Document of The World Bank FOR OFFICIAL USE ONLY FRI twl Report No. P-2957-Po REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO PETROLEOS DE PORTUGAL, E.P. WITH THE GUARANTEE OF THE REPUBLIC OF PORTUGAL FOR A PETROLEUM EXPLORATION PROJECT June 5, 1981 This document bas a restricted distribution and may be used by recipients only in the perfornnee ofi their oficial dutes. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY AND EQUIVALENTS Calendar Year 1980 February 1981 Currency Unit = Portuguese Escudo (Esc.) $1 = Esc. 50.1 Esc. 56.5 Esc. 1 = US$ 0.020 US$ 0.018 Exchange Rate Used for Cost Calculations $1 = Esc. 53.7 Esc. = US$ 0.019 FISCAL YEAR January - December WEIGHTS AND MEASURES 1 Kilogram (kg) 2.20 Pounds 1 Ton = 1,000 Kilograms 1 Ton of Oil Equivalent (TOE) = 10 Million Kilocalories (kcal) 1 MTOE = 1 Million TOE 1 Barrel = 42 US Gallons 1 Terawatt-Hour (TWh) = 1 Billion Kilowatt-Hours (KWh) 1 Megawatt (MW) = 1,000 Kilowatts (KW) 1 Square Kilometer (km2) = 1.20 Million Square Yards 1 Cubic Kilometer (km3) = 1.31 Billion Cubic Yards 1 Contos = 1,000 Escudos GLOSSARY OF ABBREVIATIONS API American Petroleum Institute BFN Banco de Fomento Nacional BIS Bank for International Settlements CNN Companhia Nacional de Navegacao CP Public Railway Company CPTM Companhia Portuguesa de Transportes Maritimos DFC(s) Development Finance Company(ies) DGE Directorate General for Energy EDP Electricidade de Portugal, E.P. EEC European Economic Community EFTA European Free Trade Association EIB European Investment Bank GPEP Office for Petroleum Exploration and Production IMF International Monetary Fund LIBOR London Interbank Offered Rate MIE Ministry of Industry and Energy MLT Medium- and Long-Term PETROGAL Petroleos de Portugal, E.P. SMI Small- and Medium-Scale Industries TAP Portuguese Airlines WHO World Health Organization FOR OFFICIAL USE ONLY REPUBLIC OF PORTUGAL PETROLEUM EXPLORATION PROJECT Loan and Project Summary Borrower: Petroleos de Portugal, E.P. (PETROGAL) Guarantor: Republic of Portugal Amount: US$20 million equivalent Terms: 15 years, including 3 years of grace, with interest at 9.6 percent per annum Project Description: The proposed project is aimed at enhancing Portugal's pros- pects for discovering petroleum by improving PETROGAL's current exploration strategy and strengthening its overall technical capabilities in petroleum exploration; it would also assist the country in evaluating its known heavy oil deposits. The project includes: (a) two seismic surveys, totalling about 850 km and provision for some 3-D seismic work to better resolve structural complexities, and reprocessing of seismic data; (b) drilling three exploratory wells to an average depth of about 2,500 to 3,000 meters; (c) technical assistance to PETROGAL, consisting of a senior explorationist, petroleum geophysicist, together with dril- ling management services, to help implement its exploration program; (d) laboratory services for analyzing existing and new source rock data and reservoir characteristics; (e) a screening study of existing data concerning heavy oil development; and (f) a planning study for PETROGAL. The combined seismic and well drilling program has been designed to provide an important first step in evaluating the petroleum potential of PETROGAL's license areas. A dis- covery of even modest size would be immediately beneficial to the national economy since the refineries and market are nearby, and could rekindle interest by the petroleum industry in further exploration in Portugal's onshore area. The seismic surveys, technical assistance and laboratory studies are designed to assist in the definition of sound drillable prospects, and reduce exploration risks. The exploratory drilling component entails the normal risks inherent in oil exploration. 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. - ii - Estimated Cost: ---------$ Millions-------- Local Foreign Total Seismic Surveys and Data Processing 0.80 6.20 7.00 Three Exploratory Wells 1.86 10.15 12.01 Technical Assistance 0.12 0.80 0.92 Laboratory Services 0.04 0.24 0.28 Heavy Oil Study 0.01 0.11 0.12 PETROGAL Planning Study 0.40 0.20 0.60 Base Cost 3.23 17.70 20.93 Physical Contingencies 0.50 2.76 3.26 Price Contingencies 0.47 1.34 1.81 Total Project Cost 4.20 21.80 26.00 Financing Plan: --------$ Millions--------- Local Foreign Total PETROGAL 4.20 1.80 6.00 World Bank Loan - 20.00 20.00 Total Financing 4.20 21.80 26.00 Estimated Disbursement: -$ Millions- Bank FY 1982 1983 Annual 14.0 6.0 Cumulative 14.0 20.0 Rate of Return: Not applicable Appraisal Report: No separate report has been prepared. Map: IBRD 15422, January 1981 THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO PETROLEOS DE PORTUGAL, E.P. (PETROGAL) FOR A PETROLEUM EXPLORATION PROJECT 1. I submit the following report and recommendation on a proposed loan to Petroleos de Portugal, E.P. (PETROGAL), for the equivalent of US$20 mil- lion to help finance a petroleum exploration project. The loan would have a term of 15 years, including 3 years grace, with interest at 9.6 percent per annum. PART I - THE ECONOMY I/ 2. An economic report entitled "An Updating Report on the Portuguese Economy" (No. 2214-PO) was distributed to the Executive Directors on September 8, 1978. Country data sheets are attached as Annex I. 3. Between the revolution of April 1974 and September 1975, Portugal's economy was radically transformed. The banks, insurance companies, power companies, major transportation agencies and the large industrial groups were nationalized. A comprehensive land reform was carried out in the central and southern parts of the country. Trade union activity was legalized and workers' rights safeguarded. Minimum wages were established and restraints were put on the highest salary levels. Prices were controlled. Unemployment and social security benefits were increased. The expectations of improved living standards, generated by the revolution, produced rapid increases in real wages and private consumption in the period to 1977, significant improvements in income distribution and large increases in public expendi- tures and deficits, necessitating rapid monetary expansion. The general circumstances of the revolutionary period and its aftermath also generated a serious deterioration in the profitability and general financial position of the private sector, and a significant decline in foreign reserves. 4. The difficulties facing the Portuguese economy were compounded in the immediate post-revolution period by three major factors: (i) the dra- matic oil price increase of end-1973 which resulted in a sharp deterioration in Portugal's terms of trade; (ii) the return of more than half a million Portuguese from the overseas colonies to the mainland; and (iii) the onset of recession in Europe with reduced demand for Portuguese emigrant labor, export commodities and tourist facilities. The combination of these external 1/ Substantially unchanged from Part I of the President's Report for the Second Banco de Fomento Nacional loan, which was approved by the Executive Directors on January 13, 1981. factors with the structural changes brought about by the revolution resulted initially in a sharp deterioration in the balance of payments. The current surplus of $348 million in 1973 turned to a large deficit in 1975, which increased to $1,500 million by 1977. Thus, the period 1974-77 saw Portugal fighting a losing battle with the problems of maintaining private consumption and meeting the investment needs of the economy in the face of continuing adverse external conditions. By 1977, real consumption per capita had increased by about 10 percent over the 1973 level, both the external current account and the domestic budget were substantially in deficit, and the level of inflation was 27 percent, while open unemployment was over 300,000 (i.e., about 8 percent of the resident labor force). 5. A program of austerity measures, including currency devaluations, was implemented in 1976 and 1977 but its impact was reduced by the continued rapid expansion of credit, mainly to finance the government deficit. In early May 1978, the Government adopted a program to reduce the balance of payments deficit in the 12 months ending in April 1979. The measures taken to stabilize the economic situation included: Ci) a 6.5 percent devaluation of the escudo and the continuation of the crawling-peg depreciation of the escudo at a rate of 1.25 percent per month; (ii) a 5 percentage point in- crease in the rediscount rate, and similar increases in deposit rates and lending rates; (iii) ceilings on domestic credit expansion; (iv) an increase in taxes; (v) limits on subsidies through substantial price increases for water, electricity, gas and transportation, and essential food products; and (vi) continued restrictions on allowable wage rate increases. The measures were effective in reducing the balance of payments current account deficit from $1,500 million in 1977 to $800 million in 1978. This improvement was associated with a substantial decline in real wages and a reduction in the inflation rate to 22 percent. The continuation of similar policies in 1979 produced even more dramatic results with the balance of payments current account showing a surplus of $150 million, export volumes rising by 27 percent and import volumes rising at only about 6 percent. Nonetheless the visible deficit increased slightly as a consequence of the substantial oil price increase during the year and a massive 60 percent increase in migrants' remittances was necessary to produce the overall balance of payments improve- ment. In early 1980, the focus of policy shifted to control of inflation and a 6 percent revaluation was implemented in February. Together with continued credit restraint and price controls, this has helped to bring the inflation rate to a level somewhat less than 20 percent. The crawling-peg devaluation was continued at 0.75 percent per month to June 1980 and thereafter was reduced to 0.5 percent per month. 6. The major price which Portugal has had to pay for its remarkable performance in the external sector has been a sluggish rate of growth (3.2 and 3.7 percent in the past two years). This has been inadequate to make any real dent in unemployment (still over 8 percent), and has contributed to an average growth rate of consumption of only 0.5 percent per annum in the past three years. The emphasis on short-run stabilization has also delayed the formulation of policies to address the serious structural problems which -3- Portugal faces, some of which were created or exacerbated by the events of 1974/75. Particularly important is the large dependence on imported energy, the rising dependence on food imports, a backward agricultural sector, an industrial sector--large parts of which still require heavy protection, an ill-defined attitude to public enterprises and a weak tax structure. Despite rising confidence in Portugal's economic and political stability, investment has been very disappointing in recent years (it fell in real terms in 1979), and has certainly not been adequate given the very considerable investment needs of the economy. A Growth Strategy for the Eighties 7. The success of short-term stabilization policies in 1978 and 1979 should lay the basis for increased growth of the Portuguese economy in the next decade. While no actions should be taken which would jeopardize the recent economic gains, a gradual policy of economic expansion now appears feasible. A doubling of per capita income by the year 2000 would seem to be an attainable goal, which implies an annual average GDP growth rate of 4.5 percent over the period (assuming a 0.9 percent population growth). However, this performance will have to be achieved in the face of some considerable constraints. First and foremost, it is clear that any policy for the medium term should allow for rates of growth of consumption which are substantially better than those of recent years. The 20 percent decline in industrial real wages since 1976 should not be expected to persist since it has now largely eliminated the gains of the immediate post-revolution period. On the con- trary, rising real wages and consumption gains of the order of 2 percent per annum in per capita terms should be anticipated. Second, Portugal's import dependence is likely to continue to rise as the economy is increasingly opened up to competition from the European Economic Community (EEC). This will be exacerbated by the large rise in the import price of petroleum products. This factor alone added nearly $1,000 million to the oil import bill and increased the 1979 visible deficit by nearly 50 percent. If the target growth rate is to be achieved in spite of this and other structural weaknesses on the import side, Portugal will require a rate of growth of visible exports significantly higher than the growth of world trade. Portugal will also need to retain policies which can maintain migrants' remittances at a high level. This will require careful balancing on the part of the Government since the measures which could ensure a reasonable balance of payments position may, at the same time, discourage investment and slow the rate of growth. 8. Certainly the position defined above will require Portugal to fully exploit its potential comparative advantage vis-a-vis the EEC, which the country expects to join in the mid-eighties. In the industrial sector this will mean an emphasis on labor-intensive industries, both light industries, such as textiles and footwear, and heavier items, including electrical machinery and transport equipment. This will imply a substantial, and possibly painful, rehabilitation process in some cases (e.g., textiles). Portugal's industrial strategy is also complicated by the fact that its wage - 4 - advantage will be eroded and that intensified competition from the Far East will become a problem for some products in which Portugal may have a compara- tive advantage for the moment. This suggests the need for a planned approach to future industrialization. Hopefully this will be assisted by finance, advice and trading concessions from the existing members of the EEC. Although Portugal's industrial strategy must give priority to exports, the development of basic industry to supply the domestic market should also be pursued whenever adequate rates of return can be demonstrated. In the case of steel, for example, it may be legitimate for Portugal to expand capacity in areas such as non-flat products where capacity elsewhere in the EEC is unlikely to be expanded. 9. In the case of agriculture, the acceptance of EEC policy will raise prices to consumers but, at the same time, cause a net flow of resources into agriculture. It will also change the relative profitability of various agricultural items. Portugal needs to respond to this opportunity and thereby reduce the very large trade deficit in agricultural items. The necessary response is to modernize and increase investment in those items such as fruits, off-season vegetables and, possibly, vegetable oils where the climate and early season confer a strong comparative advantage. Moderni- zation in other more traditional agricultural crops is desirable even in the absence of EEC entry, but would also help to ward off the threat of more intensive European competition. 10. The last major planning exercise in Portugal was conducted in 1976, in the form of a proposed plan for 1977-80 which, however, was not imple- mented. Work is now underway to launch the preparation of a medium-term public investment program. The challenge for Portuguese planners and policy- makers is to increase domestic savings, promote exports, and boost employment within the limits of the constraints defined above. It is estimated that an investment program of about Esc. 1,000 billion (in constant 1978 prices) for the period 1980-84 in industry (27 percent), housing and construction (18 percent), agriculture, transport and communications and power (8 to 9 percent each), and health, education and other services (29 percent), could produce an aggregate GDP growth rate of 4.5 percent per annum over the same period. However, to implement investments of this magnitude in a timely fashion, new institutional arrangements would be required to streamline decision making, as well as project preparation, implementation and supervision. As regards public enterprises, there is a need to define a medium-term strategy which will differentiate between their social and economic objectives. Thereafter subsidy, pricing and other policies towards public enterprises should be freed as far as possible from political intervention, thereby allowing investment decisions to be made in the light of a clear understanding of the future policy environment. For the moment, the development of these enter- prises and external lending to them is significantly hindered by the fact that this is not done. 11. The private sector is likely to be the major contributor to the economic growth rate foreseen for the 1980s and is expected to account for about 60 percent of the investment target indicated above. The Government - 5 - has recently established an integrated scheme of incentives for private investment and has improved arrangements for compensating owners of assets nationalized in 1974/75. However, private investment is still hindered by several factors. Profitability, though rising in recent years, is still relatively low by historical standards and is likely to be squeezed in the near future. Credit availabilities to the private sector are restricted by the continuing large public sector borrowing requirement, although in the absence of strong private sector demand, this has not been a major constraint in the past. Potential investors have considered current interest rates too high. Like its predecessors, the new incentive scheme is essentially designed to mitigate the perceived high cost of capital for selected invest- ments. Economic viability is a prerequisite for larger investments and an important factor in evaluating smaller ones. On the other hand, the new scheme provides modest additional encouragement to exports and its choice of sectoral priorities will require monitoring. However, the very large increase in exports in 1979 indicates the potential of the private sector in the new stable environment. 12. Agricultural growth in the past has been sluggish and this has necessitated increasing imports of agricultural products. Improvement is a matter of correcting deficiencies inherited from the period prior to the revolution, of reorganizing the Ministry of Agriculture and Fisheries and strengthening its inadequate field services. Extension is weak in terms of personnel and of the links with the research effort on the one hand, and with small farmers and cooperatives on the other. The training and education of agricultural manpower and of farmers have been insufficient in the past and recent efforts in this area need to be further intensified. Credit to the rural sector has neither been adequate nor production-oriented and the mechanisms of agricultural credit need to be reviewed. Fertilizer applica- tion rates are low. The situation has deteriorated since 1974 due to prob- lems with agrarian reform and changes in land tenure. Investment alone will achieve little without substantial advances in these other areas as well. Measures to improve the conditions in the agricultural sector are underway. External Assistance and Creditworthiness 13. Multilateral and bilateral agencies have responded well to Portugal's need for external assistance, both for balance of payments support and for long-term project loans. With gold as collateral, Banco de Portugal has obtained short-term loans for balance of payments support from the Bank for International Settlements (BIS) and European central banks. In addition, as of mid-1980, total disbursed and outstanding IMF assistance to Portugal amounted to about $180 million. The European Economic Community (EEC), European Investment Bank (EIB), European Free Trade Association (EFTA), as well as bilateral agencies have committed significant funds to Portugal in emergency concessionary aid and for long-term projects. The Bank's contribu- tion is summarized in Part II. Starting in 1977, Portugal received $750 million in medium- and long-term (MLT) aid commitments as balance of payments support from 14 countries, with the US, Germany and Japan being the main - 6 - contributors. In addition, Banco de Portugal converted about half of its $1.9 billion short-term liabilities into medium- and long-term debt. In large part because of Portugal's gold reserve, the Government and major banks and companies are able to attract medium-term loans from consortia of commer- cial banks in the Eurocurrency market. Recent terms have been reasonable with ten years repayment at an average interest rate of about 0.7 percent over LIBOR. The Government's efforts to stimulate direct foreign investment have resulted in a $600 million commitment by Renault and in the promise of other substantial investments. Portugal will however continue to require sizeable external inflows for the investment necessary to restructure its economy. The multilateral lenders, and in particular, the World Bank and the EEC/EIB, will have to continue to play a vital role in helping Portugal meet its capital requirements. Pre-accession aid proposed by the European Commission, for example, is a package of about $385 million. 14. Portugal's public and publicly guaranteed medium- and long-term debt (disbursed and outstanding) rose from about $1,400 million at end 1977 to about $3,400 million at end 1979. Service payments on this debt rose from 3.7 percent of exports of goods and services plus workers' remittances in 1977 to 5.5 percent in 1979. These figures include the portion of Banco de Portugal debt held in MLT form. This amounted to $346 million in 1977 and $1,035 million in 1979. In addition, private non-guaranteed MLT debt has risen from about $1,000 million in 1977 to $1,925 million in 1979. This gives a total outstanding debt of about $5,300 million and a debt service ratio of 12 percent. Portugal's total debt outstanding still remains at manageable levels and presents an improved maturity profile. The debt service ratio is expected to rise to about 19 percent by the middle of the decade. Given Portugal's gold reserves of about 22 million troy ounces, this seems a perfectly acceptable burden to carry. PART II - BANK GROUP OPERATIONS IN PORTUGAL 15. The first phase of Bank lending to Portugal was during the period 1963-66 and lending was concentrated in the power sector, in line with government priorities which reflected the power needs of a rapidly developing industrial sector. Five loans totaling $57.5 million helped finance three thermal and two hydropower projects, which were successfully completed. 16. The events of the more recent past have created special problems; the transition to an open political system has revealed social and economic weaknesses which are unusual for a high-income developing country. The Bank has responded to Portugal's needs through identification, preparation and financing of projects and through economic and sector work. 17. The proposed loan would finance the Bank's nineteenth project in that country, the fourteenth since the resumption of lending in 1976. Bank operations since 1976 involved a power project, two highway projects, three industrial finance projects, two education projects, water supply, agri- -7- cultural and fisheries credit, forestry, fertilizer modernization and mechanical industries projects. Total Bank financial assistance since the resumption of lending amounts to $618 million. Lack of experience with Bank procedures has caused delays in earlier projects. However, this problem has been substantially eliminated by the increasing familiarity of the adminis- tration with these procedures and the resolve to initiate procurement prepar- ations as early as possible. The 1976 power loan is fully disbursed; other 1976-1977 loans are committed and substantially disbursed without further problems. Looking at the 1978-1980 loans, projects involving direct lending to industry are progressing well and disbursing without major problems, and development finance company loans are expected to proceed satisfactorily. Projects directly implemented by the administration, or largely controlled by it, are slow in execution and disbursement. The main reasons for this are administrative weaknesses, such as lack of continuity and insufficient coordination, as well as little experience in project preparation, implemen- tation and supervision. Some of these problems are in the course of being eliminated;-others are currently addressed by institutional components in project design and by across-the-board reviews of weaknesses with the purpose of finding and implementing solutions. Nevertheless, total Bank exposure in Portugal is still small. Annex II contains a summary statement of Bank loans as of April 30, 1981, and notes on the execution of ongoing projects. 18. In an intensive parallel effort at the macroeconomic and sectoral levels, the Bank assisted the Government in reviewing policy and management issues. Economic missions and the discussion of their reports have provided a basis for a review of policy at the macroeconomic level. Reviews of the water supply (together with WHO) and education sectors were carried out and were discussed with the Government in March 1977. Agriculture and manufac- turing export industries were also studied, and were reviewed with the Government in November 1977. The report entitled "Manufacturing Export Industries in Portugal" (No. 1695a-PO) was distributed to the Executive Directors on January 13, 1978, and the report entitled "Portugal Agricultural Survey" (No. 1689b-PO) was distributed to the Executive Directors on March 24, 1978. As a major problem, unemployment has received particular atten- tion; a report which sums up the results of a Bank survey, entitled "Unemployment in Portugal: Causes, Prospects and Policy Options" (No. 2285-PO), was distributed to the Executive Directors on May 10, 1979. A survey of the proposed public medium-term investments was carried out in June 1979 and a report entitled "Priorities for Public Sector Investment" (No. 2883-PO) was distributed to the Executive Directors on August 12, 1980. This report has served the Government in establishing investment priorities. 19. In the light of the economic and sector discussions mentioned above, agriculture and industry have been identified as the areas of concen- tration for Bank lending. The industrial sector needs major structural improvements such as merging firms, eliminating uneconomic enterprises and modernizing equipment. Improvements in these areas are being introduced in the fertilizer and mechanical industry subsectors and are being studied for - 8 - textile and steel subsectors with Bank support and advice; work is well advanced on a steel subsector project. Another important constraint to industrial development has been insufficient financial and technical support to small- and medium-size enterprises; the FY79 Small- and Medium-Scale Industry (SMI) Development loan is addressing this need. The recently approved Second Banco de Fomento Nacional (BFN) loan will support medium-sized projects above the SMI range. The importance of developing the industrial sector cannot be overemphasized since this sector will be the main force in the Portuguese economy, to lead economic growth, to continue with the export expansion which started in 1978 and to maintain competitiveness in the EEC. The main objectives of Bank lending to industry are structural reform, export promotion, employment creation (or preservation) and promoting energy-saving investments. A project for industrial energy-saving investments is now under preparation. In agriculture, a sector beset by major problems, there is considerable scope for stepping up growth. The major constraints are the still unsettled land tenure conditions, institutional weaknesses and a shortage of trained technicians for promoting improved technologies. The Bank has assisted the Government in creating an agricultural credit institution and in FY80 approved a loan for a forestry project. Further operations in this sector are likely to foster agroindustries, fisheries, rural development and extension. The trained manpower requirements of the industrial and agricultural sectors, which constitute a serious bottleneck particularly in agriculture, are being addressed through the FY78 and the FY80 Education loans. The improvements in transportation required to sustain the increased output of the agricultural and industrial sectors are being addressed by the FY76 and the FY79 Highway loans, and a railways project is under preparation. The proposed loan will help Portugal to develop its ability to assess the oil production potential in areas where oil shows have been encountered. 20. The deflationary policies of 1977-1979 (para. 5), while contribut- ing to the improvement of the balance of payments, have not permitted imple- mentation of development programs now urgently needed in many sectors. Heavy dependence on imported oil and a rapidly increasing oil bill is accentuating the constraints to development. If the restructuring needs of the economy are to be tackled seriously and the pressing deficiencies in the social sectors corrected, long-term external assistance will be needed to assist Portugal. It is the World Bank's objective to contribute to these efforts and to provide advice on institutional reforms which are crucial for Portugal's long-term economic objectives. PART III - PETROLEUM SECTOR Background 21. With few domestic energy resources of its own and as yet no commer- cially exploitable oil or natural gas resources, Portugal is heavily depen- dent (70 percent) on imported oil for its energy supply. The oil import bill, which was just over $100 million in 1973, climbed to about $2 billion - 9 - in 1980; oil imports, as a share of export earnings, are estimated to have increased from some 5 percent to about 45 percent in the same period. Portugal's inability to adjust its economy to the high cost of imported energy is one of the most important issues affecting its current stabili- zation efforts and may further defer progress on key development needs. Its energy strategy for the eighties should focus on increased conservation and diversification efforts, as well as development of its modest domestic energy resource base, including more intensified exploration for petroleum. Energy Context 22. Consumption. Primary energy consumption in Portugal, totalling over 11 million tons of oil equivalent (MTOE) in 1979, on average grew about 8 percent per annum during 1975-79. Per capita energy consumption increased by more than 50 percent during the seventies; nevertheless, it remains relatively low (at 1.2 tons of oil equivalent (TOE) per capita 1/) as compared with Western Europe (3 TOE in 1976), but considerably above that for middle-income developing countries (0.6 TOE in 1976). Industry, transporta- tion and power generation are the main consumers, accounting for some 75-80 percent of energy use in recent years. Portugal's energy network was built at a time when it had access to cheap oil; its electricity generation system as well as the energy-intensive industries launched in the late sixties reflect this. Energy consumption in the eighties is forecast to grow at an average annual rate of nearly 6 percent, in line with the expected economic growth and industrial development (Annex IV gives actual and projected energy balances for 1965-1990). 23. Domestic Energy Resources. Hydropower and small amounts of coal and wood are Portugal's only domestic energy resources and supply less than 30 percent of total primary energy requirements. Hydropower has contributed about 20 percent of the nation's primary energy supply over recent years, although its share is expected to decline in the eighties as new thermal stations are brought on stream (first oil-fired and later coal-fired). Of an overall potential of 22 terawatt-hours (TWh) of hydro- power (5 MTOE), nearly 60 percent has been developed, is under construction, or is firmly planned, and another 10 percent might be added through expansion and modification of existing sites. The public power authority expects that the remaining hydropower potential, although technically more difficult to harness, will in most part be exploited by the end of the century given expected costs and availability of energy alternatives. 24. Proven recoverable coal reserves are about 5 million tons of poor quality coal (2 MTOE), with current production just meeting the requirements of a small thermal station and supplying less than 1 percent of the nation's energy. Recoverable lignite reserves of a little over 30 million tons (4-5 MTOE) are not presently utilized, although a lignite-fired power station is under consideration by the power authority. Industrial and domestic use of wood and other non-commercial fuels amounts to some 5 percent of today's 1/ Primary energy basis; 0.86 TOE per capita in terms of final consumption. - 10 - primary energy supply. Their use, in the longer term, is expected to be supplemented or replaced by solar, wind, biomass, and other renewable forms of energy. Finally, the only significant mineral resource for power genera- tion discovered to date in Portugal is uranium. Reserves, estimated at over 8,000 tons, are enough to fuel three 1000 megawatt (MW) reactors for 25 years; development, beyond mining for export and stockpiling, is awaiting a firm decision on whether to proceed with a first Portuguese nuclear power station. 25. Energy Policy. The basic thrust of the Government's energy policy for the eighties comprises (i) energy conservation, (ii) diversification away from imported oil, and (iii) development/utilization of domestic resources, including intensified petroleum exploration activity. A range of conserva- tion measures have been introduced since 1973. The Government's overall target is a 10-15 percent energy savings across the board over the next five years. One of the major conservation efforts has been the Directorate General for Energy's (DGE) program of financial assistance for conversion to energy-saving technologies. This program was initiated in 1976 in industry, and efforts are currently underway to extend it to the commercial and services sector. A study of the transportation sector's use of energy is ongoing with preliminary results expected in mid-1981. At the same time, however, there remain certain shortcomings in the Government's overall conservation policies in regard to pricing, which the Government intends to review (paras. 34-38). 26. The present investment strategy in the power subsector envisages the substitution of imported coal for oil in new thermal stations and the full use of hydropower. Work is underway on renewables, particularly wind and solar energy, where bilateral aid sources have expressed interest in sponsoring demonstration projects. Development of a long-term energy plan by the Government of Portugal is expected in 1982, following the ongoing energy review being undertaken jointly with the US Department of Energy. Petroleum Consumption Patterns 27. Portugal imported 7.62 million tons of crude oil and 1.34 million tons of petroleum products for domestic consumption and exported 0.75 million tons of products in 1979. Despite the fact that its dependence on petroleum has grown from some 50 percent of its primary energy requirements in 1965 to 70 percent today, Portugal has begun, in recent years, to curb the trend toward even further dependence on petroleum: demand for crude oil/products grew at an estimated average annual rate approaching 9.5 percent over the period 1965-75, slackened to just over 7.5 percent for 1975-79, and is forecast to stay in line with or slightly below the rest of energy demand in the eighties. Heavy fuel oil and gasoil together account for nearly 70 percent (45 and 24 percent respectively in 1979) of petroleum products consumed in Portugal. Industry, road transport, and thermal power genera- tion (33, 31, and 16 percent, respectively, in 1979) account for some 80 percent of domestic consumption. Use of fuel oil in power generation has - 11 - more than doubled in the last five years, and now accounts for over one-third of total fuel oil consumption. Gasoline consumption has declined slightly, however, while gasoil has risen by nearly 60 percent since the mid-seventies, reflecting its increased use in transportation due primarily to the retail price differential between the two products (Annex IV details petroleum products supply and use in 1979). Petroleum Resource Potential 28. Portugal has no commercially exploitable petroleum resources as yet. Two areas, however, are considered to have prospects for the discovery of oil and gas: the Lusitanian Basin, which will be the focus of the pro- posed project, and the Algarve Basin (see map). An important indication of the prospectiveness of the Lusitanian Basin is that 60 of the 110 exploratory wells drilled to date encountered oil shows. Some 45 of these encountered heavy/viscous oil shows.l/ The oil shows are not distributed randomly in the geologic section as all are found in either Middle Jurassic carbonates or Upper Jurassic carbonates and sandstones, thus narrowing the search. This evidence confirms that oil has been generated in the Lusitanian Basin al- though if discoveries are made, small field sizes (of the order of 25 million barrels or less recoverable oil reserves, capable of producing 6,000-8,000 barrels per day) are likely to be the norm due to geological complexities resulting from basin inversion late in geological time (Annex VII, paras. 4 and 5). Nevertheless, with continued increases in oil prices, relatively low anticipated development costs because of accessibility and relatively shallow oil objectives, and proximity to refineries, the exploitation of discoveries in this size range is still likely to be economic although not necessarily attractive for international oil companies. The development of known heavy oil deposits may also be economic in light of oil price trends and technical advances in the stimulation processes for recovery. 29. The Algarve Basin is the other prospective area which holds promise for discovering petroleum. Although the three wells in the offshore Algarve Basin to date were dry holes, recent offshore gas discoveries made just across the Spanish border have enhanced the attractiveness of this basin to private oil companies (para. 32) (Annex VI gives further details on the hydrocarbon prospects of Portugal). Petroleum Exploration Policy and Present Activity 30. Portugal has consistently followed an "open door" policy with respect to exploration for petroleum and natural gas, welcoming foreign participants and currently treating Petroleos de Portugal, E.P. (PETROGAL), the national oil company, on a par with foreign oil companies. Portugal's 1/ The petroleum industry generally designates heavy oil when gravity falls below 200 API (Amercian Petroleum Institute gravity measure). Based on sparse data, the shallow oil shows in Portugal are very heavy, 10-120 API. Except in rare circumstances, the very heavy oil requires thermal stimulation to produce even at relatively low rates. - 12 - overall legal-contractual framework regulating petroleum exploration and exploitation provides a reasonable balance between the rights and obligations of the concerned parties and sufficient flexibility to negotiate terms specific to a given location. 31. In the past, the Government has played a rather passive role in domestic exploration, being engaged principally in offering acreage to oil companies and evaluating offers. As a result, past exploration activity has generally been sporadic; although 90 onshore wells have been drilled since 1939, there have been no deep exploratory wells (i.e. greater than 1,000 meters in depth) onshore in the last 17 years until just recently. Offshore exploration began in 1973 and has included 21,000 line-km of seismic surveys and 23 wells, the last one completed early in 1979. 32. Recognizing the need to expedite exploration efforts, the Government began to review existing exploration data and to provide improved incentives to attract foreign oil companies. In the spring of 1978, a widely advertised promotion of the onshore blocks took place (see map). PETROGAL, a public enterprise, was the only oil company that responded initially and was awarded a license on blocks 48-49-50 in the Lusitanian Basin in July 1978. About six months later, two additional licenses were awarded, one to PETROGAL on blocks 45-46-47 and the other to a Canadian joint venture headed by Sceptre Resources, Ltd., on block 43. Later in 1980 licenses were also awarded to Union Texas, a subsidiary of Allied Chemical, in the onshore Lusitanian Basin, and to Esso, which recently signed an agreement to explore in the deep water portion of the Algarve Basin just west of the Spanish border. 33. PETROGAL, encouraged by the Government to seek foreign oil company partners to strengthen its own technical capabilities in exploration, entered into a joint venture with Shell on its first license. A year later, and after an investment of some $2 million in seismic surveys, Shell withdrew. Since Shell's interest amounted to only 25 percent, it is likely that it did not consider the prospects of sufficient size to justify its continued participation. After endeavoring, without success, to attract another partner, PETROGAL decided to continue on its own and requested Bank assis- tance in the exploration of its two licenses in April 1980. Petroleum Pricing 34. The Government sets both retail and ex-refinery prices for major petroleum products. Ex-refinery prices are based on an import parity system to encourage efficient domestic refinery operations. Retail prices of individual products have a two-tiered structure as is the pattern in many other middle-income developing countries: petroleum products for private use such as gasoline have been taxed heavily, while petroleum products used in key economic sectors such as industry and power, as well as in public transportation, have been taxed less or, in some cases, subsidized. The Government's pricing policy has further been geared to generate substantial - 13 - tax revenues from petroleum products which have been channeled through the Commodities Supply Fund to subsidize agriculture. In recent years, however, these surpluses have been seriously eroded, and the current level and structure of petroleum product prices presents both economic and financial problems (the table below and Annex V detail the price structure of petroleum products in Portugal). 35. On average, petroleum product prices in Portugal are still signifi- cantly above their equivalent import price. The weighted average retail price of the major refined products in December 1980 was $1.29 per gallon (equivalent to some $54 per barrel), in line with that in middle-income oil-importing countries, although somewhat below that in Europe in general. This high average price, however, conceals certain problems in the relative structure of oil prices. The price of fuel oil is low; it is below its equivalent import cost ($169 per ton in December 1980 compared with a cif import price of $235 per ton) and below its ex-refinery price. It is also low in relation to fuel oil prices in other oil-importing developing countries such as Turkey, Thailand, and India. Since fuel oil accounts for nearly half of the petroleum products consumed in Portugal, its low price is largely responsible for the deterioration in the sector's fiscal contribution to the Government budget. It has further encouraged the rapid growth of fuel oil consumption in the power and industrial sectors. Another pricing problem is the large differential between the retail prices of gasoline and gasoil which are close substitutes in the transport sector. Retail prices of gasoline in Portugal have historically been among the highest in Europe, and their contribution to sector revenues substantial. The price of gasoil (diesel fuel), although well above its cif import cost ($0.98 per gallon in December 1980), is presently about half the domestic price of gasoline. Since the mid-seventies, consumption of gasoil on the regulated market in Portugal has risen by nearly 60 percent compared with an overall increase in petroleum product consumption of about 40 percent, the increase in consumption being attributable to rising commercial and private vehicle usage of gasoil as well as to its intended market of public transportation; at the same time, gasoline consumption has declined markedly since 1976. In an effort to indirectly reduce the pricing differential and thereby curb the increased usage of gasoil by at least private diesel automobiles, the Government has recently levied an annual tax of about $600 on these vehicles for the use of the Ministry of Transportation and Communications. RETAIL PRICES FOR PETROLEUM PRODUCTS, DECEMBER 1980 (US dollars per US Gallon) Portugal Italy France Turkey Thailand India 2/ Premium Gasoline 3.55 3.36 2.97 - - - Regular Gasoline 3.27 3.23 2.80 2.45 2.22 2.60 Kerosene 1.60 - - 1.53 1.14 0.78 Gasoil 1.60 1.29 2.14 1.53 1.38 1.26 Fuel Oil (US$ per ton) 169 197 1/ 230 1/ 295 230 322 1/ FOB refinery. 2/ January 1981 prices. - 14 - 36. The deterioration noted above in the revenue generating capability of the petroleum sector has been a particularly serious outcome of the Government's pricing policies. Revenue generated from the sale of petroleum products has been the major contributor to the public financing mechanism, the Commodities Supply Fund (Fundo de Abastecimento). This Fund was created in 1947 to stabilize the cost of living by subsidizing selected commodities, mainly basic food items, some fuels, and agricultural inputs. It still serves the same basic objectives by (i) channeling profits on petroleum operations to subsidize agriculture, (ii) cross-subsidizing petroleum pro- ducts, (iii) serving as a buffer between monthly ex-refinery price increases and less frequent retail price increases, and (iv) reimbursing petroleum product distributors for geographic distribution expenses; it is further used to finance energy-related expenditures which might otherwise come out of the Government budget. In 1979, the aggregate resources of the Supply Fund amounted to $545 million, or 10 percent of Government revenues. The petro- leum sector's gross contribution to the Supply Fund was some $346 million; subsequent outlays from the Fund for petroleum product subsidies and other energy expenditures amounted to $218 million, thereby reducing the sectoral contribution to $128 million. Since the mid-seventies, outlays for the petroleum sector as a share of its contributions to the Supply Fund have increased from some 30 percent to over 70 percent. Projections for 1981 based on current petroleum product prices indicate that the net contribution from the petroleum sector itself would be negative, largely due to the projected level of the fuel oil subsidy, unless further price increases take place before the end of the year. 37. One further shortcoming in Portugal's current pricing policies is that the import parity system of setting ex-refinery prices (para. 34) does not presently ensure the financial viability of PETROGAL's refining and marketing operations (para. 61). The company complies with the Central Bank directive of covering its foreign exchange needs out of extended credit arrangements (para. 62); this assists the country in diversifying foreign exchange borrowing but involves an additional cost for PETROGAL which would not be incurred under normal industry practices. Under these circumstances, ex-refinery prices should cover the full cost of purchasing and refining crude oil, including the large net borrowing costs incurred in importing crude oil with external credit. PETROGAL has recently submitted a proposal to the Government for product pricing on an actual cost basis. The Government intends to implement gradual increases in ex-refinery prices over the medium-term aimed at attaining the above objective (para. 67). 38. The Government provided assurances that it would modify its current retail pricing policy in order to eliminate the distortions that have arisen in product consumption patterns and redress the weakened resource position of the sector over the medium term by means of (i) gradual elimination of the subsidies implicit in the present pricing policy, and (ii) setting retail prices of petroleum products at such relative levels as to avoid uneconomic substitution among fuels. This would entail, inter alia, increasing the retail price of fuel oil to parity with its cif import cost and reducing the present gap between the retail prices of gasoil and gasoline. To meet the - 15 - condition of effectiveness on eliminating PETROGAL's projected loss for the current year and allowing the company to meet its current ratio obligations (Loan Agreement, Sections 4.04(c) and 6.01), the Government is expected to raise the prices and margins on fuel oil and other products in 1981 (para. 67). Further price adjustments will be effected through a petroleum product pricing plan which is now in the final stages of preparation and is expected to be legislated in the first half of 1982; in the event that the adoption of the plan is delayed, the Government will use interim price adjustments. Institutional Framework 39. The Ministry of Industry and Energy (MIE) has official jurisdiction over most energy-related matters in Portugal and acts through its Secretary of State for Energy and Mining. The concerned public sector companies, PETROGAL and EDP (power company), report to this Ministry. The Directorate General for Energy (DGE) in MIE, staffed by about one hundred professionals, is responsible for establishing energy policies, projecting energy require- ments, recommending energy prices, and establishing energy conservation measures. The Office for Petroleum Exploration and Production (GPEP) in the Ministry handles all technical and legal aspects of petroleum exploration and exploitation in Portugal, including negotiation and administration of conces- sion agreements with oil companies. Although somewhat thinly staffed with 18 technical and professional personnel, a third of GPEP's staff have had considerable oil exploration experience abroad and in Portugal. GPEP will assemble and integrate available data on known heavy oil deposits in Portugal. It does not have, however, the specialized staff to execute the screening study which is therefore to be implemented under the project with the assistance of consultants. The national oil company, PETROGAL, is an integrated oil company and is the borrower under the proposed loan; its overall organization and operations are discussed in paras. 56-57. Bank Lending Strategy and Role in the Sector 40. The Bank's lending in the energy sector in Portugal to date has comprised six loans in power supply: two hydropower projects (Loan Nos. 362-PO (1963) and 452-PO (1966)), three thermal power stations (Loan Nos. 363-PO (1963), 412-PO (1965), and 453-PO (1966)), and a time slice of the power sector investment plan (Loan No. 1301-PO (1976)). All of these projects have been implemented successfully and during the implementation period of the last project (completion report under preparation), the public power company (EDP) has developed into a financially sound and efficient company. The Bank is also assisting in modernizing the hydropower equipment industry (Loan 1875-PO (1980)). Apart from past lending operations, the Bank has assisted Portugal in reviewing energy sector investment priorities (Report No. 2883-PO) (para. 18) and intends to support diversification efforts, energy conservation, and petroleum exploration. In this connection, an energy conservation and diversification project is presently under prepa- ration. In addition, following the successful implementation of the Sixth Power project and the promising institutional development of EDP, the Bank is considering further support of its investment plan which gives priority to hydropower projects. - 16 - 41. The proposed exploration project would be the Bank's first lending operation in the petroleum sector in Portugal. Its primary objective is to improve Portugal's prospects for discovering petroleum. At present, this objective is best accomplished by providing the financial and technical assistance needed by PETROGAL to efficiently explore its licenses in the onshore Lusitanian Basin. The circumstances are particularly suited to the Bank's objective of accelerating exploration in oil-importing developing countries; on the one hand, PETROGAL's blocks are considered among the more promising in the basin and petroleum is known to exist; on the other hand, foreign oil companies have not exhibited strong interest so far due to the probable small size of fields and lack of export potential. Even small finds, however, would be of economic benefit to Portugal. Should a larger discovery take place as a result of the project, directly from drilling or indirectly from the additional geologic information generated, active foreign company interest is expected to be revived. Portugal's "open door" policy would facilitate such initiatives. Like all previous Bank operations in Portugal, strengthening of sector institutions is an important objective. Measures established under this loan (paras. 67-70) will assist PETROGAL in improving its financial position and help maintain its good standing in the external financial markets. PART IV - THE PROJECT Project Objective 42. The project is designed to assist Petroleos de Portugal, E.P. (PETROGAL) in improving its current exploration strategy and strengthening its overall technical capabilities in petroleum exploration. The combination of seismic surveys and the proposed three-well drilling program is designed to provide an important first step towards evaluating the full petroleum potential of PETROGAL's license areas. The proposed work program will also identify the need for further exploration effort in PETROGAL's areas and could have an important impact on future exploration activity in the Lusitanian Basin, part of which is being explored by foreign companies. The proposed project would also help evaluate the technical and economic feasi- bility of developing the known heavy oil deposits in onshore Portugal. Should this evaluation indicate a potential for development, an extension of Bank lending to the heavy oil field is likely to be requested. The project was prepared following four missions to Portugal from May 1980 to February 1981. Negotiations were held in Washington, DC, from April 15 to April 17, 1981. The Portuguese delegation was led by Mr. Antonio Labisa, Advisor to the Ministry of Finance and Planning, and included representatives from that Ministry, the Ministry of Industry and Energy, and PETROGAL. The Loan and Project Summary and Annex III contain the main features of the proposed loan and project. No separate Staff Appraisal Report has been prepared. Project Area - Exploration History and Petroleum Potential 43. PETROGAL's exploration activities under the project will cover six blocks in the onshore portion of the Lusitanian Basin (see map). To date, 58 exploratory wells have been drilled in these blocks, of which 51 were shallow tests and 7 deep tests to 2,000 m or more. Shallow heavy oil shows were - 17 - encountered in 41 wells and light oil shows in 6. These represent 64 percent of the exploratory wells drilled onshore to date, and 91 percent of the heavy oil shows and 55 percent of the light oil shows encountered thus far (for exploration history, see Annex VI). 44. It is certain that oil has been generated in the Lusitanian Basin. Moreover, as evidenced by past activity and the number of shows of oil, the PETROGAL blocks have been considered the most promising in the onshore basin. Two particularly promising shows on these blocks have been: (i) Barreiro (12 km southeast of Lisbon) where a well encountered up to 20 m of very good light oil saturation in porous Middle Jurassic limestone, and (ii) Arruda (6 km northwest of Vila Franca de Xeira) where good light oil satura- tions were encountered in Upper Jurassic sandstones. Neither well has been conclusively tested, and both predate the energy crisis since which time the development of even small reserves in the 5-25 million barrel range, in a country such as Portugal, has become increasingly viable, both economically and technically (for petroleum geology, see Annex VII). Improving the chance for success in the search for oil in light of the geological complexities of the Lusitanian Basin, however, requires an exploration program utilizing recent advances in technology in order to determine the optimum relationship between structure and stratigraphy and to permit the selection of the best drilling sites. 45. The heavy oil deposits also warrant further evaluation in view of the continuing increase in international oil prices and the technical advances in recovering heavy oil. Six of the eight known heavy oil deposits in Portugal are located on the PETROGAL blocks. The known extent of these deposits is about 18 km2 and might even be larger. Reserves in place have yet to be determined but could approach 150 million barrels, with up to 30 million barrels recoverable through thermal stimulation. Project Description 46. The proposed project would consist of: (a) reprocessing of old seismic data acquired in 1954-56 and 1962-63, and undertaking a seismic survey in two phases, the first phase covering 340 line-km and already completed, and a second phase covering 500 line-km; (b) drilling of three exploratory obligation wells to an average depth of about 2,500 to 3,000 m; (c) strengthening of PETROGAL's exploration capabilities through technical assistance consisting of a senior explorationist (7 manmonths), a petroleum geophysicist (18 manmonths), and drilling management services (30 manmonths); (d) two programs of laboratory services for analyzing source rock data and reservoir characteristics, the first using existing data and the second future data from proposed wells; (e) a screening study of existing data pertaining to heavy oil development; and (f) an overall planning study by PETROGAL. 47. The terms of PETROGAL's exploration concessions provide for the drilling of three wells before relinquishment of 50 percent of the concession areas by 1982-83. Although several prospects have been identified by - 18 - PETROGAL geologists, their further definition and confirmation will be required before drilling can be warranted, and this will depend upon the results of the proposed seismic surveys. The seismic surveys will assist PETROGAL both in delineating quality prospects and judiciously selecting drilling locations for the three wells under the project, and in making selective relinquishments of its areas and locating additional prospects which may be drilled in the future. Provision has been made for 3-D seismic methodology, if required, in the highly structured portion of PETROGAL's blocks, in order to better resolve the structural complexities at depth. The laboratory services, will further assist PETROGAL in evaluating prospects defined by the seismic surveys through source rock and reservoir analysis based on existing data, and will enable PETROGAL to better evaluate the results obtained through analysis of new data gathered from the wells under the project. The heavy oil screening study will determine, using existing data, whether commercial exploitation of the deposits might be technically feasible. If the outcome is encouraging, PETROGAL would consider a full-scale feasibility study or pilot development project to ascertain the economic feasibility of development of these deposits. The planning study will assist PETROGAL in reinforcing its present overall planning and assessment capabilities through the institution of planning systems, which are responsive to the breadth of its activities and to the volatility of the petroleum sector and which would serve as a basis for the review and assessment of financial and investment policies (para. 70). Project Costs and Financing 48. The total cost of the proposed project is estimated at $26.0 million, of which $21.8 million is in foreign exchange. The major items are the seismic work (about $7.0 million base cost) and wells (about $12.0 million base cost). Cost figures do not include import duties and taxes, from which the project would be exempt; they include, however, a surface rental charge of $240,000 for the concession areas. In estimating the total cost of the wells, it is assumed that only one of the three wells will be completed as a producer at an estimated completion cost of $0.51 million. The costs of reprocessing old seismic data and of the first seismic program (about $1.8 million base cost) reflect expenditures already incurred. The cost of the second program of seismic services (about $5.2 million base cost) is based on the existing contract rate for 400 line-km of conventional seismic work plus a provision at present market rates for 100 line-km of 3-D seismic. Costs of the technical services (about $0.92 million base cost) of the senior explorationist, petroleum geophysicist, and drilling management assistance have been estimated at an average $17,000 per manmonth, including travel, subsistence, and overheads. The cost of the heavy oil screening study (about $0.12 million base cost) is based on a projected requirement of 5 manmonths of consultant services, at an average $12,000 per manmonth (including travel, subsistence, and overheads), in addition to data collec- tion, processing, and transport costs. The cost of laboratory services ($0.28 million base cost) is based on a projected requirement for analysis of about 750 samples (at about $250 per sample) and of about 450 feet of core (at about $100 per foot), plus estimated transport costs. The cost of the - 19 - planning study ($0.60 million base cost) is based on an estimated requirement of about 50 manmonths of local and 12 manmonths of expatriate consultant services, at an average cost of about $8,000 and $17,000 per manmonth respec- tively, including travel, subsistence and overhead. The base prices are as of February 1981. Physical contingencies are about 16 percent of base cost, and price contingencies for the one-and-a-half-year implementation period are about 8 percent of base cost increased by physical contingencies (for detailed cost breakdowns, see Annex IX). 49. The proposed Bank loan of $20.0 million would finance 78 percent of the total project costs (net of duties and taxes) and 92 percent of the foreign exchange costs. Bank financing would cover the foreign exchange cost of all project components except the reprocessing of seismic data and the first seismic survey, which are completed, and the first program of labora- tory services. The remaining 8 percent, or $1.8 million, in foreign exchange costs (for the above specified items) and all local costs would be financed by PETROGAL from its own resources. It is recommended that the loan be made to PETROGAL, with the guarantee of the Republic of Portugal, for a period of 15 years, including 3 years of grace, at the prevailing Bank interest rate. PETROGAL would bear the foreign exchange risk. Procurement and Disbursement 50. The rental of a drilling rig and all major purchases of drilling materials and related equipment will be procured through international competitive bidding in accordance with the Bank's procurement guidelines. Well services (for mud and chemicals, cementing, logging, testing, and perforation), as well as seismic services, will be procured through limited international tenders because of the limited availability of qualified suppliers. Small purchases or rentals of up to $100,000 for equipment, parts, materials, and consumables, may be procured on the basis of local procedures (such as local competitive bidding and limited tendering), acceptable to the Bank, provided that their aggregate does not exceed $1.0 million. 51. Disbursement on all Bank-financed items would be made against 100 percent of the foreign exchange expenditures, with the exception of drilling equipment and materials with respect to which disbursement would be made against 100 percent of ex-factory cost or 100 percent of foreign expenditures, and the planning study with respect to whicn disbursement would be made against 33 percent of total cost (the estimated foreign exchange cost). Retroactive financing estimated at $1.5 million is recommended to cover PETROGAL's expenditures incurred after January 1, 1981, for technical assistance and the second seismic survey, which are essential for the early start-up of the project. Disbursement against expenditures on the drilling rig (except $500,000 in down payments) and other services directly related to the three exploratory wells will be made only after Bank approval to proceed with the drilling. This will be based on a pre-location report for the particular well, to be submitted by PETROGAL and received in the Bank reason- ably in advance of the proposed start of drilling (Loan Agreement, Sched- ule 1, para. 4(c)); an understanding has been reached with PETROGAL on the - 20 - specific content of these reports, broadly including proposed well loca- tion, depth, and drilling and testing program. The closing date of the loan is June 30, 1983. Project Implementation 52. PETROGAL's Exploration and Production Department will implement the proposed exploration project. The 12 professionals now working in Lisbon consist of one director, two administrators, five geologists, two engineers, one geophysicist, and one paleontologist. All but two of them have 7-20 years of relevant petroleum exploration experience. Both the quality and experience of the personnel are good, but the department is thinly staffed and requires the assistance of the additional geophysicist and drilling management consultants provided under the proposed loan. This is the first exploration program on which PETROGAL's exploration staff will be working as a group; the services of the senior explorationist, to be provided under the project, will help strengthen its overall capability. 53. The additional geophysicist would assist in the supervision of the seismic crew, selection of seismic processing techniques, interpretation of seismic sections, and preparation of seismic maps and prospect files. The drilling management team would assist PETROGAL's engineers in the design and planning of the drilling programs, preparation of tenders and evaluation of bids for all drilling services, materials and supplies, and supervision of all drilling, casing, testing and completion activities. The senior explora- tionist would assist the department in its geological studies, integration of seismic and other geophysical data, prospect evaluation and selection of drilling locations, and design of overall exploration strategy. 54. PETROGAL will implement the heavy oil screening study and the pro- gram of laboratory services assisted by consulting firms specialized in these fields. With respect to heavy oil, most of the relevant data is available in the Office for Petroleum Exploration and Production (GPEP) files. As system- atic collation of the available data would be advantageous before bringing in the consultants, GPEP would assemble and collate all necessary information by end-October 1981 and turn it over to PETROGAL in order that the screening study may commence immediately thereafter (Guarantee Agreement, Section 2.03(a)). The planning study, to be completed by June 30, 1982, will be implemented by PETROGAL's Planning Department with the assistance of finan- cial management consultants satisfactory to the Bank (Loan Agreement, Sections 3.02 and 4.06). Project Schedule 55. The logistic schedule for the project is tight but still realis- tic. PETROGAL must report the results of its exploration activity and make an application for renewal by April 26, 1982, 90 days before expiration of the primary term on blocks 48-49-50. The primary term on its second conces- sion, blocks 45-46-47, expires on January 10, 1983. The proposed project schedule therefore provides for spudding the first well by December 1981, - 21 - the second by March 1982, and the third by June 1982, in order for the two wells on blocks 48-49-50 to be completed by end May 1982 and the well on blocks 45-46-47 by end August 1982. Technical assistance has been recruited and the first seismic survey completed; having agreed on the program and schedule for the initial phase of the second seismic survey, the survey is underway and PETROGAL is expected to meet the drilling schedule (for details of the implementation schedule, see Annex X). Well completion reports will be sent to the Bank within 60 days after each well is completed. The project is expected to be completed by December 31, 1982. The Borrower 56. Petroleos de Portugal, E.P. (PETROGAL) was established as a public oil company by Decree Law 217-A/76 of March 26, 1976. It comprises the merger of four previously nationalized Portuguese companies--SACOR, SONAP, PETROSUL, and CIDLA. PETROGAL is an integrated oil company involved in petroleum explo- ration and development, refining, importing, distributing and marketing, and in petrochemicals. Its principal activity is refinery operations. PETROGAL owns and operates Portugal's three refineries (Sines, Porto, and Lisbon) which are, on average, now operating at less than 50 percent of their 19.5 million ton refining capacity. The company is allocated some 70-80 percent of the regulated market (75 percent of total domestic market), and holds a somewhat smaller share of the free market 1/; foreign companies hold the rest of both markets. The onshore exploration in Portugal under the two concession agreements signed in 1978 and 1979, and to be financed in part under the proposed project, represents PETROGAL's first undertaking in exploration, although SACOR had previously been involved in prospecting for oil. 57. PETROGAL is managed by a Board of Directors composed of five to seven members appointed for a period of three years by the Cabinet of Ministers upon the recommendation of the Minister of Industry and Energy. It is further supervised by a Fiscal Committee of three members whose duties include auditing and overseeing the financial and related aspects of the company's activities as reported by the Board. Divided into 16 departments, the company has over 7,200 employees, of which some 20 percent are profes- sionals. Overall, PETROGAL is a reasonably well-managed company. 58. Accounts and Audits. Like all public sector companies, PETROGAL prepares its accounts according to the guidelines of the Official Account plan introduced by the Government in 1978. It has a competent internal audit unit which carries out its activities under the direction of the Fiscal Committee. Its accounts are also reviewed and certified annually by an inde- pendent firm of public auditors who are satisfactory to the Bank. PETROGAL will keep separate accounts for the proposed project and submit copies to the Bank regularly. 1/ That portion of the market in which distributors' shares are not allo- cated by the Government, including mainly liquified petroleum gas, aviation fuel, marine bunker, naphtha, and other non-energy products. - 22 - PETROGAL - Financial Position and Prospects 59. Background. In terms both of the size of its assets and its gross revenue and of its role as main energy supplier in the country, PETROGAL is one of the principal companies in the Portuguese economy. As the national oil company since 1976, its activities include the import into Portugal of almost all requirements of crude and the control of all refining capacity as well as the greater part of petroleum distribution. PETROGAL presently derives the main share of its income from sales of petroleum products in the internal market and, to a lesser degree, from sales of bunker and aviation fuels at Portuguese ports. 60. While PETROGAL has returned in each of the past years a net profit on overall operations, its financial performance and position have been less than satisfactory. This has been due to problems primarily of a macro- economic origin, that cannot be remedied either immediately or through measures specific to the petroleum sector (para. 6). In addition, these problems are outside the domain of exploration which forms a very small part of PETROGAL's activities. Despite this, the broad lines of PETROGAL's financial performance have been appraised in order to identify the major and primarily external issues affecting such performance and to propose initial measures to improve the situation. To this end, a plan of action has been established with the Government and PETROGAL on (i) remedial measures, including action on pricing and on arrears, to provide a minimum base for improvement in PETROGAL's medium-term finances (paras. 67-68) and (ii) an indepth study to define the optimum strategy for PETROGAL's longer-term financial strength (paras. 47 and 70). 61. PETROGAL's financial performance continues to be restrained essen- tially because of a shortage of working capital and, particularly, a lack of liquidity. This situation arose because: (i) returns from operations have been insufficient due to the fact that prices do not fully cover PETROGAL's financial charges on short-term borrowings for crude imports; (ii) key public consumers have failed to pay regularly for their purchases; and (iii) the capital structure of the company has been inadequate. 62. Due to a shortage of foreign exchange, the Central Bank since 1977 has directed that major imports of goods into Portugal be effected through extended (6 months) external credit arrangements. In line with this directive, PETROGAL finances all purchases of crude through such short-term loans and, as a result of the interest cost on this borrowing, bears substan- tial additional expense on imports. At the same time, whereas the present system of setting ex-refinery prices and related adjustments ensures that PETROGAL earns an adequate return on long-term capital invested in refinery operations, the system does not provide for any margin 1/ earmarked to cover the net additional interest charges incurred on the short-term borrowing for crude. 1/ With the exception of adjustments which ensure that the company only bears the interest charges equivalent to those on comparable internal loans, presently at 18.75 percent. - 23 - 63. PETROGAL's liquidity has been further exacerbated by the inability of certain key public customers to pay promptly and regularly for their purchases. In order to cover shortfalls of funds due to customer arrears, PETROGAL has been led to further short-term borrowing at substantial finan- cial cost, and despite a recent increase in the interest rate that it may charge on receivables (from 6 percent to 15 percent in 1980), a large differential remains between the present rate and PETROGAL's current cost on borrowed funds (between 18.25 percent and 20 percent). By end-1980, overdue customer bills amounted to nearly $170 million, representing over 4 months of sales to delinquent customers mostly in the public sector; of this amount about 80 percent was accounted for by four companies in the transportation sector: the Portuguese airline, TAP (58 percent), two maritime companies Companhia Portuguesa de Transportes Maritimos (CPTM) (13 percent) and Companhia Nacional de Navegacao (CNN) (7 percent), and the railroad company CP (2 percent). Large accumulations of inter-company debts have been a general problem within the Portuguese economy. The source of this problem resides in the financial difficulties which the public sector companies are experiencing, in several cases so severe as to have led the Government to proceed with plans to restructure those most affected through financial rehabilitation contracts. A contract of this nature between the Government, the banking system, and TAP was concluded in 1980 and will be revised in the near future; similar contracts for CPTM and CNN are under preparation and are expected to be completed by end-1981, and for CP by end-1982. These contracts are expected to include provisions for the liquidation of arrears to PETROGAL (para. 68). 64. Past Financial Performance. As a result of these two problems, PETROGAL's earnings from its refining and marketing operations have been seriously eroded by the high financial charges for short-term borrowings. Although gross revenues increased from $600 million in 1977 to $2.2 billion in 1980, net profit after tax only increased from $12 million to $44 million, due mainly to the interest on short-term borrowing which grew from $8 million in 1977 to $166 million in 1980. The lack of working capital was reflected in an unsatisfactory current ratio which between 1977 and 1980 ranged between 0.88 and 0.98. Total debt/equity (i.e. including short-term debt) remained at about 87/13 over the same period. PETROGAL's equity and liabilities, as of December 31, 1980, were as follows: $ Million % Equity 312 13 Long-Term Debt 566 24 Current Liabilities 1,500 63 Total 2,378 100 - 24 - The salient feature of the above figures is the exceedingly large amount of current liabilities which mainly consists of short-term debt. This debt has serious implications not only as previously mentioned for PETROGAL's financial performance, but also for its capital structure since a significant proportion of the debt is covering a strategic reserve of crude stocks which might appropriately be financed by equity. This is one of the issues which will be carefully reviewed in the course of the proposed planning study (para. 47). 65. The following table sets out the principal features of PETROGAL's finances over the period 1977-1980. Further details are given in Annex VIII. -------In Millions of $------- 1977 1978 1979 1980 Gross Revenues from Sales 620 730 1,280 2,154 Gross Margins from Sales 226 256 614 568 Operating Expenses 232 236 444 308 Interest on Short-Term Debt 8 62 90 166 Interest on Long-Term Debt 22 16 76 74 Net Profit After Tax 12 6 26 44 Rate of Return on Total Assets 1/ 5% 6% 11% 13% Current Ratio--Times 0.91 0.88 0.98 0.98 Total Debt/Equity Ratio 89/11 86/14 87/13 87/13 Debt Service Coverage--Times n.a. 1.1 1.5 1.4 1/ Fixed assets last revalued in 1978. 66. In the absence of immediate remedial action, the adverse impact of the crude financing and customer arrears problems would be expected to become even more acute in the future. In fact, budget projections for 1981 indicate that refining and marketing income would be insufficient to cover expected financial charges, and a loss of nearly $20 million would be incurred on overall operations. For the 1982-84 period, PETROGAL's profitability would be expected to remain at best marginal; since the debt service coverage would be inadequate, the company would have no net internal cash generation to support its investment plan and even if relieved from present profit distri- bution requirements and assisted with Government equity infusions at past levels, PETROGAL would be expected to continue to have a worsening shortage of working capital. 67. Remedial Measures. In order to redress this worsening trend, the Government is expected to increase the ex-refinery price of fuel oil and other products in 1981, and it has provided assurances that it would continue to adjust ex-refinery prices of products through a medium-term plan on - 25 - pricing which is currently under preparation or through interim price adjustments if the adoption of the plan is delayed. These increases would bring ex-refinery prices to levels which would cover PETROGAL's full cost on its imports (including net financial cost) and refining of crude, or the cif import price, whichever is higher. Specifically, the increases in ex-refinery prices would be sufficient at the minimum to ensure that (i) in 1981, PETROGAL does not incur a net loss on overall operations and achieves by the end of the year a current ratio of not less than 0.92; and (ii) in following years, PETROGAL can generate net funds from internal and other sources sufficient to cover, at the minimum, 15 percent of capital and other investment requirements in 1982, 20 percent in 1983 and 35 percent in 1984 and thereafter, as well as the full amount of annual increases in working capital required to ensure a current ratio of at least 0.95 by end-1982, progressively increasing to at least unity by end-1984. PETROGAL, on its part, would take the necessary measures within its power to achieve these financial objectives (Loan Agreement, Section 4.04). To supplement these measures, the Government has undertaken to provide equity contributions to cover any shortfalls of funds needed to meet the above targets resulting from lags in ex-refinery price adjustments (Guarantee Agreement, Section 2.02). 68. The Government and PETROGAL have also provided assurances on a set of measures to eliminate PETROGAL's customer arrears. The Government would assist PETROGAL in eliminating customer arrears and eliciting current payments on its bills through (i) including schedules for repayment in rehabilitation contracts under preparation or to be revised (para. 63); and (ii) using, among other avenues, the means made available to it through the rehabilitation contracts to ensure adherence to these schedules and regular payment of current bills (Guarantee Agreement, Section 2.03(b). In addition, while in recent months PETROGAL has succeeded in curbing the growth of customer arrears, in order to bring about further progress, PETROGAL would maintain and modify, whenever necessary, its presently instituted terms for payment in such a way as to ensure that (i) all delinquent companies are maintained on special (harder than the 30 days commercial) terms until their arrears are rescheduled and 50 percent paid; and (ii) all companies which maintain after July 1, 1981, irregular payment records (and after January 1, 1982, irregular arrears repayment records) be asked to prepay their bills (Loan Agreement, Section 4.09(a). PETROGAL would consolidate in its accounts by December 31, 1981, and record as medium-term assets all receivables not scheduled for payment within the course of the following year (Loan Agreement, Section 4.09(b)). 69. Future Prospects. The above measures would relieve PETROGAL of two major obstacles to its attainment of a sound financial position over a reasonable period of time and would assist the company in achieving gradual improvements in financial performance. In this respect, PETROGAL has agreed to maintain a debt service coverage of at least 1.2 in 1982 and 1983 and 1.4 thereafter, a debt/equity ratio of not greater than 65/35, and to achieve a current ratio of at least 0.95 by end-1982, 0.98 by end-1983, and at least 1.0 by end-1984 and thereafter (Loan Agreement, Sections 4.04 and 4.05). The - 26 - remedial action on pricing and on customer arrears are expected to result in significant improvements-in PETROGAL's financial position in 1982 through 1984, exceeding the covenanted financial objectives. On this basis, it is expected that returns on total assets in these years could range from 16 percent to 20 percent (see Annex VIII). Further improvements would be expected to take place in the ensuing period. For the 1981-84 period, PETROGAL projects a total investment of about $418 million, of which approximately $52 million (12 percent) is for exploration and production. With the remedial measures to be taken by the Government and PETROGAL, financing for the 1981-84 investments is expected to be as follows; US$ Million % PETROGAL (internal) 130 31 1/ Long-Term Loans 278 67 Government 10 2 2/ 418 100 1/ Assuming 10 percent investment coverage for 1981 and an average of 44 percent for the 1982-1984 period. 2/ Assuming the Government waives its right to dividends; a higher proportion of equity contribution may otherwise be required. 70. Given PETROGAL's role in the energy sector and its position within the Portuguese economy, the criteria of financial performance as detailed in para. 69 above should be considered as minimal targets. PETROGAL intends to strengthen its capabilities in planning and in the assessment of financial and investment policies. Through the implementation of a planning system and help in tne definition of appropriate future financial and investment strate- gies, the overall planning study component of the proposed loan (para. 47) will assist it in this task. The results of the study will be reviewed by PETROGAL, the Government, and the Bank with a view to determining the measures required to further strengthen the financial position of PETROGAL (Loan Agreement, Section 4.06). Environmental Impact 71. Very little, and no irreparable, damage to the environment should occur. Seismic surveys will use vibrators for an energy source, rather than explosives, causing little or no damage to nearby structures. Serious drilling problems such as blowouts should not occur as long as good oil field practice is followed, since no well drilled in the area to date has en- countered abnormal subsurface pressure. Appropriate industry practices will also be followed regarding the disposal of fluids recovered in tests, bore- hole cuttings, and other waste materials normal to drilling operations. - 27 - Nevertheless, PETROGAL has agreed to make adequate safety provisions, includ- ing the immediate allocation of any funds required to secure specialized international services in the event of a blowout, fire, or spill (Loan Agreement, Section 3.05). Project Benefit and Risk 72. Portugal is heavily dependent on imported oil for its energy needs. The oil bill, about 45 percent of export earnings in 1980, has recently been growing at about $1 billion per year. While the country is making serious efforts for conservation and diversification, these structural changes take time and cannot sufficiently alleviate oil expenditures in the short run. Discovery of even modest oil reserves would have an immediate impact on the economy allowing some foreign exchange resources, now committed to oil imports, to be directed to pressing development needs. The proposed project represents an important step in that direction: a small field, the most likely size of a discovery resulting from the proposed exploratory effort, could give rise to a production of 6,000-8,000 barrels per day, representing about 4 percent of current annual imports; net savings to the economy could be more than $200 million, in current prices, over the life of the field. 73. The anticipated small size of Portugal's possible onshore oil reserves have not attracted large scale foreign prospecting. As the only Portuguese company involved in exploration, PETROGAL has a vital role in accelerating renewed efforts in exploration. Should its exploratory activity lead, through the provision of further geologic information or through an actual oil find, to a discovery of an oil field of a larger than anticipated size, this would have the added benefit of attracting foreign interest for further onshore exploration. 74. The proposed project would improve PETROGAL's current exploration strategy and its prospects for discovering petroleum. Without Bank financial and technical assistance, PETROGAL would likely be constrained to conducting an exploration program principally directed toward meeting seismic and drilling obligations at minimum cost. During the preparation of this pro- ject, the Bank has already had an important influence on PETROGAL's explora- tion program by proposing the Government grant the company a one-year post- ponement of its initial drilling obligations to enable it to acquire sufficient data to locate better quality drillable prospects. Careful monitoring of the proposed seismic surveys will help achieve this objective. The project would further assist PETROGAL and the government departments in evaluating the country's known heavy oil deposits. The appraisal of the project has additionally made possible the identification of issues having a bearing on energy sector policies, including petroleum product pricing and the financial position of PETROGAL. As regards the latter, arrangements under this loan would (i) help strengthen PETROGAL's financial position and protect its future viability, and (ii) serve to initiate an effective dia- logue with the Government on energy policies and related action. - 28 - 75. The project still involves considerable risk, and may not result in the discovery of significant oil accumulations. To reduce this risk, dril- ling locations will be selected with care, based on a substantial body of geologic data including numerous oil shows. PART V - LEGAL INSTRUMENTS AND AUTHORITY 76. The draft Loan Agreement between the Bank and Petroleos de Portugal, E.P. (PETROGAL), the draft Guarantee Agreement between the Republic of Portugal and the Bank, and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement, are being distrib- uted to the Executive Directors separately. 77. Special conditions of the project are listed in Section III of Annex III. As a special condition of effectiveness, the Bank will notify PETROGAL that it has concluded, on the basis of information supplied by the company and on the basis of prices and margins set by the Government for petroleum products, that PETROGAL is expected not to incur a net loss and to achieve a current ratio of 0.92 for 1981 (Loan Agreement, Section 6.01). PETROGAL's submitting pre-location reports to the Bank for approval for each well sufficiently in advance of the start-up of drilling is a condition of disbursement against expenditure on drilling and other well services (Loan Agreement, Schedule 1, para. 4(c)). 78. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 79. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments June 5, 1981 Washington, D.C. - 29 - aNrntA I TABLE 3A Page 1 of 5 PORTUGAL - SOCIAL INDICATORS DATA SHEET PORTUGAL REFERENCE GROUPS (WEIGHTED AVEMI±sGES LAND AREA (THOLUSAND SO. - MOST RECENT ESTIATE) TOTAL 92.1 AGRTCULTURAL 41.1 MOST RECENT MIDDLE INCOME INDUSTRIALIZED 1960 /b 1970 /b ESTIMATE lb EUROPE COUNTRIES GNP PER CAPITA (US$) 350.0 930.0 1990.0 2381.1 8104.2 ENERGY CONSUMPTION PER CAPITA (RILOGRAMS OF COAL EQUIVALENT) 382.0 754.0 1030.0 1641.4 7021.1 POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (MILLIONS) 9.0 9.0 9.8 URBAN POPULATION (PERCENT OF TOTAL) 22.5 26.2 29.6 53.9 76.0 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 12.0 STATIONARY POPULATION (MILLIONS) 14.0 YEAR STATIONARY POPULATION IS REACHED 2100 POPULATION DENSITY PER SQ. YM. 98.0 98.0 106.0 77.2 142.8 PER SQ. EM. AGRICULTIJRAL LAND 218.0 218.0 238.0 129.5 523.3 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 29.2 28.5 27.2 30.6 23.5 15-64 YRS. 62.8 61.8 62.7 61.1 65.1 65 YRS. AND ABOVE 8.0 9.7 10.1 6.2 11.4 POPULATION GROWTH RATE (PFRCENT) TOTAL 0.7/c O.O/c 1.0 1.6 0.7 IIRBAN 1.4 1.5 2.5 3.3 1.3 CRUDE BIRTH RATE (PER THOUSAND) 24.0 20.0 18.0 22.8 13.8 CRUDE DEATH RATE (PER THOUSAND) 8.0 9.0 10.0 8.9 9.1 CROSS REPRODUCTION RATE 1.6 1.5 1.2 1.5 0.9 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) USERS (PERCENT OF MARRIED WOMEN) .. .. FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) 92.0 109.0 75.0 113.1 110.8 PER CAPITA SUPPLY OF CALORIES (PFRCENT OF REQUIREMENTS) 116.0 128.0 126.0 125.3 131.6 PROTEINS (GRAMS PER DAY) 78.0 89.0 83.0 91.0 98.0 OF WHICH ANIMAL AND PULSE 32.0 38.0 38.0 39.6 62.1 CHILD (AGES 1-4) MORTALITY RATE 7.0 4.0 2.2 4.3 0.8 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 63.0 67.0 69.0 67.8 73.5 INPANT MORTALITY RATE (PER THOUSAND) 77.5 58.0 39.0 55.9 13.2 ACCESS TO SAFF WATER (PERCENT OF POPULATION) TOTAL .. .. 65.0 IIRBAN .. .. 0o. RURAL .. .. 56.0 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. .. URBAN .. .. RURAL .. .. POPULATION P'ER PHYSICIAN 1200.0/d 1100.0 707.0 1030.1 624.8 POPULATION PER NURSING PERSON 1430.0/d 1000.0 502.0 929.4 218.9 POPULATION PER HOSPITAL BED TOTAL 183.0 164.0 190.0 289.7 121.2 ITRBAN .. .. RURAI. .. .. ADMISSIONS PER HOSPITAL BED .. 10.0 12.0 17.0 17.0 HOUSING AVERAGE ORE rOF HOUSEHOLD TOTAI 3.9 3. 7 URBAN 4.0 .. RURAL .9 ..9 AVERAGE NIMBER OF PERSONS PER ROOM TOTAL 1.1 .8 ITRBAN 1.0 .. RURAI 1.1 ACCESS TO ELECTRICITY (PERCENT oF DWELLINGS) TOTAL 40.5 64.2 URBAN 88.5 .. RURAI, 27.4 .. - 30- lu4xL I Page 2 of 5 TAELE 3A PORTUGAL - SOCIAL INDICATORS DATA SHEET PORTUGAL REFERENCE GROUPS (WEIGHTED AVER4GES - MOST RECENT ESTIHATE) MOST RECENT MIDDLE ,NCOME INDUSTRIALIZED 1960 Ab 1970 /A ESTIMATE Ab EUROPE COUNTRIES EDUCATION ADJUSTED ENROLLMENT RATIOS /h PRIHARY: TOTAL .. 98.0 130.0 105.9 100.1 MALE .. 99.0 134.0 109.3 102.2 FEMALE .. 96.0 127.0 103.0 102.3 SECONDARY: TOTAL .. 57.0 59.0 64.0 87.1 MALE .. 63.0 59.0 71.1 84.4 FEMALE .. 51.0 59.0 56.9 84.3 VOCATIONAL ENROL. (2 OF SECONDARY) 46.0 32.0 40.0 28.8 19.0 PUPIL-TEACHER RATIO PRIMARY 34.0 34.0 27.0 29.4 21.3 SECONDARY 19.0 17.0 14.0 26.1 16.4 ADULT LITERACY RATE (PERCENT) 62.0 71.0 70.0 .. 98.9 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 17.0 54.0 108.7 84.6 339.9 RADIO RECEIVERS PER THOUSAND POPULATION 96.0 159.0 173.0 192.2 932.9 TV RECEIVERS PER THOUSAND POPULATION 5.0 45.0 82.0 118.5 354.8 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPUJLATION 63.0 84.0 70.0 93.0 327.4 CINEMA ANNUAL ATTENDANCE PER CAPITA 3.0 3.0 4.1 5.7 3.3 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 3478.5 3550.0 3763.7 FEMALE (PERCENT) 17.9 24.8 26.0 30.4 36.1 AGRICULTURE (PERCENT) 44.1 33.3 27.0 37.0 7.6 INDUSTRY (PERCENT) 29.0 33.2 37.0 29.3 38.8 PARTICIPATION RATE (PERCENT) TOTAL 38.5 39.3 44.6 40.9 44.6 MALE 66.0 62.3 56.4 55.9 58.1 FEMALE 13.2 18.5 32.3 26.2 31.7 ECONOMIC DEPENDENCY RATIO 1.0 1.0 1.0 1.0 0.8 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS HIGHEST 20 PERCENT OF HOUSEHOLDS .. 56.1/s.f 56.3/ .. LOWEST 20 PERCENT OF HOUSEHOLDS .. 6.2/s.f 7.3/es. LOWEST 40 PERCENT OF HOUSEHOLDS .. 20.6/e.f 2 a.4/es. POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. RURAL .. ESTIMATED RELATIVE POVERTY INCOME LEVEL (US $ PER CAPITA) URBAN .. .. 480.0 RURAL .. .. 480.0 385.8 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. RURAL .. Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. lb Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970 between 1969 and 1971; and for Most Recent Estimate, between 1974 and 1978. /c Due to emigration population growth rate is lower than rate of natural increase; /d 1962; /e Highest 251 and lowest 251 and 501 of households; /f 1968; I& 1973-74. /h Enrollmont ratios r ot comrparable in tine due to changes ir. age groups ir. primary znd secondary education. October 1980 -31 - ANNEX I Page 3 of 5 DEFINITIONS OF SOCIAL iNOlCAlORS Notes- Althc-gh the dataar drama frot ore eeal ogdtets obfttv sad eliale,iaoaldals be sated thme they may net heI lna- thme,scl d-eclibe order of mgnttsds., tadi-tat treds, sadcar -tr -icrtt major differeace beten- aeei Ste refarean groupsYoar (1)fthrcm oar 100 ftamh(n omr m 2) .o..arry groap alth somehat hrieraer- Iao than the oose..rI groat of thaasbjecoosoty (amcpr fo CaItal SeaFlo OiEoras roPabere. 'Middle locat Notch Afr Io ad Middl:E ,ia" I. those. hbn-oc ofsree - leac half . of theiootri toagrs has datahtar eh at:&.. pd, Rhiao. lc herrrg of..o.atrie ma tO iofr dapeed ond the .I msihi.t.o dmtaavdimnotoatfcrmoaonlormsmthteaernaadimrelanlngsreraea of oomladfcenrioah.th_o. Tre_eereagesara-adlysdefolIah.epeataglhtvaIf If..rIvdlcarcrath anls hamteamredeeer ram fatl-otaaalacaracspraio ladaeaadolad eaem. lna,cqolf.d esfdaaiaholy -totnercanlevi.g h 19)0. sad 1978 data. hahilitathianteeeeim..Hasp tts7sdarm emtahltmt1ma9-d-p---ametfip mt...ed E-I t 'C 'b. 1 __'y "'~~y sles aaphmnia Ithiatmer eatta olaeal netta -rcny t ior-dofca bq aim pard tAtll; 090,1976 5, mpmd) 1919t0m, mtdwbl,itP,blem .1 ho te e-ajedraaia a rad data, liitdd 1e9t7edca8frtdtem-Fr t It SIna pur'pameesehe hapi MPERCYCOINS1J1PTITaPEL C TOISTAOES .. -pihI hbceit-a loca or. roalbrPtimmad meicl adeseriy ceatert. data, fear hospitals d~~~~~~~~~~~~~~~~~~~~~~~~7iviely tie ohefffes llrhaa Fonslatioc Snarceat6 of total) - ratioidof.orbfatinoi tots--popolans-r; ameccortl- c 100.197, od197Fdts.Ovrse paryf anshil Ierimbycrhomehldd- atl. fos, iadre tal Pooato PoatinaCOfmbodontme ta rs-ah tdvtulthe tr legqater metrs cr ertlit rote. of mo hove thre levels, aso-oa ecinhmaacpied l darim.db h fetltyairdf,oic e lvlan attanopistg efrasa-crm si-rrnlvlmaeoo delmab-naad oba.ad ua Eah osnr i teoasipa oe f hem ir cmbnalnaofmemmit cavntreldwllagnibeerriit t ivmgqulter a peresg iooat. Thi is athetd only afterfetlity ravd deoilive -tOl -dloted inrlra taiA b..dt 9t- .- tb -lddi ifo loon. IIl fIb -1 h.h Ironre ...t omiverJmedo1aianeaolu aetedolprcv horms oayooltr srctd-Tapa e ttlnt oPltr irem ateaebb raoeteafns nodae rie a baeta 'ifd'I -oodarytihol -totl, mle md fmal -dCmpsed a shve; enodar total stain. acoa~~~~~~~~~~~~~ -F..ll of 12 tod at o a;certodarecussar aal ovIt.--li i,A~..I Eaaiml.,erroltyowp ...arie.. of aomdrl -ocfa llatt_lr broom; 1900, 1970. and 1970 data. Pnpol-teecherratSr - primary, cad sanomdery-fatal snvdIeI-etae-nfalled is1d-lli.~ I..p'Itit yaso papsisslort (or 1950-00. 190-71, aad 1977-t.horeprdv lavi.E I L i" i y Erd lrh OotcI i (car .boeod d-hOaa live dorh paUCATarIoOed-ea poo --E-;192 1970 ma 1978l.. da. EoIIcfO Erode leath lane (oro thoomaodl - Anmsal Otaths par ttoomaad of nid-yecr paemenuer Ears leer thoomavd roaslatiomi - Faacavger otet toepriae-ty h- met-or tltyrtaa; doa ly-ie-etavrgasda f-iv1900. 191.an 1977.I yroarast bto generalI pdbiffe. totIa.fposaff calds n famly lsolv-dceonor. grual nbotadm(- Cncl ombe i acsptru ceaed ecives i connitsan inpees Oanregtssmim a rdiaae FOCI .I041 OCht_TfOtin tonaiem sad in pec hetrgitala fTVtnfmeief Iscao PodOodcto re aia(10-li9 - lade of pe taita aa.oa mi Y of "dil getal etrermeYape- dfiedampeioioi ab oslvo veae rdotrpiesihe;10-i 1970, and 970 data, and me-hilehi stirs.. P orrrisoadi tedorceooa sadriyi itioln eur- Detitm ooria aacedv not-1 Yoaarale 1900,. 19111 mm ..vu ..a.clvne l 19 060,sa9d070 phy197log78e tidufo vrtl on 170daa vcuhod 1a96,0tt-70, 190,ad 19707 daadueta c eoer5ao.ttlIaorfrc;190f11 adl9tdaa Pa(siam P-,c of... vroel -sayy daySl L - Ponlbcier fpe 5i aoIehoeco A - P- .a.. forr dvs 1to . cavatrociosI oatrn ve-1ti; 196p 197of fodprdoy Netso8 l of oo is hdrfv d' as ahad. O- an PletI-olny, sfer1. a dolta ampeeoans.ge o som laortoe;190 C-dloahma-nf 2 for all ) cocrc uAbiuthd hy It --d proid foIitimd17sd190daa PiloP vc oftEi gam1 of6ota pooteo pa dyav 0 oomoNSialai aTIirtON tt rret oa ae a eaerri sito pos ooel,ofoic 0 rmasoodheolalcito. hvenod ctvtyrn : r coptdmPoal. s a eal ao ooa G tI oa protein a sAVerg foIhIoh rpvdh toIotnTod 16 97,ad17 aa hs are p...ILls C. pafticpatif rae -alet irons dato dented froa iota tables; 1901.~~~~~~~~~~'I 197 m 960 177 da. R,EOtt lITo- yo OrdIvo perrenesge of Faivacenocoer (both Or cash mod 77f-ad(-leteiocd ty ro-helt LoaOvetncs tri(oaa -Oarg oma o arto itrestn 5prda,rihm 20 .rct. pors 2 eco.mdpors'l ecn IUd iI d -Slli~~~~"pp" Ih....d If of oseetolds of .- cR0 per IB rhoobmoh-lice1births. famImated Abs1iahd IFovrt. Inrom Leve (nt) ocr cac -t l. - rIaIadara to aleCaar feosa o pooltlol toa,Itao an rTal- bsout !,paverty t.1hOcm.lve p. .in T the -ta -m leve belgoadicaminma tWDANDNeRIofTIoNl LttSIra, v oa)vtoraoal acs osf ovriio....eqat dEprt c ,b I e -em Iadl vo-fodrlireet-R o oat-arfvch Pasttae foce prtre hrtp n vetv vdsntr me9ol r ftimne Iea Io Yoverr Onrha Level it (0 f ca tsrtai -urdmi maVrf ml Iocn ino hIrrneto aoalom vacohvreaolcRrlriviepvryint lvliIn-hr f vrg e apn fo .....aio _0 sfemdpoI-"""caIdvnvrtla 00mtr Ifoaoe - a Nhe provl tcmao rosty prhamleneim derivedfh otmher drs -cc -set Y_oci Iioal Icr iooldnu_ni ctaldosbad mud roors - tmbar f pecla (otal orba, ma roral sered yemrac poat a nlda ihe tlleotlo so,d, . doafe, sieb..I, i -titoIAtaesMetp-fronvitr sapei-s .. te -roe tth. eeparnmef ctrrrvdsImiaf vtlaio October novd bil - 32 - AINNA 1 Page 4 of 5 ECONOMIC DEVELOPMENT DATA (Amounts in Millions of US Dollars) Share of GDP at Actual Annual Growth Rate (1) Market Prices (Current Price.) 1979 1974 1975 1976 1977 1978 1979 1960 1970 1975 1978 1979 1980 ($l1Esc. 49.8) (Proiected) NA1IUNAL ACCOUNTS Gross Domestic Product a/ 19,744 0.7 -3.7 9.0 5.6 3.2 3.7 100.0 100.0 100.0 100.0 100.0 100.0 Agriculture 2,341 -1.8 -2.7 1.5 -10.0 4.0 5.0 22.7 16.1 14.1 11.6 11.9 11.4 Industry 6,853 4.0 -9.3 4.3 10.4 3.3 3.7 34.5 37.3 39.9 33.4 34.7 36.0 Services 9,034 0.8 1.6 15.8 6.6 2.5 2.3 35.4 36.2 37.9 46.6 45.7 44.5 Consumption b/ 17,426 10.3 1.2 3.1 3.3 1.1 0.9 87.8 83.3 96.1 88.7 88.3 86.8 Gross Investment 4.173 -6.1 -45.7 30.5 28.8 -4.7 -4.7 18.5 23.5 16.3 23.1 21.1 21.7 Exports ot GNFS 5.165 -15.7 -13.2 4.8 6.8 14.6 27.4 16.6 23.4 19.6 19.9 26.2 27.4 Imports of GNFS 7,020 4.8 26.7 17.5 13.1 -1.8 5.8 22.9 30.7 32.2 31.8 35.6 35.9 Gross National Savings 4,303 -35.4 -39.2 13.7 28.4 16.9 32.4 12.2 16.7 9.3 18.9 21.8 22.0 Pr ices Kate of Inilation 27.4 20.4 18.3 27.3 22.1 24.2 Exchange Kate c/ 25.4 23.6 30.2 38.2 43.9 49.8 MERChAhDlbE ThADE Annual Data at Current Prices f/ As Percent of Total f/ Imports 1973 1975 1977 1978 1979 Capital Goods 701 565 607 1,211 1,375 1,545 20.5 14.5 24.4 26.2 24.0 Intermediate Goods 2,635 2,185 2,431 2,442 2,498 2,998 58.4 56.1 49.2 47.5 46.6 Fuel and Related Materials 575 621 696 715 808 1,249 6.0 16.0 14.4 15.4 19.4 Consumption Goods 677 522 595 596 567 644 15.1 13.4 12.0 10.8 10.0 Total nerchandise Imports (c.i.f) 4,648 3.893 4,329 4.964 5,248 6.436 100.0 100.0 100.0 100.0 100.0 Exports Agricultural Products 363 324 307 330 371 489 18.8 16.8 16.5 15.6 13.6 Wood and Cork Products 360 306 345 359 371 570 14.8 15.8 17.9 15.6 15.9 Textiles, Clothing and Footwear 672 578 524 594 774 1,193 30.4 29.8 29.6 32.5 33.2 Machinery and Transport Equipment 285 254 226 297 321 426 13.2 13.1 14.8 13.5 11.9 Other 558 474 388 421 542 916 22.8 24.5 21.2 22.8 25.4 Total Merchandise Exports (f.o.b.) 2,238 1,936 1,790 2,001 2.379 3,594 100.0 100.0 100.0 100.0 100.0 MEK1bANlD0ISE TEADE INDICEb 1975-100 Enport Price Index 99 100 106 142 173 224 import Price Index 91 100 112 144 178 236 Terms of Trade Index 109 100 95 98 98 95 Current Prices (Billion Escudos) As Percent of GDP at Market Prices PUBLIU FINANCE 1974 1975 1976 1977 1978 1979 Current Receipts 77.8 93.2 127.1 173.6 212.2 264.3 d/ 23.0 24.8 27.2 27.9 27.2 26.9 Current Expenditures 76.5 102.6 153.3 182.1 238.5 302.2 22.6 27.3 32.8 29.3 30.6 30.7 Current burplus/Dsfigit (-) of the State 1.3 -9.4 -26.2 -6,5 -26.3 -37.9 0.4 -2.5 -5.6 -1.3 -3.4 -3.9 cGpital Expenditures (Nt8) 7.1 12.4 19.3 34.5 39.1 42.7 3.4 4.4 5.0 6.4 5.0 4.3 Nnt financing kaquiremnts 5.S 21.9 45.5 43.0 65.4 80.6 1.7 5.8 9.7 8.0 8.4 8.2 limamimg bads 9.3 17.4 48.9 44.7 75.5 97.1 2.4 4.* 10.4 7.2 9.7 9.9 UDebt Amrtiatie -1.5 4.4 -3.4 -1.7 -10.4 -16.5 0.7 1.2 0.7 0.3 1.3 1.7 LAbOM FORCE ASD UUTPUT PEA WDSX TOTAL lAICS *OS / In Thousands Percent of Total Growth Rate(S) 1974 1977 1978 1979 1974 1977 1978 1979 1978-79 Agriculture 1.300 1,263 1,187 1,174 34.5 33.4 31.8 30.9 -1.1 ladustry 1,307 1,250 1,283 1,330 34.7 33.0 34.3 35.0 3.7 services 1,160 1,273 1,266 1,294 30.8 33.6 33.9 34.1 2.2 Total 3,767 3,7b6 3,736 3,798 100.0 100.0 100.0 100.0 1.7 a/ At market prices. bectoral components are expressed at factor costs and will not add due to exclusion of net indirect taxes and subsidies. b/ atatistical discrepancy is included in the consumption data. c/ Exchange rate since February 1980 US$I-Esc. 47.7. d/ Estimated. e/ Total employed labor force excluding workers abroad and unemployed. f/ nata tor years before and after 1975 are not fully comparable because of a revised detinition of intermediate and capital goods. - 33 - NEX I Page 5 of 5 BALANCE OF PAYMENTb AND EXTERNAL ASSISTANCE AND DEBT (Amounts in Millions of US Dollars at Current Prices) Actual SUWYlAlY OF SALANCY OF PAYMENTS 1973 1974 1975 1976 1977 1978 1979 Exports (F.D.B.) 1,843 2,238 1,936 1,790 2,001 2,379 3,594 Imports (F.0.d.) 2.745 4.277 3.606 3,965 4,533 4,787 6.016 Trade Balance kX-M) -902 -2,039 -1,670 -2,175 -2,532 -2,40B -2,422 Net Non-Factor Service 67 -74 -170 54 82 276 530 Tourtsm Receipts (Gross) (550) (513) (360) (327) (403) (592) (940) &esource balance -835 -27113 -1,839 -2,121 -2,450 -2,132 -1,892 Net lnvestment Income j/ 86 129 -14 -133 -179 -329 -430 Net Transfers b/ 1,097 1,111 1,037 964 1.134 1,635 2,472 Balance on Current Account 348 -873 -817 -1.290 -1.495 -826 +150 DIroet Foreiga lmy.tmot 110 109 122 51 52 56 49 Public JILT Leame Disbwresm.ts 158 153 231 229 425 1,382 745 Asortiaation 74 68 78 63 83 97 191 Net Disburrse-ents 84 85 153 166 342 1,285 554 Uther MLT Loans Net Disbur.ements 228 165 422 390 bhort-Term LUapital and Errors and OUmssions 135 -32 -89 105 -30 202 366 Ltner Capital (8.E.1.) -332 156 -58 612 607 1,036 -1,418 Changes in Official Liquid Foreign Exchange Reserves (- - increase) -345 554 688 128 359 -103 -91 ctticial xeserves Groas Lnd oi Year cl 2,839 2,354 1,534 1,301 1,391 1,880 1,951 Ot which: G.ld 1,163 1,193 1,136 1,125 1,025 1,009 1,020 Foreign Exchange 1,641 1,125 390 166 361 871 930 Actual GDANT AiW LuAN ItIuMlIMENTs DEBT AND DEBT SERVICE dI 1974 1975 1976 1977 1978 1979 Ofticial Grants and Grant-like - - 3 - - - - Total Debt Outstanding and Disbursed 1,346 1,358 1,750 2,384 4,120 5,317 Public M< Loans Of which, Public 723 825 1,005 1,458 2,772 3,392 LIRD - - - 36 74 131 143 Interest on Public Debt 22 35 37 66 115 230 IDA - - - - - - - Repayments on Public Debt 68 78 63 83 97 191 Other M.Ltilateral - - - 123 87 63 69 Total Public Debt Service 90 113 100 149 212 421 Governnrs - 20 65 96 195 743 134 Other N< Debt Service 140 215 157 332 385 483 b.ppli.r. - 27 35 164) 119) 608) 354) Total M4LT Debt Service 230 328 257 481 597 904 F.nanccal Ma-cots - 413 20 ) 1 7 7 Publ.c Loans n.e.i. - - - - _ - - - BURDEN ON EXPORT, NOP-FACTOR Total Public MSLT Loans el 51 460 120 419 475 1,545 700 SERVICES AND WO( KERSX RLEMITTANCES (2) Actual Debt Outstandina on December 31. 1979 EXTE5'NAL DEBT Disbursed OnlI Percent Public Debt Service 2.0 2.9 2.9 3.7 4.1 5.5 liob 63 1.2 Total M6LT Debt Service .. 8.8 7.4 11.8 11.4 11.8 IDA 6ther Multilateral 285 5.4 Average Terms of Public Debt Governments 1,224 23.0 (Grant Element) 13.3 9.4 15.3 18.4 6.2 4.8 buppliers 292 5.5 Interest as 2 Prior Year Financtal Markets 1,528 28.7 Public D00D 4.8 4.5 6.6 7.9 8.3 Private No,i-Guaranteed Debt 1,925 36.2 Amortization as 2 Prior Year Toitl Public and Private MtLT Debt 5.317 100.0 Public D06D 10.8 7.6 8.3 6.7 6.9 IBRD Debt Outstanding end Disbursed 42.2 39.9 35.6 32.2 36.1 63.1 IBRD DOD as 2 Public Debt Outstanding and Disbursed 5.8 4.7 3.5 2.2 1.3 1.9 18RD Debt Service es Z Pubic Debt Service 6.9 5.6 6.1 4.4 3.4 3.1 */ Largely interest payments. bh Largely workers remittances. c/ Gold, National Valuation. Special Drawing Rights, 35 per fine troy ounce and converted to US dollaro at currant rates. December 1979 stock of 22.13 million ounces would give about $11 billion, valued at /500 per ounce. dl Debt servics as a ratio of earnings from exports, non-factor services and workers remittances. e/ D.es not include Central Sank borrowings. Europe, Middle East and North Afric. Region N.t avas-able. March 2, 1981, - 34 - ANNEX II Page 1 of 4 STATEMENT OF BANK GROUP OPERATIONS IN PORTUGAL A. STATEMENT OF BANK LOANS (As of April 30, 1981) Loan Amount (less cancellation) No. Year Borrower Purpose Bank Undisbursed Six loans for power development fully disbursed* 93.5 - 1334 1976 Republic of Portugal Highways 24.0 12.5 1432 1977 Banco de Fomento Nacional Development Finance 50.0 7.3 1541 1978 Republic of Portugal Water Supply 40.0 37.8 1559 1978 Republic of Portugal Education I 21.0 20.8 1603 1978 Republic of Portugal Agricultural Credit 70.0 70.0 1649 1979 Quimica de Portugal E.P. Fertilizer Industry 58.0 41.3 1700 1979 Republic of Portugal Highways II 40.0 39.97 1701 1979 Republic of Portugal Small and Medium Industry 45.0 44.0 1793 1980 Republic of Portugal Education II 40.0 40.0 1853 1980 Republic of Portugal Forestry 50.0 50.0 1874 1980 COMETNA a/ Mechanical Industry 33.4 33.19 1875 1980 SOREFAME a/ Mechanical Industry 10.6 10.6 1942 1981 Second Banco de Fomento Development Nacional Finance bt 100.0 100.0 TOTAL 675.5 ct 507.46 of which has been repaid 46.1 TOTAL now outstanding 629.4 Amount sold 2.6 of which has been repaid 2.5 0.1 TOTAL now held by Bank d/ 629.3 TOTAL undisbursed 507.46 B. STATEMENT OF IFC INVESTMENTS (As of April 30, 1981) None. a/ Loans to two companies under the same project. b/ Not yet effective. c/ Prior to exchange adjustment. * Includes a $36 million Power Loan of 1976. - 35 - ANNEX II Page 2 of 4 C. PROJECTS IN EXECUTION 1/ Loan No. 1334 - Highways I Project; $24.0 Million Loan of March 3, 1977; Effectiveness Date: July 8, 1977; Closing Date: June 30, 1982. Road rehabilitation is on schedule, but other project items are behind schedule. The Government's decision to postpone bidding until the effectiveness of the loan resulted in a 12-month delay in purchasing highway maintenance and workshop equipment. Delays in land acquisition (which is now completed) caused an 18-month delay in the construction of the Covilha bypass road; the contract for this road has now been awarded. The railways study and the transport master plan are also 18 months behind schedule due to delays in the selection of consultants; however, work on the study and master plan is now substantially completed. Loan 1432 - Banco de Fomento National Project; $50.0 Million Loan of December 19, 1977; Effectiveness Date: March 21, 1978; Closing Date: December 31, 1981. While loan signing was delayed due to legal questions raised by the Attorney General's office, it is expected that project implementation will catch up with appraisal estimates. The loan is fully committed on schedule and progress in disbursement is satisfactory. Loan 1541 - Lisbon Region Water Supply Project; $40.0 Million Loan of June 6, 1978; Effectiveness Date: January 19, 1979; Closing Date: June 30, 1983. The contract for the Castelo do Bode pipeline (about $33 million) has been awarded. Works on the pipe plant have been completed. A solution is being sought for municipal arrears, which remain a problem despite recent improvements. Studies are behind schedule due to delays in hiring consul- tants. The Government has recently changed the management of EPAL; the new management is taking measures to expedite project implementation. Loan 1559 - Education Project; $21.0 Million Loan of June 6, 1978; Effectiveness Date: September 6, 1978; Closing Date: December 31, 1981. Architectural designs for all project institutions, including man- agement training centers, are underway. Equipment lists are ready and pro- curement of equipment is proceeding. Sites for project institutions have 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the under- standing that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution. - 36 - ANNEX II Page 3 of 4 been acquired after initial delays. Technical assistance is being recruited on schedule, the study on the teaching of science and engineering is com- pleted, and the manpower study is underway. A general public service moratorium on hiring personnel (to contain the growing budget deficit) has delayed design work. This, combined with initial site acquisition problems, has caused a considerable slippage. Recent remedial actions and understandings, however, should improve implementation of civil works. Loan 1603 - Agricultural and Fisheries Credit Project; $70.0 Million Loan of September 28, 1978; Effectiveness Date: April 30, 1980; Closing Date: June 30, 1984. The staffing of the Agricultural and Fisheries Credit Fund (IFADAP) and of project area offices of the Ministry of Agriculture and Fisheries is practically completed. Consultants have been selected for the groundwater survey and for the fish stock assessment survey. These surveys are now substantially completed. Project implementation for the fisheries component is progressing although it is about a year behind the original schedule. The credit scheme for farm development in the Alentejo has only recently been initiated. Excess liquidities in the banking system have so far sharply limited recourse to IFADAP refinancing. The Government and the Bank are in the process of reviewing the credit mechanisms. Loan 1649 - Fertilizer Modernization Project; $58.0 Million Loan of March 14, 1979; Effectiveness Date: June 1, 1979; Closing Date: June 30, 1983. The selection of consultants is completed; detailed engineering work is underway. Construction has started in Alverga (nitric acid plant). Procurement of equipment is progressing well. The fertilizer study has been completed and its conclusions are being reviewed by the Government and the Bank. Loan 1700 - Second Highway Project; $40 Million Loan of July 27, 1979; Effectiveness Date: November 13, 1979; Closing Date: June 30, 1984. Engineering for highway rehabilitation is underway. Loan 1701 - Small- and Medium-Scale Industry Development Project; $45 Million Loan of June 27, 1979; Effectiveness Date: August 29, 1980; Closing Date: December 31, 1983. A revision in the rental policy of the Public Enterprise for Industrial Estates (EPPI) has been made to ensure better returns on invest- ment. The technology study is underway and procurement on other technology items is progressing. The institutions involved have started submitting applications by companies eligible for the SMI subloans. The Central Bank is planning measures to expedite the use of the credit line. - 37 - ANNEX II Page 4 of 4 Loan 1793 - Second Education Project; $40 Million Loan of April 16, 1980; Effectiveness Date: July 10, 1980; Closing Date: December 31, 1984. The Project Coordination Group has been established. Implementa- tion of the equipment procurement aspects of the project, staffing and staff development plans are proceeding on schedule; however, civil works designs are behind schedule. Curricula and syllabi are either completed or under development. Implementation of the technical assistance program is on schedule. Loan 1853 - Forestry Project; $50 Million Loan of October 2, 1980; Effectiveness Date: March 2, 1981; Closing Date: September 30, 1986. The Project Coordination Unit has been established. Satisfactory progress is being made on the acquisition of land and equipment and the afforestation program is expected to begin as scheduled. Despite initial delays, the technical assistance program is expected to be completed on schedule. The Agricultural and Fisheries Credit Fund (IFADAP) is gearing up to process subloans to cooperatives and/or associations of private forest owners soon. Loans 1874 and 1875 - Mechanical Industries Project; $33.4 Million Loan to COMETNA and $10.6 Million Loan to SOREFAME of October 2, 1980; Effectiveness date: December 29, 1980; Closing Date: December 31, 1983. Work and equipment procurement is underway. The engineering industries subsector study has started. Technical assistance components are proceeding. Loan 1942 - Second Banco de Fomento Nacional Project; $100 Million Loan of March 27, 1981; Effectiveness date: Not yet effective; Closing Date: June 30, 1985. Appraisal of subprojects is underway. - 38 - ANNEX III Page 1 of 2 PORTUGAL PETROLEUM EXPLORATION PROJECT Supplementary Data Sheet Section I: Timetable of Key Events (a) Time taken by the country to prepare project; Six Months (March 1980-September 1980) (b) The agency which has prepared the project: Petroleos de Portugal, E.P (PETROGAL) (c) Date of first presentation to the Bank and April 1980 date of first Bank mission to consider and the project: May 1980 (d) Date of departure of appraisal mission: September 1980 (e) Date of completion of negotiations: April 17, 1981 (f) Planned date of effectiveness: September 30, 1981 Section II: Special Bank Implementation Actions None. Section III: Special Conditions 1. Effectiveness Condition The Bank has informed PETROGAL that it has concluded, on the basis of information supplied by PETROGAL and on the basis of prices and margins set by the Government, that PETROGAL is expected not to incur a net loss and to achieve a current ratio of 0.92 for 1981 (paras. 38 and 77). 2. Disbursement Condition PETROGAL to submit pre-location reports to the Bank for approval for each well reasonably in advance of drilling (paras. 51 and 77). - 39 - ANNEX III Page 2 of 2 3. Other Conditions Government (i) GPEP to assemble and collate necessary data and turn it over to PETROGAL for heavy oil screening study (para. 54). (ii) Government to adopt a medium-term petroleum product pricing policy to encourage economic use of products and to ensure full cost recovery by PETROGAL (paras. 38 and 67). (iii) Government to assist PETROGAL in improving its financial position through equity contributions as needed and other means (para. 67). (iv) Government to assist PETROGAL in eliminating customer arrears to PETROGAL and in ensuring prompt payments on future sales (para. 68). PETROGAL (i) PETROGAL to implement financial planning study with the assistance of consultants and to review the results with the Government and the Bank (paras. 54 and 70). (ii) PETROGAL to meet debt service coverage, debt/equity ratio, and current ratio targets (para. 69), and to take measures to eliminate customer arrears and ensure prompt payments on future sales (para. 68). (iii) PETROGAL to maintain appropriate ecological and safety standards (para 71). - 40 - TABLE IV1 ANNEX IV ENERGY BALANCES, ACTUAL AND FORECAST /1 Page 1 of2 1965 1970 1975 1979 j 1985 1990 I MTOE % MTOE % MTOE % MTOE % j MTOE % MTOE X Production (2.00) (40) (2.17) (32) (2.22) (26) (3.28) (28) (3.41) (21) (3.85) (18) Coal 0.20 4 0.11 2 0.09 1 0.07 1 0.08 1 0.08 1 Hydropower /2 1.10 22 1.40 20 1.51 18 2.61 22 | 2.65 16 2.92 13 X~ Wood/Other 0.70 14 0.66 10 0.62 7 0.60 5 1 0.68 4 0.85 4 N Net Imports Li (2.97) (60) (4.66) (68) (6.38) (74) (8.53) (72) 1(12.90) (79) (18.12) (82) 9 Coal /4 0.46 9 0.58 8 0.30 4 0.34 3 j 0.70 4 3.12 14 g Crude Oil/Products /4 2.47 50 4.07 60 6.06 70 8.21 69 12.20 75 15.00 68 Electricity 0.04 1 0.01 - 0.02 - -0.02 - j - - - - TOTAL 4.97 100 6.83 100 8.60 100 11.81 100 1 16.31 100 21.97 100 Change in Stocks +0.04 - +0.11 - -0.10 - +0.65 - I - - - _ Transformation, Energy I Sector Use, Losses /5 1.08 22 1.81 27 2.56 29 3.63 33 I 4.31 26 5.96 27 z Coal A 0.64 17 0.60 13 0.26 4 0.29 4 I 0.65 5 1.30 8 S Petroleum Products jj, 2.10 54 3.05 62 4.39 72 5.38 71 1 8.85 74 11.30 71 8 Town Gas 0.04 1 0.05 1 0.06 1 0.06 1 0.06 - 0.06 - Z Electricity 0.37 10 0.55 11 0.81 13 1.20 16 j 1.76 15 2.50 16 Wood/Other 0.70 18 0.66 13 0.62 10 0.60 8 0.68 6 0.85 5 : TOTAL 3.85 100 4.91 100 6.13 100 7.53 100 12.00 100 16.01 100 Source: Table based on data provided by DGE, including 4th Trimester 1979 (No. 31/79) issue of Petroleo and energy balances prepared in September 1980, as well as energy statistics and balances published by OECD. /1 Energy forecasts, prepared in September 1980, are updates of 1978 projections based on information from major energy users, progress on investments, economic growth, etc. Growth rates in real terms averaging to 5 percent for GDP over the period to 1990 were initially assumed, with the growth of energy consumption being higher yet in view of expected industrial development; the impact of Government conservation policies and fuel price increases were not explicitly incor- porated. In actual fact, GDP grew in real terms in 1979 by only 3.5 percent, and yet consumption of petroleum products was some 2 percent higher than expected. Portugal plans to revise these forecasts within the coming year once a series of studies on long term energy supply/consumption are concluded in connection with their program with the U.S. Department of Energy. 12 Hydropower is expressed as the amount of fossil fuel required to generate the same amount of electricity in existing ccrventional thernal stations (0.23 TOE/lOOOkWh), rather than as that with the same energy content as the generated electricity (0.086 TOE/lOOOkWh), tne differential being the loss of energy as waste heat during the transformation process. t3 Petroleum products are the only significant energy source exported, and other than exports for bunkers (0.6-0.7 MTIE in recent years), trade in products is primarily to make short-term adjustments to balance refinery output/consumer demand; Table IV.2 gives further details for petroleum products supply in 1979. Trade in electricity through interconnections with Spain is also largely to correct short-term imbalances (e.g., in 1979 imports were 930 million kWh or 0.08 MTcE and exports 1163 million kWh or 0.10 MTOE). /4 The need for imported coal may not increase quite as rapidly as forecast, as much of it is for use in thermal power plants planned for the eighties and the investment program in power is substantial and delays in project implementation inevitable; similarly in the case of crude oil/products where modifications in industrial development plans from heavy to medium or light industry could affect energy requirements. /5 The transformation, etc. section includes non-energy use of petroleum products for 1965-79 (some 0.4-0.5 MTOE in recent years), reserving final consumption for energy use only. In 1985-90, however, non-energy use appears to be included in final consumption of petroleum products. The percentage figures in the transformation, etc. section are its share of energy supply net of change in stocks. ANNEX IV Page 2 of 2 TABLE IV.2 PETROLEUM PRODUCTS SUPPLY AND USE, 1979 /L Liquefied Motor Aviation Gas/Diesel Heavy Other Com- Non-Energy Producta a Pet.Gases Gasoline Fuels Oil Fuel Oil bustibles Napntha Others ITotal SUPPLY (1000 tons) Production 173 905 428 1696 3405 125 290 174 17196 Trade (329) (-65) (-107) (136) (200) (-) (-7) (102) 1(588) Imports 330 3 186 255 439 - - 126 91339 Exports -1 -68 - -46 - - -7 -17 i-139 International Bunkers - - -293 -73 -239 - - -7 :-612 Change in Stocks (additions -; -22 -90 -76 -157 -277 -8 _9 -1 -640 drawdowns +) TOTAL 480 750 245 1675 3328 117 274 275 ,7144 Statistical Difference (1000 tons) +2 +2 -5 +10 - -6 +1 +5 +9 Refinery Use and Losses (1000 tons) J2 7 - 9 25 200 15 - - 256 DOMESTIC USE (1000 tons) 471 748 241 1640 3128 108 273 270 6879 (M) 7 11 3 24 45 2 4 4 :100 Economic Activities (X) /3 Internal Market (100) (100) (-) (92) (97) (100) (100) (99) (93) Industry 20 - - 4 56 11/4 90 na 33 Transportation - Road - 100 - 78 - - - na ' 31 -Rail - - - 3 - - - na 1 Transformation - Electricity - - - 1 34 - - na 16 -Town Gas - - - - - 26 /5 10 na 1 Others 80 /6 - 6 7 63 /4 - na 11 National Bunkers (-) (-) (100) (8) (3) (-) (-) (1) (7) Aviation - - 100 - _ _ - - I 4 Marine - - - 8 3 - - 1 ' 3 Source: Table based on DGE's Sintese Anual 1979 issue of Petroleo. /1 Figures are net of processing contracts for export which entailed 858,000 tons of crude oil imported and 723,000 tons of products exported. /2 Total refinery use and losses amounted to 450,000 + 128,000 - 578,000 tons distributed over 8,378,000 tons crude oil and products to be reprocessed, or about 7 percent of input (range among refineries 6-10 percent). /3 Percentages are based on sales/deliveries rather than actual ccnsamption. Only subtotals in total column include non- energy products other than naphtha. /4 Kerosene (80,000 tons total); use in others category is domestic, agriculture, and commercial. /5 Refinery gas (28,000 tons). /6 Use is primarily domestic and retail commercial. - 42 - ANNEX V Page 1 of 2 PORTUGAL PETROLEUM EXPLORATION PROJECT Petroleum Product Pricing The regulated market for petroleum products in Portugal accounts for nearly 95 percent of the domestic sales of premium and regular gasoline, kerosene, gasoil, and fuel oil, or 75 percent of total domestic consumption of petro- leum products including aviation and marine bunker fuels. Portugal follows an import parity system of setting nationwide prices for these five major petroleum products, as illustrated in the table below. The pricing system for the other products, liquefied petroleum gases, aviation fuels, naphtha and other non-energy products, and the remaining 5 percent or so of the major fuels, appears to be less rigidly structured although still generally subject to Government approval. PETROLEUM PRODUCT PRICE STRUCTURE December 1980 (US dollars per US gallon) Price Premium Regular Heavy Components Gasoline Gasoline Kerosene 1/ Gasoil Fuel Oil 2/ Persian Gulf Price Plus Transport 3/ 1.138 1.067 1.164 1.088 208.20 Refining Adjustment 4/ 0.064 0.060 0.074 0.063 15.80 Ex-refinery Price 1.202 1.127 1.238 1.151 224.00 Customs Duty, National Salvation Tax, Agent's Fee 5/ 0.325 0.312 0.056 0.020 4.60 ------------------------------------------------------------------__---------_ Commercial Expenses 6/ 0.040 0.053 0.026 0.026 3.60 Profit Margin 7/ 0.041 0.041 0.029 0.024 4.40 Retailer's Margin 8/ 0.065 0.065 0.036 0.054 00 Marketing Margin 0.146 0.159 0.091 0.104 8.00 ------------------------------------------------------------------__------- Commodities Supply Fund 9/ 1.877 1.668 0.213 0.323 -67.80 Selling------Price-------/--3--550----3--266---1---598---1--598-__-168.80--- Selling Price 9/ 3.550 3.266 1.598 1.598 168.80 - 43 - ANNEX V Page 2 of 2 NOTES 1/ Kerosene for light; also set price of that for heat. 2/ Price in US dollars per metric ton. Specific gravity assumed to be 0.95, for a conversion factor of 278 US gallons/ton. Fuel oil with 3.5 percent sulfur; also set price of that with 1.0 percent sulfur. 3/ Average of set of posted product prices in Persian Gulf over previous month; transport includes freight, insurance (0.5 percent), and losses (1 percent). This is adjusted monthly. 4/ Since the opening of the Sines refinery in 1978, a refining differential has been paid to PETROGAL (from the Supply Fund) in an effort to compensate the refineries for higher-than-industry-average costs due to underutili- zation of capacity. The refining differential is calculated yearly on the basis of PETROGAL's projected refining loss, one third of its overhead costs, and a return on its net fixed assets involved in refining equivalent to the prevailing discount rate of the Bank of Portugal; adjustments may be made at year-end when actual costs are known. Under present Government regulations, PETROGAL is entitled to some 70-80 percent of the internal market for gasoline, kerosene, gasoil, and fuel oil, including sales to EDP, the rest being handled by private companies (Shell, Mobil, British Petroleum). The refining adjustment figure is a blend of PETROGAL's refin- ing differential (estimated at about $12/ton in 1980) and the refining fee charged to the private companies (some $40/ton in 1980). 5/ Customs duty is levied on the product when it leaves the refinery as though it was imported; duty on crude oil is negligible. 6/ Based on a blend of the previous year's distribution expenses incurred by PETROGAL and the private companies. An additional allowance for geographi- cally distributing products is reimbursed to companies out of the Supply Fund after the product is sold (ranging from $0.014-$0.061 per gallon for gasoline and gasoil and from $0.035-0.078 per gallon for kerosene in 1980). 7/ Based on a blend of a roughly 15 percent return on the various companies' net total assets involved in distribution in the previous year. 8/ Based on sampling of retailers' costs in the previous year. 9/ The final selling price of the products is set by the Cabinet of Ministers, while the annual budget of the Supply Fund is determined by the Ministry of Finance and Planning, to be distributed among the products by DGE. The amounts allotted to each product vary somewhat from month to month as the Supply Fund is used to offset monthly adjustments in the ex-refinery price until the final selling price is adjusted (once or twice a year as neces- sary, most recently December 18, 1980). Gasoline and gasoil have been taxed and fuel oil subsidized since at least 1971; kerosene was generally subsidized from late 1973-78 but is now usually taxed with occasional adjustments. The selling price of fuel oil does not include delivery except in the case of that sold for electricity generation; agricultural and fisheries users are entitled to a rebate on their purchases of gasoil. - 44 - ANNEX VI Page 1 of 3 PORTUGAL PETROLEUM EXPLORATION PROJECT Petroleum Exploration Prospects Introduction 1. Two areas (basins) in Portugal are considered to have some pros- pects for the discovery of oil and gas. These are the western Atlantic Basin, locally termed the Lusitanian Basin, and the Algarve Basin (see map). The Lusitanian Basin covers the onshore and adjacent offshore from Porto on the north to Sines on the south, approximately 350 km, with a width averaging about 80 km, widest just north of Lisbon. The basin has an area of about 28,000 km2 and a sedimentary volume of some 100,000 km3. Annex VII details its petroleum geology; the proposed project is onshore in this basin. The Algarve Basin occupies the southern offshore Atlantic shelf and margin and adjacent onshore. It continues eastward into Spain, where gas discoveries have been made offshore. Lusitanian Basin 2. Exploration History and Current Status. Excluding unrecorded early holes, exploratory drilling onshore in Portugal began in the Lusitanian Basin in 1939 and continued rather steadily until 1963. Companhia de Petroleos de Portugal had exclusive exploration rights during this period, but from time to time took on foreign partners, principally French companies and Mobil. Since 1963 the exploratory tests drilled onshore have been limited to shallow wells with heavy oil objectives. Only 27 of the 90 onshore wells penetrated deeper than 1,000 m; only ten of these were carried below 2,000 m, and only three below 3,000 m. Thus there has been no substantive exploratory drilling effort onshore in the past 17 years, and the most recent exploratory wells predated the development of common depth point seismic methods and digital recording of seismic records. 3. Offshore contracts for exploration were first let to foreign com- panies in 1973; between 1974 and 1978, some 20 exploratory wells were drilled in the Lusitanian Basin. Operators included Shell, Sun, Esso, and Texaco. These were deep tests ranging from 2,000 to 4,000 m in depth. The wells were located on seismic prospects of modern vintage and of fair to good data quality. All of the offshore acreage has been subsequently relinquished by the operators. - 45 - ANNEX VI Page 2 of 3 4. Four contract areas onshore in the Lusitanian Basin are presently in force, two held by PETROGAL and two by foreign oil companies (see map). PETROGAL's areas, each comprising three blocks, were awarded in 1978 and 1979 for an initial period of four years; seismic work and three exploratory wells are required. Shortly after this, a contract was agreed with a Canadian enterprise, Sceptre, Bow Valley, and Siebens. Sceptre commenced drilling its one obligation well, the first deep test onshore in Portugal since 1963, at the end of Octobe- iq80. Negotiations with Union Texas, a subsidiary of Allied Chemical, tor an additional contract area onshore were completed in late 1980. This contract includes an option for the operator to relinquish the area after two years with only a seismic obligation, or to continue the contract and drill at least two wells in the ensuing two-year period. 5. General Prognosis. Some 55 percent of the 110 exploratory wells drilled in the Lusitanian Basin to date encountered oil and gas shows; of these, 75 percent consisted of heavy oil found at shallow depths. There is no doubt that oil has been generated in the Lusitanian Basin. The explora- tion history and petroleum geology (Annex VII) further indicate that the probability of ultimately finding small commercial deposits is rather high. 6. Due to the stratigraphic and structural complexities of the basin, particularly the late reversal of structures, the search will be difficult and large fields are not expected. Recent advances in exploration technology should be sufficient to determine the optimum relationships between structure and potential reservoirs and to permit the selection of the best sites for further exploratory drilling. The larger prospects may well be stratigraphic traps, i.e. reefs and carbonate or sandstone porosity pinchouts on the flanks of present structures. The structurally more complex features may require an intensive seismic effort to locate traps either on the flanks or at depths. Field sizes of 25 million barrels or less would likely be the norm. The petroleum industry obviously recognizes this, hence the lack of enthusiasm for the basin. However, depending upon costs, producing rates, and realized price, fields in the 5 million-25 million barrel reserve range should be economically exploitable. The heavy oil deposits also warrant further evaluation in light of current and forecast oil prices and recent technical advances in the stimulation processes for recovery. Algarve Basin 7. The Algarve Basin is best developed offshore in the southern Atlantic shelf and adjacent deeper water, although its northern flank is onshore. This basin contains both Mesozoic and Tertiary deposits. The Mesozoic structure and stratigraphy appear to be similar in many respects to - 46 - ANNEX VI Page 3 of 3 the Lusitanian Basin, although much less is known about them. The Algarve Basin differs in that a wedge of Tertiary sediments thickening seaward is present offshore. Just to the east in Spain, Tertiary clastics, probably of Miocene age, have been proven gas productive on five structures. 8. Esso has recently signed a contract on the deep water area off Portugal just west of the Spanish border, presumably to attempt to extend the gas productive area westward into Portugal (see map). Esso is committed to a seismic program and a minimum of two wells during an initial three-year period. This is a substantial effort considering that the principal pros- pects are for gas in water 200-800 m in depth. The three wells drilled off- shore in the Algarve under earlier contracts have had no shows of oil or gas. One of these is on the Esso contract area and represents the only deep water exploratory test drilled in Portugal to date. - 47 - ANNEX VII Page 1 of 3 PORTUGAL PETROLEUM EXPLORATION PROJECT Petroleum Geology of the Lusitanian Basin Introduction 1. Some 90 exploratory wells have been drilled in the onshore portion of the Lusitanian Basin, and a modest amount of seismic survey work conducted although most of the data are old and only marginally useable. Twenty exploratory wells have been drilled offshore, and seismic coverage is of modern vintage and of fair to good quality. Annex VI gives further details of the basin's exploration history and petroleum prospects in brief. Basin Development and Stratigraphy 2. Based on the subsurface control and extensive detail surface geologic mapping, the Lusitanian Basin appears to have been formed by generally north/south trending block faulting during late Permian or early Triassic time, probably associated with the opening of the north Atlantic Ocean. In its early stages the basin is essentially a graben, or series of grabens. As determined by analysis of the seismic and a few isolated surface outcrops and several well penetrations, the early Triassic basis fill is principally non-marine sandstone. One or more layers of relatively thick evaporite (principally rock salt) was deposited above the sandstone section, with the thicker salt deposits restricted to individual graben depressions. The Triassic sandstone and salt are at least 1,500 m thick in the central portion of the basin. 3. Marine deposition, consisting of dark shales and limestones of a moderate to deep water marine environment, began in the Lias (Lower Jurassic). The Lias may be up to 1,300 m in thickness. During the Middle Jurassic (Dogger), shallower water limestones containing evidence of "reefs" and interbedded shales were deposited totalling about 1,000 m in thickness. During the Upper Jurassic, the basin subsided again with dark marine shales being deposited in localized low areas and shallow marine limestones on structural highs and along the basin margin. Near the close of the Upper Jurassic, the remaining lows and/or channels were subsequently filled with thick sandstones, delta or fan deposits. The Upper Jurassic is about 1,300 m thick, giving a total Jurassic section of about 3,500 m in localized thick areas. During the Lower Cretaceous, shallow water marine and continental sands filled the remaining basin lows lapping out on the then existing highs. Sedimentation ended with a widespread deposit of shallow marine lime- stones of Upper Cretaceous age, some 300 m thick. - 48 - ANNEX VII Page 2 of 3 Structure 4. From the development of the Lusitanian Basin in early Triassic through mid-Jurassic, the basin underwent periodic episodes of widening and/or deepening (conditions of tension). Structuring during this time appears restricted to the major fault blocks. At the beginning of the Upper Jurassic the basin began to close, apparently as a result of lateral movement along the faults, and compressional structures were initiated. The deposi- tional basin of the Upper Jurassic was segmented into sub-basins between the growing structures. This movement continued sporadically into mid-Cretaceous time with increasing deformation culminating in volcanic activity, extrusion of basalt and the implacement of dikes, particularly concentrated in the basin center just north and west of Lisbon. Additional compressional move- ments took place during the Tertiary Period resulting in the complete inver- sion of the Lusitanian Basin forming present structural-related topography. Simultaneously, a young basin filled with Tertiary non-marine clastics was formed east of the Tejo River. 5. These compressive movements resulted in severe deformation and structural complexity, particularly near the basin axis, diminishing toward the eastern and western margins. The present basin axis is a banana-shaped elongate north/south, lying predominantly onshore. It crosses the coastline near Figueira da Foz in the north and Estoril-Cascais in the south (see map). Basin inversion or reversal has the effect of placing the depositional lows on present structural crests and depositional highs in present synclines. Source and Reservoir Rocks 6. There are primarily two source rock intervals in the Lusitanian Basin, at least partially identified by geochemical analysis: the widespread dark shales and limestones of the Lias and the localized dark shales in the lower portion of the Upper Jurassic. Potential reservoirs are found in the sometimes porous shallow water carbonates, including reefs, of the Middle and Upper Jurassic and the uppermost Jurassic sandstones where developed. Oil and Gas Shows 7. Of the 110 exploratory wells drilled in the Lusitanian Basin (90 onshore and 20 offshore), some 60 encountered bona fide shows of oil and gas. However, 45 of these consisted of heavy oil found at shallow depths on several complex structures near the basin axis in the vicinity of Torres Vedras and Monte Real (see map). Fifteen deep wells had shows of oil, four offshore Figueira da Foz and 11 onshore. - 49 - ANNEX VII Page 3 of 3 8. The best of the deep well oil shows occured at Barreiro, 12 km southeast of downtown Lisbon, where a well encountered up to 20 m of very good light oil saturation in porous Middle Jurassic limestone. The well was not conclusively tested although several attempts were made. Recovery con- sisted of mud and mud filtrate with some oil but no formation water. Another show occurred in a well at Arruda, 6 km northwest of Vila Franca de Xeira, where good light oil saturations were encountered in Upper Jurassic sand- stones. However, this zone was not tested. Two of the offshore wells had good shows recov- g some light oil on tests from rather thin reservoirs in the Lias and Middle Jurassic limestones. No gas shows of significance have been encountered. Heavy Oil 9. The heavy oil has been found both in the subsurface and at surface outcrops. Mining of surface outcrops for asphalt has taken place for over 150 years, but this resource has never been fully evaluated. The occur- rence of heavy oil is associated with complex highly deformed structures often associated with salt diapirs. It is reservoired in Upper Jurassic sandstones and in both Middle and Upper Jurassic limestones at depths of less than 1,000 m. It is quite heavy and viscous (12-140 API), and only a few of the wells were tested. One well in the Torres Vedras area produced 55 barrels on test at the rate of about 5 barrels per day. No completion attempts have been made. Areally the accumulations are small; however, they are numerous. At least 8 areas have been identified so far. - 50 - ANNEX VIII Page 1 of 3 PETROGAL Statements of Income, 1977-1984 (In Millions of Contos) ----------Actual--------- ----------Forecast----------- Year Ending December 31 1977 1978 1979 1980 1981 1982 1983 1984 REVENUE Gross Revenues from Sales 31.0 36.5 64.0 107.7 186.7 300.0 353.0 413.0 Less Prime Cost of Sales 1/ (19.7) (23.7) (33.3) (79.3) (141.5) (239.0) (277.2) (321.8) Gross Margin on Sales 11.3 12.8 30.7 28.4 45.2 61.0 75.8 91.2 Other Income (Net) 2.4 3.1 2.3 3.2 2.2 2.7 3.3 4.0 Total Operating Revenue 13.7 15.9 33.0 31.6 47.4 63.7 79.1 95.2 EXPENSES Operating Expenses 2/ 10.9 11.2 19.1 12.2 25.4 29.0 33.6 39.0 Depreciation 0.7 0.6 3.1 3.2 4.4 4.4 4.9 5.4 Total Operating Expenses 11.6 11.8 22.2 15.4 29.8 33.4 38.5 44.4 Net Income Before Interest 2.1 4.1 10.8 16.2 17.6 30.3 40.6 50.8 Interest on Short-Term Debt 0.4 3.1 4.5 8.3 14.0 20.4 23.4 26.3 Interest on Long-Term Debt 1.1 0.8 3.8 3.7 3.6 3.6 3.6 3.5 Total Interest 1.5 3.9 8.3 12.0 17.6 24.0 27.0 29.8 Net Income After Interest 0.6 0.2 2.5 4.2 - 6.3 13.6 21.0 Income Tax 3/ - (0.1) 1.2 2.0 - 2.9 6.4 9.9 Net Profit 0.6 0.3 1.3 2.2 - 3.4 7.2 11.1 Return on Total Assets % 4.8 6.4 10.8 12.9 13.1 16.3 17.8 19.8 1/ Assumes a substantial increase in crude refined from 7.6 million tons in 1980, to 8.5 million tons in 1981 and 10.0 million tons beginning in 1982. 2/ Including refining and marketing expenses, customs duties and provisions. 3/ Including adjustments. Notes on this statement and assumptions used in the projections are in the project file. - 51 - ANNEX VIII Page 2 of 3 PETROGAL Statements of Sources and Applications of Funds 1978-84 (In Millions of Contos) ------Actual------ ----------Forecast-------- Year Ending December 31 1978 1979 1980 1981 1982 1983 1984 SOURCES Net Income before Interest 4.1 10.8 16.2 17.6 30.3 40.6 50.8 Depreciation and Provisions 1.0 3.3 3.3 4.7 4.7 5.2 5.7 5.1 14.1 19.5 22.3 35.0 45.8 56.5 Other Sources - 0.4 - - - 2.0 2.0 Increase in Capital - 1.2 0.5 0.5 - - - Borrowings 1/ 7.7 4.9 2.9 6.6 3.3 2.0 2.0 TOTAL SOURCES 12.8 20.6 22.9 29.4 38.3 49.8 60.5 APPLICATIONS Investments 2/ 10.2 5.3 6.6 7.9 5.0 4.0 4.0 Debt Service: Amortization 1.1 1.8 2.8 3.4 4.4 5.4 6.8 Interest 3/ 3.9 8.3 12.0 17.6 24.0 27.0 29.8 Total Debt Service 5.0 10.1 14.8 21.0 28.4 32.4 36.6 Income Tax (0.1) 1.2 2.0 - 2.9 6.4 9.9 Working Capital: Customers' Accounts 1.7 3.7 2.4 12.9 6.0 3.0 4.0 Inventories 5.1 15.2 9.7 13.5 24.0 10.0 12.0 Other Current Assets 1.9 4.8 1.9 2.1 4.0 4.0 4.0 Increase (Decrease) in Current Assets 8.7 23.7 14.0 28.5 34.0 17.0 20.0 Short-Term Loans (6.3) (9.8) (15.7) (24.5) (31.0) (6.0) (3.0) Other Current Liabilities (4.7) (9.9) 1.2 (3.5) (1.0) (4.0) (7.0) Decrease (Increase) in Current Liabilities (11.0) (19.7) (14.5) (28.0) (32.0) (10.0) (10.0) Increase (Decrease) in Working Capital (2.3) 4.0 (0.5) 0.5 2.0 7.0 10.0 TOTAL APPLICATIONS 12.8 20.6 22.9 29.4 38.3 49.8 60.5 Total Debt Service Coverage - Times 1.0 1.3 1.2 1.1 1.1 1.2 1.3 Long-Term Debt Service Coverage - Times 1.1 1.5 1.4 1.2 1.5 1.8 2.0 1/ Including drawdowns on Bank loan of 0.21 in 1981 and 0.86 in 1982. 2/ Including expenditure on proposed project of 0.10 in 1980, 0.34 in 1981, and 0.96 in 1982. 3/ Including interest on short-term debt. Notes on this statement and assumptions used in the projections are in the project file. - 52 - ANNEX VIII Page 3 of 3 PETROGAL Balance Sheets, 1977-1984 (In Millions of Contos) ----------Actual--------- -----------Forecast---------- As of December 31 1977 1978 1979 1980 1981 1982 1983 1984 ASSETS Gross Fixed Assets 10.7 18.6 44.8 47.0 64.3 66.5 70.4 73.8 Less Depreciation (6.1) (10.2) (13.3) (16.5) (20.9) (25.3) (30.2) (35.6) Net Fixed Assets 4.6 8.4 31.5 30.5 43.4 41.2 40.2 38.2 Work in Progress 19.3 28.7 7.6 11.8 1.2 3.4 2.9 2.9 Other Assets - Net 1/ 3.4 3.4 3.0 3.1 10.0 10.3 8.6 6.9 Current Assets: Customers' Accounts 1/ 11.3 13.0 16.7 19.1 26.0 32.0 35.0 39.0 Inventories 8.4 13.5 28.7 38.4 51.9 75.9 85.9 97.9 Other Current Assets 7.4 9.3 14.1 16.0 18.1 22.1 26.1 30.1 Total Current Assets 27.1 35.8 59.5 73.5 96.0 130.0 147.0 167.0 TOTAL ASSETS 54.4 76.3 101.6 118.9 150.6 184.9 198.7 215.0 EQUITY AND LIABILITIES Equity: Capital 6.1 6.1 7.3 7.8 8.3 8.3 8.3 8.3 Revaluation Reserve - 4.0 4.0 4.0 4.0 4.0 4.0 4.0 Retained Earnings - 0.3 1.6 3.8 3.8 7.2 14.4 25.5 Total Equity 2/ 6.1 10.4 12.9 15.6 16.1 19.5 26.7 37.8 Long-Term Debt 18.5 25.1 28.2 28.3 31.5 30.4 27.0 22.2 Current Liabilities: Short-Term Debt 16.7 23.0 32.8 48.5 73.0 104.0 110.0 113.0 Other Current Liabilities 13.1 17.8 27.7 26.5 30.0 31.0 35.0 42.0 Total Current Liabilities 29.8 40.8 60.5 75.0 103.0 135.0 145.0 155.0 TOTAL EQUITY-LIABILITIES 54.4 76.3 101.6 118.9 150.6 184.9 198.7 215.0 Current Ratio - Times 0.91 0.88 0.98 0.98 0.93 0.96 1.01 1.08 Debt/Equity Ratio 75/25 71/29 69/31 64/36 66/34 61/39 50/50 37/63 Total Debt/Equity Ratio 89/11 86/14 87/13 87/13 89/11 89/11 87/13 82/18 1/ Assumes conversion of 6.0 in customers' accounts from short-term to medium-term assets at end-1981. 2/ Assumes no dividend distribution. Notes on this statement and assumptions used in the projections are in the project file. - 53 - ANNEX IX Page 1 of 2 PORTUGAL PETROLEUM EXPLORATION PROJECT Summary of Project Costs and Financing Plan Project Costs: Local Foreign Total Local Foreign Total (In Escudos Millions) (In US$ Millions) Reprocessing Existing Data 1/ - 6.4 6.4 - 0.12 0.12 Seismic Survey I (IAO0km) 1/ 13.4 77.9 91.3 0.25 1.45 1.70 Seismic Survey II kjO0km) 29.5 248.7 278.2 0.55 4.63 5.18 Three Exploratory Wells 2/ 100.0 545.3 645.3 1.86 10.15 12.01 Petroleum Geophysicist 2.2 11.8 14.0 0.04 0.22 0.26 Drilling Management 3.2 24.7 27.9 0.06 0.46 0.52 Senior Explorationist 1.1 6.4 7.5 0.02 0.12 0.14 Laboratory Services I 1/ 0.5 8.1 8.6 0.01 0.15 0.16 Laboratory Services II 1.6 4.9 6.5 0.03 0.09 0.12 Heavy Oil Screening Study 0.6 5.9 6.5 0.01 0.11 0.12 PETROGAL Planning Study 21.5 10.7 32.2 0.40 0.20 0.60 Subtotal 3/ 173.6 950.8 1,124.4 3.23 17.70 20.93 Physical Contingencies 4/ 26.8 148.3 175.1 0.50 2.76 3.26 Price Contingencies 5/ 25.2 72.0 97.2 0.47 1.34 1.81 Total 225.6 1,171.1 1,396.7 4.20 21.80 26.00 Local Foreign Total Financing Plan (In US$ Millions) PETROGAL 4.20 1.80 6.00 Bank Loan - 20.00 20.00 Total 4.20 21.80 26.00- 1/ To be totally financed by PETROGAL. qp 2/ Based on the assumption that one of the three wells will be completed at a cost of $0.51 million (see Annex IX, page 2). 3/ Based on February 1981 estimates. 4/ Based on a 0 percent contingency on the reprocessing of existing data and the first seismic survey, a 10 percent contingency on the second seismic survey, and a 20 percent contingency on all other cost items. 5/ Based on a 9.0 percent and 8.5 percent escalation of foreign costs in 1981 and in 1982 respectively and a 17.0 percent and 15.0 percent escala- tion of local costs in these two years. No escalation is included for the reprocessing of old seismic data, the seismic surveys, and the foreign exchange cost of the geophysicist, drilling management and the senior explorationist. - 54 - ANNEX IX Page 2 of 2 PORTUGAL PETROLEUM EXPLORATION PROJECT Estimated Cost of One Exploration Well Local Foreign Total Local Foreign Total (In Escudos Millions) (In US$ Millions) Site Preparation 1/ 20.682 - 20.682 0.385 - 0.385 Drilling Rig 2,3/ 8.058 82.730 90.788 0.150 1.540 1.690 Materials and Equipment (tubular goods, cement, mud & chemicals, and miscellaneous equipment) 1.612 65.538 67.150 0.030 1.220 1.250 Services (mud, chemicals and cement services, mud logging, electrical logging, testing, and perforation) 1.880 25.357 27.237 0.035 0.472 0.507 Subtotal 32.232 173.625 205.857 0.600 3.232 3.832 Provision for Completion 4/ 1.075 8.058 9.133 0.020 0.150 0.170 Total 33.307 181.683 214.990 0.620 3.382 4.002 1/ Includes an allocation for land rent of $0.24 million prorated over three wells. 2/ Based on a proration over three wells of the estimated $750,000 cost of rig mobilization and demobilization, an estimated drilling contract cost of $16,000 per day, and an estimated drilling requirement of 90 days per well. 3/ The local costs associated with the drilling rig include local labor, supplies and services for camp, fuels, lubricants, and water. 4/ Based on a proration over three wells on the assumption that one of the three will be completed as a producer at a completion cost of $510,000. PORTUGAL PETROLEUM EXPLORATION PROJECT Project Implementation Schedule 1 9 8 O _ 1 9 8 1 1 9 8 2 _J F M A M J J A S O N D J F M A M J J A S O N D J F M A H J J A S O N D Existing Seisinic Data. Seismnic Survey I Seismic Survey II Exploratory Well I Exploratory Well II Exploratory Well III Petroleum Geophysicist Drilling Management Senior Explorationist Laboratory Services I Laboratory Services II Heavy Oil Screening Study IBRD 15422 9 ': l . . 4 8° 7 6I JANUARY 1981 42' 42' (S :Bragag V \ ~~~Oporto t E 4t~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~) A TLANTIC (fANI o -40 40 J '41 ea IPORTUGAL 9~aa Praer PETROLEUM EXPLORATION t.~~~~~~~~~~~~l PralgeCONCESSION AREAS: ant.m I Li0 o :~~ ~ ~ ~~~~~~~~~ ~~~~~~~~ - A, s, of Ljio C oasin .arrs F ue i oM r WETR eG n 4ff ~~~~~~~~~~~~~~~~~~~~~~~~. - Inentioa Bonnda....... ries 38' eXeiran TexaW k s excls .H~~~~~~~~~~~~~~~~~~~~~~~~~~~h con rnenc ofte edeso ~~ ) /?gW Tei° / t P0RTUGA(VWHeLw Oi ovr-Limit of the Ceno-Mesonsic Basins < 4 --Ax s of L~cjudgamen Bosi n . . 1 / MouraWatr so D in Meterrits an endrs > 9 ~~~~~~~~~~~~~~~R,Rlers /: I.tematioral Bonactesund toe3' ; ( / j i' Beja -~~~~~~~~~~~~~ 38',0 : - \ v vVo~~~~~~~~~~~~~~~~~~~~~~~rld Sank's at.lff -1-ws/ely for \ \ ~~~~~~~~~~~~~the conveience of the meade.s of . F . ,#f \ $ ~~~~~~~~~~~~~~~~~~~~~~The denmo-ario- used and the 0 1~~ ~~~~~~~~~ gz'-W W-1 Be k aridV it dooftk, hapffifiat-, any . . . J ( Of s~~~~~~~~~~~~~~_ _A~~~~~t5~~~~R ~a,y term/oq - arnyendorse.artt -37- - 1 - . . ~~~~~~~~~~~~~~~~~or aswept of such boundanes tD D S .5 w 0 3 ~~~~~~~~~~~~~~S P A I : NtL METER..... 4;..... .. , ^/>/>... i........-