Document of The World Bank FOR OFFICIAL USE ONLY Report No: 21541 IMPLEMENTATION COMPLETION REPORT (CPL-38890; SCL-3889A; SCPD-3889S) ONNA LOAN IN THE AMOUNT OF US$90 MILLION TO THE GOVERNMENT OF THAILAND FOR CLEAN FUELS AND ENVIRONMENTAL IMPROVEMENT PROJECT DECEMBER 29, 2000 ENERGY AND MINING SECTOR UNIT EAST ASIA AND PACIFIC REGION This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective December 5, 2000) Currency Unit = Baht 1.00 Baht = US$ 0.022 US$ 1.00 = 43.73 Baht FISCAL YEAR RTG: October I to September 30 BCP: January I to December 31 WEIGHTS AND MEASURES I Barrel (bbl) of Crude Oil (0.85 Specific Gravity/34 API) = 0.136 Metric Ton (t) I Barrel = 0.159 Cubic Meter 1 British Thermal Unit (Btu) = 0.252 Kilocalories (kcal) I Cubic Foot (cu ft) = 0.028 Cubic Meter i Gallon (US) = 3.785 Liters (1) 1 Metric Ton of Crude Oil = 44.4 million Btu (typical) 1 Mile = 1.609 Kilometers (kIm) I Standard Cubit Foot (SCF) of Natural Gas = 1,000 Btu (typical) I Ton of Oil Equivalent (toe) = 10.415 million kcal ABBREVIATIONS AND ACRONYMS bbls barrels BMR Bangkok Metropolitan Region BCP Bangchak Petroleum Public Co. Ltd. bpcd barrels per calendar day bpd barrels per day bpsd barrels per stream day CO Carbon Monoxide DGOHT Deep Gas Oil Hydrotreater DPC Department of Pollution Control FCC Fluidized Catalytic Cracker HC Hydrocarbons kbd thousands barrels per day mbd million barrels per day NGO Non-Govermental Organization PTT Petroleum Authority of Thailand RTG Royal Thai Government SO2 Sulfur Dioxide toe tons of oil equivalent tpy tons per year Vice President: Jamil-ud-din Kassum Country Manager/Director: Jayasankar Shivakumar Sector Manager/Director: Yoshihiko Sumi Task Team Leader/Task Manager: Mohammad Farhandi FOR OFFICL USE ONLY Thailand Clean Fuels and Environmental Improvement Project CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings I 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 3 5. Major Factors Affecting Implementation and Outcome 4 6. Sustainability 6 7. Bank and Borrower Perfornance 8 8. Lessons Learned 10 9. Partner Comments 10 10. Additional Information 10 Annex 1. Key Performance Indicators/Log Frame Matrix 11 Annex 2. Project Costs and Financing 12 Annex 3. Economic Costs and Benefits 14 Annex 4. Bank Inputs 16 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 17 Annex 6. Ratings of Bank and Borrower Performance 18 Annex 7. List of Supporting Documents 19 Annex 8. Supporting Tables 20 Annex 9. The Borrower's Contribution to ICR 27 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. Project ID: P004802 Project Name: CLEAN FUELS & EA QUA Team Leader: Mohammad Farhandi TL Unit: EASEG ICR Type: Core ICR Report Date: December 29, 2000 1. Project Data Name: CLEAN FUELS & EA QUA L/C/TFNumber: CPL-38890; SCL-3889A; SCPD-3889S Country/Department: THAILAND Region: East Asia and Pacific Region Sector/subsector: GS - Refining, Storage & Distribution KEY DATES Original Revised/Actual PCD: 07/15/92 Effective: 12/20/95 01/18/86 Appraisal: 08/30/93 MTR: 03/15/97 05/13/98 Approval: 05/23/95 Closing: 06/30/2000 06/30/2000 Borrower/lImplementing Agency: BANGCHAK PETROLEUM PCL/BANGCHAK PGT CO/NEB Other Partners: STAFF Current At Appraisal Vice President: Jemal-ud-din Kassum Gautam Kaji Country Manager: Jayasankar Shivakumar Callisto Madavo Sector Manager: Yoshihiko Sumi Vineet Nayyar Team Leader at ICR: Mohammad Farhandi Lakdasa Wijetilleke ICR Primary Author: Farrokh Najmabadi 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: L Institutional Development Impact: M Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: U Project at Risk at Any Time: 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The Clean Fuel and Environmental Improvement Project was the second loan to Bangchak Petroleum Public Company Ltd. (BCP). Its objectives were to support the reduction of air pollutants attributable to petroleum fuels by assisting the Borrower in: (a) meeting reformulated gasoline and diesel oil specifications established by the Government; and, (b) improving its refinery operations through the installation of appropriate facilities and equipment to further reduce refinery emissions and enhance safety. The objectives were clear and fully consistent with the Royal Thai Government's (RTG) stated goal of protecting natural resources and the environment. Moreover, both the Bank and the RTG considered the reduction of urban air pollution among their high priority objectives. This is still the case as reflected in the latest Country Assistance Strategy (Report 1 8002-TH dated June 16, 1998). Prior to this loan, the Bank had supported the development and implementation of the RTG's Action Plan to improve air quality and reduce air pollution in the Bangkok Metropolitan Region (BMR) and other urban areas through its lending for the road and transport sector. Such support and technical assistance helped the RTG devise cost-effective pollution mitigation strategies such as the production of cleaner fuels before addressing more complex cross-sectional issues. It also assisted the Department of Pollution Control (DPC) build its ambient air monitoring network, define new ambient standards, establish vehicle emission and fuel standards and implement vehicle emission testing. 3.2 Revised Objective: The objectives of the project were not revised. 3.3 Original Components: The project comprised the following components: (1) a Deep Gas Oil Hydrotreater (DGOHT) unit of 30,000 barrels per stream day (bpsd) capacity to enable the production of 0.05 per cent sulfur diesel oil; (ii) a Fluidized Catalytic Cracker (FCC) unit of 16,000 bpsd capacity and modification to an existing naphtha reformer to produce high octane, low aromatic, low benzene content gasoline in order to enable the refinery's gasoline pool to meet unleaded octane requirements and permissible aromatic and benzene levels and other prescribed specifications; (iii) the installation of equipment and facilities to improve the environmental conditions and safety in and around the refinery; (iv) purchase of mobile air quality monitoring equipment; (v) project engineering and management; (vi) acquisition of technology, catalysts and chemical; and (vii) training. 3.4 Revised Components: The construction of two new conversion refineries in Thailand as well as the East Asian financial crisis and the resulting collapse of the demand for petroleum products (both in Thailand and the region) obviated the company's need to construct the FCC unit as it could satisfy its FCC gasoline requirements by importing or purchasing from other producers in Thailand. With the cancellation of the FCC unit there remained no need for training, nor were there any requirements for investment in pollution control equipment associated with that unit (such pollution mitigation facilities and equipments constituted an important part of what was envisaged in the project). The company's success in obtaining the ISO 14001 certification for environmental standards also ruled out the need for the installation of additional air pollution control equipment or wastewater treatment facilities in the refinery except for the sulfur recovery plant which remained essential (the DGOTH produces sulfurous gases as a process by-product). Moreover, because the Department of Pollution Control had decided to purchase a number of stationary and mobile air quality monitoring (AQM) equipments and the refinery could utilize the government purchased mobile AQM units, the need for the refinery to invest in a mobile unit had been obviated. - 2 - 3.5 Quality at Entry: The quality at entry was not assessed by the Quality Assurance Group (QAG). At appraisal, no implementation or technical risks were envisaged. Further, inadequate attention was paid, in the project documents, to the risks associated with the excess refining and conversion capacities (para. 5.2). While the project design envisaged, in a general sense, the possible risk associated with excess capacity, it was assumed that such a risk would be minimal, in that the BCP could export any surplus supply considering the potential demand of other countries in the region. In practice, however, this "export potential "did not materialize, and the demand for petroleum products collapsed following the onset of the East Asian financial crisis which reduced the possibility of exports from the Thai refineries and squeezed refinery margins. Under these circumstances, BCP decided to cancel the construction of the FCC unit as the economic viability of this component was completely eroded. While the financial crisis that hit Thailand could not be foreseen at appraisal and it was beyond the control of the Government and the BCP, the construction of the new refineries had been approved by the Government before the crisis. Thus, in retrospect, the project analyses should have taken that into account, or at least flagged, the substantial risk associated with the biggest component of the project, namely the FCC unit. Finally, the project cost estimate at the time of appraisal was significantly higher than the actual costs (or currently estimated costs for those components which were not completed), indicating an overestimation of the project's total cost. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective. Although the achievement of the project's physical objectives were only partial, the project, nonetheless, substantially achieved its major objective of enabling the refinery to produce cleaner fuels thereby supporting the RTG's plan of actions for improving air quality and reducing air pollutants. Since the types and amount of air pollutants emitted by vehicles are closely related to the fuel quality, the efforts by all the refiners (as directed by the government) to reformulate automotive gasoline and to reduce the sulfur content of gas oil have already had beneficial effects on the air quality in the BMR as evidenced by the relevant statistics (discussed below). Environmental Indicators The major emissions of concern from gasoline fueled vehicles are lead, Carbon Monoxide (CO), unburned hydrocarbons (HC), aromatic and benzene emissions which have been shown to have carcinogenic effects. Leaded gasoline was gradually phased out of the Thai market by the beginning of 1996 and it has no longer been available since. The elimination of lead from gasoline has also permitted the use of pollution control technologies such as the catalytic converters (in cars) which reduce both the CO and HC emissions. There is conclusive evidence that, despite the existence of many old models in the existing vehicular pool, the use of cleaner fuels has reduced the air pollutants such as lead, CO and Sulfur Dioxide (S02) in the Bangkok Metropolitan Region (Annex 8, Table 1). In respect of S02, although the regulations stipulated the introduction of 0.05 sulfur diesel oil by the beginning of 1999, that fuel has been voluntarily available in the market since 1997 and city buses were also required to use it since January 1997. 4.2 Outputs by components: The commissioning of the DGOHT started in February 1999 and the unit becamne fully operational by June of 1999. The plant has been operating continually and without any interruption ever since. So has the sulfur recovery unit which also came on stream on time. As for the production of cleaner gasoline without - 3 - the benefit of an FCC unit, the refinery has been able to purchase sufficient quantities of FCC gasoline from other local refineries to enable it to produce unleaded gasoline according to specification. The RTG's decision not to further tighten the aromatic and benzene specification of unleaded gasoline, also made the revamping and modification of the naphtha reformer redundant. 4.3 Net Present Value/Economic rate of return: In the project as originally designed, the stream of benefits accrued mostly on account of the output from the FCC unit which helped increase the ratio of distillates (gasoline and diesel oil) output to the crude oil input. With the cancellation of the FCC unit, the stream of benefits are now only related to a quality improvement (reduction in the sulfur content of diesel oil from 0.5% to 0.05% by weight) which can be deduced from the historical and current pricing practices in the Pacific Region and the costs associated with importing very low sulfur diesel oil from a refinery center such as Singapore (Annex 3). Under the assumptions contained in this annex, the economic rate of return for the DGOHT is estimated at 20.1 percent which is somewhat lower than the appraisal estimates of 21.7 per cent (the SAR's rate of return includes the FCC unit). It should be noted that this calculation does not include the considerable health benefits that result from improving the air quality in the BMR, thereby reducing mortality and morbidity from respiratory illnesses. 4.4 Financial rate of return: The internal financial rate of return for this project is substantially the same as (though marginally lower than) the economic rate of return as computed in Annex 3. Except for the financial capital costs of the project which should include the interest expenses during implementation and any import duties or local taxes on equipment and material, there would be no need for any further adjustment to the streams of benefits and costs because; (i) Thailand's exchange rate is market determined; (ii) there are no labor market distortions; and (iii) product prices are equivalent to imported prices from the international market. 4.5 Institutional development impact: In the last two decades, a concerted and cooperative effort is being made by the RTG, industry, the public and non-governmental organizations (NGOs) to improve the air quality in Thailand. A number of measures have been adopted to mitigate air pollution problems, particularly those associated with the transport sector. They are aimed not only at reducing vehicle emissions through improvement of fuel quality and engine specification, but also at implementation of in-use vehicle inspection and maintenance programs, expansion of the mass transit systems and the improvement of traffic conditions through better traffic management. This is a comprehensive program that is being implemented step by step by the DPC with salutary results. Through its continuing dialogue with the Bank and the implementation of this project, the BCP has intensified its diligent efforts to control and mitigate pollution in and around the refinery, to comply with the Bank's environmental guidelines and the country's environmental standards and to build an amicable and trustworthy relationship with the communities surrounding the refinery. These efforts have been handsomely rewarded when the refinery received certification that it complied with the ISO 14001 standards for environment. Nonetheless, the institutional development impact resulting directly from the project has been modest, since most of the needs in this area either became redundant or were met by DPC providing help to BCP. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: After the approval of the project, the pace of new conversion capacity construction picked up both in Thailand and in the Region in anticipation of the heightened demand for distillate products. This substantially increased the likelihood that excess refining and cracking capacities would be created. Given this new situation and the potential for ample conversion capacities in both Thailand and the East Asian - 4 - Region, the BCP's management remained hesitant to proceed with the construction of an FCC unit. An independent study in 1996 by a Bank consultant also indicated that, under the then prevailing conditions and consumption trends, an FCC unit would only be needed if the refinery could not purchase its requirement of FCC gasoline from other producers on a long term basis. With the onset of the East Asian financial crisis in July 1997 and the precipitous decline in energy and petroleum products consumption (Annex 8, Tables 2 and 3), the company's management revisited the project's economic viability and eventually decided in 1998 to cancel the construction of the FCC unit( the official steps were, however, taken in 1999). A shift in the consumption of premium and regular unleaded gasoline in favor of the latter during the late 1990s (Annex 8, Table 4) and the Government's decision not to filrther tighten the specification of unleaded gasoline obviated the need to revamp and modify the naphtha reformer unit and this component was also canceled in 1999. 5.2 Factors generally subject to government control: This project was prepared and appraised at a time (1992/3) when the RTG had approved only one new 145,000 bpd cracking refinery to be constructed in Thailand. Soon after, the license for another 120,000 bpd grass roots cracking refinery was granted to the private sector. At this time, the anticipated total conversion capacity (FCC and Hydrocracking) stood at 150,000 bspd, increasing the risk that the construction of the FCC unit by the BCP would lead to overcapacity in conversion facilities. 5.3 Factors generallv subject to implementing agency control: The loan became effective after a short delay due to the time needed for Bangchak refinery to receive the legal opinion of the Judicial Council of Thailand. The implementation of the project faced more serious delay of 4 months as the contract for the construction of the DGOHT unit was signed in December of 1996 instead of the August scheduled date. This was mainly because the Borrower did not follow the Bank's Procurement Guidelines for the pre-qualification of prospective bidders and failed to apply appropriate selection criteria (in fact, they had used the criteria that existed at the time of the previous project in the mid-to late 1980s). Once issues related to pre-qualification of the bidders and those conceming the invitation to bid were resolved, much of the scheduling flexibility had been lost so that the construction of the DGOHT had to be placed on a fast track. In spite of all efforts to complete the construction and make the unit operational by the beginning of 1999, difficulties with the performance of the civil works contractor and the vibration problems experienced during commissioning delayed full capacity production until June 1999. However, this did not create insurmountable difficulties for the refinery as it managed to produce specification gas oil by operating the existing gas oil desulfurization unit under more severe conditions and the DGOHT at 70 to 80 percent capacity, thereby satisfying the depressed diesel oil demand induced by the East Asian financial crisis. The Bangchak refinery's success in obtaining ISO 14001 certification for environmental standards in 1997 proved beneficial to BCP as it attested to the refinery's compliance with all environmental regulations and standards. The BCP was also certified to comply with the Thai Industrial Standard 18001 with respect to occupational health and safety management standards. The decision not to construct the FCC unit and not to modify the naphtha reformer obviated the need for further investmnent in air pollution installations and wastewater treatment equipment, saving the company considerable sums at a time of financial distress. While the sulfur recovery unit downstream of the DGOHT was constructed and came on stream on time, the company did not use any of the funds eannarked for training due to the cancellation of the FCC unit. 5.4 Costs andfinancing: Since the construction of the FCC unit as well as the modification of the naphtha reformer and the acquisition of the bulk of the environmental enhancement equipment were canceled, the project cost and the loan disbursement were only a fraction of those anticipated in the Staff Appraisal Report (Annex 2). Even the installed cost of the DGOHT proved to be considerably lower than the original estimate because of a - 5 - reduction in design capacity from 30,000 to 25,000 bpd and intense competition among the bidders. The cancellation of other components also affected the disbursement of the funds that had been allocated to the purchase of technology, catalysts, and chemicals as well as those earmarked for project engineering and management assistance and training. The project was financed basically from the funds supplied by the Bank and the BCP's own funds (Annex 8, Table 11). An issue that arose between the Bank and the Borrower during the implementation of this project was the slow disbursement of the funds. This was occasioned mainly because of the Borrower's hesitation to proceed with the cancellation of the funds allocated for the construction of the FCC unit (hence, the percentage of the undisbursed amount remained high, resulting in the percentage of the disbursement amount lagging significantly behind the SAR forecast). Given the Borrower's financial needs during the crisis, it wanted to use the Bank's funds (allocated for the FCC) to retroactively finance other components of the project and other related projects. The Bank analyzed the Borrower's requests and in the majority of cases could not approve the requests. However, some of the delay in disbursement can be attributed to the DGOHT turn key contract. Because of the financial weakness of the civil works subcontractor (a Thai-Japanese joint venture), many execution milestones were missed and payments were, therefore, delayed. By the closing (June 30, 2000), total disbursement amounted to US$38.1 million, some 42.3 % of the original and 63.5 % of the revised loan amount. 6. Sustainability 6.1 Rationale for sustainability rating: Given the proven quality of the BCP's management and workforce and the well-maintained condition of the refnery, its operation is technically sustainable for the foreseeable future. With its existing configuration and process facilities, the Bangchak refinery is most likely to meet the current and future clean fuels specification without having to make any major investment. It still remains one of the less financially vulnerable refineries in Thailand because it does not carry a huge undepreciated investment (as is the case with other privately owned conversion refineries). Nonetheless, it needs to put its finances on a sounder footing in order to assure its long-term stability. The East Asian financial crisis has, however, taken a considerable toll on the profitability and financial performance of the Bangchak refinery (Annex 8, Table 5). The company sustained a crushing foreign exchange loss of 6.8 billion baht in 1997 which has totally debilitated its finances. Consequently, an entity which had an operating profit of 1.4 billion baht (nearly US $28 million at the prevailing rate of exchange) has changed to one which is essentially at break even. Two factors have conspired to bring about these conditions: Firstly, Bangchak's sales have declined since 1997 because of the shrinkage in the Thai market for petroleum products (Annex 8, Table 6); and, secondly, the intense competition has eroded both the refinery and the marketing margins. A new factor this year has been the informal intervention of the Government (through the PTT's pricing practices) to suppress the retail prices of gasoline and high speed diesel oil, thus depriving Bangchak's marketing operations from its normal margins since August (reportedly, this practice has been discontinued recently). As a result, despite the return of some stability to the petroleum product market in Thailand, the company is anticipated to make an operating loss of nearly 0.5 billion baht in the 2000 (Annex 8, Table 5). In the meantime, the Banchak's share prices have plunged from 50 baht in mid-1995 to 5 baht by October 2000 as the Thai Stock Exchange (SET) index has declined from near 1600 to around 300 in the same period. Government still remains the majority shareholder with the Ministry of Finance and PTT holding 80 percent. The other 20 percent is currently owned by the public. -6 - 6.2 Transition arrangement to regular operations: The Bangchak refinery's response to this situation has been initially to stabilize its finances by converting its short-term loans and overdrafts to longer term liabilities (Annex 8, Table 7) so that it can better manage its cash flow. It is now expected that the increase in the demand for petroleum products in the Asia-Pacific Region (already 1.3 mbd since 1998) will lead to the firming of refining margins (a phenomenon that is already underway) in the region (Annex 8, Table 8) and eventually in Thailand. The Thai market is, however, anticipated to remain behind the curve in view of the small projected increase in consumption during the next few years (Annex 8, Table 3) mainly due to the availability of increasing quantities of natural gas reducing demand for fuel oil. On this basis, it is expected that the company will become profitable, starting in 2001, though a return to the mid-i 990s conditions may not be easily at hand. The Company has also requested the RTG to agree with a further issuance of shares in early 2001 for Thai private sector subscription with the aim of reducing the total government shareholding (Ministry of Finance and the PTT) to 49 percent. While the Company reported that the Government's approval has been obtained, it is anticipated that some 2.5 billion baht may be raised in this way, making it possible for the company to retire some of its medium and longer-term debts which stood at 11.9 billion baht at the end of June 2000 (Annex 8, Table 7). Through this increased privatization, the company also wishes to rid itself from any government regulation to which it is still subjected. It specially feels frustrated by the informal intervention of the Government in suppressing pump prices at a time when its finances have been under such pressure. By raising capital and retiring some debts, the company anticipates an enhancement of its profitability (this is not reflected in the projected income statement - Annex 8, Table 5). Beyond this the company is intent on pursuing aggressively its marketing policies that have been the backbone of its profitability. Over the years the company has consistently increased the ratio of its sales at the retail level which has a higher profit margin by building new gasoline stations (some with a convenience store) and marketing other products such as fuel oil to the end-users. This approach has worked well for BCP which has successfully increased direct sales ratio from 40.6% in 1997 to 53.6% during the first 9 months of 2000. As a result more than 50 percent of BCP's sales are now effected through either the company retail outlets or to final consumers (Annex 8, Table 9) instead of being sold at wholesale to other marketers or traders. An area of special emphasis has been the direct marketing of fuel oil which has historically been low compared with Bangchak's production. The above appears to be, on the whole, a prudent and practicable plan for the future operation of the Bangchak refinery. Technically, the company has a sound and efficient operation with all the processing units in excellent working order. It has no intention of entering any new capital investment unless it helps the company in its quest to directly market a higher share of its total sales. Such new investments are expected to be only around 400-500 million baht per year, well within the capability of the company. The BCP is not the only independent refining marketing entity in the world without upstream activities facing the vagaries of the petroleum product market. Many have dealt with violent market fluctuations and survived. Given these plans many of which are underway and the strong likelihood that the demand for petroleum products will continue increasing rapidly in many countries of the region (e.g. The People's Republic of China), resulting in improved refinery margins and a higher profitability for the BCP, the sustainability of this project is rated as likely. -7 - 7. Bank and Borrower Performance Bank 7.1 Lending: The Bank performed satisfactory in identification and preparation of the project. However, during the appraisal, the need for the biggest component of the project (i.e., FCC unit) was not flagged as a potentially significant risk, and no sensitivity analyses were carried out in this regard. Further, while the SAR anticipated a trouble-free implementation on the strength of Bangchak refinery's familiarity with the Bank's procurement guidelines, problems were encountered because some rules such as the criteria for pre-qualification of the bidders had changed and the Borrowers had not been adequately informed of the import of such changes. Nonetheless, the Bank accommodated this situation by putting on the right track the procurement procedures and approval in record time, and the contract for the construction of the DGOHT was signed in December 1996, allowing the Bangchak to achieve full capacity operation by mid-1999. 7.2 Supervision: Assistance and guidance was provided by the Bank through its regular supervision of the project. Given the uncertainty surrounding the construction of the FCC unit, the Bank even commissioned a study in order to assess the advisability of implementing this component of the project. The study confirmed the proposition that an FCC unit would only be needed by the Bangchak refinery if there were no possibility of contracting to import its requirements of FCC gasoline. With regard to the cancellation of the FCC funds, once it had become obvious that FCC would no longer be needed, in retrospect, the Bank should have been more forceful in urging the Borrower to formally cancel the amount. 7.3 Overall Bank performance: The Bank's overall performance in the project is rated as satisfactory. Although a major risk factor had not been adequately identified during appraisal, overall the Bank had substantial impact through this project in helping the Borrower to: (a) keep the project implementation on track; (b) meet its obligation to the Government with regard to production of environmentally cleaner fuels; (c) base its investment program on a rationalized framework; and (d) be vigilant of and take remedial actions to deal with its precarious finances during the crisis. In addition, the Bank's involvements in and dialogue through this project, represented a "continuity" of the Bank's critical involvement in Thailand's energy and environmental sectors. The impact of these involvements in the sector has been huge by any standard, given the critical role the Bank has played in the formulation and implementation of major policies that have resulted in the development of one of the most deregulated and liberalized energy sectors in the region. The Bank has had a cooperative and fruitful relationship with the Bangchak refinery extending over one and a half decades. The financing of the Bangchak Refinery Restructuring Project (loan 2548-TH), which was completed in June 1992, assisted the RTG in the managerial, financial and physical restructuring of a stagnant government owned enterprise, transforming it into a commercially-oriented and profitable entity. Building on the success of this first project the Bank and the Borrower embarked on the Clean Fuel and Environmental Improvement Project with the objective of addressing the environmental degradation in Thailand, and more specifically in the Bangkok Metropolitan Region, related to the quality of fuels being utilized in the transportation sector. In this, the Bank was directing its financing towards helping Thailand achieve its developmental objectives with improved enviromnental management Two decades of involvement by the Bank in Thailand's energy sector has placed it in a unique advisory position. Both the RTG and its energy producing and marketing entities have regularly sought the Bank's advice about energy sector issues. The carrying out of several important studies such as the Fuel Option Study (Report No. I1 948-TH) have been most helpful in guiding the sector in the right direction. All in all, - 8 - this close relationship and familiarity with the issues has helped the Bank to provide assistance with usually satisfactory results. Borrower 7.4 Preparation: The project was well prepared by the borrower. It was fully responsive to the specifications set by the RTG for the production of vehicular fuels. It was also cognizant of the technological choices that were available and selected those that responded to the requirements at the lowest cost. There remains, however, the question that soon after the approval of the project, the Borrower became doubtful as to the advisability of constructing the single most costly component of the project, namely, the FCC unit. While it is true that the RTG had not approved quite so much conversion capacity at the time of project preparation, the Borrower was also somewhat sanguine about the possibility of exporting, in case such an eventuality came to pass. 7.5 Government implementation performance: Throughout the implementation of this project, the Borrower remained committed and cooperative. Once the procurement problems with the DGOHT contract were resolved, the construction got underway in 1997 but the civil works subcontractor's weak management and financial capabilities resulted in completion delays that could have proved costly to BCP. However, through judicious persuasions by the BPC's management, the construction was finished by early 1999 and the commissioning activities started in February of that year. The project implementation team was competent and it was ably assisted by engineers and consultants. The unit has been operating.flawlessly since it came on full stream in June 1999. 7.6 Implementing Agency: Since the restructuring of the late 1980s, the company is being managed by a group of technically competent and motivated professionals performing well in a highly competitive market. The company has kept its operational work force to a minimum and its operating expenses are kept low through preventative maintenance and total quality management (TQM). Despite the existence of many processing units in the refinery, the energy consumption and loss in the refinery has been kept low at around 3.3 percent of the crude oil throughout. The company is about to introduce gasohol in its gasoline stations and intends to phase out the use of other oxygenates such as MTBE which is looked upon unfavorably worldwide. This move may also marginally improve the company's profitability. 7.7 Overall Borrowerperformance: The BCP's management was initially hesitant about carrying through with the construction of the FCC unit. While the East Asian financial crisis and the resulting collapse of the demand for petroleum products left little doubt as to the inadvisability of constructing the FCC unit, it took a long period for the company to cancel that part of the loan that pertained to the FCC. During this period, the company proposed many items of capital expenditure for retroactive financing which could not be accepted by the Bank. The Bank was, however, willing to finance a power plant from the available unused funds, but the decline in electric power consumption in the country eroded the economic viability of this unit because the project was based on the plant selling the bulk of its output to the grid (as an Independent Power Producer - IPP). The Borrower's overall performance is rated as satisfactory. The Bangchak refinery has been a leader in complying with the environmental regulation. Being situated next to residential areas on the bank of the Chao Pharya river, it has achieved a cooperative understanding with the surrounding communities through its pollution control efforts. The company's success in obtaining the ISO 14001 certification for environmental standards has enhanced its standing in these communities as it strives to further reduce any -9- emissions into the atmosphere such as those at the truck loading racks. The company has had to weather rough times since the beginning of the East Asian financial crisis which started in Thailand in July 1997. Through some deft financial management and short-term borrowings it has succeeded to keep its operations and workforce unaffected. It has now converted its short-terrn borrowings into longer term obligations, earning the much needed respite to concentrate on its future. In the meantime it has even tried its hand at marketing imported products when such activities were financially more beneficial for the company. Bangchak complied with all the covenants contained in the Loan Agreements except two financial covenants, namely: the debt service coverage and long-term debt/equity ratios (Annex 8, Table 10). 8. Lessons Learned 8.1 The implementation of this project brings out some of the generic lessons that have been learnt repeatedly in the past namely that: (a) the skill and competence of the project implementation team and its consultant are paramount; (b) risk management is important; (c) Borrower ownership and management is indispensable; and, (d) regular supervision and monitoring usually pays dividends. That said, there are still a few specific lessons that can be drawn from the implementation of this project: 8.2 At the start of implementation it was assumed by the Bank that since the Refinery had already implemented a previous project it would be completely familiar with the Bank's Procurement Guidelines. This overlooked the fact that certain parts of the Guidelines had already been changed in the interim period. Although it is the responsibility of the Borrower to ascertain all rules, it would be only reasonable to expect that the Bank staff explain any changes to the Borrower in the interest of better implementation. 8.3 Given the fact that there is normally little flexibility in the critical paths of fast track projects, the contractor's familiarity with the local conditions assumes an inordinate importance. In addition to the managerial and financial weaknesses of the civil works contractor, the project's main contractor had only carried out another contract in Thailand previously and apparently had chosen a new project team for his project. The Bank may wish to consider including the track record in the country as a pre-qualification criterion especially in the case of fast track projects. 9. Partner Comments (a) Borrower/implementing agency: The BCP have provided their contribution to the ICR (Annex 9). No comments were received from BCP on the draft ICR. (b) Cofinanciers: There were no cofinanciers in this project. (c) Other partners (NGOs/private sector): None 10. Additional Information - 10- Annex 1. Key Performance Indicators/Log Frame Matrix Outcome / Impact Indicators: tndlctorlMatwlx Projected in last PSR ActualLatest ismate (1) Sulfur levels will be controlled by the new (1) The hydrotreater unit producing at (1) The refinery produces diesel oil with 0.05 units which will have emissions control capacity. The sulfur content of diesel oil percent sulfur content at capacity. equipment designed to meet both Thailand reduced from 0.5 to 0.05 percent. The sulfur and WB standards. recovery unit on stream. (2) Environmental impacts on ambient air (2) The refinery would meet the (2) The refinery obtained their ISO 14,001 quality would be within Thai standards and environmental standards. certification for compliance with WB guidelines. environmental standards. Output Indicators: fndicatoulMatirlx Projected in last PSW Actual/lfte. t Fstltmte (1) Production of 25,000 to 30,000 barrels (1) Production of 25,000 barrels per day of (1) Producion of 25,000 barrels per day of per day of low sulfur diesel oil. 0.05 percent sulfur diesel oil 0.05 percent sulfur diesel oil (2) Production of 28,000 to 30,000 barrels (2) Production of up to 20,000 barrels per (2) Production of up to 20,000 barrels per per day of unleaded gasoline day of unleaded gasoline using some day of unleaded gasoline using some imported FCC gasoline to be added to the imported FCC gasorine to be added to the intemally produced gasoline pool intemally produced gasoline pool End of project - 11 - Annex 2. Project Costs and Financing Project Cost by Component (in US$ million equivalent) IAppralal Actual/LateEt P prcetageiof ~~~Poet ;Cos t;: By; Comp'oient U $$== miio U$ mAillio DGOHT 66.30 32.40 48.9 FCC 148.00 0.00 0 Environmental and Safety Enhancement 33.00 3.50 10.6 Air Quality Monitoring Mobile Unit 1.00 0.00 0 License Fee, Technology, Catalysts chemicals 3.00 1.60 53.3 Project Engineering and Management Assistance 7.60 3.10 40.8 Operations Assistance and Overseas Training 2.00 0.00 0 Total Baseline Cost 260.90 40.60 Physical Contingencies 26.10 0.00 0 Price Contingencies 42.10 0.00 0 Total Project Costs 329.10 40.60 Interest during construction 40.90 0.00 0.00 Total Financing Required 370.00 40.60 Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent) ICB LIB Other NBF Total Cost 1. Works 293.1 15 308 1 (69) (11.5) -- (80.5) 2. Goods -- 1.0 4.5 5.5 (1.0) (3.7) _ (4 2) 3. Consulting Services 3.1 Project Management and Engineering -- 9.7 9.7 Assistance (0.0) (0.() 3.2 Operation Assistance _ _ 2.0 2.0 Overseas Training (1.0) (I (') 3.3 Technical Services, Technology 3.8 3.8 Property Licenses (3.8) (3.8) Total 293.1 16.0 10.3 9.7 329.1 (69) (12.5) (8.5) (0.00) (90.0) - 12- Project Costs by Procurement.Arrangements (Actual) (US$ million equivalent) ICB NCB Other NBF Total Cost 1. Works 33.3 0.0 2.6 0.0 35.9 (33.3) (0.0) (0.0) (0.0) (33.3) 2. Goods 0.0 0.0 1.2 0.0 1.2 (0.0) 0.0 (1.2) (0.0) (1.2) 3. Consulting Services 3.1 Project Management and Engineering 0.0 0.0 0.0 0.0 0.0 Assistance (0.0) (0.0) (0.0) (0.0) (0.0) 3.2 Operation Assistance 0.0 0.0 0.0 0.0 0.0 Overseas Training (0.0) (0.0) (0.0) (0.0) (0.0) 3.3 Technical Services, Technology 0.0 0.0 3.5 0.0 3.5 Property Licenses (0.0) (0.0) (3.5) (0.0) (3.5) Total 33.3 0.0 7.3 0.0 40.6 (33.3) (0.0) ] (4.7) (0.0) (38.1) - 13- Annex 3: Economic Costs and Benefits Underlying Assumptions for Economic Analysis The principal benefit that may be quantified in this analysis is related to the increased production of very low sulphur diesel oil (the construction of the FCC unit having been canceled) with a specification that meets the revised fuel quality standards. Since the petroleum product market in Thailand is deregulated and open to imports, the economic value of such products is the price in the international market (in this case FOB Singapore) adjusted for quality, maritime transportation and other legitimate costs ex-refinery. However, in the absence of the project, the refinery would have been forced to export all of its diesel oil production (with higher sulphur content) at Singapore FOB prices because no outlet would exist for it in the Thai domestic market. Over the last few years as diesel oil with lower sulphur content has become increasingly the norm in the East Asia and Pacific Region, prices have been posted in the PlatVs Oilgram Price Report. As of the first week in October 2000 such listings include the 0.05 percent sulphur diesel oil for the first time (though this specification had been traded for sometime). The differential in the prices of 0.5 percent and 0.05 percent sulphur diesel oils FOB Singapore which started at nearly US$0.75 per barrel earlier in 2000, has now settled down toward US$0.5 -0.55 per barrel (See Platt's Oilgram Price Reports dated Oct. 4, 2000; Oct. 25, 2000, Nov. 10, 2000 and Nov. 29, 2000). On this basis, the ex-refinery price of 0.05 percent gas oil for Bangchak is estimated as follows: Quality Differential at Singapore US$0.5/bbl Freight to Thai Post US$0.71bbl Insurance US$0.05/bbl Loss US$0.201bbl Island Freight US$0.15/bbl Total US$1.60/bbl As for the incremental costs of refinery, they are derived from the actual expenses of processing, material and maintenance that are attributable to the DGOHT and the sulphur recovery plants. DGOHT's residual value is estimated at US$2.5 million. - 14 - Estimated of the Economic Rate of Return (1999 prices) (US$ millions) Year Investment Costs Incremental Incremental Benefit/(cost) Operating Cost Revenue 1997 4.5 (4.5) 1998 16.8 -- -- (16.8) 1999 14.1 6.6 14.6 (6.1) 2000 6.2 6.6 14.6 1.8 2001 -- 6.6 14.6 8.0 2002 --- 6.6 14.6 8.0 2003 --- 6.6 14.6 8.0 2004 -- 6.6 14.6 8.0 2005 1.0 6.6 14.6 7.0 2006 --- 6.6 14.6 8.0 2007 --- 6.6 14.6 8.0 2008 --- 6.6 14.6 8.0 2009 --- 6.6 14.6 8.0 2010 1.0 6.6 14.6 7.0 2011 --- 6.6 14.6 8.0 2012 --- 6.6 14.6 8.0 2013 -- 6.6 14.6 8.0 2014 -- 6.6 14.6 8.0 2015 2.0 6.6 14.6 6.0 2016 -- 6.6 14.6 8.0 2017 --- 6.6 14.6 8.0 2018 --- 6.6 14.6 10.5* IERR = 20.1% * Includes residual value - 15 - Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No. of Persons and Specialty Perfornnce Ratin (e.g. 2 Economists, I FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective Identification/Preparation March 1994 3 IEnergy, I Economist, I Financial Appraisal/Negotiation June 1994 3 1 Energy, I Economist, I Financial March 1995 4 1 Energy, I Financial, I Legal, I Disbursement Supervision December 1995 1 Energy, S S September 1996 2 2 Energy, S S February 1997 1 Energy HS S November 1997 1 Energy S S May 1998 2 2 Energy S S December 1998 2 2 Energy S s June 1999 1 Energy S S May 2000 1 Energy S S ICR November 2000 1 Energy S S (b) Staff Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ ( 000) Identification/Preparation 18.3 56.5 Appraisal/Negotiation 27.0 80.4 Supervision 62.1 211.9 ICR 7.0 27.0 Total 114.4 375.8 - 16- Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating O Macro policies O H O SU 0 M 0 N * NA 0 Sector Policies O H *SUOM O N O NA OPhysical OH OSUOM ON ONA O Financial O H OSUOM O N O NA L Institutional Development O H O SUO M O N 0 NA 7l Environmental * H OSUOM O N O NA Social El Poverty Reduction O H OSUOM O N * NA LI Gender OH OSUOM ON *NA Ol Other (Please specify) OH OSUOM ON * NA E Private sector development 0 H O SUO M 0 N 0 NA El Public sector management 0 H 0 SU 0 M 0 N 0 NA l Other (Please specify) O H OSUOM O N * NA -17 - Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.1 Bank performance Rating O Lending OHS Os *u OHU O Supervision OHS OS Ou OHU O Overall OHS OS O u O HU 6.2 Borrowerperformance Rating 0 Preparation OHS OS O u O HU O Government implementation performance O HS O S 0 U 0 HU O Implementation agency performance OHS Os O u O HU 0 overall OHS OS O U O HU - 18- Annex 7. List of Supporting Documents 1. Air Pollution Control Strategies in Thailand Pollution control Departmnent, Ministry of Science, Technology and Environment 2. Air Emission Sources Database Update and Ambient Air Quality Impact Assessment in Bangkok Metropolitan Region Pollution Control Department, Ministry of Science, Technology and Environment 3. Quarterly Report and Statistics National Energy Policy Office 4. Report of the Independent Auditor and Financial Statements - The Bangchak Petroleum Public Company Ltd- for the six months ended June 30, 2000 5. ICR Mission Aide-Memoire 6. The Borrower's Contribution to the ICR - 19 - Annex 8 Table 1: Air Quality Indicators (Annual Average) Bangkok Metropolitan Region Roadside Lead CO Total Suspended Particles SO2 microgram per ppm milligram/cubic meter ppb cubic meter 1991 1.6 -- 0.50 -- 1992 0.7 3.6 0.52 -- 1993 0.3 3.3 0.42 -- 1994 0.25 4.3 0.38 -- 1995 0.2 3.9 0.55 -- 1996 0.1 3.0 0.53 -- 1997 0.1 2.8 0.38 13 1998 0.1 2.3 0.30 10 1999 0.1 2.4 0.22 9 Source: Air Quality and Noise Management Division Department of Pollution Control Table 2: Thailand's Actual and Projected Energy Consumption (Thousand Barrels/day Oil Equivalent) Oil Natural Lignite Coal Hydro Total Gas Actual 1995 636 197 115 29 30 1008 1996 685 227 126 49 33 1121 1997 681 281 139 41 33 1176 1998 611 305 127 20 35 1089 1999 611 336 118 41 19 1125 Projected 2000 610 360 110 40 30 1150 2001 620 370 110 50 30 1180 2002 635 390 110 55 30 1220 2003 655 405 120 50 30 1260 2004 680 410 130 50 30 1300 Source: Nepo and Mission Estimates - 20 - Annex 8 Table 3: Thailand's Actual and Projected Petroleum Products Consumption (Thousand barrels/day - physical quantities) LPG Gasoline Kerosene/J Gas/Diesel Fuel Oil Total Jet-Fuel Oil and Others Actual 1997 51.3 126.5 62.4 301.7 156.5 698.4 1998 47.3 123.4 57.8 263.0 136.6 628.1 1999 51.3 120.9 57.6 263.2 136.4 628.4 Projected 2000 56.0 118.0 59.0 262.0 133.0 628.0 2001 57.0 123.0 61.0 275.0 123.0 639.0 2002 60.0 128.0 65.0 290.0 113.0 656.0 2003 65.0 135.0 69.0 307.0 102.0 678.0 2004 68.0 141.0 72.0 325.0 104.0 710.0 Source: BCP, NEPO and Mission estimates Table 4: Sale of Regular and Premium Quality Gasoline in Thailand (Thousand barrels/day) Year Regular' % of Total Premium % of Total Total 91 octane 95 octane 1997 33.9 26.8% 92.6 73.2% 126.5 1998 37.9 30.7% 85.5 69.3% 123.4 1999 40.3 33.4% 80.6 66.7% 120.9 2000 (9 months) 46.0 39.5% 70.6 60.5% 116.6 Source: BCP Note: 1/ The octane number for this quality of gasoline is the research octane number (RON) which is equivalent to 87 octane regular unleaded gasoline in the United Status as defined by US standards. -21 - Table 5: BCP's Actual and Projected Income Statement Actual Projection Unit MBaht 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Revenues Sales 32,339.1 31,878.3 38,384.0 34,138.1 38,621.5 55,700.0 61,337.9 62,034.3 61,725.9 62,779.0 Other Income - Interest Income 806.1 950.3 376.3 159.8 81.1 61.6 45.4 22.9 20.3 18.6 - Others 219.8 275.8 531.0 346.8 77.2 368.8 305.3 337.5 371.9 384.8 Total Revenues 33,365.0 33,104.3 39,291.4 34,644.7 38,779.8 56,130.3 61,688.6 62,394.7 62,118.1 63,182.4 Expenses Cost of Sales -29,997.5 -29,425.5 -35,634.0 -32,689.1 -35,798.7 -53,776.7 -58,976.1 -59,565.3 -59,188.1 -60,146.9 Selling and Admin. Expenses -1,025.1 -1,030.9 -1,213.4 -1,246.9 -1,964.6 -1,372.3 -1,482.1 -1,590.0 -1,686.3 -1,782.7 Interest Expenses -1,068.9 -1,175.1 -1,007.5 -1,021.6 -1,101.7 -1,205.2 -1,019.3 -926.2 -846.6 -758.3 Director's Remuneration -1.4 -1.5 -0.5 -0.5 -0.5 -0.5 -0.5 -0.5 -0.5 * Total Expenses -32,091.4 -31,632.8 -37,856.4 -34,958.1 -38,865.4 -56,354.7 -61,478.0 -62,081.9 -61,721.5 -62,688.4 Net Operating Income 1,273.6 1,471.5 1,434.9 -313.4 -85.6 -224.4 210.6 312.8 396.6 494.0 Gain/(Loss) From Foreign Exchange -31.7 -9.3 -26.0 406.4 -146.6 -260.0 Fluctuations Profit Before Tax and Extraordinary Items 1,241.9 1,462.2 1,408.9 93.0 -232.2 -484.4 210.6 312.8 396.6 494.0 Income Tax -371.2 -439.4 -33.7 -1,501.9" -121.9 Profit Before Extraordinary Items 870.7 1,022.7 1,408.9 59.3 -1,734.1 -484.4 210.6 312.8 396.6 372.1 Extraordinary Items - Loss from FX 1997 -6,788.4 - Income Tax Credit 1,595.0 Net Profit 870.7 1,022.7 -3,784.5 59.3 -1,734.1 -484.4 210.6 312.6 396.6 372.1 Source: BCP Note: 1. Write off income tax credit 00 Annex 8 Table 6: Bangchak's Annual Sale of Different Products During 1995-2000 (kbd) 1995 1996 1997 1998 1999 2000 (9 months) LPG 3.64 3.02 2.76 2.17 2.15 1.56 MOGAS 19.85 15.63 17.02 15.50 16.69 15.72 IK/JET 9.36 9.48 9.34 9.61 9.88 8.50 High Speed Deisel 37.78 32.48 35.76 32.51 36.52 36.23 Fuel Oil 42.82 36.94 38.99 34.84 33.89 27.45 Total 113.44 97.54 103.86 94.62 99.12 89.47 - 23 - Annex 8 Table 7: Balance Sheet (Million Baht) 1996 1997 1998 1999 IH2000 Assets Current Assets 81 2,180 772 690 197 Cash on hand and at banks Short-tenn investments 5,672 115 173 181 182 Trade accounts and notes receivable-net 2,444 2,575 1,596 2,728 2,662 Inventories 3,676 4,012 2,266 4,985 5,563 Other current assets 824 929 856 1,092 1,632 Total Current Assets 12,697 9,811 5,663 9,676 10,236 Long-Term Investment 133 163 163 30 36 Investment in Associated Companies 254 259 265 239 237 Property, Plant and Equipment-Net 11,723 17,619 17,804 16,759 16,303 Intangible Assets 758 1,179 1,291 1,271 1,235 Other Assets 484 2,098 2,173 1,041 975 Total Assets 26,049 31,129 27,359 29,016 29,022 Liabilities and Shareholders' Equity Current Liabilities Bank overdrafts and short-term loan 8,330 5,207 6,211 7,839 2,574 Trade accounts payable 3,000 8,310 2,784 4,589 2,950 Current portion of long-terrn loan 218 5,267 1,064 2,467 2,826 Other current liabilities 976 966 1,498 1,415 898 Total Current Liabilities 12,524 19,750 11,557 16,310 9,248 Long-Term Loans 3,689 795 5,685 4,552 11,937 Other Liabilities 118 117 124 315 308 Total Liabilities 16,331 20,662 17,366 21,177 21,493 Shareholders' Equity Share capital 5,220 5,220 5,220 5,220 5,220 Paid-in capital 2,008 7,173 6,690 6,270 6,086 Retained earnings 2,564 (1,873) (1,917) (3,651) (3,777) Deferred losses from foreign exchange (74) (53) - - - fluctuations prior to year 1996 Total Shareholders' Equity 9,718 10,467 9,993 7,839 7,529 Total Liabilities and Shareholders' Equity 26,049 31,129 27,359 29,016 29,022 -24 - Annex 8 Table 8: Dubai Cracking Margin At Singapore (Cargos) ($/bbl) 1996 1997 1998 1999 2000 (QI) 2000(QII) 2000 (QIII) Gasoline 23.58 24.57 17.19 21.02 30.66 31.00 36.52 Naphtea 20.22 21.92 14.84 19.39 27.03 26.82 30.81 JetFuel/Kerosene 28.36 24.97 16.36 21.43 31.59 29.41 37.79 Gas Oil 27.07 24.28 15.47 19.13 30.31 28.47 36.40 LSWR (0.3% sulfur) 1/ 18.04 16.92 10.98 15.50 23.62 25.92 26.92 HSFO (3.5% sulfur- 180 CST) 2/ 16.83 15.93 10.65 15.70 23,21 25.31 24.27 HSFO(3.5%sulfur-380CST)3/ 15.90 15.10 10.09 15.14 22.48 24.34 23.33 Gross Product Worth 23.06 22.04 14.85 18.74 28.25 27.99 29.32 Dubai Cracking Margin 3.10 2.30 1.01 0.95 3.25 2.36 4.69 Source: IEA Oil Market Report, November 2000 Notes: 1/ Low Sulfur Waxy Residue 2/ Low viscosity High Sulfur Fuel Oil 3/ High viscosity High Sulfur Fuel Oil Table 9: BCP's Sales of Petroleum Products and Market Share From 1997 to 2000 (kbd) 1997 1998 1999 2000 9 months BCP's Directly Marketed Sales 42.18 41.67 44.92 47.97 BCP's Total Sales 103.86 94.62 99.12 89.47 Share of Directly Marketed Sales 40.6% 44.0% 45.3% 53.6% Total Sales in Thai Market 698.4 628.1 628.4 628.0 (Excluding Luboil, bitumen, etc.) -25- Annex 8 Table 10: Actual Financial Performance Item Covenant 1996 1997 1998 1999 IH2000 Current Ratio > 0.8 1.01 0.50 0.49 0.59 1.11 Debt-Service Coverage > 1.2 2.05 (0.33) 0.88 0.08 0.29 Long-Term Debt/Equity < 1.5 0.40 0.58 0.68 0.90 1.70 Table 11: Project Financing by Component (in US$ million equivalent) Appraisal Estimate Actual/Latest Estimate Percentage of Appraisal Component Bank Other External Own Cash Bank Other Own Cash Bank Other Own Cash Sources Generation External Generation External Generation Sources Sources 90.0 170.0 110.0 38.1 0.0 2.5 43.3 0.0 2.3 -26 - Annex 8 The Borrower's Contribution to ICR Implementation Completion Report Thailand: Clean Fuel and Environmental Improvement Project (Loan 3889-TH) Introductioo In early 1990, The Nation Energy Policy Office (NEPO) commenced the review of petroleum fuel specifications to bring these standards to the same level as that of developed countries. The refineries were required to reduce the sulfur level of Diesel Oil to 0.05 weight percent by the year 1999 and Aromatic Content in Gasoline reduce from 50% to 35% Volume percent by the year 2000. The new specifications mandated by NEPO both for gasoline and Diesel Oil were very stringent among this region. The proposed Environmental Improvement and Clean Fuels Project providing the additional refinery facilities required to meet the new clean fuels standard was developed in consultation with the World Bank in parallel with the various regulations which NEPO was developing. The finalization was in March 1995 for the proposed World Bank loan to the Bangchak Petroleum Public Company Limited with the Guarantee of the Kingdom of Thailand to assist in financing the Environmental Improvement and Clean Fuels Project with amount of US$ 90 million equivalent. Project Objectives I ) The main objectives of the project were to facilities the reduction of air pollution attributable to petroleum fucls in meeting Diesel Oil and Gasoline specifications established by the Government of Thailand, to improve its refinery operations through the installation of appropriate facilities and equipment to reduce refinery emissions and improve safety contributing to the development of the Thai Govemment's long term strategy to abate the concentration of selected pollutants. 2) The project comprised of 2 main components the Deep Gas Oil Hydrotreater (DGOHIT) Unit and the Fluid Catalytic Cracker (FCC) Unit. The project also included several smaller components such as modification of Naphtha Reformer Unit, Utilities Upgrading, Environmental and Safety Equipment, Catalysts and Consultancy Service. Itbe Bangchak Petrolcumn lubic Compdny Limiteid. Construction Control Divsion - 27 - Annex 8 2 Implementation Experience and Results I ) The project's objectives were substantially achieved. The testing and commissioning of the DGOHT Unit have been started on February 12, 1999 and the performance test run have been completed by June 8, 1999. Although the test run have been 3-4 months delay due to some hydraulic problem but the DGOHT Unit could operate 70-80% capacity together with more severity condition of existing Desulfurization Unit until the completion of the new unit. However, BCP has been able to continuously produce sufficient quantities of 0.05% sulfur Diesel Oil without any shortages to our market. 2) Due to excess capacity in Thailand's refining industry and downtum in the economy including the sufficient supply of FCC Gasoline from local refinery in T hailand for blending the 35% aromatic content Gasoline, the construction of the FCC Unit was postponed indefinitely. As the result, US$ 30 million of the loans were cancelled in July 1999. 3) Regarding the Naphtha Reformer Unit modification, it was likely to be tighten the standard by the Government for reducing the Benzene content, Aromatic content and Reid Vapor Pressure (RVP) of the gasoline. Replacement of catalyst of Reformer Unit and upgrading of furnace were necessary in order to reduce sulfur further. However the Government has not yet decided on the new standards therefore the amount of the loan allocated has been still no disbursement up to the closing date in June 30, 2000. 4) For Catalyst and Chemicals, two of the three catalyst lots have been procured for DGOHT. The use of third lot depended on the modification of Naphtha Reformer Unit as mentioned above. Nevertheless, the amount of the loan allocated for this portion has been no disbursement up to the closing date in June 30, 2000. 5) Regarding the Environmental and Safety Enhancement Equipment, the Sulfur Recovery Unit designed to handle the by products from the DGO}IT unit has been fully completed whereas the other amount of loan allocated for Air Quality Monitoring (AQM) Equipment and Waste Water Treatment Plant has not been fiurther needed due to using sweet fuel gas and very low sulfur oil as refinery fuel, the emission from the stack has complied with emission standard of Thai Government. In addition BCP has implemented for ISO 14001 since 1997 and to reduce the usage water in the plant was one of environmental targets. As a result the quantity of wasted water has been reduced. Therefore the capacity of existing wasted water has been sufficient. BCP also improvc the safety system to confident that the refinery could operate with safely operation is certified by third party agent according to The Thai Industrial Standard (TIS 18001) which in line wvith British Standard (BS8800: 1996 Guide to occupational health and safety management system). rhc Bangchak Petroleum Public Cninpany Limitcd Cuiistruction Control Divisiun - 28 - Annex 8 6) Consultancy Contracts and Licensor's Fee were effectively complete with the exception of a short extension to the consultancy contract required to cover the delay in the DGOHT unit completion. 7) Tlhe project was implemented at a cost of US$ 40.6 million which was disbursed from the Bank in amount of US$ 38.1 million. Achievement of Objective The project's outcome is substantially satisfactory. Most of its major objectives regarding DGOHT have been achieved although it was delayed in the completion caused by lack of experiences of the local condition by main contractor and some financial problem of the subcontractor due to the crisis. There still have been continuously supplied of Diesel Oil sulfur 0.05 weight percent without any shortages. Some unforeseeable external factors especially the economic crisis and the excess of supply in the country affected to the change of some objective regarding FCC unit including the pending project due to the unclear of Government's direction of implemented new specification that will tentatively be more stringent. Project Cost Final actual costs for each portion of the project are as follows:- Project Element MUS$ 1. Works (with associated Goods and Services under Turn-key Contracts) 1.1 DGOHT & Associated Facilities 30.20 1.2 FCC & Associated Facilities 1.3 Environmental & Safety Enhancement Equipment 3.08 2. Goods 2.1 Air Quality Monitoring Equipment 2.2 Catalysts & Chemicals 1.24 3. Consulting Services 3.1 Project Management & Engineering Assistance 3.2 Operations Assistance & Overseas Training 3.3 Technical Services 3.15 4. Proprietary Licenses and Technology 0.43 Total 38.10 Ilhc Bangchak Petrolcum Public Cornpany Linited Construction Control Division - 29 - Annex 8 4 Bank Performance The project's objective was in line with Thailand's priority in implementing a cost-effective Clean Fuel program, which the Bank has worked closely with the Govemrnment agencies involved in developing this program. The Bank's policy also supporting the Thai Government to mitigate the adverse impacts of transport-related air pollution, particularly in Bangkok and vicinity area. This is consistent with a key element of the Bank's country assistance strategy ( Report No. 13458-TH). The project was implemented with close cooporation with the Bank in carrying many projects since 1986 (The Bangchak Petroleum Refinery Restructuring Project: Loan No2548-TH). The Bank was fully supporting in financial and technical. The Bank's advisory to BCP was highly contributed to the success of the project. The Bank's performance is considered highly satisfactory. Although, BCP's project management team was familiar with the Bank's procurement procedure of the past experience with previous project, But there was some revise to the Bank's guideline at the beginning of prequalification has slightly effect to the project schedule, however with regular and closely supervision by the Bank could resolve the outstanding issues in timely With, the Bank's effective supporting and the supervision to the project was concluded as a key element which contributed to the project's success. Future Operation Due to the economic crisis BCP estimate to have some slightly loss in this year but it is better than other competitors such as ESSO, RRC (Shell refinery), SPRC (Caltex refinery), or TOC (Thai Oil refinery) and could be tumaround to profit 300-500 million Baht per year. To improve the company's profitability, the directions are focusing on:- 1) Retail business The target is shifted to the profitable market and secured refinery outlet. Although the price war were initiated by Shell & Esso in late 1999 and government squeezed to marketing margin to help Thai people during high price have some effects to the marketing margin but now back to normal. BCP has been continuously increased in market share from 0% in 1993 up to 9% in 2000 and plan to increase 1% per year in the next 5 year. 2) Low investment To delay FCC is the right decision due to installation of other three refineries instead of I refinery as original plan cause gasoline. LPG surplus to the country and BCP could procure FCC gasoline instead of installing a new FCC unit. The company's strategy still has been kept for low investment in refinery sector. Thc Bangchak Pctroleunm Public Company Limited Construction Control Division - 30 - 5Annex 8 considering only high profitable investment. Other investment will concentrate in marketing sector. The country's demand of fuel oil was forecasted to reduce due to additional Natural Gas supply. BCP has adjusted type of crude oil to reduce fuel oil production from 35% to 25% of crde capacity and BCP could increase the industry sale from 25 Million Liter per month to 45 Million Liter per month and plan to increase to 60 Million Liter per month. 3) Financial restriction BCP has converted short term loan to long term by issurance the bond. To recapitalize 2.5 million Baht to public from 5.2 million Baht at present. Morever, PTT will sale 1/3 of their share to public. This plan has been approved by the cabinet. Tentative plan for privatization will decrease the share of the government from 80% to 45% in Year 2001. 4) Diversify Now BCP are seriously consider to diversify the related business which stand alone and profitable. The consequence will be increasing the traffic to the gasoline station cause increasing the sale volume of both gasoline and diesel. 5) Marketing MTBE is a concern to environmental problem. BCP plan to launch a new gasoline formula blended with Ethanol 10% instead of MTBE in early next year as altermative fuel. The bio fuel will be produced from agricultural product. This could help Thailand for more secure and stabilize to both energy and agricultural sector. This is also in line with the company's strategy, which concentrate in green marketing and community. The Bangchak Pctrolcum Public Company Limited. Construction Control Division - 31 -