan France. There is extensive trade between the two countries; Algeria receives ovrer four-fifths of its imports from France and sends to France a similar proportion of its exports. Large-scale immigration from France over a period of a hundred years -- Europeans now account for 10% of the total population - has provided Algeria with skilled labor and management, while the reverse movement has afforded an important outlet for the surplus Moslem labor force, 23W French investment has created a modern network of railways, roads, and harbors but economic progress has been very uneven. The industrial sector of the economy has been expanding rapidly over the past five years, under the impact principally of three factors: large French expenditures for military services and supplies, civil administration and public investment; petroleum exploration and development; the housing boom. The rebellion, which has not hampered the grow th of industry to any significant extent, has somewhat reduced production at outlying iron ore and phosphates mines, sales from which

8 - 7 - have in any case been suffering from a slump in world demand. There has been little long term growth in the production of basic foodstuffs consumed by the Moslem population, whose farming methods remain very backward. Many Moslem families live at or near the subsistence level but the potential for expansion in agriculture, which employs about 85% of the Moslem labor force, is limited by terrain and climate. 24. The 1Ioslem population is growing rapidly. Unemployment and underemployment are alreadv widespread and expanding output is imperative if living standards are not to decline seriously. Mt is to face that threat that the five-year Constantine E an was launched in October last year. An essential element of the plan is to turn to the advantage of the Algerian economy the new opportunities for industrial expansion afforded by the availability of petroleum and natural gas as new sources of cheap energy and raw materials. Oil will also make an important budgetary contribution to Algeria and the Sahara, as well as providing very substantial earnings or savings of foreign exchange for the franc area. The Economy of France 25. The French economy has made striking progress since the stabilization of December Price rises since the devaluation have not exceeded the limits that were forecast, and new measures are being considered to offset the expected impact of the sunrmer drought on food prices. Wage increases have also been moderate, although pressure for further increases is to be expected. On the budgetary front, the Tt impassel for 1959 has been kept within the prescribed limits and will not be increased in the proposed budget for 196D0. After a pause, industrial production is again expanding and unemployment is declining. The balance of payments has been dramatically reversed: the first 9 months of 1959 shog a trade surplus of $290 million in contrast with the deficit of $540 million for the same period last year. France has cancelled a $200 million standby credit from New York banks and has made a voluntary repurchase from the International Nonetary Fund of $200 million equivalent. 26. Gold and foreign exchange reserves are nearing a post-war record but are still modest in relation to external trade and particularly the external debt. Total foreign debt is close to 3 billion equivalent, having risen by dp50 million in Heavy debt payments fall due over the next several years: in 1960 and 1961 they wrill together amount to some a800 million including repurchase obligations of nearly $200 million to the International 2Ionetary Fund. In view of its excellent debt record and strengthened economy, France should be able to meet these obligations, as well as the additional borrowring which is contemplated.

9 PA`RT VTT, K*U - COI4PLIAUdCE,3S JWIjTH f ARTICLESOFARFN. IE ACIREEMENJT 27. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. The Report of the Commaittee provided for in Article III, Section 4 (iii) of the Articles of Agreement is attached (No. 7). PART VIII - RECOIH,NIDATIONS 28," I recommend that the Bank make a loan to the Societe Petroliere de Gerance (SOPEG), guaranteed by the Republic of France, and by SN REPAL, CFP(A) and CFP, under the respective Guarantee Agreements, of the equivalent in various currencies of $50 million for a total term of 12 years, with interest (including commission) of 6% per annum, and on such other terms as are specified in the attached draft Loan and Guarantee Agreements and that the Executive Directors adopt a Resolution to that effect in the form attached (No. 9), Eugene R. Black Attachments Washington, D.C, November 27, 1959