Report No. 886-YU Appraisal of the ,ga Uay Yugoslavia Oil Pipeline (Yugoslavenski Naftovod Poduzece za Transport Nafte U Osnivanju) October 7, 1975 Regional Projects Department Europe, Middle East, and North Africa Regional Office Not for Public Use Document of the World Bank 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 EQUrJAIJ.iTS Currency Unit -- +aosiaviga Dinar (Din,) Din. 1 u us$oo059 US$1 - Di]t, J7W) WEIGHTS AND MASA-RES 1 inch (in) - 2,54 CentImeters 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = O.6214 miles (mi) 1 square kilometer (km2) = 02386 s.-are mile 1 cubic meter (m3) = 6.28-3 baxrels = 0.80 to 095 metric tons of crude oil 1 barrell (bbl) =42 'S gallons (gal) 1 kilocalorie (kcal) - 3,968 British thermal units (Btu) 0 0,001,6 kilowatt hours (kWh) 1 horsepower - 07)46l kilo-watt (kW) 1 Megawatt (MW) = 1,000 kilowatts (16-kkW) 1 Gigawatt hour (GWh) 1 mil lion kilDwatt hours (106kWh) 1 long ton (lg ton)1/ 2,21iO pouids (lbs) 1metric ton (ton) - 2,205 pounds (lbs) 1 short ton (sh ton) - 20G0O pounds (lbs) Tons oil equivalent (Toe) - 10 million kilocalories (kcal) GLOSSARY OF ABBREVILATIONS ANSI - American National Stand&us Inst:itute API - American Petroleum Institute CCITT - Comite Consultatif International Telegrafique et Telephornique CCIR - Comite Consultatif InternatLonal des Radiocommunications dwt - Deadweight tons, oil carrying capacity of tanker in lg tons FCEI - Federal Committee on Energy and Industry IEC - International Electric Code JUGEL - Union of Yugoslav Electric Power Industry MATREZ - Federal Directorate for Reseries of Foodstuffs and Strategic Stocks NEC - National (US) Electric Code SAS - Social Accounting Service JUGOSLAVENSKI NAF2C'OYGD FISCAL YEAR January 1 - December 31 1/ Used throughout the report when referrLig t.o c;rude oil and pipe APPRAISAL OF THE YUGOSLAVIA OIL PIPELINE (Jugoslavenski Naftovod Poduzece za Transport Nafte U Osnivanju) CONTENTS Page No. SUMMARY ...........................................i I. INTRODUCTION ..................... ................. II. BACKGROUND ........................................ 2 A. The Country and the Economy .... .............. 2 B. Energy Resources ............................. 3 C. Energy Sector Policy and Organization ........ 3 D. The Oil and Gas Sector .... .................... 4 E. Past Developments in Energy Supply and Demand. 5 F. Present Situation and Future Prospects ....... 6 III. THE BORROWER ...................................... 7 A. Background ....... ........................... . 7 B. Organization and Management ............... .. . 7 C. Recruitment and Training ................. .... 7 D. Line Fill ................................... . 8 E. Insurance ....... ........................... . 8 F. Operations and Maintenance ............... .... 8 G. Operational Arrangements with Clients and Others . ..................................... 9 H. Investment Plan ...... ....................... . 9 IV. THE PROJECT ....................................... 10 A. Objectives ................... ................ 10 B. Description ...... ............ ................ 10 C. Status of Engineering ........... .. ........... 12 D. Cost Estimate ............... .. ............... 12 E. Financing Plan .......... .. ................... 14 F. Implementation ............... .. .............. 15 G. Disbursements ............... .. ............... 17 H. Ecology and Safety ..........................17 TABLE OF CONTENTS (Continued) Page No. V. FINANCIAL EVALUATION ............................... 18 A. Financial Forecasts ............ .. ............ 18 B. Tariffs ...................... . ................ 19 C. Cash Flow ...... ............. ................. 20 D. Audit ....... .............. ................... 20 E. Special Loan Repayment Guarantees .... ........ 20 VI. ECONOMIC EVALUATION ................................ 21 A. General ...................................... 21 B. Demand Projections ........ ;: ................. 21 C. Size of the Proposed Facilities .... .......... 22 D. Alternatives to the Proposed System .... ...... 22 E. Project Benefits ..................... 23 F. Sensitivity to Changes in Traffic Growth ..... 23 G. Beneficiaries and Employment .... ............. 23 H. Impact on Alternative Means of Transport 24 VII. AGREEMENTS REACHED AND RECOMMENDATIONS .... ........ 24 ANNEXES 1. The Energy Sector ir. Yugoslavia 2. Tanker Terminal 3. Duties of The Foreign Consultants 4. Detailed Project Cost Estimate 5. Estimated Schedule of Disbursements 6. Budget and Accounting Procedures 7. Bases and Assumptions Used in Financial Ana:Lysis 8. Revenue Accounts 9. Balance Sheet 10. Cash Flow 11. Resume of Transport Agreements 12. Background and Assumptions Used in the Justification of the Project 13. Design Codes and Standards CHARTS 1. Organization Chart (World Bank 9761) 2. Schematic Diagram of the Pipeline System (World Bank 9754) 3. Project Schedule (World Bank 15172) >APS 1. Location of The Pipeline System (IBRD 11536) 2. Location of Hydrocarbons and Coal (IBRD 11617) APPRAISAL OF THE YUGOSLAVIA OIL PIPFLINE (Jugoslavenksi Naftovod Poduzece za Transport Nafte U Osnivanju) SUMMARY i. Yugoslavia's energy resources are lignite and coal (97%), hydrocar- bons (oil and gas 3%) and hydropower. At the 1975-1990 forecast level of consumption, lignite and coal will last some 260 years. Despite the large coal reserves and hydroelectric potential, Yugoslavia is not self-sufficient in energy; the low quality of the coal makes long distance haul uneconomic and limits its use to power and steam generation while development of the hydro- electric potential has been hampered by administrative considerations. ii. Energy producers, consumers and the authorities are in the process of negotiating social agreements which will define the interrelationship of all parties. The Government created a Federal Committee on Energy and Indus- try (FCEI) to study long-term energy policy; the Committee's findings are that: (a) Yugoslavia should limit its dependence on imported fuels by substi- tuting coal and hydropower for the former wherever feasible; (b) conservation measures should be adopted where appropriate but not at the expense of econo- mic development and (c) pricing policies should be revised to support a national energy policy. The Government has agreed to discuss these findings with a Bank mission scheduled to visit Yugoslavia in the fall of 1975. iii. These measures should provide a logical framework for energy devel- opment in Yugoslavia. The Government's energy demand forecasts which were lowered after the oil crisis show total energy demand to increase three times between 1975 and 1990. Hydrocarbons demand will increase at the same pace as total energy and imports of crude oil are expected to increase from 7.9 million in 1975 to 28 million tons in 1990. Considering Yugoslavia's current low per capita energy consumption, these projections are reasonable. iv. To handle the increased volumes of oil imports three oil and gas enterprises decided to build the necessary facilities and the Government has asked the Bank for assistance in financing the facilities for the project which will provide an oil port and overland transport of crude oil by pipe- line to five inland refineries and to Hungary and Czechoslovakia. The crude oil will be imported through the Adriatic Port of Omisalj. Besides the oil port, the project will comprise seven pump stations, five oil storage tank farms, a control system and 736 km of pipelines. The project will lower the cost of inland transport of oil in Yugoslavia. v. The project costs, net of duties and other local taxes, are estimated at Din. 6,532.2 million (US$384.2 million) of which Din. 3,675 million (USS216.2 million) would be foreign exchange and Din. 2,857.2 million (US$168.0 million) represent the local currency expenditure. - ii - vi. This would be the second loan to Yugoslavia in the pipeline sub- sector. The first loan (Loan 916-YU, June 1973) was made for the Naftagas Pipeline Project to transport and distribute natural gas to industrial con- sumers in Serbia and Vojvodina and contemplated future expansion into Kosovo, a less-developed area. Due to a tripling of the price of pipe, this project is facing a large cost overrun which the Borrower and the local guarantor bank is unable to finance. The restructuring of the project and a revised. financing plan are now being considered. vii. The project would be financed by the Bank loan (US$49 million) at 8.5% repayable in 18 years including a grace period of four years; other for- eign loans will be from Kuwait (US$125 million), Libya (USS70 million), Hungary (US$25 million) and Czechoslovakia (US$25 million). The local loans will be for US$26.5 million, US$59.0 million and US$20.5 million respectively from three oil and gas enterprises, the Federal Petroleum Fund and two banks. The proceeds of all loans total US$400 million and will cover the project costs including taxes and interest during construction on the Kuwait and Bank loans. Bank financing would be parallel with that of other foreign lenders. viii. The Borrower would be Jugoslavenski Naftovod Poduzece za Transport Nafte U Osnivanju (Naftovod), an enterprise established by three oil and gas enterprises in Yugoslavia, INA, Naftagas, and Energoinvest. Naftovod would be responsible for project implementation and for oPeration of the facilities except the port. Consultants have been employed to carry out design and construction supervision. ix. The foreign exchange costs of consultants, construction, two tugs and oil loading arms would be financed under the Bank loan and would be pro- cured under international competitive bidding except for the services of foreign consultants. The Kuwaiti loan will comprise cash and the supply of pipe, and the Czechoslovakian loan comprises pipe and construction services for the Sisak-Hungary section of the pipeline. x. The construction period would start in March or April 1976; Stage I (16 million tons annual capacity) would be completed in May 1978, and Stage II (20 million tons) would be finished in 'May 1979. xi. The project will start earning revenue from 1978 at the completion of Stage 1. The financial forecasts indicate that it will earn sufficient revenue to meet all liabilities and generate funds for financial reserves. xii. The pr,ject will provide economical transport of crude oil to five Yugoslav refineries. When compared to expanding the existing means of oil transport, railways and barges, the rate of discount at which both cost streams are equalized is 50% after taking account of foreign transit revenues. xiii. In view of the problems with recent cost overrtns in Yugoslavia, special overrun guarantees have been provided. To cope with unforeseen emergencies, which might create temporary liquidity problems, special debt service guarantees have also been provided. In view of the very tight proj- ect schedule, contingency planning will be provided to help ensure that the facilities required for the foreign transit are completed in time. - iii - xiv. Subject to agreement on the issues set forth in this report, the project is suitable for a Bank loan of US$49 million to Jugoslavenski Naftovod Poduzece za Transport Nafte U Osnivanju. A reasonable term for the loan is 18 years including four years of grace. APPRAISAL OF THE YUGOSLAVIA OIL PIPELINE (Jugoslavenski Naftovod Poduzece za Transport Nafte U Osnivanju) I. INTRODUCTION 1.01 The Socialist Federal Republic of Yugoslavia and INA, Naftagas, and Energoinvest (the Founders) have asked the Bank to help finance a pipe- line project to transport imported crude oil from an Adriatic port to five inland refineries and Hungary and Czechoslovakia. Jugoslavenski Naftovod Poduzece za Transport Nafte U Osnivanju (Naftovod, the Borrower) was created to implement the project and operate the facilities. The project was pre- pared by the Borrower with the assistance of consultants. 1.02 The concept of pipeline transport of imported oil dates back to 1969 when the Founders proposed rival pipeline schemes. In 1973 the Founders pooled their activities and the project was selected as being the most econom- ical scheme. The Bank was asked to participate in financing the project with the principal aim of attracting other foreign loans on reasonable terms. To enable the Bank to influence project execution, a loan of US$49 million is recommended. The proposed facilities will transport "transit" oil to Hungary and Czechoslovakia at a profit and will provide economical oil transport to the inland refineries. The project comprises an oil-receiving port in Omisalj Bay, five oil storage tank farms, seven pump stations, 736 kilometers (km) of various sizes of pipelines, and the services of foreign engineering consult- ants. 1.03 The project is estimated to cost Din. 6,409.4 million (IJS$377 mil- lion) including all contingencies and local taxes. The foreign exchange com- ponent is estimated at Din. 3,284.4 million (US$193.2 million) or 51% of the total.* 1.04 Including the Bank a total of five foreign lenders are contributing US$294 million, while local financing in the amount of US$106 million is be- ing contributed by six Yugoslav lenders. The financing plan includes inter- est during construction of Din. 390.6 million (US$23 million). 1.05 This report is the result of an identification mission in December, 1973, and pre-appraisal and appraisal missions in Septerber, 1974, and January, 1975, respectively. The appraisal. mission consisted of Messrs. P. Bourcier (Economist), A. Krishnan (Financial Analyst), J. Ristorcelli (Engineer), and H. Harries (consultant). * Net of duties and other local taxes but including interest during con- struction, the project is estimated to cost Din. 6,532.2 million (US$384.2 million). - 2 - II. BACKGROUND A. The Country and The Eoomy 2.01 Yugoslavia is a federation of six republics and two autonomous provinces. It has an area of 255,804 km2 and a population of 21 million growing at 1% per annum. It has a socialist market economy, in which most of the means of production are owned by society as a whole, but are entrusted, through a system of self-management, to the control of the workers that use them. There is a private sector, accounting for only 15% of GDP, which is made up of small farms and small commercial enterprises 1-rincipally in the retail and service trades. 2.02 In the social sector decisions are decentralized and largely out- side the scope of government at any level, although there are policies for mandatory coordination in certain instances. The basic principle for all economic decision-making is self-management by the workers. The basic decision-making units are called Basic Organizations of Associated Labor (BOAL) which are technically identifiable units which could, at least in principle, function independently. In most instances, several BOALs are integrated into Work Organizations of Associated Labor through revocable contracts knonm as Self-Management Agreements. The affairs of BOALs and work organizations are governed by councils elected by all the workers. 2.03 When the economic activities of workers are of concern to others, such as in public utilities and public services, Self-Managing Conmunities of Interest are established by the organizations of associated labor in these fields and the beneficiaries of their products or services. The Communities of Interest provide the framework for developing, financing, and regalating the activity concerned. They are a recent development and many of them are still in the process of being established. 2.04 The economy has grown at the high rate of 5.5% per annum over the last two decades, and GDP per capita, measured in real terms, at 4.5% per annum. Wide disparities exist between regions; compared with the national average of about US$900 (1973), per capita GDP is one-third in Kosovo and nearly double in Slovenia. Industry, which now accounts for 40% of GDP, has grown about 9% per annum. Agriculture now accounts for 20% of GDP, and its growth rate has been about 2.5% per annum. The projected trend of economic growth implies continuation of the past high-growth rate in overall energy demand, and, more particularly, electricity, oil, and natural gas (para. 2.19). -3- B. Energy Resources 2.05 Yugoslavia's main energy resources are lignite, coal, and hydro- power (Map 2). Total fossil fuel reserves are estimated at 4,100 million tons of oil equivalent (Toe) with low-grade coal and lignite accounting for 97% and hydrocarbons for 3%. Reserves of coal and lignite are located in Kosovo (70%) and Bosnia-Herzegovina (20%). Reserves of oil and gas are located in Vojvodina (40%) and Croatia (60%). Hydro resources represent about 60,000 million kWh/year and 70% df it is located in Croatia, Serbia, and Bosnia-Herzegovina. 2.06 Despite large coal reserves, Yugoslavia is not self-sufficient in energy and has to rely on imports of hydrocarbons and coking coal to satisfy internal demand. This is principally due to the low quality of lignite and brown coal which prohibits transport over long distances and limits its use to power and steam generation. Annex 1 gives a detailed description of energy reserves. C. Energy Sector Policy and Sector Organization 2.07 National energy policy is based on restraining dependence on im- ported fuels, particularly oil, through greater development and utilization of indigenous sources, and this has been accounted for in the preparation of the project (Annex 1, para. 24). Until recently the role of the Federal Government was limited to pricing and foreign borrowing. The functions of planning and policy-making in the energy sector and the coordination of the energy programs of the Republics were assigned to a Federal Committee on Energy and Industry (FCEI) created in 1974. It consists of representatives of local governments and energy and industry sectors. 2.08 Responsibility for implementing energy policy lies, as in most other sectors, with the energy enterprises which are the principal agents in the development of energy. They draw up their development and investment plans and arrange financing. A large number of enterprises are members of professional associations which represent them within the Federal Chamber of Economy. Power enterprises belong to the Union of Yugoslav Electric Power Industry (JUGEL) and coal producers to the Association of Yugoslav Coal Pro- ducers. These V-dies have no executive power and cannot coordinate adequate- ly the development of the energy sector. There is not, so far, a similar body in the oil and gas industry. 2.09 Since 1965 coordination between various subsectors (electricity, coal, and hydrocarbons) has been weak particularly in resource allocations. Investment decisions were made on a local basis without due attention to country and sector development. This was particularly true in the power sector and together with lack of adequate funds it resulted in severe power shortages in 1973. This situation is not expected to improve until 1977/78. -4- 2.10 The recent constitutional changes and the increase in the world price of energy, particularly oil, have brought about two major changes: (i) relations between energy enterprises, users, and local and Federal Authorities are now regulated by "social agreements" which will form the framework of the future development of the sector for a period of five years, and (ii) through FCEI the Federal Government is now playing a more significant role in the formulation and implementation of long-term energy policies (para. 2.07),. and a statement on energy policy by the Federal Executive Council recently ap- peared in the document entitled "The Basis of Common Policy for the Long-Term Development of Yugoslavia." 2.11 Social agreements in the power and coal. industries are in the final stage of negotiations; the oil industry was expected to complete its dis- cussions and sign the agreements by the end of 19,75. These agreements will define, inter alia, the quantitative objectives to be achieved for a partic- ular branch, the investment program and financing plan of that branch for the next five years and the pricing policy. Since these agreements involve pro- ducers, users, and local and Federal Authorities, it is expected that they will improve coordination within and among branches. Some positive results have already been achieved by eliminating duplication among individual devel- opment plans. There is, however, room for improvement in the definition of sector priorities and in project preparation and implemertation. 2.12 The studies sponsored by FCEI should provide a rational framework for the selection of priorities and the formulation of adequate development strategy. It has initiated studies covering the immediate, medium, and long- term future (1985-1990) with the objective of submitting proposals to the Federal Govermnent by mid-1975. Preliminary results of these studies were discussed by the mission and were found to be a substantial improvement on past performance. Although it is too early to ma.ke a final judgment as to the eventual efficiency of the new procedures, Yugoslavia has now an adequate tool to deal with energy problems, and positive results should materialize soon. In agreement with Federal Authorities, the Bank has scheduled a mis- sion to review the findings and recommendations of FCEI. D. The Oil and Gas Sector 2.13 The oil and gas sector consists primarily of two large integrated domestic enterprises, INA and Naftagas, which cover all activities in the oil and gas industry from exploration to distribution. of final products. In addition there is one enterprise dealing with oil refining (Energoinvest) and several enterprises dealing with the distribu.tion of refined products. All these enterprises are independent and to a large extent competitive; however, they are linked together by market agreements regarding the purchas- ing of crude oil and the distribution of products. They also cooperate -5- closely in the preparation of tariffs for approval by the Federal Government which coordinates the imports of oil. By year-end 1975 Yugoslavia expects to sign long-term oil supply contracts covering 80% of the country require- ments over the five years ending in 1980. 2.14 Coordination between these enterprises in the past has been in- adequate; in many instances they could not agree on common development pro- grams and some projects have been delayed considerably by conflicting re- gional interests. This is the case for the proposed project which was first initiated in 1969, and for which agreement was not reached until the end of 1973. The situation, however, is improving considerably, partly as a result of the efforts of FCEI, and partly as a result of the proposed project which led to intensive discussions on long-term supply and demand projections, pricing policies, and development of domestic refining capacity. Within this framework, the oil and gas enterprises have agreed on common supply/demand figures until 1985-1990 (Annex 1, para. 27) and have also agreed to lower refining capacity expansion to satisfy the projected demand. These will be finalized in the social agreement presently under negotiation (para. 2.11) and have been used as the basis for the project. E. Past Developments in Energy Supply and Demand 2.15 After a period of relative stagnation, overall energy consumption increased rapidly from 1967 to 1973 at an average rate of 8.2% per annum com- pared with an average GNP increase of 6.4% per annum. During the same period the structure of demand changed considerably and coal whiLch had been tradi- tionally the predominant fuel in Yugoslavia was surpassed by oil. This was due primarily to the development of a modern industrial sector (40% of GDP) and to the rapid growth of road transportation. In 1973 total oil consump- tion accounted for over 40% of the total demand compared to 28% in 1967. Oil is used mainly in the industrial and transportation sectors, which account for 84% of total demand for main oil products; oil and gas consumption in power generation has always been and will remain margi;ial, as most of the in- crease will be based on the use of domestic coal. 2.16 Domestic oil production has not kept pace with demand and Yugo- slavia has to rely increasingly on imports to supply its six domestic refin- eries (Rijeka, Sisak, Bosanski-Brod, Novi Sad, Pancevo, and Lendava). In 1973 oil imports accounted for 70% of total internal demand for refined products. Traditionally, the USSR has been the main foreign supplier of oil; however, in recent years Yugoslavia has been importing increasingly from the Middle East (Iraq, Iran). Russian crude is imported through the Danube by barge, while Middle East crude is imported through Adriatic ports and transported by rail to the refineries of Sisak and Bosanski Brod; in 1974 oil and oil products transport on the Yugoslav railways accounted for about 7% of total freight traffic, and the cost of oil imports represented about 12% of all imports. - 6 - F. Present Situation and Future Prospects 2.17 Since Yugoslavia is a large importer of crude oil, it was seriously affected by the oil crisis; the problem, however, wa- more one of prices than of availability. Because of the poor quality of domestic coal, possible sub- stitution of coal for oil is limited and only minor adjustments could be made in the short run to reduce the country's dependence on foreign oil. The main steps taken were increases in the price of refined oil products and the crea- tion of an equalization fund to align the price of domestic crude with world market prices; as a result, consumption growth slowed down to 6% per annum in 1974 compared to 7.7% in 1973. 2.18 Before the oil crisis it was expected that total energy demand would continue to grow rapidly and would increase 3.5 times between 1973 and 1990. Oil demand would continue to grow faster than overall demand and would be primarily satisfied by imports, since domestic production was not expected to meet more than 9% of the total energy demand.. Natural gas would also be developed based on exploitation of domestic resources and on imports from the USSR and North Africa and by 1990 hydrocarbons would account for more than 51% of total energy demand. 2.19 Following the oil crisis these projections were lowered and the preliminary results of studies sponsored by FCEI] show that total energy con- sumption will increase 3 times over the next 15 years reaching about 83 mil- lion Toe by 1990. Hydrocarbon demand will grow at the same pace as total demand; however, the volumes of oil imports in 1990 will be almost identical to those projected previously because: (i) previous projections were based on fast growth in the use of natural gas which is not likely to materialize. Recent - evaluations of domestic fields have been somewhat disap- pointing and import possibilities at competitive prices are limited; and (ii) previous projections for domestic oil production were over- optimistic. It is now estimated that domestic production would start declining after 1985 to reach 5 million tons in 1990 instead of 8 million previously considered. 2.20 Based on these projections it is now considered that import of crude oil will increase from about 7.9 million tons in 1975 to 28 million tons in 1990, at average rates per annum declining from 11% between 1975 and 1980, to 8% and 7% between 1980 and 1985, and 1985 and 1990, respectively. Host of this oil would be imported from the Middle East through Adriatic ports and would have to be transported to the inland refineries. Conventional transport of such volumes of oil by rail is not economical and it was, there- fore, decided to build the pipeline. III. THE BORROWER A. Background 3.01 The three principal oil and gas enterprises of Yugoslavia, INA of Croatia, Energoinvest of Bosnia-Herzegovina, and Naftagas of Serbia (the Founders), have jointly established a new enterprise, JUGOSLAVENSKI NAFTOVOD (Naftovod) to design, build and operate port and pipeline facilities for the transport of imported crude oil to five local refineries and for transit to Hungary and Czechoslavakia. The new Enterprise has been registered in the District Commercial Court in Rijeka; its headquarters will be in Rijeka with offices in Zagreb and Belgrade. Naftovod will be the Borrower. The Enter- prise will charge the foreign offtakers at agreed commercial rates and local refineries at cost, both arrangements being covered by take or pay clauses in the transport contracts. B. Organization and Management 3.02 Currently and until completion of construction, Naftovod is an "enterprise under foundation" and a Council of 12 members, six appointed by the Founders and six by Naftovod, which will be the governing body responsible all policy decisions. The General Manager, guided by a Coordinating Commit- tee of six members (two from each Founder) will execute the Project in accord- ance with the Council's decisions. During this phase Naftovod, assisted by local and foreign consultants (para. 4.04), will be responsible for project execution. It will employ over 100 staff, 40 of whom have already been ap- pointed; no difficulties are envisaged in recruiting the balance. - 3.03 At the start of commercial operations, the Council will be substi- tuted by a Workers' Council and the Coordinating Committee will look after the interests of the Founders. The Enterprise will then consist of five departments, namely: (1) Technical, (2) Economic and Financial, (3) Legal and Personnel, (4) Commercial, and (5) Operations, comprising a total of 350 staff (Chart 1). The proposed organization appears suitable, and the manage- ment staff thus far appointed are capable and diligent. C. Recruitment and Training 3.04 No difficulties are anticipated in the recruitment of the majority of the skilled personnel, as experienced staff are available in the various refineries which employ thousands of skilled workers. Most of them will re- quire only familiarization with the new facilities and the pipeline's operat- ing procedures. However, Naftovod will have to train staff in some special skills, such as electronics, instrumentation, and oil dispatching and schedul- ing. A program of training has yet to be worked out; this will be done by -8- the foreign consultants (Annex 3). The specialized training will very likely involve less than 40 individuals, and it will be carried out partly on the job in Yugoslavia, partly in foreign suppliers' plants, and in part in simi- lar European facilities. The Bank has Naftovod's agreement to begin implement- ing the specialized training program no later than May 31, 1977. D. Line Fill 3.05 The initial supply of crude oil to fill the pipeline and the storage tanks, the line fill, would amount to about US$30 million. In the case of pipeline companies who are common carriers, the line fill is either provided by them as part of their capital investment and tariffs charged accordingly or supplied by the users and treated by them as their "sailing stock." This latter procedure is common in Europe. In the case of Naftovod, the line fill will be provided free of cost by the Federal Directorate for Reserves of Food Stuffs and Strategic Stocks (MATREZ), who will have first call on the line fill in case of a national emergency. E. Insurance 3.06 Adequate insurance coverage for all assets and third-party risks, including possible damage from oil spills, will be provided; adequate pro- vision for insurance has been made in the revenue accounts. F. Operations and Maintenance 3.07 The local refineries, under the coordination of the Federal Govern- ment, and Hungary and Czechoslovakia will be responsible for arranging de- livery of the crude oil to Naftovod at the oil port. 3.08 Handling the tankers and operating the port facilities will be the responsibility of the Port of Rijeka (para. 3.12 b(i)). 3.09 Naftovod will be responsible for receiving the crude and delivering it to the offtakers. Basic transport agreements have been signed between Naftovo.d on one hand and Hungary, Czechoslovakia, and the Founders on the other; detailed operational arrangements have yet to be agreed (para. 3.12 (a)). 3.10 Electric power for the operation of the system will be provided by local enterprises. Naftovod will install telecontrol systems to serve the pipeline in areas where the Federal Communications Authority has no such in- stallations. In other areas, largely from Sisak eastward, Naftovod will lease cable facilities from the appropriate communications authorities (para. 3.12 r) (ii) ). - 9 - 3.11 The principal maintenance depot will be located in Sisak and a smaller one in Omisalj. The maintenance crews of the various refineries will be available to Naftovod during emergencies. The project estimate includes Din. 44.2 million (US$2.6 million) for warehouses, shops, and maintenance equipment; this is adequate. G. Operational Arrangements with Clients and Others 3.12 The Bank has Naftovod's agreement that it will sign: (a) by Novem- ber 15, 1975, operating agreements with the seven offtakers covering technical and operational matters, such as batching procedures, metering and custody transfer, types of crude, including physical and chemical properties, sche- duling of oil receipts and shipments, etc., (para. 3.09), and (b) by May 31, 1977, the following agreements: (i) a port operations agreement with the Port of Rijeka for providing normal port facilities and services, which will ensure that Naftovod will receive suitable compensa- tion for the port facilities financed by the project and turned over to the port authority (para. 3.08 and Annex 2, para. 11), and (ii) a telecommunications and power supply agreement with the appropriate authorities for the lease of communications facilities and the supply of power (para. 3.10), and that prior to such signature it will submit the draft agreements to the foreign consultants for their advice and thereafter the draft agreement under b(i) to the Bank for its review and approval. H. Investment Plan 3.13 The proposed project is the first and major part of a series in Naftovod's investment plan which provides for the project and for increases in capacity to handle the traffic to 1990. The investment program totals Din. 8,315 million during the period 1975-1990; this includes Din. 6,800 million for the project and Din. 1,515 million, for expansion to ultimate capacity (para. 4.01). The mission found that refineries' demand forecasts were high because they overlapped due to a lack of coordination (paras. 2.11 and 2.14) and this led to inflated projections which were corrected after some discussion. To help ensure proper coordination in preparing future demand projections, the Bank has Naftovod's agreement not to undertake capacity ex- pansion programs without prior consultation with the Bank. - 10 - IV. THE PROJECT A. Objectives 4.01 Stage I of the project will be completed in 1978 and comprises the facilities to transport 16 million tons of petroleum per year; Stage II will be completed in 1979 and will increase the capacity to 20 million tons annual- ly. The facilities are capable df being expanded to 34 million tons yearly, the throughput in 1990. The project will provide substantial earnings to Yugoslavia from the transit of foreign oil and economical transport of crude to the Yugoslav refineries. B. Description 4.02 The project is the least cost solution tCo oil transport and it com- prises (Chart 2 and Map 1) an oil port, five oil storage tank farms, seven pump stations, 736 km of pipelines, a control system and engineering services. The project will be designed to the codes and standards listed in Annex 13 and will consist of: (a) the procurement of two tugs of about 2,000 horsepower each and several launches, to assist the tankers to and from the berths; (b) the procurement and installation of two marine berths in Omisalj Bay capable of handling tankers from 30,000 dwt to 350,000 dwt, including mooring dolphins, power, bunkering, fire-fighting and water-supply facilities, and navigational aids at the approaches to the port. (c) the procurement and installation of an oil storage tank farm with a capacity of approximately 720,000 m3 (about 612,000 tons), including piping, utilities, and a fire-fighting system; (d) the procurement and installation of: (i) approximately 173 km of 36-in pipeline between Omisalj and Sisak with a short lateral pipeline to the Sisak refinery; (ii) two pump stations (Omisalj and Melnice) totalling ap- proximately 17,500 kW; (iii) a maintenance depot at Omisalj housing specialized equip- ment and personnel; (iv) a pressure-reducing station between Melnice and Sisak; - 11 - (v) a buffer oil storage tank farm at Sisak with a capacity of about 70,000 m3 (approximately 60,000 tons); (e) the procurement and installation of: (i) approximately 105 km of 28-in pipeline from Sisak to Virje and Gola 1/ (Hungarian border); (ii) a 7,500 kW pump station and a maintenance depot at Sisak; (iii) a buffer oil storage tank farm of about 30,000 m3 (approxlmately 25,500 tons) capacity at Virje; (iv) a pump station at Virje of about 600 kW, and (v) a 67 km long 12-in pipeline between Virje and the Lendava refinery; (f) the procurement and installation of: (i) approximately 138 km of 28-in pipeline between Sisak and Slobodnica with a 4.5 km lateral pipeline between Slobodnica and the Bosanski Brod refinery; (ii) two additional pumps at Sisak with a total power of 3,200 kW, and (iii) a buffer oil storage tank with a capacity of 40,000 m3 (approximately 34,000 tons) at Slobodnica; (g) the procurement and installation of: (i) a 16-in pipeline about 85 km long between Slobodnica and Negoslavci; (ii) a 4,100 kW pump station at Slobodnica; (iii) a 22-in 78 km long pipeline between Negoslavci and Novi Sad with a short lateral pipeline between Novi Sad and the Novi Sad refinery; (iv) a 2,300 kW pump station at Negoslavci, 1/ At Gola a connection will be made with the Hungarian pipeline which will be built to transport the crude oil into Hungary and to Ctechoslovakia. - 12 - (v) a buffer oil storage tank farm of 40,000 m3 (approxi- mately 34,000 tons) at Novi Sad; (vi) a 2,600 kW pump station at Novi Sad,, and (vii) a 86 km 18-in pipeline between Novi Sad and the Pancevo refinery; (h) the incorporation into the system of an existing 16-in pipeline between Slobodnica and Negoslavci; (i) the procurement and installation of a supervisory control system including telecommunications, telemetering and tele- control; (j) the services of pipelines engineering consultants to do the basic designs, tendering and project plarnning and to provide overall supervision during implementation. C. Status of Engineering 4.03 The project is based on a feasibility study by INA Engineering (Zagreb) and INEG Consultants (UK) and optimization studies by Industropro- jekt, Zagreb consultants. Although final designs have not yet been started, sufficient preparatory work has been done to define! the project and make realistic cost estimates. Slight reductions in the size of the facilities may be indicated upon completion of final designs. 4.04 Naftovod has assigned overall design responsibility to Industro- projekt of Zagreb, assisted by Omniam Technique des Transports par Pipelines (OTP, a French firm) who will be responsible for designs, tender preparation, project coordination, and some of the duties outlined in Annex 3. Industro- projekt may, at its discretion, subcontract further work to other competent local firms on terms and conditions acceptable to Naftovod and the Bank. Naftovod informed the Bank that it will assign overall responsibility for construction supervision also to Industroprojekt assisted by OTP, who will carry out the remaining duties in Annex 3. These arrangements are satis- factory. D. Cost Estimate 4.05 The project is estimated to cost Din. 6,409.4 million (US$377 mil- lion) including all contingencies and local taxes plus interest during con- struction of Din. 390.6 million (US$23 million) on the proposed Kuwaiti and Bank loans. The foreign exchange component is estimated at Din. 3,675 million (US$216.2 million) or 54% of the total. Customs duties and other local taxes are estimated at Din. 267.8 million (US$15.7 million). - 13 - 4.06 The basic components of the project and their estimated costs (rounded) are shown below; further details are shown in Annex 4. % of Basic ----Din Million ------ -----US$ Million----- Project Local Foreign Total Local Foreign Total Cost A. Port Facilities 224.7 202.6 427.3 13.22 11.92 25.14 9.3 B. Terminals, Tanks and Pump Stations 580.0 607.5 1,187.5 34.12 35.74 69.86 25.9 C. Pipelines 958.2 1,488.0 2,446.2 56.35 87.52 143.87 53.3 D. Telecommunication & Control 21.1 124.3 145.4 1.24 7.31 8.55 3.2 E. Owners supervision, training & consult- ants 312.8 69.4 382.2 18.40 4.08 22.48 8.3 Basic project cost 2,096.8 2,491.8 4,588.6 123.33 146.57 269.90 100.0 F. Contingency allowances 1. Physical 285.1 231.7 516.8 16.77 13.63 30.40 11.3 2. Price 743.1 560.9 1,304.0 43.70 23.00 76.70 28.4 Subtotal F 1,028.2 792.6 1,820.8 60.47 46.63 107.10 39.7 G. Total project cost 3,125.0 3,284.4 6,409.4 183.80 193.20 377.00 139.7 4.07 The estimate was prepared by Naftovod and the consultants; it was reviewed by the Bank and found adequate. Although it is not anticipated that foreign contractors alone will win many bids due to the advanced state of the contracting industry in Yugoslavia, some participation by foreign con- tractors is expected. The above estimate reflects Naftovod's and the Bank's judgment of the most likely degree of participation by foreign contractors (para. 4.15). The foreign exchange costs of the project could increase to US$213:2 million or decrease to US$179.2 million based, respectively, on maximum and minimum awards to and participation by foreign contractors. The estimate provides an overall physical contingency of 11.3% which is ample. Price contingencies of 15% and 12% were applied to local costs for 1975 and thereafter, respectively; foreign costs were escalated at 11% and 8%, respect- ively, in 1975 and thereafter. These escalation factors are in accordance with current Bank guidelines. - 14 - E. Financing Plar 4.08 The project is expected to be financed frc, the sources shomn below. Interest during construction on all loans biit Kuwait's and the Bank's proposed loan (para. 4.11) will accrue but will not be payable until operations start and Naftovod has made adequate provisions for this in its operating budgets. The interest during construction on the Kuwait and Bank loans, US$23 million, is covered by the financing plan.' US$ (Million) Interest Rate Grace Repayment Local Foreign Annual % Period Period (1) IBRD 49.0 8.50 4.0 14 (2) Kuwait 125.0 8.50 4.0 8 (3) Hungary 25.0 8.25 3.0 6 (4) Czechoslovakia 25.0 8.25 3.0 6 (5) Libya 70.0 9.00 3.0 7 (6) Founders 26.5 - 6.0 25 (7) Petroleum Fund/i /2 59.0 2.00 3.0 15 (8) Local Banks/2 * 20.5 12.0 3.5 7 Totals $106.0 $294.0 Grand Totals $400 /1 The Federal Petroleum Fund was created to cover investments and emergen- cies in the oil sector and its revenues are derived from a tax of Din. 0.15/liter on Petroleum products, levied by the Federal Government. It will have reserves of nearly Din. 3 billion by the end of 1975 and is accumulating further reserves at a rate of some Din. 1.7 billion annually. /z Grace period likely to be increased to tally with Bank loan. 4.09 All loans are considered firm. Protocol agreements have been signed with Kuwait and Libya, the Founders have signed an agreement covering their contribution, the draft contract with the local banks has been agreed and the Federal Executive Council will shortly give formal approval to the loan from the Petroleuml Fund. Basic Transport Agreements with Hungary and Czechoslovia, stipulating the loan amounts, were ratified in December 1974. 4.10 Bank financing would be parallel with that of other foreign lenders. The loan from Kuwait would include the supply of some 58,000 tons of pipe representing about 33% of its loan; the balance would be in cash and the Borrower plans to finance mainly local expenditures with it. The Hungarian loan will be in fully convertible currency while the Czechoslovak loan is likely to be in the forrmi of 28-in pipe (about 15,000 tons) and construction services for the Sisak-Hungarian border pipeline. The Libyan loan would be used to finance both foreign and local expenditures. A condition of loan effectiveness is the effectiveness of the other loans. - 15 - The Loan 4.11 The project is suitable for a Bank loan of US$49 million with repay- ment in 18 years, including a grace period of four years which corresponds with the construction period. The proposed Bank loan would cover the foreign ex- change costs of consultants, construction services (para. 4.14) and procure- ment of two tugs and oil loading arms. These elements would be disbursed in rhythm with construction or late in the procurement cycle, and this would provide the Bank with an effective means of influencing project execution (paras. 4.15 and 4.16). Retroactive financing of foreign consultants' ser- vices to May 1975 in an amount not to exceed US$0.5 million is provided. Cost Overrun Guarantees 4.12 Loan proposals did not provide cost overrun guarantees with the ex- ception of the local banks who had agreed to guarantee overruns in propor- tion to their contribution to the project, 50; this is inadequate. During appraisal the Bank asked the Federal Authorities and Naftovod to consider covering cost overruns with guarantees from: (a) the Petroleum Fund; or (b) the Founders; or (c) the five refineries. The Bank has now obtained confirma- tion that the Founders will provide this guarantee and a condition of loan effectiveness is that the Founders Agreement will be suitably amended. F. Implementation Land Acquisition 4.13 According to Yugoslav regulations many formalities have to-be com- pleted before the land required for the project can be acquired and construc- tion work can commence. These involve obtaining approvals in principle (this has been done), based on preliminary studies and then construction permits based on final designs and estimates; the approvals and permits are granted by many committees in each Republic. Although no serious impediments are anti- cipated, the complex procedures involved could delay the project. It has been agreed that Naftovod shall promptly take all such action as shall be necessary and shall supply evidence satisfactory to the Bank that it has ob- tained all construction permits and acquired all the land and right-of-way permits require I for the project. Procurement 4.14 Procurement under the loan would be by international competitive bidding in accordance with the Bank Group's "Guidelines for Procurement." (For construction contracts the loan would cover foreign exchange costs of these contracts whose total value is estimated at US$160 million excluding project materials and pipe and the laying of the Sisak-Gola pipeline which would be financed by other loans and with the exceptions noted below). Ex- ceptions would be: (a) construction contracts estimated not to exceed - 16 - US$100,000 (provided that in the aggregate they do not exceed US$1,000,000) which would be procured by local shopping, and (b) construction contracts estimated not to exceed US$500,000 (provided that in total they do not exceed USS9,000,000) which would be procured by local competitive bidding. Local shopping and competitive bidding in accordance with local procedures are appropriate for the above contracts because they are geographically dispersed and the amounts involved are such that foreign firms would not be interested. Moreover, these contracts would cover mostly preparatory works such as site preparation and construction of materials yards wrhich should be awarded early in view of the tight schedule, and international competitive bidding would involve delays. Bank staff has reviewed the local procedures and they are acceptable since they ensure adequate competition. The construction costs to be financed by the loan would exclude project materials since these would be financed by other foreign loans. Yugoslavia has no preference treaties, and bids for the tugs and loading arms included in the Bank loan will be com- pared on a CIF basis net of customs duties; a preference of 15% of the CIF price or the actual customs duties, whichever is the lower, will be given to local manufacturers who qualify as preferred bidders. 4.15 In view of the specialized nature of the work and of the tight proj- ect schedule (para. 4.17), the Bank has Naftovod's agreement to prequalify construction contractors under the Bank's Guidelines for Procurement; it would thus assist Naftovod in screening contractors, particularly local ones, who might be fully occupied in the many oil and gas projects being undertaken in Yugoslavia and who might require the cooperation of international contractors. Local contractors are competent to construct the port facilities, pump sta- tions, tanks and most of the pipelines and depending on their commitments are likely to bid for these contracts. The most probable outCome will be a mix of local contractors and joint ventures of foreign and local firms, and this is the basis for the project estimate. 4.16 As stated in para. 4.10, the Kuwait and Czechoslovak loans involve the supply of some 73,000 tons of pipe. It is important that the pipe be made according to internationally recognized standards, reasonably priced and sup- plied in accordance with the project schedule. The Borrower provided the Bank with an engineering report on the capabilities of the Kuwait Metal Pipe In- dustries Mill. The report states that the qualit:y of the pipe produced by the Mill is good, but it casts some concern as to the ability of the Mill to supply the pipe in time to meet the construction schedule. Any delay in the delivery schedule will, however, be detected in time for Naftovod to ob- tain supplies from alternative sources. The Bank has Naftovod's agreement to select and hire competent inspection agencies to inspect all pipe at the Mills. Project Schedule 4.17 The schedule for the project is very tight (Chart 3) since Stage I is to be completed and operating by May 31, 1978 and Stage II one year later. Failure to start delivering oil to all offtakers by May 31, 1978 could subject Naftovod to penalties and to avoid this, extremely careful planning is needed. - 17 - This will require that Naftovod place orders for pipe and long lead materi- als for Stage I in late 1975 at the latest and follow the progress of these orders with extreme care. In some cases, premiums for early deliveries will be required, but they will be well within the contingency allowance. Since the Omisalj tank farm and the pipelines lie on the critical path, this will require starting site clearing, grading and blasting in 1misalj this fall or very early in 1976 and pipeline construction soon thereafter; moreover, at least two construction crews each for the pipelines, tank farms and pump sta- tions will be required. Valuable time has been lost in obtaining financing but with proper controls and good planning, Naftovod should be able to meet the target completion date for Stage I. If construction slips and timely completion is threatened, contingency plans would give priority to the facil- ities required to deliver oil to the foreign offtakers, and the Bank has Naftovod's agreement to assign such priority and to seek the refineries' agree- ment not to impose penalties on Naftovod for failure to deliver oil according to schedule. The timely completion of Stage II does not pose serious problems. G. Disbursements 4.18 Loan disbursements would cover: (a) the foreign exchange costs of the foreign consultants (b) the foreign exchange costs of construction con- tracts - the Bank would disburse against the foreign exchange costs, estimated at 38% of total costs for foreign firms and 25% for local firms or joint ventures - and (c) the costs of two tugs and loading arms for two berths if procured abroad or 75% of their total costs if procured locally, up to US$4 million. Disbursements are expected to take place over four years from the fourth quarter of 1975 to the fourth quarter of 1979. The estimated schedule of disbursements is given in Annex 5. Since this is a self-contained project, any surplus loan amounts on completion of the project should be cancelled. H. Ecology and Safety 4.19 Environmental impact studies and related recommendations will be made by four Yugoslav agencies 1/ and the UNDP Study Group for "Protection of Human Environment in the Yugoslav Adriatic Region." These organizations will also monitor the project during construction. 1/ Institute Ruder Boskovic (Zagreb), the Hydrographic Institute of the Navy (Split), the Institute for Oceanography and Fishing (Split), the Biological Institute of the Yugoslavian Academy of Arts and Sciencies (Dubrovnik). - 18 - 4.20 The following are some of the environmental protection measures recommended in the feasibility study: (a) a floating boom and skimmer (Annex 2) to contain any oil spills inside the harbor and to remove any spilled oil; (b) a 15,000 ton capacity tank and API separator to receive slops from the tankers with backwash filtration of the settled water from the separator and of storm water from oil operating areas, and biological percolation of these, as well as sewerage, so that the oil content of the processed water will be less than 5 parts per million, and (c) oil storage tanks to be surrounded by dikes of such a height that the enclosed area will be able to contain one- and-a-half times the tank volume as safety in the event of tank leaks. The Bank has (a) Naftovod's agreement that these or similarly effective measures, such as purifying all effluents from the installations, monitoring for pipe- line leaks and air pollution, etc., will be taken, as well as any reasonable measures recommended by the environmental study agencies, and (b) the Federal Government's assurance that it will take such action, within its constitution- al powers, as necessary to ensure the expeditious and effective institution and implementation of such measures. 4.21 Installation of the pipelines will pose no threat to the environ- ment. They will be buried at sufficient depth to avoid interference with land cultivation, highways, railways, natural drainage, and animal migration. At water crossings, they will be either suspended by a structure sufficiently high to avoid interference with shipping or buried deep under the river beds. They will be a silent, nearly invisible, and clean means of overland trans- port. The only visible signs of the pipeline system will be its storage tank farms and pump stations, and the former are required, in any case, by rails and barges, while the latter will be noiseless, clean, and unobtrusive. V. FINANCIAL EVALUATION A. Financial Forecasts 5.01 In 1978, the traffic handled will be 8.3 million tons increasing to 16.7 and 19.8 million tons, respectively, in 1979 and 1980. Revenue Ac- counts and Balance Sheets were prepared by Naftovod staff on the standard Yugoslav pattern. These have been modified where necessary for the finan- cial analysis. A description of the budget and accounting procedures is given in Annex 6. Bases and assumptions used in the financial analysis are given in Annex 7, Revenue Accounts to 1988 in Annex 8, Cash Flow Statement in Annex 10 and Balance Sheet in Annex 9. Represeintative Revenue Accounts for 1978, 1979 and 1980 are shown below: - 19 - 1978 1979 1980 --------Din. Million------ Operating Revenue 760 1,486 1,554 Operating Expenses 88 193 239 Depreciation 178 315 315 Surplus 494 978 1,000 Interest Charges 277 606 586 Repayment of Loan 185 415 454 Operating Ratio 35 34 36 Interest Coverage 1.7x 1.6x 1.7x Debt Service Coverage /1 1.4x 1.3x 1.3x /1 Surplus + depreciation , interest and loan repayment. 5.02 Naftovod is protected by the take or pay clause in the transport agreements. The Revenue Accounts (Annex 8) show that under the existing transport arrangements sufficient surplus is generated to meet all expendi- tures including debt service, and, therefore, the Enterprise is financially sound. To ensure the continuance of this, the Bank has Naftovod's agreement that it will not, without prior consultation with the Bank, consent to any modification of the contracts which would affect the agreed quantities of crude oil to be transported and the basis of charges therefor. B. Tariffs 5.03 The agreements with the Founders provide for the annual revision of the tariffs payable by them on the basis of the actual expenditures in- curred by Naftovod, plus a surplus limited to 25% of the gross salarie's and wages. Under this arrangement, Naftovod would normally not incur a loss. As to Hungary and Czechoslovakia, the tariffs payable by them are laid down in the respective agreements, which provide for annual revisions according to price indices for steel, labor and electricity. Without providing for any changes in the price of steel 1/ but, allowing for inflation in wages and electricity (para. 1, Annex 7), Naftovod is expected to make a substan- tial profit from transit oil beginning with Din. 118 million (US$7 million) in 1978 and totalling up to Din. 1,439 million (US$85 million) by 1988. If allowance is made for an increase in the price of steel, the profit is likely to be even more. The yearly profit has been shown separately in the Revenue Accounts as "Profit from Transit." According to existing agreements, this profit is to be passed on to the refineries. A resume of the provisions in the transport agreements is given in Annex 11. 1/ At the end of November 1974, the average price increase of the steels cited in the agreements was 34% over the base price of November 1973. - 20 - C. Cash Flow 5.04 The Cash Flow (Annex 10) shows that the surplus funds available to Nafto,cd increase from Din. 2.3 million (US$0.13 million) in 1978 to Din. 214.8 million (US$12.6 million) in 1988. The initial working capital will be provided by the Founders. D. Audit 5.05 The annual financial statements of Naftovod will be checked by the Social Acrounting Service (SAS), a separate statutory organization responsible for such work (para. 3, Annex 6). The staff of SAE; is being trained to enable it to carry out audits in accordance with standards, acceptable to the Bank (para. 5, Annex 6) and it is expected that staff will be suitably trained by 1979. The Bank has Naftovod's agreement to have its annual financial state- ments audited in a manner acceptable to the Bank anid to submit them within six months of the end of each year. E. Special Debt Service Guarantees 5.06 The foreign offtakers have signed transport agreements with Nafto- vod containing take or pay clauses which provide that the offtakers will pay Naftovod 80% of the tariff for any amount of allocated capacity not utilized by them; likewise Naftovod will pay the offtakers 80% of the tariff for any agreed amount of oil that it fails to deliver. The take or pay clause is voided by events of force majeure. Naftovod and the Founders have signed a sf,ilar agreement except that only events of force majeure lasting more than six months would void the take or pay commitment. 5.07 A total shutdown of the pipeline for periods exceeding a few days is extremely unlikely and as mentioned in para. 5.02, Naftovod is expected to earn sufficient revenue to cover all expenditures. A severe fire or an ex- tensive landslide could shut down the pipeline for 2 to 3 months and the six- months clause mentioned in para. 5.06 could pose a financial threat to Nafto- vod, because, in such an event, it would not only lose its revenue from all seven offtakers, thus causing it tc be unable to meet debt service, but it would also have to pay t. the local refineries an amount that would approach its lost revenues. The same situation would arise if project completion were delayed or if unusual problems were to be met during commissioning and _tiart up of facilities. Naftovod has obtained guarantees from the local banks to meet these financial commitments in case of need, other than the debt service obligations with regard to the Bank loan, which is; guaranteed by the Federal Government. In the event of a shutdown of the pipeline for a short period, the estimated operating surplus available at the end of the year would be .-ore than sufficient to cover the annual debt service of the Bank loar. - 21 - VI. ECONOMIC EVALUATION A. General 6.01 According to recent projections for energy supply and demand in Yugoslavia, it is expected that internal demand for hydrocarbons (oil and gas) will increase from 13 million Toe in 1974 to about 40 million Toe in 1990. A large part of the incremental demand will have to be imported from eastern Europe, North Africa and the Middle East, and transported from the ports of entry to the main oil processing and gas consumption centers. While there is presently no economic alternative to pipelines for overland transport of gas, oil can be transported by a variety of means (road and rail tankers, barges, pipelines). Therefore, the economic feasibility of the proposed crude oil pipeline system was evaluated by comparing the cost of transporting oil through the pipeline with the cost of conventional transport. B. Demand Projections 6.02 Annex 1 gives details of future energy supply and demand. Demand projections used to size the project were derived from studies sponsored by FCEI after the oil crisis of 1973-1974 and are considered reasonable. They are lower than pre-crisis projections and reflect efforts being made under government coordination to conserve energy and to substitute domestic fuels (mostly coal) for expensive foreign oil. Current energy demand projections for Yuigoslavia are 15% and 18% lower than pre-crisis projections in 1980 and 1985 respectively. This is comparable with the expected decrease in total energy demand in the European Economic Community (EEC) for the same period, according to a recent study 1/ by the Organization for Economic Cooperation and Development (OECD). However, the increase in demand for hydrocarbons would be larger in Yugoslavia (3.0 times between 1972 and 1985) than it would be in the EEC (1.8 times). This is due mainly to the limited scope for energy conservation in a country which has low per capita consumption and low quality coal, which in most instances cannot now be substituted economically for hydrocarbons. 2/ However, the sensitivity of the feasiblity of the pro- posed project was tested against lower demand figures (para. 6.08). 6.03 Since domestic production is not expected to increase substantially, (para. 2.19) net oil imports in Yugoslavia should increase from 8.7 million 1/ Energy Prospects to 1985, OECD Paris 1974. 2/ Coal gasification and liquefaction on a commercial scale in Yugoslavia are not expected to occur before 1985 to 1990 and would, therefore, not threaten the viability of the project. - 22 - tons in 1975 to 11.7 million tons in 1978, the first year of operation of the proposed pipeline and to about 20 and 28 million tons in 1985 and 1990 re- spectively. These figures do not account for any substantial discovery of oil in Yugoslavia or off-shore; if commercial discoveries should take place, the new fields could be connected to the pipeline which crosses the main potential areas (Map 2) and the flow of oil could even be reversed in some sections of the pipeline. A discovery off shore would imply that oil would be lifted by tanker from the drilling site and unloaded at the Omisalj terminal in much the same fashion as imported oil. It is therefore not expected that new domestic discoveries would threaten the economic feasibility of the pipeline. C. Size of the Proposed Facilities 6.04 The pipeline system and the terminal facilities were sized to handle about 34 million tons of oil annually by 1990 (24 million tons for the Yugoslav internal market and 10 million tons in transit for Hungary and Czechoslovakia). Naftovod used computer simulation models to optimize the size of the pipeline and tanker terminal. The methodology used was satisfactory and led to reduc- tion in the diameter of the Sisak-Slobodnica section of the line and in tank- age capacity. Naftovod, however, has decided to maintain the diameter of the first section (Omisalj-Sisak) at 36" for which the study shows the optimum size to be 34". The main reason behind this decision is that transit traffic might increase in the future (discussions have talcen place with Austria), and that it would be difficult to increase the capacity of the first section of the line to satisfy additional transit requirements, since it crosses diffi- cult mountainous terrain. In the light of the comparatively small difference in initial investment costs (less than US$3 million, i.e. 0.75% of the total project cost) this decision is acceptable. The project was compared with other pipeline alternatives, in particular to one linking the port of.Ploce with the inland refineries, and was found to be the least cost solution. D. Alternatives to the Proposed System 6.05 Since most oil imports are expected to come from the Middle East and North Africa, the next best alternative to the pipeline system is a com- bination of rail and inland water transport. Such an alternative would re- quire substantial investments in ports and railway facilities and the acqui- sition of railroad tank cars and barges. Since it would require frequent crude oil transfers from one mode to another, it would increase the risk of pollution, particularly in the main waterways. Estimates prepared by Nafto- vod, with the assistance of consultants, show that total investments of about US$300 million would be required to expand existing and create new port and railway facilities at Koper, Bakar, Bar, Pancevo, Novi Sad, Bosanski-Brod, Sisak and Lendava. In addition, the transport of 34 million tons of oil would require the acquisition of some 12,500 rail tank cars and 750 locomo- tives and of barges and pusher tugs at a cost estimated at about US$460 million. - 23 - E. Project Benefits 6.06 The total project cost, including the cost of expansion to ultimate capacity, is estimated at Din. 5,940 million (US$350 million) excluding taxes, customs duties, interest during construction, and price contingencies. No adjustment was made for shadow labor costs or rate of exchange. The value of the land used by the pipeline proper was not included, since it will be re- stored to its normal use after construction; however, project costs include compensation for crop and property damage along the pipeline and land values for pump stations and tank farms. 6.07 The comparison of the project cost and of the next best alternative shows that the rate of discount which equalizes both cost streams over 20 years is 50%. This high rate indicates that the facilities should have been built sooner. Assumptions and details of the calculation are in Annex 12. F. Sensitivity to Changes in Traffic Growth 6.08 If oil import demand should be lower so that the traffic in 1990 is only 85% of the projections (a conservative assumption), the pipeline would still be the least cost solution for the transport of oil, and the rate of discount which equalizes both cost streams over 20 years being in excess of 43%. G. Beneficiaries and Employment 6.09 The benefits derived from the project would be savings in transporta- tion costs which are estimated at slightly over 1% of the average sales price of oil products because oil is an expensive commodity. These marginal savings can be passed on to the consumer without significantly increasing demand, thus the beneficiary would be the public at large. 6.10 During construction, the pipeline will provide employment to some 2,000 persons while during operations some 350 staff will be employed. The increase in the transport of oil products and other cargo resulting from nor- mal growth of the economy will, in a short time, make up any temporary slack created by the pipeline in the railways and the few local waterways carriers involved (paras. 6.11 and 6.12). - 24 - H. Impact on Alternative Means of Transport 6.11 The present requirement of about 12 million tons of crude oil per annum "or all the refineries in Yugoslavia is transported from overseas by tank'.ers and by rail and barges inside Yugoslavia. About 4 million tons are receaivd in Rijeka by tankers for the Rijeka refinery. Of the remaining 8 million tons, about 5.4 million tons are transported by rail from other ports in the Adriatic and from domestic oil fields and the remainder, about 2.6 million tons, by barges on the Sava and Danube Rivers. 5,12 The construction of the pipeline will divert crude oil traffic from the railways and barges. However, this should not be a problem because rail and river traffic is already congested. Since most of the oil moving in the Inland waterways is transported in barges of foreign flags the impact of this diversion on the local carriers will be minimal. Many of the railway wagons are fairly old and not likely to be in use very long, while others are on hire from foreign countries and can be returned when no longer required. Although oil and oil products account for only 7% of total rail traffic, the railway authorities are aware of the pipeline project and have taken it into -ccount in their projections of future rail traffic and investment programs. Because of the increase in the anticipated consumption of oil products in the country, the railways and local water transport enterprises will profit from the increased transport of refined products. VII. AGREEMENTS REACHED AND RECOMMENDATIONS 7.01 Agreement has been reached on the main :issues referred to in the preceding chapters and more particularly on cost overruns (para. 4.12), proj- ect schedule (para. 4.17) and Debt Service Guarantee (para. 5.07). Subject to the conditions of effectiveness referred to in paras. 4.10 and 4.12, the pro- posed project is suitable for a Bank loan of US$49 million to Naftovod for a term of 18 years including four years of grace corresponding to the period of construction. ANNEX 1 Page 1 APPRAISAL OF THE YUGOSLAVIA OIL PIPELINE (Jugoslavenski Naftovod) The Energy Sector in Yugoslavia A. Background 1. The main part of Yugoslav proven energy reserves consists of low- grade coal (brown coal and lignite) located in Kosovo and Serbia, and of a sizeable hydro power potential in Croatia, Bosnia-Herzegovina and Serbia. Known hydrocarbon reserves (oil and natural gas) located mainly in Serbia and Croatia are relatively small. Other potential sources exist (nuclear, geothermal and oil shales) but have not yet been investigated in sufficient detail to be evaluated accurately. A description of the reserves is given in Table 1, and their location is shown on Map 2. Coal 2. Coal reserves amount to about 4,000 million tons of oil equivalent (Toe) or about 260 years at average 1975-90 consumption. The largest part of the reserves (83%) consists of coal with an average heating value of about 1,900 kcal/kg (7,520 Btu/kg) and high water and ash contents. The size and location of the deposits makes them suitable for open pit, mining each with an average annual production of about 12 to 15 million tons (2.50 to 3.00 mil- lion Toe). Brown coal reserves account for about 15% of total coal reserves; individual deposits are generally small and scattered and most of them are not suitable for open pit mining because of the depth of the layer (150 to 500 m). The average calorific value of Brown coal is about 3,500 kcal/kg (13,860 Btu/kg). Hard coal accounts for 2% of the total coal reserves. MIost depo- sits have highly complex features and steeply dipping strata; the layers are thin and irregular and normally occur at considerable depth, limiting the use of modern mechanical equipment. The use of domestically produced house coal is limited because of its high sulphur content (1 to 9%); the average calorific value is about 6,420 kcal/kg (25,400 Btu/kg). Hydroelectricity 4. Total economicallv exploitable hydropower generation potential in Yugoslavia is evaluated at about 60,000 million kWh p.a. At the end of 1973 only 30% of this potential was developed with an average production capability of 18,000 million kWh. The underdeveloped potential is spread rather evenly over the country. While it is recognized that further development would be justified, this has been delayed by lack of appropriate resources and admin- istrative considerations. PaNNEX 1 Page 2 Hydrocarbons 5. Total proven recoverable oil and natural gas reserves are estimated at about 100 million Toe and they account for 2.5% of total Yugoslav energy reserves (about 16 years and 13 years at average 197j-1990 oil and gas consumption respectively). Known reserves evaluated at -15 million Toe are located in the Pannonian Basin (north and northeastern part of Yugoslavia) and are producing an average of 3 million tons of oil and 1,000 million m3 of gas annually. Exploration has recently started in the Dinaric Basin offshore the Adriatic coast where potential oil and gas-bearing structures exist. So far three gas-producing wells have been drilled but no commercial exploita- tion has started. Probable recoverable reserves in the Dinaric Basin are estimated at 200 million tons of oil and 37 million Toe of natural gas. 6. Local production of oil, supplemented by irports (para. 12) is processed in six refineries (Rijeka, Sisak, Bosanski-Brod, Pancevo, Novi Sad and Lendava) with a total annual refining capacity of about 12 million tons (Map 1). Nuclear Fuel and Other Non-Conventional Fuels 7. Potential uranium bearing areas cover some 170,000 km2 of which 65,000 km2 have been explored. Preliminary estimates show that some 36,500 tons of uranium concentrate (U308) could be recovered. Further investigations are being carried out to refine these estimates and to prepare the develop- ment of the most promising deposits which are in Slovenia. B. Past Supply and Demand for Energy 8. Per capita consumption in Yugoslavia is 15% below the world average and about 40% of the West European average. There are, however, considerable variations in the level of consumption among the various Republics and Prov- inces. The highest levels are reached in Croatia and Serbia which are fairly developed, and the lowest in elontenegro and Kosovo. From 1965 to 1973 annual per capita consumption grew from about 8.5 million keal to 12.6 million kcal, an average rate of 5% p.a. 9. Until the mid-sixties coal had been the predom½-nant fuel and Yugos- lavia was almost self-sufficient in energy except in oil production, which had to be supplemented by imports. After a period of relative stagnation following the economic reforms of 1965, overall energy consumption increased rapidly from 1967 to 1973 at a rate of 8.2% p.a. compared with an average GDP increase of 6.4% per year. During the same period the structure of con- sumption changed considerably and coal was surpassed by hydrocarbons, prin- cipally oil. The share of hydroelectricity stayed almost constant while the use of natural gas remained marginal. This was due mainly to the rapid development of modern industrial sectors (31% of GDP) based on heavy industry ANTNEX 1 Page 3 (mining and metallurgy) which are energy-intensive and require high-grade coal or liquid fuels, and to the rapid growth of road transport (Table 2 and 3). 10. Most of the coal is used near the mining site, mostly in power and steam generation which account for 70% and 30% of the total consumption respectively. The relatively small volumes of hard coal produced locally are used in the residential sector and by light industry. Coking coal for iron and steel industry is imported. 'In 1973 total coal consumption accounted for 39.5% of the total internal demand compared to 64.3 in 1965. 11. About 84% of the demand for oil products is accounted for by the transportation and industrial sector, the remainder being divided between agriculture (6%) and residential and commercial usage (10%). At present, demand for petrochemicals is low but is expected to grow in the future as feedstock requirements for fertilizers and plastics increase. The use of fuel oil for power generation has traditionally been limited; in 1973 the first oil-fired plant was commissioned, while four more were under construc- tion. Following the oil crisis, steps were taken to restrict further construc- tion of such plants (paras. 25 and 26). CONSUMPTION OF MAIN REFINED PRODUCTS BY SECTOR IN 1973/1 (000 Tons) Gasoline Diesel Oil Fuel Oil Total % of Total Agriculture 30 350 100 480 5.6 Transportation 1,350 1,700 520 3,570 41.8 Industry 315 520 2,280 3,115 36.3 Power Generation 10 150 380 540 -6.3 Others 35 500 320 855 10.0 Total 1,740 3,220 3,600 8,560 100.0 /1 Source: Federal Chamber of Economy_ excludes kerosene and aviation and bunker fuels. 12. From '965 to 1973 oil consumption grew from about 3 million tons to 10.8 million to. s at an average rate of 17.5% p.a., almost three times faster than overall internal demand for energy. Growth between 1965 and 1970 was 20%, reflecting the substitution of liquid fuels for solid fuels (mainly lignite) in the industrial sector. ANNEX 1 Page 4 PAST DEMAND FOR OIL PRODUCTS (000 Tons) 1965 1970 1973 Local Production 2,063 2,854 3,332 Imports 1,503 5,543 7,810 Total 3,566 8,397 11,142 Less Exports 420 595 301 Gross Internal Demand 3,146 7,802 10,841 13. Domestic oil production has not kept pace with the fast growing demand and Yugoslavia has to rely increasingly on imports to supply its dorestic refineries. Net imports of oil and refined products, whith in 1965 accounted for 34% of internal demand for oil, rose to about 70% in 1973. Crude oil accounts for almost all the imports, and oil products are imported only to balance refinery yields or to make up for seasonal shortages. Tradi- tionally, the main foreign suppliers have been the Eastern European countries, mnainly the USSR, although, in recent years Yugoslavia has bought increasing volu:nes from the Middle East (Iran and Iraq). Presently crude oil from the USSR is imported through the Danube ports to supply the inland refineries of Sisak, Bosanski-Brod, Pancevo and Novi Sad (Map 1), while crude oil from the Middle East is imported at Rijeka on the northern Adriatic coast. Crude oil is transported to the refineries by barges, railroad tank cars and a short pipeline linking the Bosanski-Brod refinery to Opatovac on the Sava River. 14. Yugoslavia has relatively important reserves of natural gas in Serbia and Croatia which so far have not been fully developed because of the lack of resources to finance transport and distribution facilities. At pres- ent, consumption is low at about 1,000 million m3/year (0.9 million Toe) and limited to Vojvodina and a small part of Croatia. However, this situation will change rapidly when the Naftagas Project (Loan 916-YU) becomes opera- tional in 1977-1978. It is expected that natural gas consumption will in- crease fourfold by 1980 and demand will be met by local production and imports in a 50/50 ratio. Yugoslavia recently entered into an agreement with the USSR for the import of up to 3,000 million m3 (2.7 million Toe) annually starting in 1976. This gas will be allocated to Naftagas, INA and Petrol (Slovenia). There are also plans to import liquefied natural gas from North Africa to Bosnia and Slovenia, but negotiations are at an early stage and it is doubtful whether gas would be available prior to 1980-1982. Natural gas is used primarily in industry and petrochemicals as feedstock; public distri- bution to households is marginal. 15. Industry accounts for more than 60% of total per demand, the remainder being divided between the residential and corummerzial sectors in a'!out equal ratios. Agriculture, including irrigation, accounts for only 1Z ANNEX 1 Page 5 of total demand. From 1965 to 1973 final demand for power on the Jugel sys- tem grew from 15,500 GWh to 35,100 GWh an average rate of 11% p.a. Power generation capacity increased from 3,700 MW to 8,400 MW, of which hydropower accounts for 55%. Demand outside the Jugel system (some distribution enter- prises and captive plants) decreased from 700 GWh in 1965 to 380 GWh in 1973 while generating capacity outside Jugel from 1,100 MW to 500 MW. Despite con- siderable efforts to develop new generating capacity, there are still some shortages of power, particularly in the summertime, and consumption restric- tions have to be imposed. C. Organization of the Energy Sector 16. As in most other sectors, the energy enterprises are the principal agents in the development of energy. They draw up their development plans, and investment programs and arrange financing. Most power companies are members of Union of Yugoslav Electric Power Industry (JUGEL) and coal pro- ducers are united in the Association of Yugoslav Coal Producers. There is not, so far, a similar body in the oil and gas industry which is dominated by two very large enterprises, Naftagas and INA. 17. Theoretically, the Federal Government has no control over the energy sector; however, it controls most of the fuel prices and has initiated studies to improve coordination between energy producers and define a national energy policy. Energy producers, consumers, local authorities and the Federal Government are in the process of negotiating "social agreements" wh4ch will define the relationship of each part for the next five years. These arrange- ments will form the framework of the future development of the sector and will define inter alia the quantitative objectives to be achieved, the invest- ment program and the financing plan by branch and the pricing policy. The electric power and coal industries are in the final stage of negotiating such agreements and have already agreed on production and consumption targets for the next five years. Discussions are still in progress in the oil industry and are expected to be completed by the end of 1975 (agreement has already been reached on future oil requirements until 1980). 18. While "social agreements" should provide the framework of a national energy policy in the short run, the Government has sponsored a group of ex- perts in the energy field to study Yugoslavia's long-term energy policy. The Government has also created an energy committee to improve coordination with- in the Sector. This group submitted an interim report a year ago that was accepted as a working document. However, the Federal Government requested that further studies be carried out to determine the effect of the 'energy crisis" on the development of the Sector. The final report is being completed and its main conclusions are: (i) Yugoslavia should limit its dependence on imported fuels, and domestic energy resources should be developed within reasonable economic justification. In particular coal and ANNEX 1 Page 6 electricity (hydro or coal-fixed thermal plants) should be substituted for imported oil to the maximum extent feasible. (ii) Hydrocarbons should be used only when coal cannot be substituted for oil or natural gas. (iii) Conservation measures should be adopted when and where appropriate to save energy and more particularly hydro- carbons, but not at the expense of economic development. (iv) Pricing policies should be revised to support the national energy policy. These conclusions have the support of the Federal Government and were taken into account while drafting the social agreements for the coal and electric power industries, and while negotiating these agreements with oil and gas enterprises. It is still too early to make a judgment on the efficiency and reliability of the new procedures for setting national arnd regional energy policies. However, preliminary results are encouraging; discussions are taking place among energy producers and consumers that should lead ultimately to better coordination of future development plans and to a more realistic approach than in the past. Some practical results have already been achieved in the oil and gas sector and substantial reductions of demand projections were achieved by eliminating duplication among individual development plans. However, these procedures are new and complex and some prOb'Lems are to be expected in the realization of the plans. The main difficulties are likely to arise in the financing of energy-related facilit-ies. The proposed financ- ing plans (Table 6) overall do not include adequate provision for inflation, and it is to be expected that enterprises would have some difficulties in securing adequate funds to achieve their targets and thus may have to delay some of the proposed projects. However, the refining subsector app.ars to have provided adequate estimates for its financing plans. 19. The new procedures are an important step towards the formulation of a national energy policy based on the rational evaluation of future re- quirements and on coordinated investment programs. This is evidenced by the proposed project which is sponsored by three enterprises which heretofore had been competing with each other with several pi?elne schemes. D. Present Situation and Future Prospects The Impact of the Oil Crisis 20. Because of its heavy dependence on imported oil, Yugoslavia was hit hard by the increase in the world price of oil. The problems created by the energy crisis were more ones of price than of volume. Yugoslavia was not affected by the embargo, but the cost of imported oil rose from an esti- mated $25/ton in 1972 to about $100 in 1974, causing the oil imports bill to ANNEX 1 Page 7 increase by about $600 million (about 9% of total imports of goods and ser- vices). Because of the limited technical possibilities of substituting coal and electricity for imported oil, only minor adjustments could take place in the short run. These were mostly increases in the retail price of refined products, twice in 1974. At the same time the government initiated studies to determine substitution possibilities for the long run. 21. The "oil crisis" had a direct effect on energy pricing policies. Energy producers had been requesting that fuel prices be such that the users would pay the same price per unit of energy, whatever its form. Attempts have been made to link the price of gas and fuel oil, and the oil industry was successful in obtaining that domestic crude oil be priced at the same level as imported oil. However, the government has been somewhat reluctant, for several reasons, to increase substantially the price of electricity and coal, thus depriving the coal and power industries of adequate finances for expan- sion. 22. Energy pricing policy is presently under review and the proposals made by energy producers appear reasonable. The problem of aligning domestic oil prices with those of imported oil has been solved through an equalization fund and an increase in the price of refined products. Gas producers have submitted a request for a substantial increase in gas prices to bring them in line with those of refined oil products, and thus avoid uneconomical alloca- tion of scarce resources. Future Energy Demand 23. Before the oil crisis, it was projected that energy consumption would continue to grow at a ranid pace until the end of the century, as Yugoslavia would be catching up with more developed countries. Demand projec- tions prepared in 1971 showed that total internal demand was expected to grow at an average rate of 7.2% until 1990, to reach about 90 million Toe, equiv- alent to 3.5 times the 1973 level. According to these projections, hydro- carbons demand was expected to grow faster than total internal demand and by 1990 oil and gas demand would account for 40% and 11% of the total, respectively, and coal for only 30%. These projections were based on a continuing substitu- tion of oil and natural gas for coal and a high level of imports which would reach 35% of total demand by 1990. 24. As a esult of the increase in the world price of oil, these projec- tions were lowered; it is now expected that overall energy demand will grow at an average rate of 6.9% until 1990, reaching 83 million Toe. Hydrocarbons will grow at the same pace as tot-J demand. However, the volume of oil im- ports in 1990 will be identical to those projected before the oil crisis (although the total demand will be less) because: (i) Previous projections were based on fast growth in the use of natural gas, which is not likely to materialize. Recent evaluation of domestic fields has proved to be disappointing ANNEX 1 Page 8 as far as gas recovery is concerned and the estimates for local production in 1990 have been lowered from 6,000 million m3 to 3,000 million m3. At the same time Yugoslavia has been experi- encing difficulties in signing import agreements for natural gas and LNG. The USSR, which was expected to deliver up to 4,000 million m3 annually starting in 1976-1977, has only agreed to 3,000 million m3, and negotiations for the import of LNG from Algeria are at a standstill. Therefore, additional volume of oil will have to be imported. (ii) Previous projections for domestic oil production were also too optimistic, and it is now estimated that domestic pro- duction will start declining after 1985, to reach about 5 million tons by 1990 instead of 8 million tons previously considered. The revised projections are given in Tables 3, 4 and 5. They are prepared by a group of Yugoslav experts and are endorsed by the oil and gas industry. They do not account for any new discoveries in Yugoslavia as it is not expect- ed that new fields can begin producing before 1980. Coal 25. The share of coal in total internal demand will continue to decrease until 1980 and will then level off. This is due to the coming onstream of four oil-fired power plants that were started before the oil crisis; between 1980 and 1990 coal will account for more than 30% of the incremental demand ccQ;pared to 7% from 1965 to 1973. Oil and Refined Products 26. The demand for oil will continue to grow rapidly until 1980, partly because of the incremental demand of new oil-fired power plants, partly be- cause of the time required to implement conservation measures and substitute coal for oil. However, from 1975 onwards the share of oil in total demand should remain constant. 27. As domestic production is not expected to grow substantially, im- ports will increase considerably reaching 85% of oil internal demand by 1990. PROJECTED OIL DEMAND (000 Tons) 1975 1980 1985 1990 Total internal demand 12,300 18,900 25,100 33,000 Domestic production 3,600 4,500 5,200 5,000 Imports (net) Crude oil 7,900 13,400 19,900 28,000 Refined products 800 1,000 - - ANNEX 1 Page 9 Most of the imported oil is expected to come from the USSR, the Middle East and North Africa to the Adriatic coast. It will thence have to be transported to iTnland refineries. Such transport by 1990 would represent about 16,000 million ton/kms, equivalent to about 70% of the total freight traffic projec- ted for the railways in 1975. Natural Gas 28. As explained in para.24(i) the prospects of widespread use of natural gas by 1990 have been reduced substantially. It is expected, however, that natural gas will cover a substantial part of the need of eastern Yugos- lavia, which is at the farthest (-nd of the proposed pipeline system, thus minimizing oil transport costs. Power 29. It is the intention of Yugoslavia to fully develop its hydro potential by the year 2000. Hydropower will continue to grow and by 1980 will begin to be supplemented by nuclear-power generation which by 1990 would account for 25% of primary electricity generation. -a7X1 APPRAISAL OF TIFE YUGO3L_AVIA CIL PIPELINE Potential Ener-7 Resources/i (million tons of -il equivalent) Hydro/2 Energy Coal Oil Gas Totai ___ Bosnia and Herzegovina 147 835 982 91 Montenegro 45 52 97 2 Croatia 107 175 44 21 345 7 Macedonia 42 40 82 2 Slovenia 70 144 214 4 Serbia 143 2,770 22 31 2,966 64 Total 554 4,o14 66 52 4,686 100 % 812 6 1 1 100 /1 Proven reserves only, no allowance was made for potential oil and gas dis- coveries in the Adriatic (Dinaric Basin). Excludes nuclear fuel estimated at the equivalent of 9,000 million kWh per year. /2 Based on average production of 40,000 million kWi per year for about 50 years at 2,800 kcal per kWh. Source: Federal Committee for Energy and Industry October 1975 APPRAISAL OF THE YUGOSLAVIA OIL PIPELINE Past Supply of Energy 1965-1974 (000 tons of oil equivalent) Average Late of Growth 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974L1 R J. Domestic Production (Primary Energy) liard coal 724 702 564 518 422 399 438 371 357 360 (8.0) Brown coal 4,077 3,911 3,501 3,689 3,663 3,488 3,621 3,563 3,548 3,550 (1.6) Lignite 4,149 4,104 3,753 3,720 3,717 4,265 4,736 4.803 5,159 5,665 3.6 Total coal 8 950 8,717 7.818 7,927 7,802 8,152 8,795 8,737 9,064 9'575 /2 Cr,de oil 2,063 2,222 2,374 2,494 2,699 2,854 2,961 3,200 3,332 3,400 4.2 Natural gas 307 374 429 543 679 909 1,070 1,155 1,236 1,500 19.5 Hydroelectricity 2,318 2,549 2,749 3,801 3_803 4,036 4_639 4,230 4,850 8.6 Total 13,638 13,862 13,370 14,000 1 1 15,_718 16,862 17731 17,862 19_325 3.9 2. ImporEs Coal and coke 1,494 1,305 1,028 1,214 1,269 1,314 1,468 1,424 1,604 1,650 - Crude oil and refinled produ,cts 1,503 2,614 3,328 3,743 4,027 5,543 5,966 7,155 7,810 8,100 20.6 Gas Electricity 111 54 31 84 42 82 44 22 78 Total 3,108 3.973 4.387 5.041 5,338 6,939 7,478 8,601 9,492 9,750 13.5 3. Exports3 Crude oil and refined products 420 1,167 1,038 572 450 595 600 307 301 200 (8.0) Others 102 86 146 87 173 264 238 507 440 300 13.0 Total 522 1,253 1,184 659 623 859 838 814 741 500 - Gross Internal Demand (I + 2 - 3) 16,224 16,582 16,573 18,382 19,696 21,798 23,502 25,518 26,613 28,575 6.5 /I Based on six months estimates. 2 - means less than 1%. '3 Includes secondarv enerav. Note: Lower calorific Value: Hard coal 6,200 kcal/kg Brown coal 3,880 kcal/kg Lignite 2,270 kcal/kg Cr,de oil and refined products 10,000 kcat/kg Natural gas 9,300 kca l/m Hydroelectricity 2,580 kcal/kWh Source: Federal Institute for Statistics, Naftovod OcLnhb-, 1975 ANNEX 1 "abl_ APPRAISAL OF THE YUGOSLAVIA OIL PIPELINE Structure of Yugoslavia's Internal Demand for Primary Energy (Percent) ----- Actual ------ ------------------ Projected ----------------- 1965 1970 1975 1980 1985 1990 Electricity: Hydro 14.2 17.2 18.4 17.2 16.5 14.7 Nuclear . - - - 2.3 3.5 5.3 Sub-total 14.2 17.2 18.4 19.5 20.0 20.0 Solid Fuels (coal and lignite) 64.3 43.1 36.1 31.5 31.5 31.3 Hydrocarbons: Oil 19.5 35.6 40.5 39.5 39.5 39.8 Natural Gas 2.0 4.1 5.0 9.5 9.0 8.9 Sub-total 21.5 39.7 45.5 49.0 48.5 48.7 TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 OCD Europe: /1 Electricity (hydro /2 /2 and nuclear) 4.5 n.a. 10.5 - 10.0 16.0 - 15.1 n.a. Coal 22.3 n.a. 18.5 - 17.2 14.7 - 14.0 n.a. Oil 63.1 n.a. 50.0 - 55.1 47.8 - 52.8 n.a. Gas 10.1 n.a. 21.0 - 17.7 21.5 - 18.1 n.a. TOTAL 100.0 100.0 100.0 100.0 100.0 /1 1972. /2 Oil at $6 and $9 per barrel. Source: Tables 2 and 5, OECD Energy Prospects to 1985 0(>tober, 1975 ANNEX 1 lTble 4 APPRAISAL OF THE YUGOSLAVIA OIL PIPELINE Supply/Demand Projections for Hydrocarbons 1975 - 1990 ('000 tons of oil equivalent) --- Original Projections ------- -------Revised Projections- 1975 1980 1985 1990 1975 1980 1985 1990 I. Projected Demand Crude Oil and Refined Products 12,500 21,000 30,000 37,000 12,300 18,900 25,100 33,000 Natural Gas 3,000 6,500 7,700 10,300 1,500 4,500 5,700 7,300 Total 15,500 27,500 37,700 47,300 13,800 23,400 30,800 40,300 r. Supl Local production: Crude Oil 3,800 6,ooo 7,000 8.000 3,600 4,500 5,200 5,000 Natural Gas 3,000 3,500 4,500 6,ooo 1,500 1,800 2,000 3,000 Sub-total 6,800 9,500 11,500 14,000 5,100 6,300 7,200 8,000 ]riports: Crude Oil 7,900 14,000 23,000 29,000 7,900 13,400 19,900 28,000 Refin d Products (net) 800 1,000 - - 800 1,000 - Natural Gas - 3,000 3,200 4,300 - 2,700 3,700 4,300 Sub-total 8,700 18,000 26,200 33,300 8,700 17,100 23,600 32,300 Total 15,500 27,500 37,700 47,300 13,800 23,400 30,800 41,300 Source: Federal Secretariats for Finance and Flaanning Naftagas, Naftovod, Mission's estimates. October, 1975 ANNEX I Tablc 5 APPRAISAL OF THE YUGOSLAVIA OIL PIPELINE Projected Primary Energy Demand 1975 - 1990 (000 tons of oil equivalent) Average Rate Average Rate Average Rate Average Rate of Growth 1975 1980 of Growth 1985 of Growth 1990 of Growth 1975 - 1990 I. Internal Demand (original projections) Electricity: Hydro 5,600 8,250 10,500 12,200 Nuclear - 1,100 2,200 4,400 Sub-total 5,600 9,350 10.5 12,700 6.3 16,600 5.4 7.5 Coal, 11,000 15,000 6.3 20,000 5.2 26,000 4.6 6.6 Oil_1 12,500 21,000 10.5 30,000 7.4 37,000 4.2 7.5 Natural Gas 3,000 6,500 16.5 7,700 3.4 10,300 6.o 8.5 Total 32,100 51,850 10.0 70,400 6.4 89,900 5.0 7.2 'I. Internal Demand (revised projections) Electricity: lIydro 5,600 8,250 10,500 12,200 Nuclear - 1,100 2,200 4,400 Sub-total 5,600 9,350 10.5 12,700 6.3 16,60C 5.4 7.5 11,000 15,000 6.3 20,000 5.8 26,009 4.6 5.9 il1 2 12,300 18,900 8.9 25,100 5.9 33,000 5.6 - 6.8 Natural Ga/L 1,500 4,500 24.0 5,700 4.8 7,300 7.8 11.0 Total 30,400 47,750 9.4 63,500 5.9 82,9C0 5.5 6.9 Difference (%) 5 13 14 11 /1 Includes 1.1 nillion tons for power generation. 2T Original projections reduced to take into account recent import agreements with the USSR. Source: Federal Secretariats for Finance and Planning Naftovod, Mission's estimates. October, 1975 APPRAISAT, OF THE YUGOSLAVIA OIL PIPELINE Energy Sector Financing Plan 1975-1980 (Din. Million) Coal Oil Gas Power Local Foreignt Local Foreign Local Foreign Local Foreign Total Currency Exchange Total Currency Exclhange Total Currency Exchange Total Currency Exchange Total A. Application of Funds t. Exploration 22,000 3,000 25,000 5,500 2,600 8,100 - - - 33,100 2. Production 8,000 4,500 12,500 8,000 5,000 13,000 2,500 1,600 4,100 36,000 20,000 56,000 85,600 3, Processing 5,000 7,000 12,000 - 12,000 4. Transport 1,800 6,700 8,500 6,200 2,500 8,700 12,000 6,000 18,000 35,200 5. Distributtion 3,800 3,800 40,000 40,000 43,800 Total 8,000 4,500 12,500 40,600 21,700 62,300 14,200 6,700 20,900 88,000 26,000 114,000 209,700 B. Sources of Funds 1. Internally generated 500 500 27,300 27,300 7,000 7,000 8,000 8,000 42,800 2. Government grants 6,500 6,500 8,000 8,000 3,500 3,500 75,000 75,000 93,000 3. Local loans 1,000 1,000 5,300 5,300 3,700 3,700 5,000 5,000 15,000 4. External loans - 4,500 4,500 21,700 21,700 6,700 6,700 26,000 26,000 58,900 Total 8,000 4,500 12,500 40,600 21 700 62,300 14,200 6,700 20,900 88,000 26,000 114,000 209,700 Sources: Federal Secretariat for Finance October, 1975 ANNEX 2 Page 1 APPRAISAL OF THE YUGOSLAVIA OIL PIPELINE (Jugoslavenski Naftovod) Tanker Terminal Location 1. Several sites were considered for the tanker terminal. The pro- p>ed sive at Omisalj Bay was found to be the most suitable. This site is well protected from the prevailing winds and the entrance can be easily approached .'.I-ectly from the sea without turns. There is unlimited area for swinging :nkers outside the entrance, and in settled conditions, swinging could even ta place easily and safely inside the Bay, off the berths. Further, since tnlE.rs will normlally be berthed head to sea, they will be able to leave the t_;- , with little or no outside assistance in case of Thisgency. Tis ltva., 'hich has a rocky bottom, x.ater depth of 30 m and Cous ,ot need any rxdg-' ig work, allows for the construetion of three or more -Iorlgside berths : western side of the Bay. Also, the layout of the Bay allo.1ws the im- pIn' e-i..tation of practical and effective ste-ps to prevent oil Rollution. of the adjal-znt sea area. 2.ar Size, Number of Berths 'L The tonnage sizes of tankers, existing, being built, and on order tt '-e end of 1974, have been tPken int:o consideration to assess the number of ths at the tanker termini2.. There is no reason to s-X,r.ose that the -.:1i terminal wil vary appieclably from these within the tinie scale of tn. Woiect. This assu-Lation is uriforced by the plans fo- axpansion of the Suez Canal, which l.:t the size :' -ar-kers using the Canal to 150,000 dwt starting in 1977 and t.J 250,000 dl sLarting in 1980. To a1::ow for the pos- sibilitv of short and nK . aul cru'dve arriving from North .-nd West Africa in larger tankers, and to op-Oly with the provisions of the transit contracts which stipulate the minimuli- --- of tanker, the Dort will Be able to accommo- date ships from 30,000 to 350,5000 .iwt. 3D All berths would be designed to take the smallest .3;id largest tankers,expected to calP at Om.isaij bea- < N N N N N N . N I 0 ' N N N N N- Ns N N f N cc< N N a' N N a' N N N N N > NN- XZI = n O~~~N N oo N x ol ;1~~~~ at N N N>< 0 N N 3~~ ~ ~ 0N N a N N N N R~~ ~ ~ ~ a' N a' g * N N N1 Nd N N N O ~ > -' a' N N0 N N N N 0 N Ig a;oa;0 aS;a;e e N N- o N o' o N N N N ai ~ ~ ~ ~ ~ ~ ~ ~ ~ o N r. N .r NY < r~~ ~ ~ N Nl N,R_S3 N N a at .t a~~~~~~~~~~ a ~~ ..a. a tG) 0 0 o at ao a_ gt N tO¢ i' 8 - 8a 0,-a a a a' Nat-ta N a~~~~~~~~~~~ at. a .-.a S ~~~~~~~~~~ -o at aa a aN -. Nao_ _ - a a 0,-a .2 < a Naa2a'aaa A a a,- ~ ~ ~ aa-A Nt Na,-. ~ ~ n -t a 0- a a. ~ ~ ~ u a ~~~O Nv N a ANNEX 11 Page 1 APPRAISAL OF THE YUGOSLAVIA OIL PIPELINE (Jugoslavenski Naftovod) Resume of Transport Agreements A. Agreements with the Founders 1. The Founders are responsible for providing the following amounts free of interest to Naftovod for meeting the project costs: (a) Energoinvest-Bosanski-Brod refinery Din. 150.0 million (b) INA-Sisak refinery 100.5 million (c) INA-Lendava refinery 49.5 million (d) Naftagas-Pancevo refinery 105.0 million (e) Naftagas-Novi Sad 45.0 million Total 450.0 million 2. The refineries are liable to pay transportation costs for the full reserved capacity as specified below: Years 1978 1979 1980 1981 1982 1983 1984 1985 -----------------------(million tons per year)----------------- Sisak 1.5 3.2 3.9 4.0 4.0 4.4 5.0 5.8 Lendava 0.4 0.8 1.0 1.0 1.0 1.1 1.2 1.5 B.Brod 1.2 2.1 2.4 2.8 2.8 2.8 2.9 3.1 Novi Sad 0.6 1.1 1.2 1.2 2.0 2.0 2.2 2.3 Pancevo 1.4 2.9 3.5 3.6 3.9 4.1 4.3 4.7 3. The refineries shall provide a guarantee of their business banks for the payment of the transportation costs. 4. Naftovod shall repay the contribution of the Founders in 25 years in equ4l semi-annual installments, the first installment becoming due 3 years after the completior of construction. 5. Transportation costs for the crude oil are to be paid by the refine- ries for the total reserve capacity per year on the following basis: (a) Total actual fixed operating costs of the relevant section of the pipeline for transporting the reserve quantity. The fixed costs will include the amount required for repayment of loans that is not covered by normal depreciation. ANNEX 11 Page 2 (b) Variable costs in proportion to the quantity actually transported. (c) If, in any particular year, the contracted quantity of crude oil is not transported because of Naftovod's fault, the users shall pay only the fixed cost in proportion to the quantity actually transported. (d) If, in any particular year, Naftovod fails to transport the stipulated quantity of crude oil, it is liable to pay a penalty amounting to 80% of the transportation costs for that year for the quantity not transported. 6. The profit from the transport of crude oil to Hungary and Czechoslo- vakia shall be used to reduce the transport costs of the Founders. 7. Events of Force Majeure relieve either party of its obligations provided the condition or consequences of such events shall last more than six months. B. Agreement with lIungary and Czechoslovakia 1. The Yugoslav party undertakes to construct the port and pipeline within 36 months after the contract comes into force. 2. The contract shall remain in force for 20 years from the commence- ment of operations of the pipeline. 3. The Yugoslav party undertakes to construct the pipeline according to the following specifications: (a) The port and terminal will be able to receive tankers up to 200,000 dwt. (b) The number of tankers to be handled on behalf of Hungary and Czechoslovakia annually will be between 50 and 70. (c) At the border crossing the pipeline diameter will be 28 inches. 4. Crude oil will be transported according to the schedule and at the basic rate per ton given below: ANNEX 11 Page 3 Hungary Czechoslovakia Quantity Rate per Ton Quantity Rate per Ton (million tons) (US$) (million tons) (US$) 1978 1.5 4.19 1.7 3.84 1979 3.0 3.65 3.6 3.46 1980 3.5 3.38 4.3 2.74 1981 4.0 2.92 5.0 2.18 1982 4.5 2.62 5.0 2.18 1983 5.0 2.18 5.0 2.18 1984 5.0 2.18 5.0 2.18 5. If, for any reason other than Force Majeure, either party fails to deliver or supply the stipulated quantity in any year, 80% of the transporta- tion costs for the unused capacity in that year will be paid as penalty. 6. The Czechoslovak and Hungarian parties agree to provide respectively goods and services, and cash totalling US$25 million each for the construc- tion of the pipeline project. 7. If, for any reason, except Force Majeure, either party fails to deliver or take the stipulated quantity, it is liable to pay compensation to the other. 8. Port charges payable by ships are not included in the transportation costs, but the Yugoslav party guarantees that the total port charges payable by the oil tankers will not exceed the usual charges paid by tankers transport- ing oil for Yugoslavia. 9. The basic transportation fee given in Paragraph 4 above will be revised annually according to the following escalation formula: ANNEX 11 Page 4 B - 1 E - 1 L P = P (0.33 + 0.35 n + 0.20 n + 0.12 n - 1) n o B E L Nov. 1973 Nov. 1973 Nov. 1973 Where index n the year for which transportation fee will be calculated index n - 1 = the year previous to the year n P corrected transportation fee for the year n n P = basic transportation fee in US dollars/ton 0 B - 1 = Ratio of price of thick sheet metal for the year n n - 1 to November 1973, expressed in national cur- B rencies of Germany, Belgium, France, Luxembourg, Nov. 1973- and Italy. It is based on the publication "Iron and Steel Products", edited by European Community Commission, 1041 Bruxelles, 200 rue de la Loi, Batiment Berlaymont. E - 1 = Ratio of cost of electricity for the year n - 1 to n November 1973. For this purpose, the average prices E quoted in the official Yugoslav Statistical Yearbook Nov. 1973 will be taken. L = Ratio of wages in the Oil Processing industry for the n - 1 year n - 1 to November 1973. For this purpose the L average wages quoted in the official Yugoslav Statis- Nov. 1973 tical Yearbook will be taken. 10. In case of changes in the rate of exchange of the US dollar in relation to other European currencies as compared to the average rate in November 1973, suitable adjustment will be made in the transportation fees every quarter. 11. Basic transportation fees and escalation formula will be in force for 8 years after the pipeline commences operation. 12. Both parties will provide bank guarantees to ensure fulfillment of the commitments. ANNEX 12 Page 1 APPRAISAL OF THE YUGOSLAVIA OIL PIPELINE (Jugoslavenski Naftovod) Background and Assumptions Used in the Justification of the Project A. Background 1. As explained in Annex 1, Yugoslav internal demand for oil is expect- ed to grow from about 12.5 million tons in 1975 to about 33 million tons in 1990. Since domestic production is not expected to be developed substantially, the largest part of the Yugoslav consumption would have to be imported from the USSR, the Middle East and North Africa, and transported from the ports of entry on the Adriatic coast to inland refineries. Although various modes of transport could be considered for such volumes, it is widely accepted that pipelines are usually the least cost solution. The economic evaluation was therefore based on the comparison of the proposed pipeline with conventional modes of transport. B. Projected Demand 2. The projected traffic demand for the pipeline system is given in Table 1. It has been provided by Naftovod and is in agreement with Govern- ment projections (Annex 1) for the part which will supply the inland refine- ries and with contractual volumes for transit traffic to Hungary and Czecho- slovakia. The allocation of the domestic traffic to each refinery was made according to their development plans. C. Alternatives to the Pipeline 3. Two alternatives can be considered: (i) railways and (ii) inland water transport. The railway alternative could reach all refineries provided that adequate terminAls and sidings are built at the main ports of entry (Bar, Bakar and Koper) and at the refinery sites. Railways could also be used to accommodate the transit to Hungary and Czechoslovakia. Inland water transport would be adequate for the supply of the Novi Sad, Pancevo, Bosanski-Brod and Sisak refineries; it would be inadequate for the Lendava refinery and for transit. The inland water transport alternative would be less reliable than the railway alternative (particularly for the supply of Sisak and Bosanski- Brod) since rivers are already congested and have a somewhat irregular traffic. 4. Optimization studies carried out by consultants show that the next best alternative to the pipeline is a combination of rail and inland water transport. Rail would be used for transit and to supply Lendava, Sisak and Bosanski-Brod, while inland water transport would be used to supply Novi Sad ANNEX 12 Page 2 and Pancevo. The cost of this alternative is estimated at about Din. 12,860 million (US$756 million), of which Din. 5,020 million (US$295 million) are for expansion of port and railway facilities and Din. 7,840 million (US$461 million) for the acquisition of locomotives, rail tank cars, pusher tugs and barges (Table 3). 5. Direct operating costs would be about Din. 0.17 per ton/km and Din. 0.05 per ton/km for the railway and for inland water transport respectively. They would include fuel and labor costs as well as direct maintenance costs. 6. The cost stream of the rail and inland water transport alternative is given in Table 3. Transit revenues have been estimated on the basis of existing Yugoslav rail and inland waterway tariffs; operating costs are net of transit revenues. D. The Proposed Pipeline System 7. -The cost of the project is estimated at about Din. 5,940 million (US$350 million) excluding taxes, price contingencies and interests during construction. It includes subsequent investments to increase the initial capacity up to 34 million tons. Operating costs include power, labor and maintenance costs and were derived from similar facilities in Europe and ad- justed to reflect Yugoslav conditions. Transit revenues were based on actual costs of transporting oil and not on the tariffs and are, therefore, very conservative. Operating costs are net of transit revenues. E. Comparison of the Two Alternatives 8. The comparison of the two alternatives shows that the rate of dis- count which equalizes both cost streams over 20 years is 50%. The feasibility of the proposed project is not very sensitive to a decrease in domestic traffic of about 15%. Under this assumption the rate of discount which equalizes both cost streams over 20 years is in excess of 43%. ANNEX 12 Table 1 APPRAISAL OF THE YUGOSLAVIA OIL PIPELINM - (Jugoslavenski Naftovod) Crude Oil Throughputs, 1978 to 1997 (in millions of tons)/1 Omisalj- Omisalj- Omisalj- Sisak Sisak Sisak- Sisak- Slobodnica Novi Sad Virje- Domestic Transit Total Slobodnica Novi Sad Pancevo Lendava 1978 8.3 1979 10.1 6.6 16.7 6.1 4.0 2.9 0.8 1980 12.0 7.8 19.8 7.1 4.7 3.5 1.0 1981 12.6 9.0 21.6 7.6 4.8 3.6 1.0 1982 13.7 9.5 23.2 8.7 5.9 3.9 1.0 1983 14.4 10.0 24.4 8.9 6.1 4.1 1.1 1984 15.6 10.0 25.6 9.4 6.5 4.3 1.2 1985 17.4 10.0 27.4 10.1 7.0 4.7 1.5 1986 18.6 10.0 28.6 11.0 7.7 5.2 1.6 1987 20.0 10.0 30.0 11.9 8.5 5.9 1.7 1988 21.3 10.0 31.3 12.6 8.9 6.0 1.9 1989 22.7 10.0 32.7 13.0 9.0 6.0 2.0 1990 24.0 10.0 34.0 14.0 9.0 6.0 2.0 1991 24.0 10.0 34.0 14.0 9.0 6.0 2.0 1992 24.0 10.0 314.0 14.0 9.0 6.0 2.0 1993 24.0 10.0 34.0 14.0 9.0 6.0 2.0 /1 Design properties of crude oil are 0.85 specific gravity and a viscosity of 24 Centistokes at 10 degrees Celsius. Source: Naftovod October, 1975 APPRAISAL OF THE YUGOSLAVIA OIL PIPELINE Imported Crude Oil Requirements (million tons) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Yugoslavia Refineries Rijeka/L 5.0 5.5 6.0 6.2 6.4 6.6 6.8 7.0 7.2 7.4 7.6 7.8 8.0 Sisak 1.5 3.2 3.9 4.0 4.0 4.4 5.0 5.8 6.0 6.4 6.8 7.7 8.0 Lendava 0.4 0.8 1.0 1.0 1.0 1.1 1.2 1.5 1.6 1.7 1.9 2.0 2.0 Bosanski Brod 1.2 2.1 2.4 2.8 2.8 2.8 2.9 3.1 3.3 3.4 3.7 4.0 5.0 Novi Sad 0.6 1.1 1.2 1.2 2.0 2.0 2.2 2.3 2.5 2.6 2.9 3.0 3.0 Pancevo 1.4 2.9 3.5 3.6 3.9 4.1 4.3 4.2 5.2 5.9 6.0 6.0 6.0 TOTA L 10.1 15.6 18.0 18.8 20.1 21.0 22.4 23.9 25.8 27.4 28.9 30.5 32.0 /1 The Ri,ieka refinery will not be supplied by the pipeline. /2 Includes re-exports Source: Naftovod 1g October, 1975 APPRAISAL OF THE YUGOSLAVIA OIL PIPELINE CJugoslavenski J'aftovod) Economic Justification (Din. million) --Alternative I: Rail and Inland Waterway Transport-- ----Alternative II: Pipeline---- Net Ports and Rail- Barges and Operati Investment Operating Cash Flow way Facilities Rolling Stock Costs- Total Costs Costs/l Total (I & II) 1975 200 200 :(200) 1976 600 600 1,3h0 1,340 (740) 1977 1,005 1,770 2,775 2,630 2,630 145 1978 1,205 515 (250) 1,h70 1,160 (130) 1,030 h4o 1979 860 370 (10) 1,220 (50) 160 1,060 1980 300 930 (5) 1,225 (h0) 360 865 1981 200 1,035 (50) 1,185 20 20 1,165 1982 300 220 (20) 500 40 4o 460 1983 250 250 (ho) h60 60 60 hoo 1984 100 1hO 30 270 70 70 200 1985 100 965 80 1,145 95 95 1,050 1986 100 190 290 130 130 160 1987 265 265 150 150 115 1988 320 320 170 170 150 1989 460 460 195 195 265 1990 520 520 215 215 305 1991 520 520 215 215 305 1992 1,500 520 2,020 215 215 1,805 1993 400 520 920 215 215 705 199h 170 520 690 215 215 475 The Rate of Discount at which the difference between the Net Present Value of both alternatives is equal to zero is 50%. q 3 I thDirect operating costs less transit revenues. (D Source: Naftovod and Mission estimates October 1975 ANNEX 13 APPRAISAL OF THE YUGOSLAVIA OIL PIPELINE (Jugoslavenski Naftovod) Design Codes and Standards ANSI B 31.4 Liquid Petroleum Transportation Piping Systems ANSI B 16.5 Steel Pipe Flanges and Flanged Fittings ANSI B 16.9 Steel Butt Welding Fittings API 5LX or 5LS Steel (Seamless and Welded) High Test Line Pipe API 6D Steel Gate, Plug, Ball and Check Valves for Pipeline Service API 610 Centrifugal Pumps for General Refinery Service API 650 Welded Steel Tanks for Oil Storage API 1104 Standard for Welding Pipelines and Related Facilities API 82100100 Manual on Disposal of Refinery Wastes IEC and NEC Electrical Standards (or Yugoslavian Standards where these are applicable) CCITT and CCIR Regulations and Recommendations Yugoslavian General Building and Civil Engineering Standards Yugoslavian Fire and Safety Requirments Source:. Naftovod I YUGOSLAVIA APPRAISAL OF THE YUGOSLAVIA OIL PIPELINE (J ugoslavenski Naftovod) Organization Chart Council Workers'Council (During Construction) Coordinat ng General Manager Committe I Asst General Manager Asst. General Manager Technical Affairs |Economic Affairs Technical & Maintenance Operations ers3 &n Commercial Economic & F World Bank-9761(R) rr Y U G OSLAV I A APPRAISAL OF THE YUGOSLAVIA OIL PIPELINE 1I J.g.,OI-ks. NW0-d) VISJE TERMINAL S_.- D_.- ithhenKc DElr tIlE P,p.In. Sys-n, SLOBODNICA TEIRMINAL AND PUMP STATION NOVI SAD TERMINAL AND PUMP ST ATION UMSTIO 9~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SCAE TRA V18l, LENDAVAVIC - NOVI SAD PIPELINE IVA , OOA_ ~~~~~~~~SISAK - SLOLA~C PIIEL-18"'LNE PRESSUR REDLEDNIACIRMNA AU UPSTATION /< N IM 1A NNG7LV ADPM TT 1~~~~~~~~~~~~.S I - S IESAR PIIVELT 9+INEFA^2 W~t ~~i OMISALJ T-Mi S TISAK PIEINET-1-11t ) ~ ~ ~ 33 n 173 vm MA~~~~~~~~~~~~TN F-- UM MELNICE PUMP STAT10F ( E;M -+F-i M^IN LlNe tjMP s^ne~~~~~~~~~~~~~~~~~~~~~~1"O YUGOSLAVIA APPRAISAL OF THE YUGOSLAVIA OIL PIPELINE (Jugoslavenski Naftovod) Project Schedule 1975 1976 1977 1978 1979 3Q 40 10 2Q 30 4Q 1Q 2Q 3Q 40 1Q 2Q 30 40 1Q 2Q Appointment of Engineering Consultants and Pipe Inspection Agencies Design, Procurement, Ins- I pection & Commissioning _ _ _ _ _ _ ~~~~~~C' C 5/31 5/31 Training - - Agreements with: Port of Rijeka Offtakers Power Enterprises and Telecommunications Authorities Pipeline Materials A Pipeline Construction A Tank Farm Materials A A D - Tank Farm Construction A _ _ _ _ _ _ - Pump Station Materials AM A D_ __ Pump Station Construction A _ Port Facilities, Materials A D Port Facilities, Construction1 A Telecomms, Telemetry, etc. A D Materials & Installation LEGEND A = Contract Award I = Phase 1, 16 million tons/yr. D O Materials delivud to site II = Phase 11, 20 million tonstyr. * - Start of Activity C = Commissioning V = End of Activity ¢ tn / Excluding Piping which mould be , installed under Tank Farm V/ork World Bank-15172 BR D 11586 UU\ w / 1 1 2 X F .MAY ~~~~~~~~T K4 ASNl \t MIUEI C T P ULF1Z RDI A YUG0StAVIA- T 'J \ t. \- JE'P A R~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ AOS APPRAISALOFTHEYUGOSl~~~~~~~AVPSEIAELILP.IN EIEEMDTKR/T, ,t + , T > IRA ~ ~ ~ ALWY ( JUGOSLAVENSKI NAFTNGROVOD) GRUNEAPA UGLUENV A7R S T A NK F ARM sC - - 5X.9 S / _ ^ 0 S 0 V O rs Y rK sr aA I v~~~~~~~~~~~~~~~~~~~~~~~~~~~~$ O S A IA ` c savERIN,~~~NRRW GyE N 43°~~~I- A PUNDE L NTEA TIOS 57<%\4hKI All ROARS~~~~~~~~~~~~~~~~~~~~~~~~~~~~Ill ,fENAIURLE CNL GEREDEURIRT STAISN- ,\(IAR S PL * IN tXSTNEPARIFNF - / X |~ SEELS P REZIU,R A,6USEN ET PI,T , ' s KUMANG EE RJAE G N N ,32 ARS N TFKANDARDAUGES5S USKGA H 3 '~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~RLARS .A 'L,pNp RARKDW GAUG IpPCP K" ,. 'ATV EE - - + aTeRENUaTISU[AJAUIRN RAI ApI MP Ap C EDfOL A I -55 ERR O 5POS~SED NEW LlaFK A L B A N I A t g A OKADKKXuKuRCANRUM GA 42R~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~S JIERSD S E R BntXtf YUGC LAV AVGGtAA5 _., EE LOCA ION F TH PIELINPEA NIHWYSTE M 00 2D TG EO 50 SO 70 R CAAA0aI lTL ; OTHER MAIN RIIA05 KILDiETERS TAd bOurdaracr rAn,e on Ibl. NgOV do laoW D \ gr , GEJLt T5~~~~~~~ITI.V BGuNGKEesGF RPUBILS AG AUGNDMUK PGsINES mlY edonel olsc;etanr bv 11e l 5E _ . - NTERNATIGNAIGDUNDARIES~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~~~~~~~~KOS htrdl0dtd/lt 11 IbU IG° 17o IS-T R7DPC_NG STAT2D2 H u N 0 A R y AUSTRIA ova J Q- olo S L 0 V EljA LJUBLJANA 0 05ubotica' Q) N TkSTt J Kor Koper_-_-- lova C) Sisk 0 ijeka V 0 J V 0 D N A -A T I A VI IN c R is ij 1111,T Rovi J ki 5, 'od-r \ Pancevo ni 0 Puld" BELGRADE Bo n j a C' Luka B 0 S N I A - 4#4kZvornik H E R Z F G 0 V I N A OZenica Bor (DZodor cp Sibenik Joblanica 0 c Nis "V, Y UGOSLAVIA APPRAISAL OF THE YUGOSLAVIA OIL PIPELINE Ptoce, 0 (JUGOSLAVENSKI NAFTOVob) LOCATION OF HYDROCARBONS AND COA M 0 N, T E, N: E G R Co Exploration under wcly I Dubroynik ' ' I I I I I / , 1% i o Resources ndiccited 5, v o TiTOGRAP r Prospective areas Refineries Project oil p,peline Cocil deposits, I Iliard coal Brown coal Lignite Autonomous province boundaries M A C E D 0 N I International boundaries 20 60 80 100 L ORFFCF 2p 4p 6p 8p 1?0 Vid-