Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Report No.

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1 Project Name Region Sector Project ID Borrower Implementing Agency Report No. PIC879 Mozambique-Pande Gas Engineering Project(#) Africa Energy/Infrastructure MZPA1780 Date Prepared June 16, 1994 Appraisal Date November 1993 Board Date June 1994 Country and Sector Background The Republic of Mozambique Empresa Nacional de Hidrocarbonetos de Mozambique (ENH) Avenida Fernao de Magalhaes Maputo, Rep. of Mozambique Contact: Director-Geral Tel: Fax: In 1975 Mozambique was a relatively prosperous country, but today its per capita income (around US$ 80) is one of the lowest of the world and its social indicators are among the worst in Sub-Saharan Africa. Factors which account for this deterioration include a colonial legacy of very low investment in human resources, inappropriate (socialist) economic policies, weak civil service capacity, and most debilitating, the civil war. To address these problems, the Government launched the Economic Rehabilitation Program (ERP) in 1987, which led to a marked increase in production. From 1987 to 1989, real GDP growth averaged 5.4 percent per annum. Fiscal adjustment under the ERP and the subsequent Economic and Social Rehabilitation Program (ESRP) doubled domestic revenues, reduced budgetary deficits to 6t of GDP, and improved the composition of the investment program. However, the uneven flows and general lack of foreign exchange remain key issues for Mozambique merchandise exports amounted to only $196 million against merchandise imports of $911 million. The net cost of services (including interest) required a further $150 million. In this situation, encouragement of foreign exchange earning investments, such as the Pande project, is vital to lifting Mozambique from its exceptional dependence on donors. Mozambique's best prospects for exports lie in agriculture, mining and energy. Now that the armed attacks have ceased it should be possible for Mozambique to achieve success in gaining private investment in these areas. The primitive infrastructure, both physical and institutional, will automatically lead to a focus on those investments that initially have little reliance on Mozambique's provision of any services, whether publicly provided services in

2 communications, utility supplies, and public infrastructure such as schools and health care, or privately provided services such as banking and auditing. Project Objectives The primary objective is to see that the necessary preinvestment work is done to ensure that ENH on behalf of the Government of Mozambique and private sector investors are in a position to make a firm decision to develop the Pande gas for export and for use in Mozambique. Secondary objectives include minor environmental clean up relating to previous operations, and some training and institutional strengthening. Project Description The Pande gas field, located near the coast in central Mozambique, was discovered by a Gulf/Amoco group in 1961, but the concession was relinquished because of lack of market at that time. Since then, ENH with financial assistance from a variety of donors, has drilled further wells on structure and has brought the reserves about to a level needed for commercial development. As a result of a number of studies, the most important being by UNDP/ESMAP in 1992, the existence of sufficient market potential has been substantially proven. The Pande gas development is expected to lead to annual gas exports to South Africa of $150 million. The Mozambique state, through its national oil company is expected to have a non-operating share in this scheme. Moreover, it is envisaged that annual taxes and royalties will amount to about $40 million, which will have a major impact on the national budget. However, there are still remaining issues to be resolved and work is required to ensure that all steps necessary are taken so that a firm decision can be taken to develop the project. This is the purpose of the engineering project - to bring all the parties to a stage where they should be able to decide in favor of project development. It will be undertaken in two phases. Phase I will take about one year and will support ENH to put together a feasibility study, to prove gas reserves to a level needed for commerciality, to review of financing options (needed for identifying structuring options and partners), and to start long lead time work. Phase II will not proceed without the pari passu financial participation of at least one JV partner in the pre-investment work. Phase II is to define the development project in sufficient detail for final go/no go decisions, both by investors and financiers, and includes further engineering work, arranging the financing and detailed environmental review and mitigation plan. Phase I would cost about US$20 million and would comprise: (a) Technical assistance to strengthen the Hydrocarbons Directorate of the Ministry of Mineral Resources, including defining environmental standards, formulating the relevant institutional and regulatory framework, tax and incentive -2 -

3 systems and appropriate training. (b) Technical assistance to strengthen ENH and to facilitate its proposed role as a joint venture partner. The former includes ENH accounting and management information systems, a structured training program, the work related to gas supplies to towns near to Pande, and environmental support. With respect to ENH's role of joint venture partner, the work includes further work on project coordination, negotiations assistance and a range of studies to prepare a better project and to better define ENH's position. (c) Reserves enhancement and limited technical assistance relating to the joint venture, and towards which the eventual partners will contribute. It is envisaged that this will bring the remaining recoverable reserves to two trillion cubic feet. Phase II is less fully defined and the major part has to be agreed with the joint venture partners. The cost would be about US$30 million. The scope of work includes: (a) Further strengthening of the Hydrocarbons Directorate of the Ministry of Mineral Resources and assistance in finalizing the institutional, tax and incentive systems. (b) Support to ENH in negotiating its participation and benefits from the project, in firming up its knowledge of issues related to its role in the project, detailed work relating to gas supplies to Maputo and other towns, and in implementation of a new accounting system related to its joint venture role. (c) Costs related to the joint venture, to be shared between the partners. These include a project management team, a full environmental assessment and mitigation plan, arranging the finance, further engineering of the development project and operational training. The major cost items are for arranging the finance and for engineering work. Project Cost and Financing The engineering project will therefore cost about $50 million altogether. IDA would contribute the bulk of the financing for the first phase and a share of the second phase such that its total contribution to the common costs of the project would be equal to that of the other partners. About $8 million of the costs relate to the Mozambican Government and/or ENH and are not suitable for sharing with the JV partners and will therefore be financed by IDA. The IDA contribution could reach $30 million. The Government of Norway has expressed interest in cofinancing which might amount to about $3 million in which case the IDA contribution would fall to $27 million. It is expected that the Mozambique contribution will be a little over $1 million. The joint venture partners would round out the financing with a contribution of about $19 million. - 3-

4 Project Implementation Phase I of the project would be managed by ENH except for the Government component, which would be managed by the Hydrocarbons Directorate with support from ENH. ENH has some good staff, and the support by consultants has been solid. The weak links in this first phase are the role of the Government in administrative issues, such as contract approval, and the heavy reliance of ENH on a few individuals. For the second phase, the role of a Project Management Team will be negotiated with the joint venture partners to coordinate the partners and allow ENH staff to continue to take an important role in project development. External assistance will be needed for managing the Phase II process and advising on technical matters. ENH has a one year renewable non-exclusive agreement with Sasol (South Africa). Sasol is a key player because it could be the 'anchor' consumer and it owns the Johannesburg gas system. In essence, the agreement gives Sasol access to the technical data of the Pande field and some priority rights to enter into an investment agreement with ENH, while providing for Sasol to assist ENH in the development of the project, mostly in estimating and developing the market for natural gas in South Africa and in attracting experienced international petroleum investors. Sasol will also participate actively in some of the feasibility studies to complement the efforts of ENH, eg,in the market studies, and in a preliminary review of financing options. Pluspetrol (Argentina), an oil and gas producer, recently entered into a joint cooperation agreement with ENH and Sasol, and in time may become the technical partner. The technical partner is needed mainly to provide gas development experience which neither ENH nor Sasol has. Project Sustainability The gas development project can proceed only with the participation of experienced foreign partners. The engineering project is not intended to be independently sustainable--it is merely the first step of a long gas development project. It is dependent on the installation of a high-quality Project Management Team and the provision of adequate funding. Training included in the project (to be supplemented through operational training in connection with the development stage) will lead to a significant Mozambican involvement for the longer term. The development of Mozambican skills is a high-priority objective. The project components have been reviewed with ENH and with Eduardo Mondlane University, and for each component, the role of Mozambican consultants has been identified. The need for strong counterpart working arrangements is explicitly recognized in the terms of reference. Further, a thorough skills assessment and training needs program has been prepared and will be implemented as part of the project. Poverty Category -4-

5 The project will lead indirectly to poverty reduction through long term growth. Environmental Aspects The project is classed as a Category B project. Consultants have reviewed the environmental aspects of the engineering project in more depth than is normal for a Category B project. No significant environmental damage is expected. Except from the blowout at Pande 4, which caused significant damage over an area of 1 sq.km., no material environmental impact is visible at previous well sites or at seismic locations. No displacement of inhabitants is expected. As a result of the environmental review, ENH is drawing up environmental procedures for its operations, preparing an action plan to help the recovery at Pande 4, and undertaking a general environmental cleanup to remedy minor problems from previous work. The proposed environmental assessment for the actual development of the gas reserves is part of the Phase Two work and will be a full Category A assessment. Future commercial development such as pipeline construction will be subject to this environmental assessment and the related mitigation plan. Program Objective Categories The project fits within the country strategy of increasing exports by exploiting an important natural resource in an environmentally responsible way. The project will stimulate development of the private sector. Special attention will be paid to human resource development. Contact Point Public Information Center The World Bank 1818 H Street, NW Washington. D.C Telephone : Fax : Note: This is information on an evolving project. Certain components may not be included in the final project