ocuament of The World B FOR OFIMCIL US} i-Al i RiqmoNoL P-5522-Ko MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$100 MILLION TO THE REPUBLIC OF KOREA FOR A GAS SYSTEM EXPANSION PROJECT Ob OCTOBER 15, 1991 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 (As of December 1990) Currency Unit Won (W) US$1.00 W700 W1,000 US$1.43 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS CGC City Gas Company CHP Combined heat and power GOK Government of Korea KEPCO Korea Electric Power Corporation KGC Korea Gas Corporation LNG Liquefied Natural Gas MTY million tons per year FOR OFFICIAL USE ONLY GAS SYSTEM E3XPINSON PRO-N. I oan and Protect Summazy Borrower. Republic of Korea Beneficiary: Korea Gas Corporation (KGC) Amount: US$100 million equivalent Terms: 15 years including a grace period of five years, at the Bank's standard variable interest rate. On-lending Terms: The Government would relend the proceeds of the Bank loan to KGC on the same terms and conditions as the Bank loan. KGC would btdr the foreign exchange and interest rate risks. Loai Foreign Total US $million Financing Plan: Internal Cash Generation 100 - 100 Additional Equity 250 - 250 IBRD Loan - 100 100 Other Borrowings 231 51 282 Total .&1 1J1 732 Economic Rate of Return: 29% Staff Appraisal Report: Report No. 9462-KO Map: IBRD 22793 This document has a restricted distribution and may be used by recipien#- only i the performance of their official duties. Its contents may not otherwise be disclosed withou. * ..d Bank authorization. MEMORANDUM AND RECOMMENDATION TO THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF KOREA FOR A GAS SYSTEM EXPANSION PROJECT 1. The following memorandum and recommendation on a proposed loan for an amount of US$100 million equivalent is submitted for approval. The proposed loan would be extended to the Republic of Korea at the Bank's standard variable interest rate with a 15-year maturity including a grace period of five years. The Bank loan would be onlent to the Korea Gas Corporation (KGC) on the same terms and conditions as the Bank loan. KGC would bear the foreign exchange and interest rate risks. 2. Background. In 1981, in the wake of the second oil crisis, the Government of Korea decided on promoting the importation of liquefied natural gas (LNG) as a part of a broader strategy to diversify fuel supplies away from imported oil. Deliveries (from Indonesia) started in 1987, and LNG now accounts for 3X of total primary energy consumption. More recently, the Government's energy strategy has become increasingly influenced by environ- mental considerations. This has led to still greater emphasis on natural gas as an economically attractive, yet environmentally harmless, form of energy. 3. An energy strategy that encompasses the import of LNG needs to be carefully formulated because of two key considerations. First, LNG is a relatively expensive fuel and its utilization is therefore limited to applications: (a) where enhanced convenience in use, or gains in end-use equipment efficiency compensate for differentials in energy costs; or (b) where gas offers positive environmental externalities which are deemed socially advantageous to capture. Second, the import and handling of LNG re- quire extensive infrastructure investments in receiving terminals, regasi- fication facilities, and transmission and distribution pipelines, the long- term economic viability of which needs to be firmly established. Aware of the strategic significance of investment decisions in the gas sector, the Government sought the assistance of the Bank in carrying out a Gas Utilization Study to help establish the scope for economical use of natural gas in Korea. The Bank undertook this study in 1989, jointly with the Korea Energy Economics Institute (Report No. 8142-KO dated January 23, 1990). 4. The study established that natural gas (imported as LNG) was com- petitive with alternative fuels in a number of applications, including power generation (in combined-cycle plants), combined heat/power (CHP) plants sup- plying district heating systems, and selected residential, commercial and industrial uses (particularly where elements of convenience, quality, and/or efficiency of end-use technology can be brought to bear on consumer choice). The relatively benign effect of natural gas on the environment was seen to add to its potential as an attractive form of energy for Korea (e.g., as a space heating fuel for residential and commercial use in urban areas). The study also helped define a strategy for the sector in terms of likely future imports and the scope of investments required to handle the additional quantities. 5. The demand for natural gas, compared to the 2.4 million tons consumed in 1990, is expected to increase threefold by the year 2000. KGC's future demand scenario shows total demand rising to 4.9 mty by 1995 and 7.2 mty by the year 2000. KEPCO, the Korean power utility, is projected to account for 69X in 1995 and 611 in the year 2000 of these amounts, the remainder being consumed by domestic, commercial and industrial customers. On completion of the proposed project, the Pyong Taek LNG terminal throughput will be increased from 3.0 to 5.0 mty. Plans are underway to install a new LNG terminal at Incheon with an initial capacity of 3.0 mty. 6. The prospective beneficiary of the Bank loan, KGC, was established in 1983 as the government agency responsible for the planning and execution of the basic infrastructure necessitated by the import of LNG (terminal and transmission pipelines). Responsibility for gas distribution to the final consumers (except for such large-scale users as KEPCO) has been vested in privately-owned city gas companies (CGCs), which are KGC's customers. 7. Rationale for Bank Involvement. The main rationale for continued Bank lending to Korea is the desire by the Government to receive Bank advice and assistance in sector analysis and policy formulation, taking advantage of the Bank's broader experiences. The Bank is able to provide this type of assistance with a relatively modest level of lending and sector work. Bank operational work is focussed primarily on issues of equity and social services, technology transfer, institutional development and environment. The proposed project and the Bank's participation in its formulation are in line with this general strategy. The Bank's involvement in project prepa- ration has already resulted in a stronger interface between gas and elec- tricity utilities and a streamlining of public policies affecting gas utilization patterns. Further Bank participation in project design would be useful to assist KGC through critical technology choices. 8. The proposed project will be the first LNG-based project supported by the Bank. It reflects the Bank's growing appreciation for the economic and environmental merits of natural gas as an energy source. Its particular significance lies in that it signals a broadening of this awareness to deve- loping countries whose energy endowment does not include natural gas and whose geographic location leaves no alternative but to import gas as LNG by marine tanker. Bank association with this unique project will provide valu- able opportunities to gain experience which could be relevant to other devel- oping countries. 9. Project Objectives. The project aims to: (a) provide the infrastruc- ture required to facilitate the import and utilization of 5 mty of LNG by 1995, thereby improving the efficiency of energy use in Korea and mitigating its impact on air quality in urban areas; and (b) strengthen KGC's operatio- nal performance and management, particularly in the area of financial management. 10. YkoJect DesSciption. The project consists of the following components: (a) extension of the Pyong Taek LNG receiving terminal; (b) - 3 - construction of additional pipeline capacity to deliver the increased terminal throughput; an<, (c) utilization of consultants' services for the engineering of terminal extension and pipeline expansion. The terminal extension component comprises the installation of two 100,000 m3 LNG storage tanks and additional regasification and gas sent-out facilities. The pipeline component expands the existing pipeline system covering the Seoul metropolitan area, and installs a trunkline from Pyong Tasek to Tae Jon to support natural gas market developments in the Central Region. The project would be implemented over 5 years. 11. Project Costs and Financing Plan. The total cost of the project is estimated at US$678 million (excluding interest during construction, estimated at US$54 million). The proposed Bank loan of USA100 million represents 14X of total costs and 82X of estimated foreign exchange expenditures. Additional financing for the project would come in the form of additional equity, internal cash generation and other borrowings. The Bank loan would be made to the Government which will onlend its proceeds to KGC under a Subsidiary Loan Agreement satisfactory to the Bank. A breakdown of costs and the financing plan are given in Schedule A. Amounts and methods of procurement and disbursement and the disbursement schedules are given in Schedule B. Retroactive financing equivalent to $10 million is recommended for expenses incurred after March 31, 1991, mostly for partial payments of equipment with long delivery periods for cryogenic services, already ordered through advanced contracting approved by the Bank. A timetable of key project processing events and the status of Bank Group operations in Korea are given in schedules C and D, respectively. A map showing project location is also attached. The Staff Appraisal Report, No. 9462-K0, dated August 13, 1991 is being circulated separately. 12. Envronment. Globally, the project will have a positive impact on the environment because use of natural gas would be in lieu of more polluting forms of energy. Actually, increased use of LNG will have beneficial environmental implications both at the national/regional and global levels. Its most immediate effect will be on sulfur dioxide and particulate concentrations in urban and highly industrial areas; seen in a longer-term perspective, use of LNG will provide a substantial, if partial, response to concerns about global warming by reducing carbon dioxide emissions by a factor of 35% to 50X compared to most alternative fuels. 13. The construction of the project does not involve any sensitive environmental issue. The terminal expansion component does not require acquisition of additional land and the designs of both the terminal and pipeline components incorporate internationally-recognized safety standards. Relevant information (including the original Environmental Assessment of the Pyong-Taek terminal) has been submitted to and reviewed by the Bank. 14. Agred Action. The Bank has agreed with KGC that it shall: (a) furnish to the Bank for comments its updated annual investment program; (b) cause to be carried out regular safety audits of its technical operations; (c) prepare and furnish to the Bank for its comments an Action Program to strengthen its expertise in financial management; (d) prepare and submit to the Bank for its comments a rolling long-term finaacial plan; (e) prepare and submit to the Bank for its comments the rationale for the proposed wholesale gas price structure; and (f) maintain a current ratio of at least 1.2, a debt/equity ratio not exceeding 75:25, and a debt service coverage ratio of at least 1.2 times in 1992, and 1.4 times thereafter. Assurances have also been given by the Government that it will take appropriate measures to enable KGC to meet its financial covenants with the Bank. The signing of the Subsidiary Loan Agreement satisfactory to the Bank is a condition of loan effectiveness. 15. Benefits. The project will have significant economic and environmental benefits. About 80% of incremental gas consumption between 1990 and 1995 can be justified based on strictly-defined economic arguments (i.e., ignoring environmental externalities). In particular, the project will support the use of natural gas in combined-cycle power and CHP plants which have been shown to be parts of the least-cost solution to Korea's power and residential space heating development requirements. Gas prices to CGC consumers are set by the Government, taking into account the profitability requirements of KGC and the CGCs. Gas demand from residential, commercial and industrial users therefore largely reflects individual choices based on economically-efficient pricing. This notwithstanding, the Government has taken measures (in the form of fuel use directives) to promote the use of gas by certain categories of residential and commercial consumers with a view to bettering air quality in urban areas. These policies will affect about 20% of incremental sales (essentially the space heating loads); the additional energy costs involved in meeting the Government's environmental objectives are deemed reasonable. Overall, the project is projected to show an economic rate of return of 29%, showing the robustness of the proposed project. 16. While LNG will be used largely because of its competitiveness, an important justification for the large proposed investments in gas infrastructure, and the critical role assumed by the Government in bringing these investments about, lies with the major contribution natural gas will make toward mitigating the impact of energy use on the quality of the environment. Compared to alternative sources of energy (with the possible exception of nuclear energy), natural gas is a clean and low-polluting fuel and its expanded availability in the Seoul-Incheon area (and progressively in other parts of the country) will lead to a significant improvement in air quality in these areas by reducing emissions of, inter alia, sulfur dioxide and particulates. The new gas-fired power plants will in effect substitute coal-fired stations, while CHP plants in support of district heating systems will obviate the need for individual oil-fired space heating equipment. Similarly, gas use by CGC consumers will substitute an array of (mostly liquid) fuels with a higher sulfur and particulate content. 17. Risks. The project faces technical risks inherent to the gas industry. The probability of these hazards arising, however, is minimal as the necessary safety devices will be included in the design of the project facilities. Also, KGC's record in operating the existing terminal and pipeline facilities has been exceptionally good. 18. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Lewis T. Preston President Attachments Washington, D.C. October 15, 1991 -6- Sc-hgdule A GAS SYSTEM EPNUMI0N PM=:CI Estimated Cost and Einancing PJan Local Forig Total --- US$ million-- Estimated Costs Pyong Taek Terminal Extension Phase I 82.5 44.3 126.8 Phase II 67.0 34.5 101.5 Subtotal 149.5 78.8 228.3 PifRlines Seoul Metropolitan System 161.9 12.3 174.2 Central Region Trunkline 137.4 10.9 148.3 Subtotal 299.3 23,2 22.5 Duties and Taxes 10.3 - 10.3 Total Base CostS/ 459.5 102.0 561.1 Physical Contingency 45.0 9.7 54.7 Price Contin&ency 52.7 9.6 62.3 Total Project Cost 556. 121.3 678.1 Interest During Construction 24.0 30.0 54.0 Total Financing Required 580.8 151.3 732 Financing Plan Internal Cash Generation 100 - 100 Additional Equity 250 250 IBRD - 100 100 Other Borrowings 231 51 282 TItal 581 1t1 a u A/ Inclusive of taxes and duties. -7. Sckfflule B Page 1 of 2 XQRUA GAS SYSTIEM KEXAIONQ rurement Method and Disbursmentg (US$ million) Procurement Method Total Project Element ICB L_CB Others/ N.A. Cost LNG Terminal Extension Goods 58 75k1 133 (44) (9) (53) Taxes & Duties and Imported Goods 7 7 Construction - - 101 - 101 Engineering & Project Management - 37 - 37 (10) (10) Consultancy and T.A. - - 5 - 5 (4) (4) Piglin2s Land Acquisition - - - 63 63 Goods 27 138 - 165 (20) (20) Taxes & Duties on Imported Goods 5 5 Pipe Laying - 64 - - 64 (10) (10) Buildings & Structures - 77 - - 77 Engineering & T.A. 21 21 (3) (3- 85 279 239 75 678 TotiaB (64) (10) (26) (100) Note: Figures in parentheses are the respective amounts to be financed by the Bank. / Includes direct contracting and international shopping. k/ Proprietary items $72; international shopping $3.0. -8- Page 2 of 2 Disbursements (US$ million) Amount of the Loan Allocated (Ex- % of pressed in US Dollar Expenditure Category Egualent) to be Financed (1) Equipment and Materials 66,000,000 100% of foreign expenditures; 100% of local expenditures (ex-factory cost) (2) Civil works 9,000,000 90% (Pipelaying) (3) Consultants/Engineering Services and T.A. 15,000,000 100l (4) Unallocated 10,000,000 Total 100,000,000 Estimated Disbursements IBRD Fiscal Year 22 29 94 95 96 29 -(US$ Million)-------------- Annual 10 22 20 24 14 10 Cumulative 10 32 52 76 90 100 Retroactive financing equivalent to 10% of the proposed loan is recommended for expenditures incurred after March 31, 1991, to cover advanced contracting for equipment with long delivery periods. -9m Schedulle C KOREA GAS SYSTEMS EXPANSION PROJECT Timetable of Key Project Processing Events (a) Time taken to prepare: nine months (b) Prepared by: KGC (c) First IBRD Mission: June 1990 (d) Appraisal Mission Departure: April 15, 1991 fe) Negotiations: July 22, 1991 (f) Planned date of effectiveness: November 1991 (g) Relevant PCR and PPAR: none ScIeOuie 0 - 10 - Page I of 2 THE STATJS OF BANK 5ROUP OPEPATIONS IN THAILAND A. SrATEMENr OF SANK LOANS ANO CA CREDOfS a/ (As of June 30. 1991) Lown or AnJonmt (US$ mdion) Ogsdls Fiscal Aefee va"ollUo8 * Num' Yeu BSonwar Purpso eBank IDA Unsueo Ss_f*sbI loWO Six cdi fthUy dibursed 3,030A85 13 .42 Of whh SECALs. SAL. and Pgam Loan 2097 1982 hg0dom of Thaad SAL I 150.00 2256 1963 1dgom of Thaland SAL U 175.50 Suob.Tha 325.50 1922 1081 KIngdom of Thailand Agrlo.tie Resea4Ch 29.95 3.28 2407 1984 Sa. Gui. Aut of Th. Mae Mh Ugib 3 15.00 1.18 2440 1964 Iida m at Thailand Land Irdng 35.00 4.34 2520 1965 Igoam of Thiand Regionrl Ca. 20.33 5.61 2548 195 a5 hak Petrolsum Co. PeANry I (Begeuk) 85.00 69.17 2795 1987 Nafl Houin AuL Third Sher 9.00 4.47 2572 t6 SOM Ralwy of Th. Ra&vay Effinwy 1300 7.45 2584 1966 Kgdom o Thaland Hgh Sor 50.00 22.39 2i1 1S66 EWz Gem Auth. of Thl. Power Trns$lon 110.00 15.63 300 1969 Kfdamn at Thl. soo Hway aor 87.00 41.21 3m 1l0w Be. GwL Auth. at IN. PoWr" Syeam 0ev. 90.00 1.20 3138 1900 sE. Gui Auti of Thl. Seosmn Pwr Syswm Oev. 94.00 25.65 1160 Kngdom ot Thaand Hgway Sor al 0.00 46.82 3254 1S99 KIngom Of Thailafd LandTlg 11 - 30.00 29.89 324 1991 ngdom of Thalland Tax Camp AUo.,- 32.00 32.00 raw 3,781.13 115.42 310.31 of which has been fepad 1,706.63 7.38 Toed now held by Bank and IDA 2.0750 16.08 manro sold & 199 of Whh repaid 14.47 Toal undelmsed 310.31 310.31 A Ths saO of ts proeo _td In Padl A l descrbe in a sepam rpo on aa IOnMA.nne project in exetion. which is updad twice ySty and cirisd so tE Em lve Dieco on Aprgi 30 and Octb.' 31. O Of which S43.3 mOM OMd fo i 8Ult of Thdand. 1Seule D Page 2 ot 2 B. 8TATEME OF IFC INVESTMENT (AS tJune 30, 1991) HOWi mcudlong rolnmel Conmm*mnt oy IFC p*rUclp8nul Loan Eqiy Tota (at co"o Year oaor Type of Bsne 1965 Concret Produow and Cemeit a&Con. Ma.Meu 0.3 0.3 AgWa Co. Ltd. 198471 Induslrid Pin. Co.p. of DhL Oevopment Fanu 0.4 0.3 1969/7W8/5 Sam Cent arup Cemet & Const Matbs 28.3 4.4 328 1.4 19 The Mtal Fnd Co. Ud. Money & Cil Madte1a 0.6 0.8 0.8 1977 UrAnd Sugpr Tomb-Au Food & Food Pr q 2.5 02 2.7 1978 Small & Mediun Scae Momey & Caphal Maeul 2.0 2.0 bxsa Ei_pd 1979/zM BoVkdt Gouis kwuwY Glass Canftbws 9.9 0.4 10.3 i984186181M Naloroe P _Iodumca Cherrcals & PeVoChniiaJ 35.0 0.5 3S55 35.5 197 /81187 Sin City Cement Cement & ConsL M u"b 118.1 B.1 124.2 2.2 194 Talad Tantdum Mir 5&5 3.4 56.8 979 hai Odo Leaa Co. Money B Capit MajkW * 0.1 0.1 198l MadtauI ted MkbV 0.1 01 195 SEAmvP e Money & Cao Mwk 1.0 1.0 1954 Wold AqLasu*a Food & Food Roossng 3.1 Ca 3.7 19ow sea Meaa LItd Co. LUd Ofhom Tin Blamon - 0.6 0a 0. 19a$ Phpm Thai I Hopita Hflh Cue 42 0.6 50 1986 Tho Thd Fund Mwne & Capitl Madet 268 2a8 196 NACO Tonuar Pa - -.1.8 0.5 2.3 2.0 1968 HMC Polner Poolmi 26 1. 2 15.8 16w Phanwk+d Palm on 3.6 1.1 4.7 4.7 3. 1989 PeOWo Chmias & Pefoalu. 10.7 10.7 10.7 1966 Tha PrIm Fund, Ltd. Moy & Capil Mase - 150 15.0 1900 sC8 Eqy Un MO-ay 8 CaOl MasheS 1-. 15 15.0 15.0 1S90 TFS Eqity lU Money & CWl Mad et 5.0 50 5.0 4.3 190 9AVPMJI Money & Capit Ma . 1.5 1.5 1.5 0. 1990 Sm Aahi Coblr TV GI*= dbs 8.2 S.2 5Z2 TOW 2a99.0 93n6 392.7 103.1 26.9 - buA rat yetage 1990 Sh*hel Paperw ap Prduch 500 5.19. 61.9 819 1990 V u Petedhecab 150.0. 0 150.0 S00 150.0 19D1 Sam City Cement Cmenm & CanaL M8ata0lel 150. 15. 30.0 1i5s0 1991 AVudhe Leas Money & capw Mam 0.2 02 02 0.2 Tal Oum COm ttents 665.0 99.8 ?548 243 39_1. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _IB R D 22793 12~~~~~~~~1 DE k~~~~~~~~~~)~i PromP EI -0 \ >1,. REl'tJB)OREA A4,ea of I-kan satigpt ~~~~~~~~~~~Map "we ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~-KOREAo - 3r30' Inchon Chungdwi1o_ apchong an3- 30 - Pt N% INHI ongi n{ _ , . h() Dsslv~o,an lael- .'- a s~~~~~~~tnyuno f LNGRFCLII MofM2 1gksm 2 s TERMINAL Pwn cho Pundang _ _ . _ 1 _3--oo 37'0O ; L- \ING RECEIVIAC 37°00' EMV 'N _K Anchung 3~-0 _ o n,3 t;s e k s 'S 'ghwa REPUBLIC OF KOREA GAS SYSTEM EXPANSION PROJECT Sushin ' LNG RECEIVING TERMINALS AND ) ""' " * GAS PIPELINES N K I hchw3 Chongju Proposed Proij ; Proposed Seoul Metropolitan Pipelines / J - Proposed Mid-Zone Pipelnes Njmmvon 33 -36'30'o 63 - 36030 ExiAting Pipeline, f 6 3 * Existing LNG Terminal ,..' rh' ,onbmq ' rho' iQ Planned LNG Terminal wdk- oiodht oeoo4oa,,o'A 104 tIe' A' 'n,'e,na~w"l 1o tO,% trrd H-an Yusong .~~~~~~~ad i/or Mi ,nt- i..a.b ' A Valve Stations \Yusong t onhn 'nlitnin. County or City Boundaries a \ Taejonrn, IOp. f -a and rh, Special City or ProsinceBoundaries /ntWt'OJU F-atn-, ("nopn'i"oi,- O'&airtOilit on so,, I- 0 10 20 30 i ioifdtt ei'ra kILOMETERS 127'30 121 1200 JANUARY 1q99