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Document o f International Bank for Reconstruction and Development and International Finance
Corporation
FOR OFFICIAL USE ONLY
Report No: 26757-MOZ
PROJECT APPRAISAL DOCUMENT
ON TWO PROPOSED
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
PARTIAL RISK GUARANTEES
IN THE AGGREGATE AMOUNT OF UP TO US$30 MILLION
FOR SYNDICATED COMMERCIAL BANK LOANS
AND
ON PROPOSED
INTERNATIONAL FINANCE CORPORATION
EQUITY INVESTMENT OF UP TO US$18.5 MILLION
FOR THE SOUTHERN AFRICA REGIONAL GAS PROJECT
BETWEEN THE REPUBLIC OF MOZAMBIQUE AND THE REPUBLIC OF SOUTH AFRICA
October 22,2003
Energy Team, Infrastructure Group, Africa Regional Office Oil and Gas Division, International Finance Corporation
This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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CURRENCY EQUIVALENTS
(Exchange Rate Effective October 20,2003)
Currency Unit = Meticais SDR 1 .O = US$1.42782 (October 20,2003) US$l .O = 23,348 Meticais US$l.O = 7.5 Rand
AfDF AFD APL ASME CAS CEF CMG C M H
CPF DBSA DEG DNCH
DNE DRC ECAs ECIC EdM EFIC EIA EIB EMP ENH
EPC EPCm ERAP ERR FMO FRR GDP
FISCAL YEAR January 1 -- December 31
ABBREVIATIONS AND ACRONYMS
African Development Fund Agence Franqaise de DCveloppement Adaptable Program Loan American Society o f Mechanical Engineers Country Assistance Strategy Central Energy Fund, wholly owned by the RSA Government Companhia Mocambicana de Gasoduto (Mozambique Gas Company) Companhia Mocambicana de Hidrocarbonetos (Mozambique Hydrocarbons Company ) Central Processing Facility Development Bank o f Southern Africa German Investment Company Direqgo Nacional de Carvgo e Hidrocarbonetos (National Directorate for Coal and Hydrocarbons) Direqgo Nacional de Energia (National Directorate for Energy) Democratic Republic o f the Congo Export Credit Agencies Export Insurance Corporation o f South Africa Electricidade de Moqambique (Mozambique Electricity Company) Export Finance Insurance Corporation o f Australia Environmental Impact Assessment European Investment Bank Environmental Management Plan Empresa Nacional de Hidrocarbonetos de Moqambique (Mozambique National Oil Corporation) Engineering, Procurement and Construction Contract Engineering, Procurement and Construction Management Contractor Energy Reform and Access Project Economic Rate o f Return Netherlands Finance Company Financial Rate o f Return Gross Domestic Product
This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.
FOR OFFICIAL USE ONLY f
GLMC
GoM GoSA GSA GTA HIPC IBRD IDA IFC JOA LDP LIBOR MGJ MGJ/a MICOA
. MIGA MIREME M W Natref NORAD OED PA PPA PRG PRI RESA ROMPCO RP IP RSA SADC SCMB SPI SPT TA TCF U JV WBG
Grinaker LTA McConnell Dowell and Consolidated Contractors International Company Government of Mozambique Government o f South Africa Gas Sales Agreement Gas Transportation Agreement Heavily Indebted Poor Countries International Bank for Reconstruction and Development International Development Association International Finance Corporation Joint Operating Agreement Letter o f Development Program London Interbank Offered Rate Million gigajoules Million gigajoules per annum Ministerio para a Coordenaqiio da Acqao Ambiental (Ministry for Coordination o f Environmental Affairs) Multilateral Investment Guarantee Agency Ministry o f Mineral Resources and Energy o f the Republic o f Mozambique Megawatt National Petroleum Refineries of South Africa Norwegian Agency for Development Operation Evaluation Department Pipeline Agreement Petroleum Production Agreement Partial Risk Guarantee Political Risk Insurance Regional Environmental and Social Assessment Republic of Mozambique Pipeline Investments Company (Proprietary) Limited Resettlement Planning and Implementation Program Republic o f South Africa Southern Africa Development Community Standard Corporate and Merchant Bank Sasol Petroleum International Sasol Petroleum Temane Limitada Technical Assistance Trillion Cubic feet Unincorporated Joint Venture World Bank Group
Vice President, IBRD: Country Director, IBRD: Country Director, IFC: Sector Director, IBRD: Director, IFC: Team Leaders, IBRD: Team Leader, IFC: Program Assistant, IBRD: Program Assistant, IFC:
Callisto Madavo Darius Mans Haydee Celaya Michel Wormser Rashad-Rudolf Kaldany Joel MawenilMarie-Ange Saraka-Yao Gulrez Hoda Lily Wong Elizabeth Hickman
This document has a restricted distribution and may b e used b y recipients only in the performance of their official duties. I t s contents m a y not be otherwise disclosed lwithout W o r l d Bank authorization. I
MOZAMBIQUE
SOUTHERN AFRICA REGIONAL GAS PROJECT
CONTENTS
A. Project Development Objective
1. Project development objective 2. Key performance indicators
B. Strategic Context
Sector-related Country Assistance Strategy (CAS) goal supported by the project Main sector issues and GoM strategy Sector issues to be addressed by the Project and Strategic Choices World Bank Group Assistance Strategy
C. Project Description Summary
Project Description Project Costs and Financing Plan Political Risk Mitigation Strategy The Proposed Partial Risk Guarantees IBRD Enclave Guarantee Risks Associated with IBRD Guarantee Proposed IFC Investment The Proposed Equity Investment Risks Associated with IFC Equity Investment Key Policy and Institutional Reforms Supported by the Project Benefits and Target Population Project Implementation and Institutional Arrangements Summary o f Contractual Arrangements
D. Project Rationale
Major Projects Financed by the Bank and/or other Development Agencies Lessons Learned and Reflected in the Project Design Indications o f Government Commitment/Borrower Ownership Value o f World Bank Group in this Project
Page
1 1
7 9
12 13 15 17 17 18 19 19 19 20 22
25 25 27 27
E. Summary Project Analysis
1. Economic 2. Financial 3. Technical 4. Procurement 5, Financial Management 6. Environmental and Social
Executive Summary and Update Public Disclosure and Consultation Environmental Impact Assessments Resettlement Planning and Implementation Program (RPIP) Regional Environmental and Social Assessment (RESA) Monitoring and Auditing Provisions
7. Safeguard Policies
F. Sustainability and Risks
Sustainability Critical risks
G. Effectiveness Condition IBRD Partial Risk Guarantees IFC
H. Readiness for Implementation
I. Compliance with World Bank Group Policies
28 28 31 32 32 33 33 35 35 37 38 39 40
40 40
43 43
43
44
Annexes
Annex 1: Annex 2: Annex 3(a): Annex 3(b): Annex 4: Annex 4: Annex 5: Annex 6: Annex 7: Annex 8: Annex 9(a):
Annex 9(b):
Annex lO(a):
Annex 10(b):
Annex Annex Annex
Annex
1: 2: 2:
2:
Project Design Summary Detailed Project Description Estimated Project Costs Project Financing Plan Economic Analysis Attachment 1 : Economic Analysis Project Sponsors and Financial Analysis Project Financial Performance o f IFC Equity Investment Project Processing Timetable Mozambique at a Glance Indicative Terms and Conditions o f the IBRD Guarantees: A. SPT IBRD-Supported Facility Terms B. Indicative Terms and Conditions o f the IBRD Guarantees: A. ROMPCO IBRD-Supported Facility Terms B. Summary o f Material Obligations to be covered by the SPT Partial Risk Guarantee Summary o f Material Obligations to be covered by the ROMPCO Partial Risk Guarantee Statement o f Loans and Credits - IBRD, IFC, IFC & M I G A Environment and Social Assessment Management Plans and Monitoring Attachment 1 : Overview o f Suite o f Technical Reports for the Southern
Attachment 2: Summary o f Actions for Implementation o f the RESA
Proposed SPT IBRD Guarantee Terms
Proposed ROMPCO IBRD Guarantee Terms
Africa Regional Gas Project
45 49 57 58 59 65 66 74 76 78 80 80 83 88 88 91 96
98
100 103 118
122
M A P IBRD 32737
Mozambique Southern Africa Regional Gas Project
Project Appraisal Document Africa Regional Office / IFC Oil and Gas Division
Team Leaders, IBRD: Joel Maweni, Marie-Ange Saraka-Yao Team Leader, IFC: Gulrez Hoda Date: October 22, 2003
Country Directors: Oil and Gas Director: Rashad-Rudolf Kaldany Manager: Somit Varma, IFC Sector Director: Michel Wormser Sector Manager: Yusupha Crookes, IBRD
Sector: Energy and Private Sector Development Lending Instruments: IBRD Enclave Partial Risk Poverty Targeted Intervention: [ ] Yes [ x] No Guarantee
Darius Mans, Haydee Celaya
I [XI IFC Equity [ ] Credit [ ] Grant [XI IBRD Guarantee [ ] Other [Specify]
Commercial Loan Facility 229.00 IBRD SPT PRG 20.00 IBRD ROMPCO PRG 10.00 MIGA 72.00 Export Credit Agencies 127.00
Other Debt Facility Sasol Equity CMH Equity IFC Equity Total
* IFC investment could be up to US$18.5 million. I n addition to the U S $ l O million shown as direct contribution to the project, it wil l pay US$6 million to CMH, a subsidiary o f the Mozambican national oil company for past costs incurred in bringing the Project to this state and another US$2.5 million to
220.00 206.00
56.00 10.00*
721.00
Final maturity: 14 years from financial closing. Amortization profile: Repayment installments structured to meet the Project profile. Financing available without IBRD guarantee: No. I f yes, estimated cost or maturity with guarantee: Not Applicable. Implementation Period: April 2002 to December 2004. Effectiveness Date: November 30,2003. Closing Date: December 3 1.201 7.
1 Excludes capitalized finance charges and pre-investment fees for advisors.
A. Project Development Objective
Project Development Objective: (see Annex 1)
1. The proposed Project’s main objective i s to initiate the development and export o f Mozambique’s substantial natural gas resources in an environmentally sustainable manner, thereby contributing towards economic growth and poverty reduction. The proposed World Bank Group instruments (IBRD partial risk and MIGA guarantees’ and IFC equity investment) wi l l facilitate the mobilization o f critical private capital as wel l as commercial debt financing required for implementation o f the Project. In addition, IFC i s helping the Government o f Mozambique (GoM) on broadening the participation o f local investors and in raising financing to cover the shortfall in Mozambican participation in the Project. As this would be the first large scale privately-financed energy export project in the gas sub-sector, it would also provide a framework for other future private sector projects and facilitate further investments in gas exploration and other gas-related industries.
K e y Performance Indicators: (see Annex 1)
2. The project’s key performance indicators are as follows:
(a) Gas Exports: Export o f about 72 mi l l ion gigajoules (MGJ) o f gas in year 2004 ramping up to a plateau rate o f 120 mi l l ion gigajoules per annum (MGJ/a) in year 2009 and remaining at that level for the duration o f the Project.
Fiscal Benefits : As a host country, Mozambique wil l derive revenues in the form o f gas royalties and taxes amounting to about US$498 mi l l ion or US$ l05 mi l l ion in net present value terms at a discount rate o f 10%. In addition, Mozambique wil l receive returns on i t s equity participation in the Project’s upstream component (gas field development and central processing facility) and the pipeline over the Project’s 25 year period.
2 (b)
B. Strategic Context
Sector-related Country Assistance Strategy (CAS) Goal Supported by the Project: (see Annex 1) Document number: 20521-MOZ Date o f latest C A S discussion: June 1,2000
3. The latest CAS discussion for the period FY2001-FY2003 was held on June 1,2000. A new CAS covering the period FY2004-FY2007 will be discussed at the same time as the proposed Project. Under the new CAS, the World Bank Group’s overall approach i s to help Mozambique improve its investment climate, expand service delivery and build the capacity and accountability o f i t s institutions. T o support the achievement o f Mozambique’s long-term development priorities o f economic growth and poverty reduction, the CAS calls for the selective deployment o f the whole range o f Wor ld Bank Group instruments (IDA credits, guarantees, IFC instruments and MIGA guarantees) to leverage private resources for infrastructure development, including energy. The proposed Project would be the f i rst
A separate Board Paper on a proposed Modification o f Prior Concurrence to the Equity guarantee approved 1
by the MIGA Board on December 11,2002 (MIGAR2002-0076) i s being circulated separately and wi l l be discussed at the same time as the proposed IBRD/IFC financing. 2
oil, inflation rates in Mozambique and South Africa as applied to data provided by the Empresa Nacional de Hidrocarbonetos (ENH) and i ts advisers.
These represent staff estimates based on assumptions regarding critical variables such as the prices o f crude
1
operation under the new World Bank Group CAS to help Mozambique improve its investment climate in the gas sector by deploying IBRD’s Partial Risk Guarantee, IFC equity investment and MIGA’s guarantee. I t would also contribute towards an improved investment climate by providing a framework for development o f infrastructure projects in the future. In addition, the gas transportation infrastructure to be provided under the Project i s likely to attract additional investments in gas exploration, industrial and commercial gas applications, small scale gas-to-electricity schemes, and to promote the substitution o f imported petroleum products with natural gas. Although the extent i s yet to be determined, the substitution o f gas for imported petroleum products would help Mozambique reduce the foreign exchange costs o f imports while at the same time providing the population with a cleaner form o f energy.
4. The award o f contracts to Mozambican local contractors, about 205 to date, for a total o f approximately US$68 million and the use o f local inputs, (in excess o f the agreed local content target o f 15% for the Project, excluding imported materials) i s helping to spur economic activity and the creation o f jobs, particularly in the province o f Inhambane, one o f the priority regions for the GoM efforts to promote balanced regional development. In terms o f direct financial benefits, the estimated revenues to the GoM o f about US498 million in nominal terms to be generated by the Project over its 25-year life, will help promote growth. As stated in the Government’s Letter o f Development Program for the Energy Reform and Access Project, approved by IDA’S Executive Directors on August 19,2003, the revenues generated by the Project will be integrated into the budget through a line item and wil l be spent in a manner consistent with the GoM’s medium-term expenditure framework which emphasizes poverty reduction.
Main Sector Issues and GoM Strategy
5. energy sector strategy for addressing the following key sector issues: (i) a substantial, but largely untapped energy resource base due to lack o f investment and a limited domestic market; (ii) low access to modern energy, for both electricity and petroleum products; (iii) low operational efficiency and weak financial situation o f the sector; (iv) limited institutional and human resources capacity; and (v) adverse environmental, livelihood, and health impacts o f energy production and use. With the help o f the Bank and other donors, in recent years, the GoM has taken significant steps towards adopting a legislative and policy framework to reform the energy sector to address these issues.
The CAS objective o f improving the investment climate i s an essential ingredient o f the GoM’s
Substantial, but Largely Untapped. Enern Resource Base
6. hydroelectricity, coal, petroleum and natural gas. However, due to the region’s relatively small urban population (approximately 25.4%), access to commercial energy resources i s limited. The Republic o f South Africa (RSA), the dominant economy o f the region accounts for about 85% o f energy consumption and 77% o f energy production. Mozambique with a rich endowment o f modern energy resources i s increasingly playing a key role in the provision o f hydroelectricity, coal and natural gas. I t has the second largest hydropower potential (about 14,000 MW) in the region, but only about 2,500 MW has so far been developed. Its internal demand i s only about 200 MW, hence the entire output o f its largest power plant, the Cahora Bassa hydroelectric scheme on the Zambezi River with an installed generating capacity o f 2,075 MW, i s exported to the RSA and Zimbabwe, the two biggest regional energy consumers. A further hydropower development i s being considered by the private sector at Mepanda Uncua (2,400 MW), largely for export.
Southern Africa3 i s endowed with diverse commercial energy resources including
Fourteen countries make up the Southern Africa Development Community (SADC): Angola, Botswana, 3
Democratic Republic o f Congo (DRC), Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe.
2
7. coal mines, whose reserves are estimated between 2 bi l l ion and 5 bi l l ion (bn) tons in Tete province, i s being contemplated by South African investment companies and international mining companies.
Coal resources are also abundant in Mozambique. The commercial development o f the Moatize
8. and Angola. Although natural gas consumption i s insignificant in the region, several projects for expansion o f i t s use are underway, including the proposed Project. Gas was f irst discovered in Mozambique in the Temane fields in 1956, followed by the discovery o f the Pande f ie ld in 1961. Whi le the combined Temane and Pande probable reserves are estimated to be at least 2.78 Tcf ‘ (o f which 2 T c f are proven), given the limited scope o f exploration in Mozambique thus far, the full extent o f natural gas reserves i s far f rom being established.
There are significant natural gas reserves in Southern Africa, primarily in Mozambique, Namibia
9. position to use energy to leverage i t s economic growth. Exports o f primary and secondary energy products and o f energy intensive manufactured products could provide a substantial source o f revenues if adequate investment, estimated at about US$10 bi l l ion over a five-year period, could be mobil ized to exploit the country’s full energy potential, including mining. The GoM’s national energy strategy, completed in October 2000, gave explicit recognition to the two key imperatives for an enabling investment climate for the energy sector. First, the strategy recognized the importance o f a supportive policy and regulatory framework to optimize the potential for private sector-led development o f the sector. Second, given Mozambique’s l imited institutional and human ski l ls base, the strategy included a G o M decision to utilize external technical assistance for structuring and negotiating large energy export projects, while simultaneously developing domestic capacity.
Mozambique’s abundant and diverse energy resource base therefore places it in an excellent
10. the introduction o f competition in the sector, the shift o f the Government’s role f rom that o f an investodmanager to that o f a policy maker and a business facilitator. The reforms resulted in: (i) the conversion o f major parastatals, Electricidade de Mocambique (EdM) in the electricity sector, Empresa Nacional de Hidrocarbonetos de Mocambique (ENH) in the hydrocarbons sector, and Petromoc in the petroleum sector, into corporate entities operating under commercial law; (ii) creation o f regulatory/quasi- regulatory bodies in charge o f overseeing the sector; and (iii) a legal framework for unbundling o f the vertically integrated power uti l i ty into several business units and for future privatization o f some o f the business units thus created.
Even prior to finalization o f the energy strategy, the G o M had enacted a series o f laws to signal
1 1. enactment o f Petroleum L a w 3/2001 whose primary objectives were: (i) to improve the institutional set- up and policy framework, in particular for the upstream development; and (ii) actively encourage private participation and investments in upstream development, particularly the gas sub-sector. On the institutional side, the law has prompted the clarification o f responsibilities o f the key sector entities in the sector. In the Ministry o f Mineral Resources and Energy (MIREME), the National Directorate for Coal and Hydrocarbons (DNCH) was empowered with the oversight o f the exploration activities. The National Directorate for Energy (DNE) was entrusted with the supervision o f the distribution activities in the local gas market.
Subsequently, in 2001 significant changes were introduced in the petroleum sector with the
12. Mozambique has yet to implement the enabling regulations, adequately strengthen i t s sector institutions and establish a track record as an attractive destination for large private sector capital flows. Hence the
Despite these significant strides in reforming the sector’s policy and regulatory framework,
The reserve estimate i s based on a report prepared by independent consultants, DeGolyer and MacNaughton (D & M) o f the U.S.A. Sasol’s estimate o f probable reserves i s 3.2 Tcf.
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need for: (i) technical assistance to support implementation o f the detailed program laid out in the Letter o f Development Program (LDP) submitted to the Bank in support o f the Energy Reform and Access Project (ERAP); and (ii) the proposed IBRD and MIGA guarantees to cover the lenders against political risks in the transition period while the policy, regulatory and institutional framework improvements are implemented. The technical assistance (TA) to be provided under ERAP includes support for: (i) negotiation o f exploration and production agreements, hydrocarbon resource data management, and resource assessment, currently being handled by DNCH; (ii) development o f a framework for growth o f domestic gas markets, including concessioning arrangements, tariff setting, etc. through DNE; and (iii) provision o f technical, legal and financial expertise for the Companhia Mozambicana de Hidrocarbonetos (CMH) and the Companhia Mozambicana de Gasoduto (CMG) --- ENH subsidiaries --- to enable them to participate in the management o f the joint venture for the gas field development and manage the GoM's investment in the pipeline operations respectively; and (iv) support for building the GoM capacity for management o f environmental and impact assessments as well as for monitoring implementation o f environmental management plans. This TA wi l l build on the earlier support provided to the GoM under the Gas Engineering Credit (Credit 2629-MOZ) which supported the delineation o f the Pande gas fields, the identification o f private investors and the negotiation o f agreements for the commercialization o f both the Pande and Temane gas reserves as well as for development o f hydropower resources. The earlier efforts have resulted in recent agreements between the GoM and Sasol for the development o f the Pande and Temane gas fields and export o f the gas to the RSA through an 865 km long pipeline. Exploration for additional gas resources continues with the participation o f Sasol and other private investors, in partnership with ENH, the national o i l company.
13. for the Project, it would not have been adequate for the realization o f this Project in the absence o f a framework for regional cooperation and integration between Mozambique and South Africa in particular and in the SADC region generally. Mozambique's ratification o f the SADC Protocol in 1999 and increased trade relations with South Africa have given impetus to regional integration initiatives, particularly in energy, transport and water resources management. Foreign direct investment in infrastructure (N4 toll road linking Maputo to Gauteng province in South Africa, railways, power transmission concession) i s concentrated around the Maputo, Nampula and Beira corridors and includes significant participation o f regional financial institutions and the private sector.
Regional Context. While a minimum policy and regulatory framework i s a necessary condition
Low Access to Modern Enerm
14. Only about 6 percent o f Mozambican households have access to electricity, and over half o f these are in Maputo, the capital, and i ts surrounding areas. O f the 120 or so "district capitals" more than 50 are without any form o f public electricity supply, or have sporadic supplies from small diesel-fueled gensets to a handful o f customers via old and poorly maintained small grids. In the supplied areas, supply reliability is low. Access to petroleum products by households (liquefied petroleum gas and kerosene), which could help to reduce the dependency on woodfuel, i s also very low due to inadequate purchasing power, high import transportation and storage costs.
15. supplementation o f the traditional grid extension approach with a package o f technical and institutional changes to lower costs o f service, enhance affordability, and bring in competitive private sector participation; and (ii) for petroleum products, the recent liberalization o f the market and the ongoing restructuring o f Petromoc, the national downstream company, to improve efficiency and reduce products' costs. The ERAP wil l initiate a program for addressing this problem more comprehensively over a number o f years. In the case o f natural gas, it i s expected that demand by households w i l l be negligible (given the climate, and affordability considerations); on the other hand, domestic gas resources could be
The GoM's strategy for increasing access to modern energy forms involves: (i) for electricity, the
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used primarily for power generation, to complement hydroelectric and coal-based power plants, wherever the economics so justify. Mozambique already has some experience with the development and operation o f gas-to-electricity mini-grids which were developed under the IDA-assisted Urban Household Energy Project in the Inhambane province.
Limited Institutional and Human Resources Capacitv
16. institutional and human resource capacity remains a major constraint to the design and implementation o f projects and programs necessary for achieving results on the ground. Thus, DNCH, DNE and ENH continue to require substantial technical assistance inputs to execute their functions. This situation is likely to persist for some time to come, given the scarcity o f graduates with adequate skills.
Whi le Mozambique has made significant progress in reforming the energy sector, the limited
17. sector institutions --- the technical regulatory agencies and ENH subsidiaries (in the transition to privatization) --- and training o f their staff. The strategy also includes better selection and coordination o f donor technical assistance support, more focused training to address the priorities at hand, and increased reliance on the private sector.
The G o M intends to support implementation o f i t s energy strategy with strengthening i t s key
Adverse Environmental. Livelihood, and Health Impacts o f Energy Production and Use
18. and agro/animal wastes). Heavy reliance on biofuels imposes significant environmental costs. The growing demand for charcoal and fuelwood, combined with inefficient charcoal production practices, has led to significant depletion o f forest stocks. In addition, traditional combustion technologies and practices cause indoor pollution, with adverse health consequences, particularly for women and children. Use o f modern cooking fuels i s limited, even in urban areas, by their high cost in relation to incomes.
Most o f Mozambique's primary energy demand i s met by traditional biofuels (wood, charcoal,
19. modern forms o f energy to partially substitute for biofuels; (ii) reforming the legal and regulatory framework for land use, wood extraction, and charcoal production and i ts transport; (iii) strengthening the resource management capabilities o f the rural communities and creating alternative means o f income generation, other than wood fuels exploitation; and (iv) employing more efficient and/or cleaner technologies. Studies to be undertaken by the G o M for the possible use o f gas in the domestic market w i l l include an economic feasibility study o f substituting electricity for biomass fuels, which could help to mitigate the adverse environmental impacts o f bio-fuels.
T o mitigate the above adverse impacts, the G o M strategy includes: (i) expansion o f access to
Sector Issues to be Addressed by the Project and Strategic Choices
20. Mozambique to attract investment to the sector and to begin to establish a track record for the sector as an attractive destination for significant private sector capital flows. Wor ld Bank Group assistance for expansion o f access to modern forms o f energy and for strengthening sector institutions and human resources w i l l be provided under the Energy Reform and Access Project as indicated above.
The World Bank Group support will facilitate financial closure for the Project, thereby helping
21. The Project concept outlined here reflects several strategic choices by the Mozambican authorities. The alternative choices for maximizing the value o f the Pande/Temane natural gas resources are: (i) gas distribution to households; (ii) fuel o i l and some diesel o i l substitution; (iii) gas use for
5
electricity generation; and (iv) the creation o f new gas-based industries. Options (i) and (ii) --- distribution o f gas for household use and substitution o f fuel and diesel oils, either separately or taken together, do not present a sufficiently large market to make exploitation o f the gas reserves commercially feasible. For example, the consumption o f fuel oi l in Mozambique i s very small and dispersed (about 20,000 tons per annum) so that local gas grids wil l have l i t t le economic merit in the short-term. The alternative o f using gas to produce electricity for the domestic market i s also not viable because Mozambique has substantial hydropower resources which are more competitive than gas, although gas i s a suitable option for small-scale complementary systems. At the same time exporting gas-based power i s constrained by the current surplus in the RSA, the largest potential market. The fourth option would be to create gas-based industries, but their viability would need to be established and this would take time. St i l l another alternative would be to convert the gas to Liquefied Natural Gas for export markets --- but, the proven reserves, at 2 Tcf, are insufficient for this type o f application. Thus, because o f the limited opportunities for using gas resources internally, Mozambique has not been able to exploit these reserves since they were discovered in the early 1960s. This leaves the alternative o f gas exports to the RSA as the only viable option for Mozambican gas. In the short- to medium-term, Sasol i s the only buyer with in- depth technical expertise, the financial wherewithal, knowledge o f the gas market, and an existing adequate customer base to make the project viable5.
22. Mozambique also had to make the strategic choice regarding the mode for developing the gas resources as a public sector project, private project or public-private partnership. Commercialization o f the gas resources by public sector institutions was ruled out early on due to limited financial resources and lack o f appropriate technical ski l ls and access to markets and technology. At the same time local participation was seen as essential to allay the political risks associated with the exploitation o f such a large resource-based project. However, there were no domestic private enterprises with the requisite human, financial and technical ski l ls to partner with Sasol, hence the decision to include ENH as a public sector sponsor, The GoM long-term strategy, nevertheless remains to include local private sector participation, once the project has become operational and qualified local parties are identified, a process that is being supported by IFC advisory services.
World Bank Group Assistance Strategy
23. completed and proposed operations.
The World Bank Group i s supporting the GoM’s strategy with the following ongoinghecently
(a) Gas Engineering Project (Cr, 2629-MOZ, closed June 30,2003) --- provided support for: (i) Pande gas field delineation to prove the adequacy o f reserves for commercialization; (ii) negotiation o f agreements for commercialization o f the Pande/Temane gasfield with investors; and (iii) initiation o f the process o f strengthening Mozambique’s gas sub-sector institutions to enable them to play a substantial role in future gas operations.
(b) Energy Reform and Access Project (approved by IDA’S Executive Directors on August 19, 2003) --- wi l l help Mozambique to: (i) expand access to electricity in a commercially viable manner so as to support economic growth and the provision o f social services; and (ii) strengthen key institutions in the sector, including targeted support to: (a) the gas sub-sector institutions, DNCH and MICOA to enable them to monitor implementation o f contractual obligations under this project; (b) DNE to develop a framework for development o f the domestic markets for gas;
Several competing proposals for commercialization o f Mozambique’s gas, including those of ARC0 and 5
ENRON were considered, but ultimately only Sasol was able to provide a viable scheme.
6
and (c) ENH subsidiaries through provision o f technical, legal and financial services to help manage the GoM’s interests in the transition to privatization.
Proposed Southern Africa Regional Gas Project --- for which: (i) two IBRD enclave partial risk guarantees wil l cover defined commercial lenders against Mozambican political risks, thus enabling the sponsors to raise required commercial debt at reasonable prices and maturities and enable completion o f the Project; (ii) a MIGA guarantee for political risks for equity was approved by MIGA’s Executive Directors in December 2002 and additional polit ical risk coverage for debt i s being proposed; and (iii) an IFC equity investment wi l l be made in the Project’s upstream component.
IFC Support for Gas Distribution --- IFC i s working with the Matola Gas Company, a jo in t venture between Gigajoule Africa o f the RSA and ENH, which plans to distribute gas in the Matola industrial area near Maputo. The Matola Gas Company wil l supply gas to industrial customers, including to Mozal for i t s second stage expansion, through a 75 km pipeline to be connected to the main pipeline at Ressano Garcia, one o f the five gas take-off points in Mozambique. IFC i s examinin the possible use o f carbon credits to improve the gas distribution project’s commercial prospects . I!?
Southern African Power Market Project --- a regional project which aims to promote power trade among the pool members, wi l l facilitate investment flows into Mozambique to develop i t s abundant energy resources, particularly hydro, for the regional market. The f i rst phase o f this Adaptable Program Loan i s scheduled to be discussed by the Board o n November 11,2003. The second phase which includes construction o f a transmission line to link Mozambique to Malawi i s scheduled to be discussed by the Board in the f i rst quarter o f FY2005. This transmission link wil l enable Mozambique to earn revenues from power sales to Malawi while the latter wi l l be able to increase i t s power system security and to avoid higher power costs in the long run.
Project Description Summary
Project Description (Annex 2)
24. (the gas fields development and central processing facility); and (ii) the transmission component comprising the gas pipeline from Mozambique to the Republic o f South Africa7. The Pande and Temane
The Project consists o f two key distinct but integrated components: (i) the upstream component
Sasol i s also considering the use o f carbon credits in South Africa and has already commenced registration
This i s the project definition adopted for the purposes o f project analyses (including safeguards issues),
6
o f the Project in this regard.
however, for the purposes o f the use o f the proceeds o f the debt guaranteed by the Bank, the Project includes only those components which are physically located in Mozambique; i.e. the upstream component and the gas pipeline to the Mozambique-RSA border. Section 4 (i) o f Article 111 o f the IBRD Articles o f Agreement provides that IBRD may guarantee, participate in, or make loans to a member, a political sub-division o f a member or an enterprise in the territory of a member on the condition that, when the member in whose territories the project i s located i s not i t se l f the borrower, the member or the central bank or some comparable agency o f the member which i s acceptable to IBRD, fully guarantees the repayment o f the principal and payment o f interest and other charges on the loan. As the proceeds o f the loans guaranteed by IBRD wi l l only be used for the components o f the Project located in Mozambique, IBRD will only seek a counter-guarantee from Mozambique and not the Republic o f South Africa. This approach has been followed by IBRD in guarantees for other cross-border projects, including the Sea Launch Project and the Bolivia-Brazil Gas Pipeline Project.
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7
gas fields reserves are estimated to be at least 2.78 tr i l l ion cubic feet (tcf), o f which 2.0 t c f are proven. The Project’s upstream component includes two sponsors, Sasol, a leading South Afr ican petrochemical company with a market capitalization o f approximately US$8 billion, and ENH, the Mozambican national o i l company which, through i t s subsidiary, CMH, wil l ho ld the GoM’s interests in the upstream.*. The pipeline component o f the Project includes three sponsors, Sasol, CMG, a subsidiary o f ENH and i-Gas, a subsidiary o f the South A h c a n Government’s Central Energy Fund (CEF)’. Implementation o f the Project i s substantially completed with more than 80% o f the Mozambican and more than 60% o f the South Afr ican sections o f the pipeline already completed as o f June 2003 and more than 80% o f the central processing facility also completed as o f the same date.
(a) The Upstream Component. The fields are located in Mozambique’s Inhambane Province. An unincorporated jo in t venture (UJV) consisting o f Sasol Petroleum Temane Limitada (SPT), a whol ly owned subsidiary o f Sasol, C M H and IFC will develop the gas fields and the associated processing facilities. Sasol has been designated as the operator o f the UJV. I t plans to make use o f the five previously drilled appraisal wells and develop the Temane gas reservoir f i rst as it has higher pressure than the Pande reservoir. Gas will ultimately be gathered f rom 18 wells in the Temane f ie ld and later o n from 16 wells in the Pande Field as the pressure equalizes, giving a total o f 34 wells, phased in over the l i fe o f the combined fields to maintain the sales plateau. The Central Processing Facil ity (CPF), which i s part o f the upstream component, will be constructed at Temane. The raw gas will be gathered through a 177 km network and processed at the CPF where it will be dehydrated, the condensate will be extracted, and the gas compressed into the inlet flange o f the gas pipeline for transportation to downstream customers. The CPF consists o f gathering networks linking the wells, drying, compression and condensate removal facilities. The Project includes associated infrastructure, such as roads, utilities, workshops, accommodation units and offices.
(b) The Gas Pipeline Component. The gas pipeline component consists o f an 865-km 26-inches diameter high pressure steel pipeline between the gas fields and Sasol’s petrochemical complex at Secunda in South Africa. The pipeline will be constructed by the Republic o f Mozambique Pipeline Investments Company (Pty) Limited (ROMPCO), currently a Sasol wholly-owned subsidiary and will be operated by Sasol Gas Limited. I t wil l be buried at a minimum o f one meter below the ground surface. Without in i t ia l intermediate compression, the pipeline wil l have a capacity o f 120 MGJ/a. Sufficient wal l thickness has been allowed in the gas pipeline design to enable the capacity o f the pipeline to be doubled to 240 MGJIa with the addition o f midpoint and quarterpoint compression, should market demand and availability o f reserves justify this. The pipeline design includes five take-off points in Mozambique (at Ressano Garcia/Maputo, Magude, Macarratane, ChigubdFunhalouro and Temane) to provide for possible domestic use o f gas. The 525-km Mozambican route portion will start at the Temane CPF to the immediate Nor th West o f Vilanculos, and proceed to the Mozambique-RSA border near the town o f Ressano
Under the Petroleum Production Agreement (PPA), C M H has a 30% interest in the gas fields and an option, under the Joint Operating Agreement to acquire a 30% interest in the Central Processing Facility (CPF). While the C M H has not yet exercised its option for the CPF, C M H intends to do so. The Project i s prepared on the basis that C M H will exercise its option for a 30% interest in the CPF and that i t w i l l farm- out 5% o f i t s interest in both the gas fields and the CPF to IFC.
The Governments o f Mozambique and South Africa through C M G and i-Gas respectively have an option to acquire up to an aggregate o f 50% o f shares in ROMPCO.
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9
8
Garcia, from where the South African portion then continues to Secunda where it wi l l be tied into Sasol’s gas distribution network.
25. following activities which are outside the scope o f the Project: (i) conversion o f i ts gas distribution network equipment and customer systems, from hydrogen-rich gas to natural gas; (ii) conversion o f the Sasol’s Sasolburg chemical complex from coal to gas as a feedstock for chemical production; and (iii) modification of Sasol’s synthetic fuel plant in Secunda to augment coal-based growth in the production o f petroleum and petrochemicals. Al l o f these components are being undertaken by Sasol on an integrated project management basis in order to ensure aligned completion. Over a period of thirty years, Sasol Gas Limited has developed a pipeline network covering more than 1,500 km and delivers gas to over 600 customers, mainly in the industrial sector. A trained team wil l help the customers to convert in a phased approach after the arrival o f natural gas in South Africa. Sasol believes there could be a substantial increase in industrial consumption o f gas which i s currently constrained by inadequate supply. Sasol Gas’s captive market (Sasol Chemical Industries Limited, National Petroleum Refineries of South Africa Ltd. and Sasol Synfuels (Pty) Limited) and i t s third party customers wi l l form the base load required for the Project at about 94 MGJ/a. One o f the motivations o f Sasol to import gas i s as an alternative to the imminent need to develop a new coal mine given that the previous coal source had reached the end o f i ts economic life. Sasol will s t i l l develop a smaller coal mine for generation o f electricity.
To utilize the gas imports in South Africa, Sasol, the Project’s private sponsor, wi l l carry out the
Project Costs and Financing Plan
26. Financing i s being organized for expenditures to be incurred until December 2004 (Initial Funding Period), after which cash generated by the Project as well as sponsors’ equity contribution wil l finance further development. The Project cost on this basis i s estimated to be US$721 million (excluding capitalized finance charges), but including an amount of US$96.7 million incurred by Sasol prior to the signature o f the key Petroleum Production Agreement (PPA) in October 2000 (Sunk Cost). The Project cost o f ~ $ 7 2 1 million includes US$3 17 million for the upstream component and US$404 million for the pipeline component (Annex 3 (a)).
27. The financing o f the Project i s being structured and implemented in two separate financing and security packages for the upstream and pipeline components. The gas fields and the CPF wil l be financed jointly by SPT, CMH and IFC in the ratio 70:25:51° and the pipeline i s being implemented and financed solely by ROMPCO at this time, but CMG and i-Gas may exercise their option to purchase up to an aggregate o f 50% o f the shares in ROMPCO. The financing plan is, therefore, as follows:
(a) Financine o f the Upstream Component. The financing o f the upstream component i s as follows:
0 SPT: Sasol wi l l finance i ts 70% investment in the gas fields and the CPF via its subsidiary, Sasol Petroleum Temane Limitada (SPT). Sasol wi l l provide an equity investment into SPT and SPT wi l l raise commercial debt financing from Standard Corporate Merchant Bank (SCMB), as lead arranger, and from the Development Bank o f Southern Africa (DBSA).
lo While at present these shares apply to the gas fields, for the CPF, it i s assumed that CMH will exercise i t s option to take a 30% share and that through a farm-in, IFC wi l l acquire 5% out o f CMH’s 30% share.
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0 CMH: CMH has decided to farm-out to IFC 5% o f its original 30% interest in the joint venture with SPT. It will raise US$56 million financing for i t s 25% share o f project expenditures from: (a) an upfront payment o f about US$6 million from IFC, representing CMH back costs; and (b) various domestic and international financing sources.. In addition, CMH will need a further US$4 million for i t s own use to cover working capital needs, financing costs and contingencies. In case CMH cannot raise adequate financing, Sasol has agreed to provide a guarantee to enable CMH to obtain debt financing for i ts investment in the gas fields.
0 IFC: In addition to i ts payments o f back costs to CMH, IFC would finance its pro rata share o f the Project costs.
(b) Financing for the Pipeline. Currently Sasol owns 100% o f ROMPCO which will be holding the pipeline assets. Sasol i s expected to fund ROMPCO through equity and debt financing from SCMB, EIB, and DBSA. The GoM and ENH through another subsidiary, Companhia Mocambicana de Gasoduto (CMG), and the Government o f South Africa, through CEF (Pty) Limited and i ts subsidiary iGas (Pty) Limited have an option to acquire, on an aggregate basis, up to 50% o f the ownership o f the pipeline.
The table below summarizes the S ta f f s estimates' ' o f the Project's financing plan in the Initial Funding period (see also Annex 3(b)):
Project expenditures have been incurred over time in different currencies and the exchange rate o f the South African Rand against the US dollar has fluctuated substantially. The cost estimates therefore represent the Staffs best estimates based on information provided by the sponsors as o f June 30,2003, but may vary from the current estimates o f individual sponsors.
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Upstream Development - Unincorporated Joint Venture C M H Equity Debt Facilities
Total CMH
IBRD Enclave PRG MIGA ECAs
IFC
20.00 27.00 50.00
SPT12 Equity Debt Facility'
Total SPT
IBRD Enclave PRG MlGA
Investments in Upstream Project Gas Pipeline currently wholly-owned by Sasol Equity Debt Facil it ie~'~ Investments in the Gas Pipeline TOTAL Financing Required for the Project
10.00 45.00
Funding Origin
18.00 38.00
148.00 182.00
285.00 320.00
Includes Sunk Cost o f US$96.7 million. 12
Includes a Commercial Debt Facility with Political Risk Cover (PRC) as follows: 13
Total
56.00
10.00
330.00
396.00
605.00 1001.00~~
Includes a Commercial Debt Facility with Political Risk Cover (PRC) as follows: 14
The difference between the estimated project costs of US$721 million and the total required financing o f 15
US$1,001 million arises from: (a) the inclusion o f US$130 million in capitalized finance charges for two years (including the costs o f advisers) in Sasol's financing plan; and (b) a US$150 million exchange rate gain resulting from the significant strengthening o f the SA Rand against the US$ in the past year (from about Rand 13/US$ to Rand 7.5/US$). Most project expenditures were incurred in US$, Euro and SA Rand in the past one and half years. Taking actual exchange rates applicable at the time when expenditures were made, as well as the rates for forward exchange contracts which were used to cover capital expenditures incurred in US$ against hrther depreciation of the Rand, the Project Costs (US$ equivalent) amount to US$721 million. However, the financing plan was prepared in Rand as the Project will be mainly funded in Rand. Converting the Rand financing plan to US$ at the current approximate exchange rate of Rand 7.50/US$ results in a higher US$-equivalent funding requirement.
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28. At present, Sasol i s financing the full cost o f construction from: (i) a bridge loan from DBSA which will be rolled over into a long-term facility at financial close; and (ii) from i t s own equity. A portion o f the equity will be refinanced out via long-term loans at the first drawdown. For the bridge loan, MIGA had provided in December 2002 equity cover amounting to US$27 million for Sasol Petroleum International (Pty) Limited’s investment into SPT and US$45 million for Sasol Gas Holdings (Pty) Limited’s investment into ROMPCO. CMH and IFC will reimburse Sasol for their share o f these expenditures incurred by Sasol after October 2000.
29. The permanent senior debt financing from the DBSA and SCMB tranches are in Rands. Other developmental institutions and multilateral agencies will be funding in Euros and the EIB will provide Rand equivalent o f Euro 100 million. SCMB is syndicating to other commercial lenders in the South African market for their participation in the Project after financial closure.
30. To raise the necessary funding for SPT and ROMPCO, Sasol i s relying primarily on a corporate financing strategy and approach by providing debt service support to the lenders for Project commercial risks for loans to SPT and ROMPCO for al l scheduled debt and interest payments. While Sasol i s willing to assume commercial risks on the Project via corporate debt support to lenders, it i s unwilling to assume full Mozambican political risks and has therefore structured a financing package to achieve the political risk mitigation strategy as described below.
Political Risk Mitigation Strategy
3 1. level, mitigation i s being sought through project structuring by ensuring Mozambican participation in the Project. To this end ENH will be a joint sponsor o f the Project and invest in it through i t s two subsidiaries, namely CMH and CMG. The World Bank Group i s supporting this aspect o f political risk mitigation through IFC’s investment in the upstream component and its advisory work related to mobilization o f funds for CMH, with an emphasis on local investors. At the second level, the political risk i s sought to be managed by the use o f political risk insurance from ECAs and financing by bilateral and multilateral institutions. To this end Sasol has secured the support o f export credit agencies (EFIC o f Australia and ECIC o f South Africa and possibly from SACE o f Italy), EIB and DBSA. EFIC, ECIC, EIB and DBSA have already approved their facilities in support o f the Project. DBSA i s assuming full Mozambican political risk for a bridge facility and for the long-term financing. The EIB facility i s to be disbursed in Rand and secured against a corporate guarantee from Sasol. The facility also provides for a partial carve-out o f Mozambican political risk which i s assumed by EIB. However, commercial lenders are unwilling to assume full Mozambican political risks and have clearly indicated that the commercial debt facility depends on the availability and scope o f political risk cover. Sasol and the commercial lenders are therefore pursuing a political risk mitigation strategy that involves: securing maximum coverage from the ECAs as well as MIGA and IBRD guarantees for the SCMB arranged commercial loans.
The strategy to mitigate political risk in this cross-border Project i s two pronged. At the first
32. Efforts were made to achieve the simplest package and thus reduce the potential complexity o f implementing and managing four covers from different underwriters covering different classes o f r isks with different eligibility for cover and claim procedures. As a result EFIC and MIGA (and possibly SACE) will be cooperating under MIGA Facultative Reinsurance Program. A part o f MIGA‘s equity guarantee (US$72 million) approved by MIGA’s Executive Directors in December 2002, will be rolled over into a debt guarantee.
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The Proposed Partial Risk Guarantees
33. While securing the maximum financing from various sources for the Project, Sasol has turned to IBRD as guarantor of last resort (para. 37) to provide necessary support to complete the financing for the Project. As per the agreed principles o f deployment o f the Bank Group private sector instruments16, the PRGs would be deployed because several o f its key features (size and risk of the transaction, benefits o f an explicit counter-guarantee, and linkage with Bank’s remedies, Bank’s sector dialogue and conditionality, etc.) are critical from a risk management and market point o f view. First, the PRGs are intended to assure successful financial closure when debt financing without political risk cover has proven difficult to achieve for infrastructure projects in a country like Mozambique. Second, the PRGs are being deployed because the gas sector i s in the initial development stages with untested regulatory framework: the legislation was enacted as recently as 2001, regulations are still being developed and regulatory capacity remains to be built because o f limited experience o f government agencies in dealing with complex financing arrangement. Third, the Project would be the first green-field cross border infrastructure project o f this size in Southern Africa.
34. enhance the credibility o f the undertakings o f the host government. While limited political risk coverage i s available for this Project, none o f the other political risk insurers has the type o f substantive dialogue with the GoM and direct relationship set forth in the Indemnity Agreement between IBRD and GoM. This direct relationship will be of the utmost importance during the Project implementation period to ensure GoM’s performance o f i ts obligations upon which the Project’s viability i s critically dependent. While Mozambique has been successful in attracting mega-projects (Mozal), this Project requires substantial government undertakings under the PPA and PA both during implementation and operational phases.
Fourth, the explicit counter-guarantee and linkage to the Bank sector dialogue are critical to
35. lenders to SPT and ROMPCO, used to finance eligible expenditures in Mozambique, respectively, resulting from a breach by the GoM o f specified material obligations as set forth in the Petroleum Production Agreement (PPA) and the Pipeline Agreement (PA), (see Annex lo). The PRGs will provide cover as defined in the two separate tranches o f SCMB loans to SPT for up to US$20 million and for ROMPCO for US$lO million equivalent. The proposed SCMB loans (see Annex 9) are for a term o f 12 years with a possible term extension of up to two years. The term includes a capital grace period o f 2 years, These loans will be disbursed in Rand in 2003 and 2004. Given that the loans are in Rand and the PRGs will cover Rand loans, but the Bank’s exposure will be subject to a U S dollar cap. Sasol has agreed to protect the lenders from the foreign exchange risks which may arise because o f the guarantee being capped at a fixed dollar amount. The sponsors have scheduled financial closure in the fourth quarter of 2003 as they have been financing the investments, so far, with their own equity as well as a bridge loan and need to secure long-term financing to achieve: the targeted debt equity ratio, refinance the bridge loan and shareholder loans and obtain acceptable political risk cover and mitigation.
It i s proposed to provide two PRGs, covering debt service defaults o f the loans from commercial
36. The PRGs would include coverage for defaults on the guaranteed loan resulting directly from a breach by GoM o f specified obligations in the PPA (in the case o f the SPT loan) and in the PA (in the case o f the ROMPCO loan), including: (i) withdrawal o f authorizations granted by the GoM in the PA and PPA with respect to the development and operation o f the Project by ROMPCO and SPT; (ii) failure to ensure that SPT or ROMPCO, as the case may be, derives the same economic benefits as provided in
“Enhancing the Use o f World Bank Guarantees as an Operational Tool - A Review o f the World Bank Guarantees” R2000-215, IDA/R2000-215, dated November 27,2000, paragraph 5.5 - Clarifying the role o f the World Bank partial risk guarantee vis-&vis MIGA and IFC instruments.
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the PPA or PA, respectively, following a change in law in Mozambique; (iii) failure by GoM to expeditiously award licenses, permits, approvals, company registration, expatriate permits, land use rights necessary to finance, develop and transport gas; to enforce licenses terms (length o f period, renewal terms, exclusivity, free access to pipeline corridor, environmental accords, appointment of management committee members, regulatory authority approval and to abide by land use and access rights); (iv) expropriation; and (v) currency transferability. The PPA and PA, which define GoM obligations, do not include any protection from GoM for war and civil disturbance and such risks would not be covered by the PRGs. A more detailed description o f the specific material obligations under the PPA and PA covered by the PRGs i s included in Annex 10. The PRGs would only be triggered following the rendering o f an arbitral award that indicates that the loan covered by the PRG i s in default as a direct result o f the breach by GoM o f one or more o f the provisions in the PPA (in the case o f the SPT loan) or the PA (in the case o f the ROMPCO loan) for which coverage i s provided under the PRGs. Notwithstanding the foregoing, a PRG would provide for provisional payments to cover debt service defaults subject to the first loss deduction equivalent to six months debt service, in the event that GoM frustrates the arbitration process under the PPA or the PA, for a period o f more than six months. If the arbitration process remains frustrated for three years following the provisional payment under the PRG, the guaranteed lenders that have received provisional payment would then be entitled to retain such payments unconditionally. The issuance o f the PRGs will be conditional upon a receipt by IBRD o f the consent o f the RSA to the provision o f the guarantees in Rand, as required under Section 1 (b) o f Article IV of IBRD’s Articles o f Agreement, and the access to South Africa for the purposes o f undertaking environmental and social monitoring o f the portion o f the Project on South African territory (see para. 63).
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Table 2: Allocation o f Project Risks for the Guarantees
Phase
Pre- construction
Construction
Operation
PPA & PA
Operation in South Africa
Risks/Obligations
Project design.
Debt and equity financing. Cost overruns. Construction delays. Operation and maintenance (0 & M). Output quality Specifications. Inadequate Gas Reserves.
Changes in laws. Exclusive license to exploit gas field. Authorization to construct and operate the pipeline. PPA will not be amended or modified in a manner inconsistent with the terms o f the Agreement. No undue delay in granting approvals, licenses and permits or revoking such approvals. Currency transferability. Expropriation. War & Civil Disturbance. Gas demand in RSA.
Technical risks in conversion o f Sasol’s facilities to natural gas conversion use. RSA regulatory risk.
Equity Sponsors
X
X X X
EPC I ?roject 3perator
X X X
X
:ommercial .enders 17
X X X
X
X
X
MIGA
X X
X
X
X
X X X
BRD Snclave harantee
X X
X
X
X
X X
IBRD Enclave Guarantee
37. entitled: “Use o f IBRD Guarantees to Support Private Enclave Projects in IDA-only countries”, (R97-85, IDA/R97-36 dated April 28, 1997). Paragraph 26 o f the above Board paper states that enclave “guarantees would be provided only for export-oriented, commercial projects expected to generate foreign-exchange outside o f the country where there are adequate arrangements to ensure that the
l7
The framework for enclave guarantees i s set forth in Memorandum to the Executive Directors
The commercial risks identified and allocated to the commercial lenders are to be covered by Sasol pursuant to the terms o f the Debt Service Support Agreements.
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borrower will be able to meet i ts obligations to IBRD in respect o f IBRD guarantee o f the loan". The Project i s a private sector sponsored commercial project exporting gas from Mozambique for consumption in the Republic o f South Africa. One guarantee would be provided for a commercial loan to SPT whose revenues would be paid in US dollars in accordance with the Gas Sales Agreement (GSA). The other guarantee would be provided for a commercial loan to ROMPCO whose revenues would be paid in South African Rand. The proposed Project would be supported by the first IBRD enclave guarantees. Except for the deviations described in paras. 38 and 39 below, the SPT and ROMPCO guarantees are consistent with the framework for IBRD enclave guarantees, as set forth in paras. 27 to 39 of the above-referenced Board paper. First, the guarantees are about 4% o f the total financing required for the Project, substantially below the 25% ceiling. Second, they cover the GoM's contractual obligations contained in the PPA and PA, which are essential to the viability o f the Project and mobilizing financing. The guarantees do not cover any commercial risk. Third, except for provisional payments, as described in Annex 9, the IBRD guarantees would only be called if there had been an arbitral award against GoM for a breach o f a GoM obligation covered under the guarantees. Demand for a payment under the guarantees may be made no less than 30 days after the date o f the award.
38. Fourth, the proposed guarantee fee would be 200 basis points (b.p.) per annum (during the disbursement period of the loan, the Bank would charge a standby fee o f 75 b.p. per annum on the committed but undisbursed amount o f the loan and a guarantee fee o f 200 b.p. on the disbursed amount). A guarantee fee reserve would not be created, and IBRD would retain the entire fee with no transfer of any portion of the guarantee fee to GoM". Under the original pricing framework, the maximum guarantee fee (300 b.p. per annum with 100 b.p. retained by IBRD) would need to be charged in view o f the credit risks associated with this Project. The Strategy, Finance and Risk Management Department (SFR) was requested to develop alternative pricing options, to secure a more competitive pricing to attract private capital for this high-priority Project. By using a pricing methodology that incorporates higher sovereign risks inherent in IDA countries and reflects the Bank's developmental objectives, SFR developed a number o f options among which IBRD i s indifferent from a risk management point o f view. The option which would charge the lowest fee (200 b.p.) among these options was selected as the most suitable for Mozambique. The absence of a guarantee fee reserve, non transfer o f any part o f the guarantee fee to the government and the periodic fee payment in lieu o f an upfront fee payment, represent deviations from the existing pricing framework for IBRD enclave guarantees. In addition to the guarantee fee, in accordance with the existing pricing framework, the following fees will be paid by the sponsor: a front-end fee o f 1% o f the principal amount o f each IBRD Guaranteed Facility payable in ZAR, an initiation fee o f US$66,700 equivalent in ZAR for the SPT IBRD Guaranteed Facility, an initiation fee o f US$33,300 equivalent in ZAR for the ROMPCO IBRD Guaranteed Facility and a guarantee processing fee payable in US dollars equal to any reasonable out-of-pocket expenses incurred by the Bank in connection with the IBRD guarantees, up to a ceiling o f 0.50% o f the principal amount o f the guaranteed loans.
39. debt service payments for al l senior lenders. As the Project i s not being financed on a limited recourse financing structure, the commercial lenders agreed to replace the debt service reserve account by an unconditional corporate guarantee provided by Sasol under a Debt Service Support Agreement. Therefore, there i s no provision for a debt service reserve account in this case. However, since Sasol's guarantee does not cover sovereign risks, IBRD would not benefit from such corporate guarantee. To provide the Bank the protection that would have otherwise been provided by a debt service reserve
Fifth, the framework for guarantees requires a debt service reserve equivalent to at least 6 month
l8 The guarantee fee would be charged quarterly during the availability period, semi-annually between the availability period and the final repayment date and annually thereafter until the end o f the guarantee period.
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account, legal arrangements are included in the guarantee agreement which require project lenders to take the f i rst loss in the amount o f 5% o f maximum guaranteed principal plus six months interest, approximately equivalent to six months’ debt service for the applicable debt service payment period in the event o f a call on the Bank’s guarantee. Sasol has agreed to compensate the lenders for such loss under the Debt Service Support Agreement.
40. Sixth, in the event o f a call on the guarantee as a result o f a default by the GoM, the Bank would through i t s subrogation right have a claim on the project security (excluding the lender’s rights under the Debt Service Support Agreement) as the lenders are being provided the traditional security rights. Finally, there are no portfolio constraints as this i s the first IBRD enclave guarantee. In the event o f a call on the guarantee the annual debt service obligation o f the GoM under the enclave guarantee would total about US$4 - 5 million. In December 2002, Mozambique had foreign exchange reserves o f US$823 million equivalent to 6 months” worth o f imports o f goods and non factor services. I t s annual foreign debt service i s US$40 million or US$3.5 million monthly. I t s GDP i s US$3.6 billion and annual tax revenues average US$505 million. Mozambique should thus have the foreign exchange available to meet i t s obligations under the Indemnity Agreement. Mozambique i s a HIPC country and has reached i t s completion point in 2001.
41. environmental, social and resettlement (para. 1 16).
Seventh, the Project complies with all applicable Bank requirements including those relating to
Risks Associated with IBRD Guarantee
42. As the guarantor o f GoM contractual obligations, specific project risks covered by IBRD under the partial risk guarantees (detailed in Annex 10 (a) and (b)) are the same as those undertaken by GoM under the PPA and PA. The obligations covered are obligations within the control o f the GoM (para. 36). Unlike most other IBRD partial risk guarantees granted so far, the GoM does not have specific payment obligations to the private sector and the amount for which it would be obligated under the guarantee would be based on arbitral award. GoM has incentives to ensure the Project’s success, as a significant portion o f the current and future capital investments would be expended in Mozambique. This investment would generate new jobs, increase the tax base, improve workers’ skill level, and add associated infrastructure and catalyze new industries in a region o f the country which has not received any significant investment to date. Moreover, once the Project becomes operational, GoM would earn revenues in the form o f royalties, taxes and equity returns.
Proposed IFC Investment
43. project, IFC’s investment i s targeted at Mozambican participation. As mentioned earlier, the large and complex project needed Mozambican participation to allay poiitical risk as well as to give a sense o f ownership and benefit to Mozambique, where the natural resources are located. ENH was the only Mozambican entity capable o f playing this partnership role with Sasol and came in as a 30% owner o f the upstream component (and potentially 25% o f the pipeline). However, Mozambique faced the problem o f finding ways to fund ENH’s participation without recourse to government financing and to do so in a manner that would enable Mozambicans to fully participate in the Project. In March 2001, ENWGoM mandated IFC to review strategic options for i t s equity participation with a focus on local participation.
While the IBRD Partial Risk and the MIGA guarantees are targeted at Sasol’s participation in the
l9 The average o f Sub-Saharan Africa countries i s 4 months,
17
IFC advised on a road map to achieve this objective and subsequently agreed to participate as an investor along with ENH. IFC i s also assisting ENH in mobilization o f funds for i t s participation in the upstream project through CMH. Funds are expected to be provided by external and local institutions. In a second phase, IFC i s expected to advise on broad-based local participation to cover individual investors, and preliminary work has begun in this regard.
44. Given this background, IFC plays a number o f roles in this Project. First, along with MIGA and the PRGs, IFC participation i s seen as an important political risk mitigant. Second, Mozambican equity participation i s important for both parties. In the absence o f strong Mozambican private sector partners, ENH has to play this role. ENH has limited resources and IFC participation through a farm-in will reduce i ts “equity burden”. IFC will also help it mobilize any shortfall in its funding. Third, ENH sees IFC’s participation in the operating committee o f the upstream joint venture as critical support while it builds up i t s own capacity. Fourth, GoM values IFC’s role in increasing local participation in this Project. This i s hoped to be achieved through three means: (i) IFC give preference, on a best efforts basis, to Mozambican private entit ies on selling down its equity share; (ii) as part o f the mobilization plan, IFC i s working to bring in local institutions as equity investors; and (iii) through i t s work in the financial markets IFC will prepare the stage for possible participation o f non-institutional investors once the Project i s functioning and the revenue streams have stabilized. Fifth, IFC is working with the Matola Gas Company, (a joint venture between Gigajoule o f the RSA, ENH and other Mozambican investors to which plans to distribute gas in the Matola industrial area) to explore the possible uses o f carbon credits. Last, IFC i s working jointly with the IBRD to ensure that the Project i s built and operated to high environmental and social standards.
The Proposed Equity Investment
45. acquisition o f a 5% participating interest in the unincorporated joint venture developing the upstream Project. The investment would consist of: (i) an up-front payment o f US$6 million to CMH reflecting the past costs incurred in bringing the Project to this stage; and (ii) a payment o f approximately US$10 million as IFC’s share o f the capital expenditures that will be incurred until December 3 1,2004.
The proposed IFC investment would consist o f an equity investment o f up to US$18.5 million for
46. approximately US$16 million, an investment o f up to US$18.5 million i s being proposed so as to cover contingencies and cost escalations. From time to time IFC may have to re-invest such portion o f its share o f the cash generation as may be necessary to meet its share o f project costs, operating costs and other obligations arising out o f annual agreed work programs and budgets, and make such additional investments as may be required to meet IFC’s obligations as an unincorporated joint venture partner in accordance with normal o i l industry practice.
Although based on current estimates, the aggregate payments to be made by IFC amount to
47. return on IFC’s equity investment i s expected to be around 15% (please see details in Annex 6). Sensitivity analysis demonstrate that the Project can deliver acceptable returns despite several downside scenarios. These downside scenarios include: (i) an overrun in operating costs by 15%; (ii) an overrun in capital expenditures by 15%; (iii) production stoppage for one month every three years due to market disruptions, including force majeure events; and (iv) a low gas price driven by Dubai crude price remaining at the floor price o f US$l6/bbl.
Projected financial performance: Under base case assumptions, the projected financial rate o f
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Risks Associated with IFC Equity Investment
48. Operator: Success o f the upstream component and the related returns on IFC equity investment i s dependent on the efficiency o f upstream operations. While Sasol has experience with pipeline operations, it does not have experience in oi l and gas upstream operations. However, Sasol has a proven track record in implementing and operating large and complex projects and has overcome its relative weakness in the upstream operations by appointing Kellog Brown and Root, a well qualified operator, under an operations and maintenance contract and by staffing i ts upstream operations with competent personnel.
49. inadequate. On the other hand, the Project’s gas fields have been studied in detail by three parties and the degree o f uncertainty in reservoir characteristics and reserves is quite limited.
Reserves: As in all natural resource projects, there i s a risk that the reserves may turn out to be
50. for growth o f the South African gas market, there i s a possibility that market disruptions caused by the cascading effect o f force majeure, and certain “qualifying events” in the larger customers, may negatively impact sales. This would lead to losses on account o f continuing operating expenses, though gas production can cease. Sensitivity analysis indicates that even if this were to occur every third year o f operation for a month at a time, it would have a limited impact on IFC’s anticipated returns. Simultaneously, options for insuring the force majeure events that are commercial in nature are being explored by the UJV.
Market Risk: Though there i s a take-or-pay arrangement in the GSA and there is good potential
Key Policy and Institutional Reforms Supported by the Project
5 1. The main policy objectives supported by the project are:
(a) Promotion o f private sector investment in the gas sector in the first instance and subsequently for other activities induced by the availability o f gas infrastructure (paras. 1 and 3).
(b) Creation o f opportunities for development o f domestic gas markets. By including five gas take- o f f points on the Mozambican section o f the pipeline, the Project design creates the necessary physical condition for development o f a local gas distribution market. Taking advantage o f the opportunity provided by these take-off points, the GoM has already awarded a concession to the Matola Gas Company (para. 44) to construct a 75 km spur pipeline from the take-off at Ressano Garcia to supply gas to the Matola industrial area, near Maputo. The technical assistance provided under ERAP wi l l help the GoM to develop rules and regulations for the competitive award o f concessions in the future, thus supporting further development o f the domestic gas market.
Benefits and Target Population
52. The main benefits and project beneficiaries are as follows:
(a) Local communities. Local communities w i l l benefit from employment opportunities created by the Project during both i ts implementation and operational phases. About 3,000 jobs have been created during the construction period o f which about 1,000 are Mozambican nationals. While local employment wi l l decline after the initial investment phase, the Project development plans call for US$228 million (Annex 5, para. 3) additional investment in gas fields and in expansion o f the processing plant after the Initial Funding Period. Therefore, further jobs w i l l be created for
19
the communities in later years. In addition, the Project includes social development initiatives for the local communities located around the Project facilities (under a Social Development Action Plan), which are being financed through a Social Fund2' established by Sasol. To date the Social Fund has invested more than US$500,000 and approved in excess o f US$3.5 million for a variety o f community-based activities: water boreholes, clinics, schools, agricultural activities.
(b) Small businesses and local contractors. Small businesses wi l l benefit from the opportunities created for the supply o f goods and services. To date the main beneficiaries have been transport companies that have been engaged to transport equipment and materials to project sites. Road construction contractors and other ancillary businesses wi l l be other beneficiaries.
(c) Sector Professional and Management Staff. Mozambique wi l l benefit from the transfer o f technology and expertise to i t s sector staff working on the Project and through training to be provided for which about US$3 million has been allocated by Sasol.
(d) General population. The general population wi l l also benefit from the financial revenues o f about US$498 mill ion to be derived by the GoM from the Project as indicated in paras. 2 and 4.
Project Implementation and Institutional Arrangements
53. The Project's ownership and implementation structure i s illustrated in the chart below. It shows that the upstream component wi l l be developed by an unincorporated joint venture among SPT, a wholly- owned Sasol Petroleum International subsidiary in Mozambique, CMH, owned jointly by ENH and the GoM and IFC.
2o The Social Fund for a total amount o f US$5 million i s earmarked for communities in the three provinces o f Inhambane (US$3 million), Gaza (US$l million) and Maputo (US$l million). In order to provide for transparency in the allocation o f benefits within the communities, Sasol has put in place a formal detailed and regular consultation process.
20
Mozambique
pq r-mT- I I
80% 'i' 20% irl 100%
1 South Africa 1 I SASOL 1
I SASOL GAS HOLDING
100%
54. wi l l be 70%, 25% and 5% respectively. The unincorporated joint venture has designated SPT as the operator o f the gas fields and the CPF. Kellog Brown and Root, a subsidiary o f Halliburton, USA wil l assist through a 5-year management contract in designing and completing the development program (including drilling o f wells) and subsequently in field operations. SPT has delegated the construction o f the CPF to Foster Wheeler RSA (Pty) Ltd., the Engineering Procurement and Construction Management Contractor (EPCm). The EPCm will undertake for and on behalf o f the operator SPT, construction, management, preparation for commissioning and start up o f the CPF.
55. The Gas Pipeline21 wil l be owned and operated by ROMPCO, a South African registered subsidiary o f Sasol. ROMPCO will enter into an operations and maintenance agreement with Sasol Gas Limited, which has experience in pipeline operations. A consortium comprising Grinaker LTA, McConnell Dowell and Consolidated Contracts International Company (GLMC) i s contractually committed to complete construction of the pipeline by December 1, 2003, on a lump-sum (fixed price) basis under an Engineering Procurement and Construction contract (EPC).
The joint venture partners, SPT, CMH and IFC shares in the upstream component o f the Project
21 The Government o f South Africa, through CEF (Pty) Limited and its subsidiary i-Gas (Pty) Limited, and the GoM and ENH through another subsidiary, Companhia Mocambicana de Gasoduto (CMG), have an option to acquire, on an aggregate basis, up to 50% o f the ownership o f the pipeline.
21
Upstream Project Pipeline Project
Cross Border Agreement
Downstream
Y Cross Border Gas Transportation Upstream Operation and Agreement Agreement Maintenance Agreement
Gas Fields
Mozambique Pipeline Agreement
pipeline Point o f Del iveq
Gas Sales Agreement Pipeline Agreement
I I Central I I
Processing 1 Facility I
I I I I I
__cL I
SPT 70% A CPF Price SPT70% CMH 25% I CMH 25%
I Distribution Users
I I SCI Sasol - synfuels
I Snsol Gns Natref I Others
I
I I I I I
R O M P C O I Network Temane Pande
sasolloo% E a r Opfwn - hu,b CMH Optm up 10 IO-.
IFC 5% I IFC 5%
Welllrend Prl‘C + CPF Priec
& Shipper ____+ Payment Contract C u Sder Agrucmcnt Snsol Gas Gm Trsnrpunutwn Aerecment
Summary o f Contractual Arrangements
56. GoM, the Government o f South Africa (GoSA), ENH, and Sasol Ltd. and i t s subsidiaries. These agreements fall under three categories relating to “Rights and Obligations”, “Commercial”, and “Operations and Participation” as summarized in the table below. A brief summary o f each o f the key agreements is given below while a l l the agreements are described in Annex 2. The key Project agreements, all o f which have been signed, include the Petroleum Production Agreement, the Pipeline Agreement, the Joint Operating Agreement (JOA), the Gas Sales Agreement (GSA), and Gas Transportation Agreement (GTA). The Petroleum Production and Pipeline agreements were signed on October 26,2000 and define the framework, rights and obligations of each party to enable gas exploration, production and distribution under the Project.
The proposed Project will be implemented under a series of contractual agreements between
~ ~ _ _ _ _ _ ~ ~ ~~ /I Rights and Obligations 1 Commercial22 I Operations and
Pipeline Shareholders Agreement 1 Gas Act Petroleum Production
Agreement ~
Joint Operating Agreement
22 A brief description o f the commercial agreements i s given in the text below and the complete agreements are available in the Project Files.
22
57. Petroleum Production Agreement (PPA). The parties to the PPA are GoM, SPT, ENH and CMH. Under the PPA, GoM grants to SPT and C M H exclusive rights for the development, production and disposition o f the reserves located in the Pande and Temane Field Reservoirs, “the Petroleum Production Area”. The exclusive right refers to the exploitation o f the Petroleum Production Area and the disposition o f the gas at the wellhead for a period o f at least 30 years from First Gas. Under a stabilization clause, GoM has undertaken not to expropriate the assets acquired by SPT and CMH, not to revoke or amend relevant authorizations and not to hinder SPT and CMH from enjoying their rights accorded under the PPA, and to negotiate in order to amend the PPA to restore the economic position o f SPT and C M H if a change in law or breach o f tax warranty have resulted in economically material adverse changes to the operations by SPT and CMH.
58. Pipeline Agreement (PA). The parties to the PA are GoM, ROMPCO and Sasol. Under the PA, GoM authorizes ROMPCO to construct, own and operate the gas pipeline and related infrastructure and equipment to transport natural gas, for a period o f at least 30 years from the date o f the agreement. Under a stabilization clause, GoM has undertaken not to expropriate or intervene in the assets acquired by ROMPCO, not to revoke or amend relevant authorizations granted to ROMPCO, not to hinder ROMPCO from enjoying i ts rights accorded under the PA, and to negotiate in order to amend the PA to restore the economic position o f ROMPCO if a change in law or breach o f tax warranty has resulted in an economically material adverse change to the operation by ROMPCO. In addition, GoM has granted to ROMPCO exclusive possession o f the area o f land through which the pipeline wi l l be constructed, and has agreed to ensure that no settlement or construction be allowed in a strip o f land 200 meters wide on either side o f the pipeline. The PA provides for open access to the pipeline for transportation and distribution o f gas within Mozambique from the beginning and after the f i rst ten years in South Africa. In Mozambique, third party access wi l l be approved by the regulator provided there i s uncommitted capacity after meeting the contracted amounts under the GTA. In South Africa, the Regulatory Agreement between the Government and Sasol provides for a period o f limited access (ten years) to the gas pipeline. The dispensation for Sasol was considered necessary to enhance the prospects for cost recovery and attract the required financing and i s not inconsistent with experience in other countries.
59. shareholders and commercial parties were signed on December 27,2002 following approval by the Mozambican Council o f Ministers on December 26,2002. In particular, the JOA, the GSA and the GTA provide the framework for management, operation and implementation o f the Project. Under the JOA, C M H and SPT have agreed to sel l natural gas jointly on terms set out in the GSA. The aggregate amount received by C M H and SPT as the purchase price o f natural gas and the processing fee under the GSA shall be allocated between C M H and SPT pro rata to their respective interests in the Gas Fields and the CPF.
In addition to the PPA and PA, commercial agreements governing the rights and obligations o f
60. Gas Sales Agreement (GSA). The GSA regulates the commercial relationship between the Sellers, SPT, C M H and IFC, and the Buyer, Sasol Gas Limited, a Sasol wholly-owned South African subsidiary. The start date for delivery o f gas shall be between July 1, 2003 and June 30,2004. The supply period shall be at least 25 years. The GSA secures a revenue stream for the Sellers through an adequate take-or-pay obligation o f the Buyer. Under the GSA, the gas price formula23 was agreed upon and consists o f two components: (i) the wellhead price i s indexed to a weighted average o f the Dubai crude oil, gas oil, and fuel oil; (ii) the processing fee i s indexed to both U S and RSA inflation and exchange rates in addition to the weighted average o f Dubai crude oil, gasoil, and fuel oil. The gas price w i l l be calculated and paid in U S dollar.
23 Details o f the gas pricing formula are available in the Gas Sales Agreement in the Project Files.
23
61. through an adequate ship or pay obligation o f the shipper. The GTA period i s set for 25 years. The transmission tariff wi l l be calculated as an agreed base tariff escalated quarterly based on an agreed South African inflation index and paid in Rand.
Gas Transportation Agreement (GTA). The GTA also secures a revenue stream for ROMPCO
62. from gas fields development to the end user sales in South Africa. Sasol (through i t s subsidiary SPT) i s one o f the sellers (jointly with CMH, a subsidiary o f ENH), the operator o f the upstream (fields and CPF) for both parties, the transporter (through i ts subsidiary ROMPCO), the operator o f the pipeline (through Sasol Gas) and the buyer (through Sasol Gas). The sponsor considered this approach essential for achieving economies o f scale and ensuring financial viability o f the Project given the substantial investment costs involved and the relatively small size o f the gas fields.
Under the Project’s contractual arrangements, Sasol wi l l be the primary sponsor o f the Project
63. been embedded in the contractual arrangements to oversee management and operations o f the Project and reduce possible conflicts o f interests, In addition, IBRD has requested the consent o f the RSA to the provision o f the guarantees in Rand as required under Section 1 (b) o f Article I V o f IBRD’s Articles o f Agreement24 and to ensure that the Bank wi l l have access to South Africa for the purposes o f undertaking environmental and social monitoring o f the portion o f the Project on South African territory. On the management side, for the upstream, a management committee comprising the representatives o f the sellers and the regulator, has been set up and i s chaired by the regulator (DNCH) to oversee petroleum operations. In addition, all decisions regarding the upstream development plans need to be approved by the regulator. Finally, an independent auditorlexpert can be called in by CMWENH and/or the regulator may verify any aspect o f the operations. For the pipeline operations, a similar management and oversight mechanism i s in place: the pipeline development plan i s approved by the regulatory authority. Any key decision such as the appointment o f ROMPCO operator, or the decision to allow third party access to the pipeline on the Mozambican side i s subject to regulatory approval. Finally, for negotiations o f the key contracts under which Sasol i s represented on both sides o f the agreements, the decision was made that SPT, as a seller, authorized ENH to negotiate the agreements on behalf o f the sellers. In the case o f the GSA, under which Sasol subsidiaries represented both the seller and the buyer, ENH on behalf o f the sellers, negotiated with the buyer, Sasol Gas Limited. Similarly, in the case o f the GTA under which Sasol subsidiaries represented the shipper and the transporter, ENH led the transporter’s negotiating team with the shipper, Sasol Gas Limited.
Given Sasol’s involvement in all aspects o f the Project, several “safeguards” mechanisms have
64. commercial, technical and political risks i s acceptable, consistent with the structure o f the Project. In the review o f Project Agreements, the legal counsel for the commercial, bilateral and multilateral lenders to Sasol have expressed the view that the Project Agreements are generally o f high quality.
The Bank’s review concluded that the contractual structure o f the transaction and the allocation o f
24 The Bank may . . . guarantee loans . . . only with the approval o f the member in whose markets the funds are raised and the member in whose currency the loan i s denominated, and only if those members agree that the proceeds may be exchanged for the currency o f any other member without restr.iction. (Article IV, Section 1 (b)). In this case the consent o f RSA i s required as the guaranteed loans are denominated in South African Rand and the underwriter o f the loans, the Standard Bank o f South Africa Limited, i s booking the loan in South Africa.
24
D. Project Rationale
Sector Issue
Bank-financed
65. The proposed Project concept emerged from a consideration o f several alternative choices for maximizing the value o f the PandejTemane natural gas resource as discussed in para. 21. The Project concept o f exporting natural gas to the RSA was selected because it i s the only viable option which: (i) enables Mozambique to access a larger market for this resource with potential to increase the volume o f exports as additional gas reserves become available; (ii) allows Mozambique to derive benefits from the gas more speedily than the option o f producing and exporting power; and (iii) offers the country the opportunity to both export natural gas and to utilize some o f it for the domestic market via several o f f take points along the pipeline route.
Latest Supervision
(Bank-financed projects only) Implementation I Development
Project (PSR) Ratings
M a j o r Projects Financed by the Bank and/or Other Development Agencies
Pre-Investment Activities Progress (IP) Objective (DO)
Gas Engineering S S -
Other development agencies
IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)
Lessons Learned and Reflected in the Project Design
66. Department’s recent review o f extractive industries and from the limited number o f gadoil pipeline projects supported by the World Bank Group to date.
The Project design has taken into account lessons o f experience from the Operations Evaluation
67. operations evaluation departments o f the World Bank Group completed a report on extractive industries, oil, gas and mining. The report entitled “Extractive Industries and Sustainable Development, An Evaluation o f World Bank Group Experience” (Report No. 26373) had, as i t s main objective, to evaluate how effectively the World Bank Group has assisted clients in enhancing the contribution o f extractive industries to sustainable development. The Project design has taken into account the report’s following three principal recommendations as follows:
Lessons from the Extractive Industries and Sustainable Development Report. During FY2003 the
(a) Formulate an Integrated Stratem. The recommendation for an integrated strategy for transforming resource endowments into sustainable development has been adopted in that: (i) Mozambique‘s share o f revenues from the Project wi l l be accounted for through the Government’s budget on a line item basis; and (ii) the Project’s environmental and social effects have been comprehensively studied and mitigation plans prepared; and (iii) the sponsors have established a Social Fund o f US$5 million to be used for communities in project areas in accordance with priorities set with community participation.
25
Strenahen Pro-iect Implementation. This recommendation has been incorporated in the Project design in that: (i) execution o f the GoM budget, including revenues from the Project, will be monitored by the Bank through reviews o f budget execution reports and o f the medium-term expenditure framework implementation; and (ii) Sasol will retain independent auditors, in accordance with procedures indicated in para. 105, to audit compliance with the environmental management plans and applicable guidelines and policies and with the Resettlement Planning and Implementation Program.
Engage the Stakeholders. Stakeholders in both countries were actively consulted during the Project design on all aspects o f the Project, and particularly on environmental and social aspects and their comments taken into account. During implementation the local communities will participate in decision making on the selection o f community projects under the Social Development Plan as described in para. 52 (a). Additionally, CMH staff are working closely with IFC in raising finance and will benefit from the experience as well as from IFC’s participation in the operating committee o f the UJV.
Lessons from Past/Ongoing World Bank Group Supported Projects. Among these projects are: the BolividBrazil Gas Pipeline Project (1 997); the AzerbaijadGeorgia Early Oil Project (IFC/R98-180); and the Chad-Cameroon Petroleum Development and Pipeline Project (2000). The World Bank Group’s experience in supporting these types o f projects in developing countries suggests several lessons:
(a) The Need for High Oualitv Project Sponsors: Private sector sponsors should have strong financial and management capacity and incentives to ensure success of the Project. The selected private sponsor, Sasol, i s the fifth largest South African company with a market capitalization over US$S billion. Sasol has not only a strong financial capacity to implement the project, but also the incentives to secure the gas for its large captive gas market in South Africa, including its own petrochemical industries. In addition, it has extensive experience in fuel, chemical and related manufacturing and marketing operations, complemented by interests in technology development, o i l and gas exploration and production.
(b) Role of World Bank Group in Mobilizinn Financing: The WBG has a critical role in facilitating the mobilization o f private sector financing for such large capital intensive projects by mitigating political risks in countries without a track record. The PRGs will help the sponsors to mobilize more than US$200 million in commercial debt. IFC will help CMH mobilize i ts share o f the financing in the upstream project.
(c) Capacitv Building for Borrower Countries: The need to provide support to the countries to build their capacities for management o f the hydrocarbons sector, environmental and social impacts o f the projects, and the gadoil revenues generated by the projects. The technical assistance requirement to enable DNE, DNCH and ENH to undertake their obligations under the Project were identified and financing included under the Energy Reform and Access Project. A team, including staff from DNCH and MICOA, which was responsible for assessing the EIA process and the EMPs during the Project preparation process will also monitor compliance with environmental and social management plans during the Project’s implementation phase. The team will be supported by advisors to be hired under ERAP’s technical assistance component.
26
(d) Commitment and Cooperation of Governments: The commitment and cooperation between the country governments i s an important factor for Project success. The fiscal benefits which both countries will obtain from the Project provides a strong incentive for their continued support to its implementation and operation. Thus, in 2001, the two governments signed a cross-border agreement, a framework to facilitate trade in natural gas between the two countries.
Indications of Government Commitment/Borrower Ownership
69. The commitment and ownership o f the Project by the Mozambican Government can be demonstrated as follows: First, Mozambique has made significant progress in recent years in developing the gas subsector by adopting a sound legislative and policy framework. The recent steps represent a continuation of efforts started soon after stability returned to Mozambique at the end o f the 1980s when the GoM initiated the process o f delineating the gas reserves at Pande and identifying private sector investors. Second, in terms of commercialization o f the gas resources, the GoM has diligently implemented the Gas Engineering Credit which provided the technical assistance required to develop the resources, and to identify and negotiate with private investors over the past 8 - 9 years. I t has negotiated and signed most o f the contractual agreements with the sponsors and the South African Government. Third, to manage the GoM's interests in the Project, ENH has established two subsidiaries, CMH which i s the joint venture partner with Sasol for the upstream component o f the Project, and CMG which will hold shares in ROMPCO should the GoM decide to exercise its option. Further, ENH and its consultants are currently developing an institutional plan, which will among other things, define actions to be taken to develop the capacity o f CMH and CMG to effectively manage the GoMs interests in the period prior to their privatization. Fifth, the GoM has shown great interest in developing the local gas market by awarding a concession to Matola Gas Company for gas supply to Mozal and other consumers which will utilize royalty gas to which the GoM i s entitled under the Project.
70. technical assistance from IDA under the ERAP. The TA will help to develop national capabilities in al l aspects o f the gas industry to ensure a proper oversight o f the activity and maximize benefits to Mozambique (para. 12).
Finally, to support continued development of the gas subsector, the GoM has acquired funding for
Value of World Bank Group in this Project
71. The value o f the WBG involvement l ies in that: (i) it i s uniquely placed to deploy a whole range o f financing and risk mitigation instruments and to catalyze the participation o f ECAs and other institutions to help realize such a large and complex Project; (ii) it has the comparative advantage to help countries that are in transition in terms o f economic and sector reform processes, to overcome impediments to the flow o f private sector capital; (iii) it i s in a position to provide unbiased advice to enhance the design o f projects, particularly with respect to the use o f sound environmental and social safeguard policies and environmental management plans; and (iv) it has worldwide experience and influence to monitor the expenditure o f Project income on the anti-poverty goals o f Mozambique's medium-term expenditure framework.
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E. Summary Project Analysis
1. Economic JSee Annex 4)
Cost Benefit Analysis: NPV = US$197 million; Share o f Economic Rent = 64%25.
72. developed region o f Mozambique where the gas fields and the pipeline are located. Several alternative uses were considered for the gas reserves at Pande and Temane, with a view to maximizing the value o f gas and economic benefits to Mozambique (para. 21).
The Project wi l l produce economic and social benefits (paras. 3 and 4) for a relatively under-
73. Project wi l l provide gas infrastructure which i s expected to attract additional investments into the upstream in Mozambique. Once the pipeline i s built, capacity could be increased. Additional gas i s expected to be found in the vicinity. The pipeline i s designed to include five gas take-off points in Mozambique and if the royalty gas becomes available, i t would substitute for imported fuel resulting in significant foreign currency savings. The availability o f natural gas could also stimulate investments in gas using industries in Mozambique. On the RSA side, the environmental benefits o f the Project w i l l be significant, since at present Sasol i s operating its plant in Sasolburg with coal as the source fuel. Replacing coal with environmentally friendly gas w i l l be beneficial to the corporation and also to the population in the plant’s vicinity.
In the medium-term, Mozambique wi l l benefit from utilization o f a cleaner form o f energy. The
74. The economic analysis o f the Project assesses the share o f the economic rent which w i l l accrue to Mozambique under the assumption that Mozambique wi l l not only be the host country for a petroleum concession (in which case, i t would earn only royalties and taxes), but also that it w i l l invest in the Project from i ts own resources (and hence it w i l l earn the dividends as a result). The border price o f gas was taken to be the proxy for the economic benefits o f the Project based on a crude oi l price o f US$21.08/bbl in 2004, derived from the World Bank’s forecasts for petroleum products and other commodities. The base case reflects the World Bank forecasts for crude oi l prices in 2004 and subsequent years, a 10% discount rate, and the minimum contracted quantities o f gas under the Project (120 MGJ/a). The robustness o f the share o f the economic rent accruing to Mozambique has been tested for variations in the parameters that are most liable to influence the outcome --- crude oi l prices, discount rate and the level o f gas production. Sensitivity analysis on these risks indicate the share o f economic rent in the range o f 55% to 85%. Net present values of the GoM’s share o f economic rent have been calculated for a range o f discount rates (see details in Annex 4) and the EIRR was found to be satisfactory.
2. Financial (Annex 5)
Summary o f GOM Financial Results
75. years o f commercial operation largely on account o f the debt o f its project companies, gradual build up o f revenues, amortization o f past cost and the accelerated depreciation o f major assets:
Mozambique wi l l derive modest revenues (royalties and taxes) from the Project in the first six
25 The economic and financial analysis o f the Project represents staff estimates o f the economic and financial benefits o f the Project and has been derived from data provided by the GoM and the sponsors, and their advisers, as well as from the Bank’s own assumptions regarding critical variables such as crude o i l prices, domestic inflation in Mozambique and South Africa, and international inflation.
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(a) Royalties: These have been set at 5% o f the gas and condensate sales, per the prevailing legislation and policy as set out in decrees 14/82 and 48/95 applicable to investments in the petroleum and gas sector. The tax provisions included under the PPA and PA follow the normal policy and do not provide any exception to the regulations. Royalties will be in the range o f US$37.5 million over the course o f the Project o f which about 70% will be generated after year 2010.
(b) Taxes: SPT, CMH and ROMPCO (for the 60% Mozambique portion of the pipeline) will be liable to pay tax on their income. This i s estimated to be US$46 1 million and will materialize towards the sixth year o f commercial operations o f the Project due to the gradual build up o f gas sales and the accelerated depreciation provisions.
Thus, under the base case scenario26, GoM will receive overall, in the form o f royalties and taxes, some US$498 million27 over the l i fe of the Project which i s equivalent to US$l05 million in present value terms.
Additionally, GoM wil l receive dividends on its direct 20% ownership o f CMH and indirectly through its ownership o f ENH, which in turn owns the remaining 80% o f CMH. The dividend flow to GoM will depend on the financial performance o f the UJV and the Pipeline, the extent and terms o f the indebtedness o f CMH and CMG and the dividend policy adopted by these companies.
Summary o f CMH Financials
76. contribute US$56 million towards its 25% share o f the Project cost. It requires a further US$4 million to cover its working capital, financing costs and contingencies, bringing its total need to approximately US$60 million. CMH plans to finance i t s e l f on a 70:30 Debt:Equity ratio. Accordingly, it i s mobilizing US$18 million as equity and the balance US$42 million as debt. The equity i s expected to be funded by US$6 million in proceeds for the farm-out o f a 5% participating interest in the UJV to IFC and US$12 million from new equity and mezzanine finance investors. As for the debt portion, several bilateral and multilateral institutions, including Agence Franqaise de Developpement (AFD), the Netherlands Finance Company (FMO), the German Investment Company (DEG), and the European Investment Bank (EIB), have expressed an interest in extending senior debt and guarantee facilities to CMH.
During the Initial Funding period i.e. Project expenditure till December 2004, CMH has to
77. case financial assumptions as described in Annex 5, its cash flows are projected to be adequate to service its debt throughout the l i fe o f the Project. Additionally, CMH’s cash flows will enable dividends to be declared and paid to equity holders, subject to lenders’ financial covenants and its Board-determined dividend policy.
CMH derives strong financial returns from its participation in the upstream Project. Under base
26 The economic rent calculation should normally have been based on the revenues and costs for the integrated Project, including the South African portion. However, in the absence o f revenue and cost data for the South African portion, the analysis was confined to the Mozambique part o f the Project.
On an annual basis, royalties and taxes would be less than 10% o f the Government’s annual revenues even at peak level o f US$39 mil l ion in 201 1. In the earlier years the royalties and taxes would be low due to the gradual build-up o f revenues, amortization o f past costs and accelerated depreciation o f major assets.
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Summary o f Sasol Financial Strength
78. Africa, was founded in 1950, and privatized and listed on the Johannesburg Stock Exchange in 1979. It i s the fifth largest South African company, with a market capitalization o f more than US$8 billion. From an original focus on the production o f synthetic fuel from coal, Sasol has diversified into the production o f high value chemical products with world-leading technology. Sasol’s strategy consists o f leveraging unique technologies and exploiting as well as cost optimizing an upstream thrust into hydrocarbon exploration and production. The Project forms an important element o f this strategy. Sasol acquired in 1998 an interest in the Temane field but could only consolidate i t s position and establish the desired economies o f scale after two key developments in 2000. The first significant breakthrough occurred when Sasol acquired the interests o f Arc0 Mocambique, a subsidiary o f ARC0 International O i l and Gas Company (USA) and Zarara Petroleum Resources from the United Arab Emirates. The second turning point arose when Sasol purchased the rights o f the Pande gas field from Enron O i l and Gas Corporation (USA).
Sasol, the private sponsor and the leading petrochemicals and liquid fuels company in South
79. For the financial year ending June 30,2003, Sasol’s operating profits are derived 68% from synthetic fuels, 19% from chemicals and the rest from crude oi l and coal mining activities. It i s now becoming a multinational with interests in Europe, Middle East, Asia, Australia, Africa and the Americas. It currently supplies some 40% o f South Africa’s liquid fuel requirements both through coal conversions and conventional crude oi l imports and refining. In i t s audited statements for fiscal year ending June 30, 2003, Sasol’s total assets were US$9.4 billion, and shareholders’ equity was US$4.5 billion. The debdequity ratio was 43%’ the net income after tax US$875 million, and the rate o f return on equity 24%. In Apri l 2003, it was listed on the New York Stock Exchange and has received a corporate credit rating o f BBB from Standard and Poor’s (S & P) for long-term foreign currency and A-2 for short-term foreign currency (Annex 5 for Summary o f Sasol’s Financial Results). Sasol’s long-term foreign currency i s in l ine with S & P current rating o f the Republic o f South Africa. Sasol i s to date the only South African energy company to be listed on an international stock exchange market and rated by an internationally reputed firm.
80. remain within 20% to 40% o f equity and further debt-financed acquisitions are expected to be o f modest size and are to take place in the core business area. I t should be noted, however, that the current strength o f the Rand against other major world currencies, especially the US Dollar, i s forecasted to reduce Sasol’s earnings because o f the high level o f exports from Sasol’s chemical division to Europe. Sasol’s S & P rating has remained unchanged after the recent profit warning.
Sasol’s financial policy i s conservative. Debt, adjusted for project finance debt, i s expected to
Summary o f SPT and ROMPCO Financial Results
8 1. Debt Service Support Agreement by Sasol where, upon a commercial debt service default, the lenders have recourse to the parent company, however, no claims can be made under the Debt Service Support Agreements, when a debt service default occurs due to a Mozambican Political Risk Event. Based on the lenders’ financial projections and analysis, SPT and ROMPCO would be financially viable entities, without taking into consideration Sasol’s corporate support. For both SPT and ROMPCO, the debt service coverage ratio (DSCR) during the loan repayment i s projected to be more than the minimum threshold level o f 1.2 times.
The transaction represents recourse financing since SPT and ROMPCO are supported through a
82, position in the RSA gas market. Sasol Ltd.’s debt i s investment grade and it i s listed on the New York
The financial underpinning for the Project i s the financial strength o f Sasol Ltd. and i t s prominent
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Stock Exchange. Sasol Ltd. has the internal and external financing resources to support i t s guarantee obligations to the lenders to SPT and ROMPCO. More importantly Sasol has a captive gas market that would absorb al l the gas imports from Mozambique in the foreseeable future. If Sasol Gas Limited manages to increase i ts third party gas sales and develop new markets, the revenues for SPT, ROMPCO and CMH would be above the current financial projections.
3. Technical
83. Temane-1 well, which penetrated to a depth of 3,506 meters. Temane-2 well was drilled by Gulf in 1967 to a measured depth of 1,736 meters and tested gas from the G-9 sandstone reservoirs of the Lower Grudja Formation. The Temane-3, -4, -5, -6, and -7 wells were drilled in 1998 by ARC0 to explore and appraise the field. The Pande field was also discovered by Gulf Oil in 1961 with the drilling of Pande-1, which penetrated to a depth of 3,587 meters. Pande-1 through Pande-5 and North Pande-1 were drilled by Gulf between 1961 and 1966 to explore the Lower Grudja Formation (G-6). In October 1965, a blowout occurred at the Pande-4 during preparation of a formation test. The blowout lasted 459 days and resulted in a loss of 580 bcf o f gas. During 1989 and 1990, Tyumengeologica (a Russian company) drilled the Pande-6 through Pande-1 1 wells and confirmed gas production from the G-6 reservoir in al l wells. Since then, Pande-12, -13, and -14 have further expanded the real extent of the G-6 reservoir to the current estimate of approximately 533 square kilometers. (The deeper G-10, G-1 1, and G-1 l a reservoirs have also tested gas within the Pande field, but that reservoir i s not included under the Project. The two fields have been extensively studied, and the main uncertainties that remain relate primarily to the area and the net pay in Temane. N o gas-water-contact has been observed on logs in wells drilled in Temane field; whereas several wells in Pande field identified gas-water-contact. Additional drilling planned in the field development program will hopefully address these uncertainties.
Gas Fields. Gulf Oil Corporation discovered the Temane field in 1956 with the drilling of the
84. Gas Reserves. Three different parties have estimated Temane and Pande gas reserves: 2 independent consultants --- the US-based DeGolyer and MacNaughton (D & M) and the UK-based PGS. Additionally Sasol has carried out an extensive in-house evaluation.
85. The D & M and Sasol assessment are for the Project’s reservoirs i.e. Temane G-9 and Pande G-6 sands only; whereas PGS’s estimates included the deeper, but minor sands G-10 and G-1 1. The field development plan i s based on D & M reservoir simulation study and reserves estimate, and so i s the IFC base case. Under the GSA, the sellers are committed to supplying a Total Contract Quantity of 2.86 TCF (3,048.4 MGJ) of gas over 25 years of the agreement. On a P50 basis in the D & M evaluation, the reserves are estimated at 2.78 TCF.
86. per million cubic feet of gas produced (bbl/mmcf) and 4.0 bbl/mmcf respectively. These yields will decline with reservoir pressure to an average 4.0 bbl/mmcf for both fields. As a result o f these yields, total condensate reserves have been estimated by D & M to be around 10.5 million barrels of which 7.3 million barrels are in the proved and probable category.
The Temane and Pande reservoir gases have initial condensate yields of 9.0 bbls of condensate
87. The condensate production i s forecasted to be initially around 1,400 bld ramping up to about 2,300 b/d in 2005 and thereafter stabilizing at about 1,500 b/d. The condensate is sweet, clear in color and the condensate price i s currently estimated to trade at Brent. The condensate storage and a truck loading rack are provided in the central production facility. The buyer will take custody of the condensate at the loading rack and transport by truck to the final destination. Bids have been invited for the sale o f condensate. The bids are expected to be received and evaluation completed by end of October 2003. As a fall back position, in case of an unsuccessful bid process, condensate will be re-injected so as to have an uninterrupted gas production, at least over the next few years.
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88. Consultant to the lenders o f SPT and ROMPCO. Stone & Webster confirmed that the current schedules to accomplish Project start-up within the defined window o f October 1,2003 and March 1,2004 are realistic. The pipeline component o f the Project includes the design, construction and installation o f a pipeline system. The pipeline is designed to free flow gas and i s engineered to achieve a gas availability exceeding 99.7 percent with a maximum allowable operation pressure o f 12,570 kPag. A l l compression occurs at the CPF. The total normal expected throughout o f gas equates to 122 MGJ/a, while the minimum i s 27 MGJ/a. A Pressure Protection Station (PPS) i s located some 4.2 kilometers from the Sasol Secunda Plant. This serves as the pipeline receiver station and provides pressure reduction and gas conditioning prior to the final gas delivery point within the Sasol plant.
Stone & Webster Management Consultants, Inc. has been appointed as the Independent Technical
89. Stone & Webster has reviewed the Design Basis for the pipeline, together with available pipeline route data. The overall pipeline route is generally straightforward and no major design, construction or installation problems have been encountered. Stone & Webster confirms that the pipeline route selection criteria are consistent with best industry practice. The Pipeline stations are designed to comply with the requirements o f American Society o f Mechanical Engineers (ASME) B3 1.8 Gas Transmission and Distribution Piping Systems and the PPS station and the in-plant pipeline in Secunda are designed in accordance with ASME B3 1.3 Process Piping. The design l i f e o f the pipeline i s 25 years. Stone & Webster concludes that the construction methods utilized are suitable and conventional. Pipeline design and construction standards are comprehensive and consistent with industry norms and regulatory guidelines. The proposed leak detection system and corrosion protection systems are robust and suitable for the intended pipeline service.
4. Procurement
90. Economy and efficiency i s the procurement standard for guarantee operations. The award o f key contracts, the EPC for the pipeline, the EPCm for the CPF and the line pipe supply contract were awarded following competitive procedures. For the EPC contract, about 25 firms submitted pre-qualification bid information and six were pre-qualified for bidding. The bid process for the EPCm was based on solicitation o f proposals from 7 short-listed firms. The summary information on the procurement procedures submitted by the sponsor indicate that the process i s in accordance with the Bank’s policy requiring economy and efficiency on private sector projects.
5. Financial Management
91. financial statements in accordance with accepted petroleum operation guidelines. The companies’ accounts for each financial year wi l l be audited by independent auditors acceptable to the Bank in accordance with appropriate auditing principles. The audited financial statements w i l l be furnished to the Bank no later than six months after the end o f each financial year. Similarly Sasol Financing and Sasol Limited wi l l have their records, accounts and financial statements for each financial year audited by independent auditors acceptable to the Bank and wi l l submit the audited financial statements to the Bank within six months o f the end o f each financial year. Since the Bank’s involvement does not entail disbursement operations for Loan/Credits, a standard financial management assessment o f the project companies was not conducted. The accounting procedures for the sponsors’ equity and debt employed in the Project are laid out in the joint operating agreement and the pipeline shareholders’ agreement. Both SPT and ROMPCO being subsidiaries o f Sasol, a publicly traded company on the Johannesburg and New York stock exchanges, financial management capacity is not an issue (moreover Sasol has and wi l l be appointing more accounting and budgeting staff in Mozambique).
The project companies, SPT and ROMPCO wi l l maintain adequate project accounts and prepare
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6. Environmental and Social Environmental Category: A (Annex 12)
Executive Summarv and Update
92. comprising the upstream component in Mozambique, the cross border gas transmission pipeline and gas distribution and industrial facilities in South Africa. The proposed Project comprises only the upstream component (Temane/Pande gas fields and CPF) and cross border gas transmission pipeline component to Secunda in South Africa. Selection o f the Project concept took place after a consideration o f alternatives (para. 2 l), including consideration o f environmental implications. Natural gas was considered a preferable feedstock as opposed to coal which has a higher impact on Greenhouse Gas Emissions (GHG) in the synthetic fuels and chemicals manufacturing operations. For Mozambique exploitation o f gas, which is available in significant quantities, provides an opportunity to earn foreign exchange income and develop the domestic market for an environmentally clean and cost-effective source o f energy.
The Southern Africa Regional Gas Project i s part o f a larger integrated investment project
93. component, the Temane and Pande gas field exploration, the EIA considered two dimensional versus three dimensional seismic grid; alternative energy sources; and alternative grid design. The EIA recommended selection o f the lower impact two dimensional grid; the lowest impact vibroseis as opposed to explosive methods for energy sources and ten o f the seismic lines (equivalent to 1 1 %) were removed from the grid in order to avoid areas o f higher environmental sensitivity. For the CPF, specific process and location alternatives were examined in detail in the preliminary design work for the Project. Further, alternatives for the alignment and construction method o f flow lines and locations o f wellheads were considered. A screening o f alternative locations for the CPF was also carried out. For the uiueline, the EIA considered alternative routes and processes. As a result, the pipeline route was realigned to avoid settlement, to improve river crossings, to avoid wetlands and pans and to avoid seasonally inundated areas. With regard to processes, the method o f trench digging and alternative methods o f river crossings were considered. This resulted in the EIA recommending investigation o f horizontal directional drilling (HDD) as an option for the Limpopo and Changane rivers.
Several design alternatives were considered for each o f the Project components. For the upstream
94. (Environmental Assessment). The sponsors have prepared a suite o f environmental documentation (required by law and in accordance with the Safeguard Recommendations issued by the World Bank Mission in December 2002) comprising: (i) seven environmental impact assessments2’ and eight management plans; (ii) a Regional Environmental and Social Assessment (RESA) --- an investigation (in accordance with the requirements o f the World Bank and scope as agreed between Sasol and the World Bank) to address the impacts that are regional in scale, indirect in nature and too broad to have been addressed in the individual activity specific environmental assessments; iii) a Resettlement Planning and Implementation Program (RPIP), documented in a series o f four reports2 , which provides a framework
The Project has been classified as an Environmental Category “A” in accordance with OP 4.01
4 28 Due to minimal and insignificant impacts o f the Secunda Interface project component, the Department o f
Environmental Affairs and Tourism, as the designated authority, exempted this Project component from having to conduct a full EIA prior to granting authorization. However, management of impacts are s t i l l addressed by means o f an environmental management system.
Volume 1 - Resettlement Planning and Implementation Program, Volume 2 - Land Settlement Plans, Volume 3 - Land Use Plans, Volume 4 - Monitoring and Evaluation Program. The Program as contained in Volume 1 was agreed with the Mozambican Government and meets the World Bank requirements for a Resettlement Action Plan under OP 4.12 and has already been publicly disclosed. Volume 2 - 4, which will provide additional information, will be disclosed when they are available, but were not required to meet OP 4.12 for disclosure 60 days prior to Board.
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and procedures for the equitable and fair treatment o f al l parties affected by the Project insofar as resettlement and compensation for property right infringements are concerned; (iv) Sasol's Social Development Action Plan --- a blueprint and strategy for social development in Mozambique and South Africa; (v) a Consolidated Executive Summary and Update which summarizes al l these reports and the public consultation and disclosure process that was followed on the Project. The diagram below gives an overview o f the comprehensive environmental and social documentation for the Project. These documents have been approved and publicly disclosed as required by law, andlor cleared by the World Bank for public disclosure. For further details refer to Annex 12.
SASOL NATURAL GAS PROJECT j , EXECUTIVE SUMMARY 8 UPDATE 1
Regional Envimnmenbl arid Sociai&sessment
95. in 2000 and the formal Mozambican and South African EIA approval process was concluded over a period from 1999 to 2002. In December 2002, following receipt o f a request from the GoM for a partial risk guarantee in support o f the Project, a joint World BanMIFC environmental mission visited Mozambique and South Africa. By then the main contractors for the pipeline and the CPF had been awarded and construction o f the pipeline had already started in April 2002. As o f June 2003 construction o f the pipeline was more than 80% and 60% complete for the Mozambican and South African sections respectively, while that o f the CPF was also more than 80% complete. At the time o f the joint World BanWIFC mission to Mozambique and RSA, MIGA was at an advanced stage with preparation o f a guarantee for equity which was approved by its Board in December 2002. It had therefore already disclosed environmental documents to the Infoshop on April 29,2002 in electronic format on its website, using a link to the Project sponsor's internet website. The mission concluded that the environmental studies and assessments had been carried out to a high standard, but recommended, by means o f the formal issuing o f Safeguard Recommendations, the preparation o f the Consolidated Executive Summary and Update; the RESA, and the RPIP. The World Bank Mission also made immediate recommendations, based on field observations and discussions, which recommendations and observations were responded to by Sasol. With completion o f these reports, the Project i s in compliance with the World Bank safeguards
The environmental and social impacts o f the Project have been studied in depth since its inception
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and environmental policies, procedures and guidelines, as well as with the environmental requirements and standards o f the governments o f Mozambique and South Africa.
Public Disclosure and Consultation
96. stakeholders since 1998 to present, in Portuguese, English, and Afrikaans and plans to continue the engagement with the stakeholders in the future, The forms o f consultation have included visits to communities in Mozambique, television coverage, news releases, public meetings in South Africa, visits to landowners in RSA and to affected community members in Mozambique, posting of notices along the pipeline route, internet publication, briefing documents for interested and affected parties and project newsletters. Sasol also established a holistic three-tier communication structure, in collaboration with stakeholders, to ensure effective and continuous communication and consultation. These include the Project Liaison Committee comprising representatives from Mozambique and Sasol, and task groups for, inter alia, environment, public liaison and complaints management.
For disclosure and consultation, the sponsor has engaged in extensive consultation with
97. SASOL Natural Gas website [http://w3. Sasolcom/natural~gas/l. The RESA and Consolidated Executive Summary and Update and the Resettlement Planning and Implementation Program have been reviewed and approved by the Bank for disclosure. They were disclosed at the Infoshop by the Bank on July 22, 2003 and by IFC on July 23,2003. They were also disclosed in English and Portuguese, as appropriate and in accordance with the World Bank recommendations, in RSA and Mozambique on or before August 15, 2003. Para. 16 in Annex 12 contains a table showing the locations at which the Consolidated Executive Summary and Update, the RESA and the RPIP documentation were disclosed in both Mozambique and the RSA.
The documents referenced above and additional specialized supporting studies are available at the
98. Assessment (OP 4.01); (ii) Natural Habitats (OP 4.04); (iii) Cultural Property (OPN 11.03); (iv) Involuntary Resettlement (OP 4.12); and (v) Pest Management (OP 4.09). At a regional scale, the key concern will be the indirect consequences o f opening lines o f access. This will be the result o f pipe line cut lines, permanent access roads and seismic lines a l l o f which, to a greater extent, could improve accessibility into previously remote areas and the management o f the transmission o f STDs/HIV/AIDS along the pipeline. Environmental management plans have been prepared to address a l l the issues foreseen during the EIA process and these are described under the relevant EIAs below. The recommendations, as explained in the RESA are also aimed at managing the regional and cumulative issues identified, and will be implemented by Sasol (Annex 12).
It was determined that the following safeguards policies were triggered: (i) Environmental
Environmental Impact Assessments
99. activities outside the scope o f this Project. The EIAs covering the Project are described below while Annex 12 provide a description o f al l the EIAs including those related to Sasol’s gas distribution and industrial facilities in South Africa.
Five o f the EIAs relate to the Southern Africa Regional Gas Project while the other three are for
(a) EIA on Temane/Pande Gas Field Exploration. Impacts could be divided in three groups: (i) those occurring as a result o f seismic activities; (ii) those occurring as a result o f the drilling o f exploration wells; and (iii) those occurring as a result o f the development o f base camps. The most enduring o f the impacts is related to the activities o f people who could gain access to previously inaccessible parts o f the exploration area. The EIA identified considerable
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opportunities for harvesting o f natural resources such as hardwoods, medicinal plants and game and expressed concern that providing poor communities better access to previously inaccessible natural resources may not be sustainable without effective management, and that leaving seismic lines open would run a risk o f permanent impact on sensitive sites within the study area. The action taken as a result o f the EIA was that an appropriate Environmental Management Plan was developed, implemented and monitored by a senior environmental consultant. On completion o f seismic testing on a particular cut line, a l l the cleared areas have been left to regrowhevegetate in accordance with the approved EMP.
(b) EIA on Temane/Pande Gas Field Development. The EIA found no major flaws associated with the proposed development o f the gas fields. During construction, the EIA identified the impact on employment as the most significant direct social impact. Better employment opportunities will benefit local people and promote sound relationships between the Sponsor and local communities. At peak construction time the Project employed 1,023 unskilled, 166 semi-skilled, and 291 skilled Mozambican nationals. A specific EMP has been developed for the management o f the construction activities and their impact on the environment. Resettlement impacts were also considered to be very significant but with minor shifts to the alignments o f the flow lines, the resettlement impact was reduced to near zero. The impacts affecting family agriculture and compensation for lost resources were considered to be highly significant in the absence o f sound management practices. These problems were considered to be manageable as long as compensation procedures were well conceived. Of the other social impacts during construction, malarial risk, HIV/AIDs, social pathologies caused by in-migration and impacts on cultural traditions, were all considered to be potentially significant. With appropriate management, their significance was considered to be low. The EIA found that potential pollution effects could result from the discharge o f treated industrial and domestic effluent in the Govuro River system. Both types o f effluent streams will be treated and final effluent discharge will comply with the respective guidelines in the Pollution Prevention and Abatement Handbook. Air emissions caused by the CPF will also comply with the appropriate guidelines in the PPAH. During the operational phase o f the Project, the EIA also forecasts that most o f the direct impacts of the Project that would occur could be reduced to low levels o f significance.
(c) EIA on Pipeline between Temane and Ressano Garcia : Mozambique. The EIA assessed three corridors within a study area o f approximately 70 km wide between Temane and Resano Garcia. The corridor deviates from a direct alignment in order to minimize impacts on sensitive ecosystems, settlements and the barrage (the main road crossing area at Maccaratane across the Limpopo River in South Africa). Specialist studies were also prepared to complement the EIA and to determine the impacts o f the pipeline on habitats, fauna and flora, river systems, agriculture, settlement and other land use, socio-economic impacts, cultural heritage and public health and safety. Most o f the issues raised in the EIA are related to construction and the access .created by construction. The key actions taken (in compliance with the relevant EMPs) addressing the issues are: (i) the pipeline alignment has been modified to avoid homestead’s along the route, so no homestead has been affected; (ii) Sasol’s public liaison team (together with other tasks groups) has permanent staff to manage community issues during construction; (iii) an archaeological survey o f the route was conducted and the small collection of artifacts that were excavated were stored in a local university; (iv) except for two crossings where horizontal directional drilling method was used, al l the river crossings were completed using open cut trenching during dry conditions; (v) the geo-fabric was installed to ensure the continuity o f sub- surface drainage; (vi) thirteen Baobabs trees have been transplanted into adjacent areas; (vii) employees are educated to prevent the persecution o f wild animals; and (viii) quarterly independent audits o f construction activities are being undertaken.
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EIA on the Pipeline between Komatipoort and Secunda : South Africa. The key actions (in compliance with relevant EMP’s) taken to address the recommendations arising from the EIA were: (i) change in alignment to avoid a proposed natural heritage site; (ii) route change to avoid four intended river crossings; (iii) the construction management procedure i s being implemented as specified in the authorization; (iv) quarterly independent audits o f construction activities are being undertaken; (v) Major Hazard Installation regulations were complied with and appropriate emergency response plans and procedures were developed and adopted; (vi) specialist archaeological input has been involved in the construction; (vii) final checks for threatened species were made; (viii) post construction monitoring o f sedimentation that was undertaken show minimum and no irreversible impact; (ix) specialist bio-assays o f the water used to hydro- test the pipeline are being undertaken and the additives to the water have been altered; and (x) a rehabilitation expert has been appointed.
Secunda Interface. After the initial scoping report, the South African environmental authority granted an exemption for the need for an EIA and an EMP because the impacts o f this component o f the Project activities are minimal and non significant.
Resettlement Planning and Implementation Program (RPIP)
100. from Sasol and GoM was constituted in May 2001 to develop a Resettlement and Compensation Procedure for the Project. Baseline surveys were undertaken at the gas field and along most o f the pipeline corridor. A l l information was given to the engineering team to enable the alignment o f project infrastructure to minimize social impact and resettlement as far as practically possible. A Resettlement Action Plan, based on the principles explained below, was initially developed and later expanded to a Resettlement Planning and Implementation Program to meet the World Bank Safeguard Recommendations and applicable policies, procedures, directives and standards. Compensation principles consistent with relevant World Bank policies and procedures are applied. The Joint Task Team has approved the following compensation principles, consistent with relevant World Bank policies, as fair and equitable: (i) Replacement of homesteads: Less than 15 homesteads have been resettled for the entire project, including the gas field development and the pipeline construction in Mozambique, with no resettlements in South Africa. Homesteads will be replaced by new brick houses or as otherwise indicated by, and agreed with the affected homestead owner; (ii) Land for resettlement: New land will be identified by authorities and the owner, developed and made available to parties to be resettled; (iii) Alternative subsistence farmingplots: If loss o f land-use opportunities and rights occurs, alternative farm plots will be identified, surveyed and developed, and made available to those losing land; (iv) Transitional support: To be provided to those moved o f f their land as a result o f resettlement or during construction, and during the period o f re-establishment; (v) Crop losses: Compensation for loss o f crops and trees will be determined at the time o f resettlement or construction and paid as soon as possible thereafter (the same number o f lost trees are also replaced); and (vi) Graves: The exhumation and reburial o f graves will be treated in accordance with the wishes o f the next o f kin, with activities and compensation negotiated on an individual basis.
A Joint Task Group (the resettlement and compensation task group) comprising o f representatives
101. monitor and evaluate the resettlement process (para. 1 OS), for what i s envisaged will be a four-year period, o f those affected by resettlement in accordance with the monitoring and evaluation program (Volume 4 o f the RPIP). I t has been agreed with the Government o f Mozambique that such audits will be conducted twice yearly, subsequent to the initial resettlement, for the construction phase o f the Project, expected to continue into the first quarter o f 2004. Officials o f the Government o f Mozambique have also
Monitoring Evaluation and Auditing. Following initial resettlement, an independent auditor will
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been monitoring the resettlement activities and wil l continue for the duration o f the implementation o f the RPIP. N o serious non-compliance has been observed or reported thus far.
Regional Environmental and Social Assessment (RESA)
102. The purpose o f the RESA was to look beyond the immediate zone o f direct social and economic impacts o f the Project and to address induced and cumulative impacts in the geographic areas affected by the Project. The actions recommended under the RESA and Sasol’s commitment to implement those under i t s control are summarized in Annex 12, Attachment 2.
103. Regional Impacts in Mozambique. (i) Biophysical Environment. The key concerns at the regional scale relate to the indirect consequences o f opening lines o f access into previously remote areas and the maintaining Govuro river water quality and biodiversity. The RESA recommends that there i s an integrated effort to bring natural resource exploitation under effective control in the Province. Sasol wi l l need to play its part by monitoring the use o f i ts access roads and by improving knowledge about the areas o f greatest natural resource sensitivity which could be indirectly affected by the Project. This knowledge wi l l assist in formulating management objectives and actions. Protocols with GoM wi l l need to be developed for follow-up actions. The Govuro River System i s an ecologically sensitive perennial coastal river system, including wetlands, which are an important source o f food for local communities. The application o f World Bank effluent guidelines i s no guarantee that the Govuro River System wi l l not be polluted and biodiversity affected. Sasol wi l l implement an effects based monitoring system in the area o f the effluent discharge. In case significant effects on water quality and biodiversity are observed, Sasol wi l l increase the level o f effluent treatment to stricter standards in order to reduce these effects. Annual independent audit reports wil l be prepared with regard to the adequacy o f effluent management. A further concern i s that in the study area, as elsewhere in Mozambique, wood i s extensively used for a variety o f purposes. The main hardwood in the project area i s ironwood. Harvesting o f ironwood i s widespread wherever patches o f ironwood occur in the Project area. The extent to which the harvesting o f forest resources in the project area will increase as a result o f access created along the pipeline construction right-of-way and the gas field infrastructure i s not accurately known. There i s already some evidence o f the use of the pipeline right-of-way for transport o f charcoal, although no hardwood extraction has been recorded. The planned mitigation measures include the following: Sasol wi l l fully rehabilitate the construction right-of-way and no path wil l be left in place which could be used by vehicles; Sasol wi l l carry out aerial monitoring; Sasol has established a strong community liaison network with local communities, this network will be used to monitor forest resources extraction; a formal reporting procedure will be put in place to report illegal activities; and Sasol wi l l assist the government in capacity building to better manage and control the forest resources in the project area. (ii) Social Environment. The main socio-economic benefit that Mozambique will derive from the Project wi l l be the government’s receipts of taxes and royalty payments. The geographical areas in which the royalty benefits wi l l accrue will depend on decisions made by GoM. The most significant demand for royalty gas in the short- to medium-term wi l l be in Maputo. For communities living around the Project, the socio- economic impact resulting directly from the operation o f the plant wi l l be low.
104. Regional Impacts in South Africa. (a) Biophysical Impacts. The introduction o f natural gas wi l l result in significant air pollution emission reductions at the Sasolburg plant. The emission reductions at Sasolburg wil l include 10,300 tons per annum o f sulphur dioxide, 8,500 tons per annum o f nitrogen oxides, 20,600 tons per annum o f hydrogen sulphide (emissions reduce to nil) and 1,400 tons per annum o f particulate matter. The introduction o f natural gas to RSA wi l l also result in fuel substitution in other industries. Out o f total 40 MGJ/a o f fuel oils currently sold in heavily industrialized areas, up to 30 MGJ/a wi l l be replaced with natural gas. Natural gas has the added advantage o f generating insignificant air pollution at source. Collectively the reduced or save emissions, imply carbon emission reduction
38
credits o f some 4.7 mi l l ion tones per annum; (b) Social Impacts. The conversion o f the Sasolburg plant to natural gas wi l l result in some 600 jobs becoming redundant. At present, it appears that a l l o f the affected employees should be able to be redeployed. The conversion from coal to natural gas wi l l also reduce the demand for coal at the affected colliery. Sasol estimates that some 700 positions at the colliery could be lost as a result o f the switch and approximately 30 percent o f these can potentially be re-deployed. Sasol has prepared an Action Plan to minimize the impact o f j o b losses at Sigma Collieries, and i s working with respective unions.
Monitoring and Auditing Provisions
105. approval has been a hallmark o f the initial phases o f the development o f the Project. EMPs for al l Project components have been completed and compliance i s being and will be monitored and audited by independent auditors. Sasol wi l l retain independent auditors, in accordance with i t s adopted management systems ( IS0 14001), to audit compliance with environmental obligations arising f rom inter alia: environmental management plans, authorizations and applicable guidelines and policies. Compliance with the Resettlement Planning and Implementation Program wil l also be audited by other external auditors in accordance with the Auditing and Monitoring Program contained in Volume 4 o f the RPIP. The audit reports wi l l be furnished to the Bank and Sasol wi l l prepare an integrated report which the Bank may make publicly available. The Bank may also, wi th Sasol’s prior consent, publicly disclose any information contained in the audit reports, if the Bank believes there i s a need for such disclosure. It was further agreed that: (i) Sasol would inform the Bank o f all changes to the environmental and social mitigation plans, and for material changes the Bank’s consent would be required; and (ii) in respect o f expansions to the upstream component the Project, Sasol would be required to comply with the applicable environmental and safeguard policies and guidelines o f the Bank3’. Under the legislation on access to information in South Africa, Sasol w i l l also be obligated to release, upon specific request, the monitoring reports o f independent auditors to any interested and affected party.
Monitoring and auditing o f compliance with the EMPs and other statutory conditions o f Project
106. Agreement was also reached wi th the G o M that Mozambique wi l l : (i) ensure that independent experts acceptable to the Bank are retained, on the basis o f terms o f reference satisfactory to the Bank to ensure adequate monitoring o f the implementation o f the Project’s environmental and social mitigation plans; (ii) require, through i t s regulatory and licensing authority, third parties to comply with the Bank’s environmental and social safeguards polices and procedures in carrying out investments requiring access to and use o f the gas pipeline.
30 General Environmental Guidelines, Monitoring, and Oil and Gas Development (Onshore), as contained in Chapters I, 11, and 111 o f the Pollution Prevention and Abatement Handbook (IFC, July 1998); General Health and Safety Guidelines (IFC, 1998); World Bank Operational Policy 4.0 1 (Environmental Assessment, January 1999); World Bank Operational Policy 4.04 (Natural Habitats, June 200 1); World Bank Operational Policy 4.09 (Pest Management, December 1998); World bank Operational Policy 4.12 (Involuntary Resettlement, December 200 1); and World Bank Operational Policy Note 11.03 (Protection o f Cultural Property, September 1986).
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7. Safeguard Policies
Policy Applicability
Compliance with application and consideration o f these policies have been satisfactorily demonstrated and explained in the environmental and social documentation developed for the Project, as per the Safeguard Recommendations o f the World Bank, which have been cleared for disclosure.
F. Sustainability and Risks
Sustaina bility
107. significant component o f the economic growth (e.g. Mozal), hence the GoM i s l ikely to maintain i ts commitment to this gas Project, The long-term benefits f rom the provision o f the gas infrastructure as described in paras. 4 and 73 include the facilitation o f additional investments beyond this Project, development o f local gas distribution, the creation ofjobs, the social services for communities to be funded by the sponsors, and the transfer o f technology and ski l ls to local Mozambicans. Finally, Mozambican participation in the Project, including by local private investors, should ensure a broad measure o f support for the Project and hence i ts continuity.
Mozambique's experience with large scale infrastructure projects shows that they account for a
Critical Risks
108. Sasol, which has vast experience in operating gas pipelines in South Africa. On the upstream side where Sasol's experience i s more limited it has hired competent staff and awarded a five-year contract to Kel log Brown and Root, an experienced operator, to provide management and technical support. These arrangements wi l l ensure efficient operation o f the Project infrastructure to deliver gas to South Africa.
Operation o f Project Facilities. The operation o f the project facilities wil l be undertaken by
109. Weak Institutional Capacity. ENH's capacity to undertake such a project as a shareholder and participate in operating decisions i s relatively weak, and so i s the capacity o f the regulator to fulfill i t s monitoring obligations under the Project. To mitigate this risk ENH wil l retain legal and financial advisors and D N C W M I C O A wil l ensure that independent experts are retained to assist the G o M in meeting i t s obligations. Funding i s provided under the technical assistance component o f ERAP.
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1 10. Environment and Social Impact Management. This is a category A project involving a major pipeline. The sponsors have prepared comprehensive EIAs and EMPs and the recommendations for mitigating adverse impacts have been, are, and will be implemented in accordance with the respective EMPs --- covering design, construction and operations. Nevertheless, because o f the scale o f the operation, close monitoring arrangements to ensure compliance with the EMPs will be necessary. To mitigate this risk the sponsors will retain independent experts to audit and report on the implementation o f the EMPs.
11 1. Revenue Management. In 2002 with a GDP o f around US$4.52 billion, current revenues o f the GoM were approximately 13.7% o f GDP. In this context the revenues generated by the Project are not significant as they are estimated to remain below 10% throughout the duration o f the Project. Nevertheless, to avoid eroding support for such an infrastructure project whose medium- to long-term benefits will be significant as more gas exploration takes place and new discoveries are made, it i s important to ensure that procedures for transparent accounting o f Project revenues are put in place. The GoM has therefore committed in its Letter o f Development Program for ERAP to account for the revenue proceeds from the Project through a line item in its budget. In addition, the use o f the revenues will be reported in the budget execution reports which are monitored by the Bank and other donors.
112. involving a strengthening o f institutions and dialogue between the main political parties. However, the political contest has at times been contentious and it is possible that some parties could capitalize on the growing discontent at the economic advantages o f the southern provinces and a widely shared concern about the dominance o f South Africa to be critical o f the Project. This concern, although real, i s mitigated by the apparent broad consensus on the role o f foreign direct investment in the country and the fact that there have been no instances o f breaches o f international contractual obligations in recent years. Further, the IBRD and MIGA guarantees, insurance from ECA and the financing from bilateral and multilateral institutions plus the participation o f Mozambican investors, should help mitigate against this form o f political risk.
Political Risk. Since the 1992 peace agreement, Mozambique has gone through political reforms
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Critical Risks (reflecting the failure o f critical assumptions found in the fourth column o f Annex 1):
Risk
From Outputs to Objective
Sovernment commitment to foster investment and private sector participation in infrastructure i s not maintained.
Zrude oi l prices decline substantially.
Risk Ratina
M
M
From Components to Outputs
The upstream component and the gas pipeline are not completed according to sppropriate technical specifications, on time and within budget.
M
Project sponsors do not fully implement the Project's environmental and social developing component.
N
I
Overall Risk Rating
Risk Mitiaation Measure
Economic benefits in the form o f revenues, :mployment creation, need to send right signals to markets for foreign direct investment, provides the needed incentives for :he GoM to maintain commitment to the Project.
High priority i s accorded by government to the development o f the central region in which the gas fields are located.
The floor price o f crude oil built into the price formula for natural gas will help to maintain benefits to Mozambique.
An EPCm concluded for the upstream component with an internationally reputable firm. For the pipeline a fixed price and date certain EPC has been awarded to an internationally reputable firm, Sasol, to provide financial support for cost overruns.
Strong monitoring plan by the GoM and independent auditing and public disclosure o f results will be undertaken.
Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk).
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G. Effectiveness Conditions
IBRD Partial Risk Guarantees
1 13. include the following:
The conditions precedent are the customary conditions for guarantee operations o f this type and
Firm commitments for sufficient financing to complete construction o f the Project, including the contribution o f equity by Sasol.
Execution o f all project financing and security documentation, as well as the IBRD Guarantee Agreements, the Indemnity Agreement and the Project Agreements.
Effectiveness o f al l required insurance (to include IBRD as an additional insured on third party liability insurance).
Provision o f satisfactory legal opinions,
The payment o f the initiation and processing fee, and the first installment o f the guarantee fee.
Conditions precedent for the effectiveness o f the Farm-Out Agreement under which 5% participating interest would be transferred to IFC include the following:
(a) Firm commitment obtained by CMH for funding its 25% share in the UJV.
(b) Consent from the Government o f Mozambique, ENH and Sasol to the transfer to IFC o f 5% participating interest in the UJV under the relevant Project Agreements.
(c) Execution o f the Novation Agreement, and the Deeds o f Assignment and Covenant in respect o f the JOA, GSA and the PPA.
(d) Receipt by IFC of a satisfactory legal opinion.
H. Readiness for Implementation
1 15. The project i s already under implementation with the pipeline construction being almost completed. Implementation i s on schedule for first commercial gas deliveries to South African customers to take place during the first quarter o f 2004. As i s usual for projects of this nature disbursements o f lenders’ facilities will take place after financial closure which i s expected in Octoberhlovember 2003.
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I.
116
Compliance with World Bank Group Policies
This project complies with all applicable World Bank Group policies.
Marie-Ange Saraka-Yao Gulrez Hoda Team Leader, IBRD Team Leader, IFC
i
Suman Babbar Somit V m a Sector Manager, IBRD Acting Director, PPF Manager, IFC
Da IUS Mans Michel Wormser Country Director, AFC02 Director, AFTPI Director, COCDR
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0 bjectives
Annex 1: Project Design Summary MOZAMBIQUE: Southern Africa Regional Gas Project
Sector-related CAS
Improve investment climate.
I Hierarchy of
Objective:
Generate export revenues to promote economic growth and poverty reduction.
Mobilize private capital and commercial financing.
Key Performance Indicators
Sector Indicators:
Increased investment to infrastructure and social facilities.
Increased employment growth o f local contracting industries.
Key Performance Indicators
Outcome I Impact Indicators:
Estimated revenues o f about US$498 over 25 years.
Increases in foreign direct investments.
Project i s fully funded.
Increased private sector presence in Mozambican gas sub- sector.
Data Collection Strategy
Sector/ country reports:
Macro-economic statistics and progress reports.
Data Collection Strategy
Project reports:
Macro-economic statistics.
Project construction progress reports.
Critical Assumptions
from Goal to Bank Mission)
Sustained macroeconomic performance.
Increase in revenue allocations to pro- poor programs.
Private sector commitment to provide social services.
Increased trade and investment within stable operating environment.
Critical Assumptions
(from Objective to Goal)
Adequate gas reserves.
Continued provision and flow o f gas.
Successful conversion o f Sasol coal-based facilities to gas. Adequate political risk guarantees.
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Hierarchy of Objectives
Sector-related CAS Goal:
Provide opportunities for development o f domestic gas markets.
Build local capacity for management of gas resources.
Key Performance Indicators
Sector indicators:
Development o f small-scale gas projects.
Cost savings in carbon imports from petroleum products.
Entities able to undertake most tasks with minimum TA.
Sector entities become commercially viable.
Data Collection Strategy
Sector/ country reports:
Sector statistics from MIREME.
World Bank Supervision Mission reports.
Statistics from MIREME and progress reports.
World Bank Missions reports on monitoring o f implementation o f ETAS and compliance with EMPs.
Critical Assumptions
(from Goal to Bank Mission)
GoM exercises option to take royalty gas in kind.
Availability o f TA and financing to develop domestic gas market.
Availability o f viable small-scale gas projects.
Pipeline open access regime to pipeline in subsequent years to the project.
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Hierarchy of 0 bjectives
Output from each Component:
Pande and Temane gas fields developed and Central Processing Facil ity constructed and operated according to international industry practice and environmental standards.
Pipeline construction completed and operated efficiently.
I Gas take-off points provide open access as per contractual arrangements.
Key Performance In d icators
Output Indicators:
Completion o f the project according to schedule.
Contractual arrangements implemented and effectively monitored by GoM.
E N W C M H technical and financial capacity strengthened.
Export revenues generated from gas sales.
865 km o f 26 inches diameter pipeline in operation by 2004.
Environment Management Plans, Social Development Act ion plans.
Data Collection Strategy
Project reports:
Progress and activity reports provided by operators.
World Bank Missions supervision reports and annual reports.
Project progress reports.
EMP and Social Act ion monitoring reports and independent audit reports.
Critical Assumptions
[from Outputs to Dbjective)
Ongoing Government commitment to foster investments and private sector participation in infrastructure.
Gas fields and CPF developed according to specifications on time within budget.
Adequate budget available for construction.
Technical expertise for construction and operation.
Sponsors’ commitment to implement environment and social development program.
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Hierarchy of 0 bjectives
Project Components I Sub-components:
Development of Pande and Temane gas fields and construction o f CPF in Mozambique.
__ ~~
865 km 26 inches diameter pipeline from Mozambique to South Africa.
Key Performance Indicators
Inputs: (budget for each component)
Estimated total cost o f US$396 million o f which debt financing i s estimated at US$220 million (Annex 3(b)).
Estimated total cost o f US$605 million o f which debt financing i s estimated at US$320 million (Annex 3(b)).
Data Collection Strategy
Project reports:
Progress reports and World Bank supervision missions reports.
Progress reports and World Bank supervision missions reports.
Critical Assumptions
(from Components to Outputs)
Adequate funding i s mobilized.
Environmental and social plans are satisfactorily implemented.
Adequate financing i s mobilized.
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Annex 2: Detailed Project Description MOZAMBIQUE: Southern Africa Regional Gas Project
1. The Project would be the first large scale energy scheme to capitalize on Mozambique’s significant natural gas resources. It consists of two key distinct but integrated components: (i) the upstream component (the gas fields development and the central processing facility); and (ii) the transmission component comprising a gas pipeline from Mozambique to South Africa.
(a) The Upstream Component. The gas fields reserves are estimated to be at least 2.78 t c f on P-50 basis. The fields are located in Mozambique’s Inhambane Province. Sasol plans to make use o f the five previously drilled appraisal wells and develop the Temane gas reservoir f irst as it has significantly higher pressure than the Pande reservoir. Gas wil l be gathered from 1 S wells in the Temane field and later on from 16 wells in the Pande Field as the pressures equalizes, giving a total o f 34 wells, phased in over the l i f e o f the combined fields to maintain the sales plateau. A central processing facility (CPF) wil l be established at Temane and linked to the production wells by 177 km of buried pipelines to the inlet flange of the gas pipeline for transportation to downstream customers. The CPF consists of gathering networks linking the wells, and drying, compression and condensate removal facilities. There are associated infrastructure, such as roads, utilities, workshops, accommodation units and offices.
(b) The Gas Pipeline Component. The component consists o f a 865 km 26 inch diameter high pressure steel pipeline between the gas fields and Sasol’s petrochemical complex at Secunda in South Africa. The pipeline i s buried about one meter below the ground surface. Without initial intermediate compression, the pipeline will have a capacity o f 120 MGJ/a. Sufficient wall thickness has been allowed in the gas pipeline design to enable the capacity o f the pipeline to be doubled to 240 MGJ/a with the addition of mid-point and quarter point compression, should market demand and availability o f reserves justify this. The pipeline design includes five take-off points at Ressano GarcidMaputo, Magude, Macarratane, Chigubu/Funhalouro and Temane in Mozambique to provide for possible domestic use o f gas at some point in the future. The 525 km Mozambican route portion wil l start at the Temane CPF to the immediate North West o f Vilanculos, cross the Mozambique-South Africa border near the town of Ressano Garcia from where the South African portion continues to Secunda where it wi l l be tied into Sasol’s gas distribution network.
2. which are outside the scope o f the Proiect: (i) conversion o f i t s gas distribution network equipment and customer systems, from hydrogen-rich gas to natural gas; (ii) conversion of the Sasol’s Sasolburg chemical complex from using coal to using gas as a feedstock for chemical production; and (iii) modification of Sasol’s synthetic fuel operations in Secunda. Over a period of thirty years, Sasol Gas Limited has developed a pipeline network covering more than 1,500 km, and delivers gas to over 600 customers, mainly in the industrial sector, where it i s used in bakeries, manufacturing o f steel, ceramics, glass and other applications where gas has an advantage. A trained conversion team wi l l convert the customers on the network in a phased approach after the arrival o f natural gas in South Africa. Sasol Gas Limited believes there could be substantial increase in industrial consumption of gas which i s currently constrained by inadequate supply. Sasol Chemical Industries unit wi l l form the bulk o f the base load required for the Project at 94 MGJ/a as indicted in the table below:
To utilize the gas imports in South Africa, Sasol wi l l need to carry out the following activities
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Natural Gas Market in South Africa: Base Case (at full pipeline capacity o f 120 MGJ/a)
Sasol Captive Market (own consumption and third party sales)
Development Market
Total
Market Segment
94.0
26.0
120.0
Volume MGJIa
I
3. mine to support i ts operations in Sasolburg, Sasol decided to invest in the proposed Project and thus substitute gas for coal.
With the Sigma Colliery nearing the end o f i ts economic life, instead o f developing a new coal
Project Ownership
4. capitalization of approximately US$8 billion, and ENH, the Mozambican national oi l company. The upstream component o f the Project (gas fields and the CPF) wil l be implemented by an unincorporated joint venture comprising: (i) Sasol Petroleum Temane Limitada (SPT), a wholly-owned Mozambican subsidiary of Sasol; (ii) Companhia Mocambicana de Hidrocarbonetos (CMH), a company owned 80% by ENH and 20% by GoM; and (iii) IFC in the ratio 70:25:5. Each entity i s responsible for raising funds for i t s share o f the investment costs. While the CPF portion of the upstream component i s currently 100% owned by SPT, CMH has the option to acquire a 30%, which option it intends to exercise. CMH wil l then farm-out 5% o f i t s interest in the CPF to IFC. The Pipeline wil l be financed solely by Sasol’s subsidiary, ROMPCO. CEF (a Republic o f South Africa-owned company) through i t s subsidiary iGas, and ENH through i t s subsidiary, CMG, have options to purchase up to an aggregate o f 50% of the shares in ROMPCO. The option for iGas expires three months after Sasol has submitted reserve reports indicating sufficient reserves to supply gas for 25 years based on ramp up volumes and 120 MGJ/a plateau production volumes per the GSA. For CMG the option wil l not expire prior to two years after First Gas.
The Sponsors of the Project are Sasol, a South African petrochemical company with a market
50
1 Mozambique I
Gas Fields and CPF
100%
Pipeline
I I
South Africa
1 SASOL I SASOL GAS HOLDING
100%
I 1 , ROMPCO I
I . 5. 1950 as a national oi l company. It was privatized in 1979 and is listed on the Johannesburg Stock Exchange and New York Stock exchanges. It i s the fifth largest South African company, with a market capitalization o f approximately US$8 billion. Sasol i s an integrated oil and gas company with significant chemical interests based in South Africa and 15 other countries throughout the world. It differentiates i tse l f from other oi l companies in that it produces refined products and chemical feedstocks from coal that it mines. Having purchased the German chemical firm, Condea in 2001, Sasol's chemical unit now makes up 68% of revenues with more than 50% outside o f South Africa. Sasol i s organized around five principal divisions: Mining, Synthetic Fuels (Synfuels), Oil and Gas, Chemicals and Other. The Mining division i s the main source o f raw material for the Synthetic Fuels division, in addition to supplying the Chemical division. In turn, the Synthetic Fuels division converts synthetic gas made from coal into a range o f petrochemicals, most o f which (refined products) are commercialized by the Oil and Gas division. The remainder i s utilized by the Chemicals division as building blocks in the production o f a vast array o f chemical products.
Sasol, i s the leading petrochemicals and liquid fuels company in South Africa, was founded in
6. ENH, the national oil company, created in 1981, was incorporated in 1997 by Mozambican decree 39/97 and thus became an entity with financial and administrative autonomy. In light o f the relatively small local private sector, ENH i s viewed by GoM as a vehicle to maximize the value that can be generated through commercial participation in petroleum activities and to warehouse participation which can, at a later stage, be divested to local private investors. Since its inception, the company has been the primary Mozambican vehicle involved in exploration activities; with the support of i t s partners, it has acquired more than 22,000 km o f seismic data. With the Bank's support, it delineated the Pande and Temane gas fields through the acquisition of more than 1,200 km of seismic data and the drilling o f 14 wells. During that period, through various partnerships, ENH facilitated about US$200 million o f investment in exploration activity and has been the key negotiating partner with ARCO, ENRON and finally Sasol in bringing about the realization o f the Project. The strategy i s for ENH to facilitate geological investigations on hydrocarbons in the country, promote investment and be a silent partner in joint ventures between i ts subsidiaries and international strategic partners. The strategy includes ENH participation in exploration activities on a carried basis in partnerships with international oil and gas companies. ENH's total assets stood at US$30 million as o f 2001 audited financial statements.
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Project Legal Structure
Upstream Project Pipeline Project Downstream
Gas Fields
I I I I I I
__LL L
Temane Pande
SPT 70% CPF Price CMH 25% I IFC 5% I
I I Wcllhrad Price + CPF Price
Gila Sdcr Agreement
CPF Point o f Sale I I
I I I I
Central I Processing I
Facility I I
pipeline Point of Delive Ay
I I
ROMPCO Distribution
Network Users
SCI - Sasol Synfuels
Sasol Gas Natref Otlters
- Payment Contract
7. GoM, the GoSA, ENH, CMH, and Sasol. All the key Project’s contractual agreements have now been negotiated and signed. These contracts include the Petroleum Production Agreement (PPA), the Pipeline Agreement (PA), the Gas Sales Agreement (GSA) and Gas Transportation Agreement (GTA). The PPA and PA were signed in October 2000 and define the framework, rights and obligations of each party to enable gas exploration, production and distribution. Within the framework o f the key agreements signed between GoM and the Project Sponsors, namely the PPA and the PA, the tax regime applicable for the Project has been laid out in addition to the rights and obligations o f the Sponsors and GoM. The agreed tax regime corresponds to the provisions o f the regulations (decrees 14/82 and 48/95) applicable to investments in the petroleum and gas sector and does not provide any exception to the regulations.
The proposed Project wi l l be implemented under a series o f contractual agreements between
8. obligations o f shareholders and commercial parties were signed on December 27,2002 following approval by the Mozambican Council o f Ministers on December 26,2002. In particular, these commercial agreements namely, the Joint Operating Agreement (JOA), the GSA and the GTA provide the framework for management, operation and implementation o f the Project. Sasol wi l l be the primary Sponsor o f the Project from gas fields development to the end user sales in South Africa. Sasol (through i t s subsidiary SPT) i s one o f the sellers jointly with CMH, (a subsidiary o f ENH), the operator o f the upstream (fields and CPF), the transporter (through its subsidiary ROMPCO), the operator o f the pipeline (through Sasol Gas) and the buyer (Sasol Gas). The Sponsor considered this approach essential for achieving economies o f scale and ensuring financial viability o f the Project given the substantial investment costs involved and the relatively small size o f the gas fields.
In addition to the October 2000 agreements, commercial agreements governing the rights and
9. been embedded in the contractual arrangements to oversee management and operations o f the Project and reduce possible conflict of interests. On the management side, for the upstream component, a management committee comprising the representatives o f the sellers and the regulator and chaired by the regulator (DNCH) has been set up to oversee petroleum operations. In addition, all decisions regarding
Given Sasol’s involvement in all aspects o f the Project, several “safeguards” mechanisms have
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the upstream development plans need to be approved by the regulator. Finally, an independent auditodexpert can be called in by CMH and/or the regulator may verify any aspect o f the operations. For the pipeline operations, a similar management and oversight mechanism i s in place: the pipeline development plan i s approved by the regulator. Any key decision such as the appointment o f pipeline operator, or the decision to allow third party access to the pipeline on the Mozambican side i s subject to regulatory approval. Finally, for negotiations o f the key contracts under which Sasol i s represented on both sides of the agreements, the decision was made that SPT, as a seller, authorized ENH to negotiate the agreements on behalf of the sellers. In the case o f the GSA, under which Sasol subsidiaries represented both the seller and the buyer, ENH on behalf o f the sellers, negotiated with the buyer, Sasol Gas Limited. Similarly, in the case o f the GTA under which Sasol subsidiaries represented the shipper and the transporter, ENH led the transporter’s negotiating team with the shipper, Sasol Gas Limited.
Contractual Arrangements with the Public Sector
10. executed in April 200 1. The Agreement sets out a framework agreed by the two Governments to facilitate trade o f natural gas between the two countries. The Governments have established a commission to facilitate the harmonization o f legal regulations relating to health and safety, environmental protection and technical standards in order to facilitate cross-border natural gas projects. The Governments have agreed with each other to issue any necessary permits, authorization or consent required for such gas projects, including any rights o f way over land or other easements or servitudes required for cross-border gas projects. The Governments have also undertaken to provide appropriate assurances to lenders relative to exchange control, expropriation and adverse changes in law.
Cross-Border Agreement The GoSA and the GoM are parties to the Cross-Border Agreement
1 1. which it will be in force wil l be announced by the President. The objective of the Gas Act i s to establish a national gas regulator in South Africa and to facilitate the development o f the gas industry. The regulator has yet to be appointed and gas regulations have to be drafted. The Gas Act provides that the Gas Regulator will be bound by the Regulatory Agreement between Sasol and the GoSA (para. 12) for 10 years from the date when gas from Mozambique i s first sold and delivered commercially and continuously to South African customers (“First Gas”). Any license issued under the Gas Act will be valid for 25 years or such longer period as determined by the Gas Regulator. The licenses provided for in the Regulatory Agreement will be valid for 25 years, and may be extended upon application by the applicable Licensees after the period o f 25 years. Distribution licenses issued in terms o f the Act are exclusive in respect o f the distribution area, subject to distribution facilities being developed. Trading licenses are also exclusive for a period to be determined by the Gas Regulator. The provisions of the Regulatory Agreement shall for the duration o f the special dispensation be included as license conditions of the licenses granted to Sasol Gas and ROMPCO.
Gas Act. The Gas Act was enacted by the President of RSA in February 2002, and the date on
12. in September 2001. The Regulatory Agreement sets out: (i) the scope of the regulatory dispensation granted by the GoSA under the Gas Act to Sasol over i t s current piped gas business and the proposed supply o f gas from Mozambique into the RSA; (ii) certain proposed terms o f the Shareholders’ Agreement to be entered into in relation to ROMPCO; and (iii) certain terms to be included in the Gas Transportation Agreement.
Regulatory Agreement. The GoSA and Sasol are parties to the Regulatory Agreement executed
13. The regulatory dispensation provides for a period of limited access to uncommitted capacity in the Gas Pipeline, licenses for Sasol Gas Limited’s existing and growth market areas and market value based pricing mechanism. The dispensation i s valid for a maximum o f 10 years from First Gas. Sasol has undertaken to use i t s best effort to supply 120 million MGJ/a of natural gas from Mozambique to South African markets for 25 years after First Gas. GoSA undertakes that the Gas Regulator will issue
53
ROMPCO with a transmission license for construction and operation of the Gas Pipeline for a period of 25 years after First Gas.
Contractual Arrangements with the Private Sector
14. signed in October 2000. Under the PPA, GoM grants to SPT and CMH (together the “Contractor”) exclusive rights for the development, production and disposition of the reserves of petroleum located in the Pande and Temane Field Reservoirs (the “Petroleum Production Area”) in Mozambique. SPT has a 70% interest and CMH has a 30% interest in the Petroleum Production Area. The Contractor has the exclusive right to exploit the Petroleum Production Area and to dispose of the petroleum at the wellhead, for a period of at least 30 years from the date of f irst delivery o f natural gas. GOM has granted tax dispensations to the Contractor and i ts sub-contractors in relation to the development and production of petroleum.
Petroleum Production Agreement GoM, ENH, SPT and CMH are parties to the PPA which was
15. commencement of commercial production and thereafter at the rate o f 32% or at the corporate tax rate applicable at the time if it i s lower. Expenditure incurred on exploration operations, including the drilling o f exploration and appraisal wells, wi l l be depreciated at 100% of cost. Capital expenditure on development and production operations wil l be depreciated at an annual rate of 25% of such expenditure. Assessed losses may be carried forward for a period of eight years. Withholding tax wil l not be imposed on remitted dividends and on interest payment to a beneficiary outside o f Mozambique. Value added tax would not be imposed on export o f petroleum by SPT to destinations outside of Mozambique and importation o f goods intended to be used for the purposes o f conducting petroleum operations are VAT exempted. SPT and i ts sub-contractors are exempted from customs and excise duties on goods imported for the purpose of conducting petroleum operations. SPT i s exempted from customs and excise duties on the exportation of gas. The expatriate personnel o f SPT and i t s sub-contractors are exempt from paying income tax on salary income earned in Mozambique and SPT and i t s sub-contractors are not obliged to make any deductions or pay any other tax or levy imposed on the working earnings o f such personnel.
Corporate tax wil l be levied at the rate o f 17.5% for a period of six years from the date o f the
16. those listed in the PPA and has agreed that where any breach of this warranty results in a material adverse change to the economic value o f the PPA to the Contractor, it wi l l meet with ENH, SPT and CMH to make amendments to the PPA to restore the Contractor’s previous economic position. GOM has undertaken not to expropriate the assets acquired by the Contractor for the purpose of the development and production of the petroleum, not revoke or amend relevant authorizations and not to hinder the Contractor from enjoying i ts rights under the PPA. Additionally, if a change in law results in a material adverse change to the economic value of the PPA to the Contractor, GoM, ENH, SPT, and CMH wil l meet to make amendments to the PPA to restore the Contractor’s previous economic position.
GoM has warranted that no taxes wil l apply to the Contractor or i t s sub-contractors other than
17. Contractor, failure by the Contractor to comply with any final arbitral decision or expert determination reached in accordance with the PPA or insolvency of the Contractor. There are no provisions relating to compensation payable in the event o f termination.
GOM and ENH, acting together, are entitled to terminate the PPA for material breach by the
18. Pipeline Agreement. GoM (through MIREME), ROMPCO and Sasol are parties to the PA. The PA sets out the terms of the authorization granted by GoM to ROMPCO to construct, own and operate the gas pipeline and related facilities and equipment situated in Mozambique for transporting natural gas from Mozambique to South Africa and the related obligations o f GoM and ROMPCO. Sasol i s a party to the PA only in relation to the negotiation o f the Gas Transportation Agreement and the Shareholders’
54
Agreement to be entered into in relation to ROMPCO. Both the PA and the Regulatory Agreement fulfill certain obligations and commitments of GoM and GoSA set out in the Cross-Border Agreement.
19. without delay, not to allow any expropriation o f any ROMPCO’s assets and also to ensure harmonization of new legislation so that the PA remains in full force and effect. GoM has granted various tax dispensations to ROMPCO and its sub-contractors and has warranted that no taxes wil l apply to ROMPCO or i t s sub-contractors other than those listed in the PA. Under a stabilization article, GoM has undertaken not to expropriate the assets acquired by ROMPCO, not to revoke, or amend relevant authorizations and not to hinder ROMPCO from enjoying their rights, and to restore through amendments of the PA ROMPCO’s economic position, if a change in law or breach of tax warranty has an adverse material change on i t s value. In addition, GoM has granted to ROMPCO exclusive possession of the area of land through which the pipeline wil l be constructed and has agreed to ensure no settlement or construction wil l be allowed in a strip o f land 200 meters either side of the pipeline.
Under the PA, GoM has agreed to grant all permits required for conducting pipeline operations
20. Joint Operating Agreement. The JOA, concluded in December 2002, sets out the detailed provisions on the rights and obligations of CMH and SPT with regard to the operations under the PPA. SPT has been designated as the operator and i t s duties are specified in an agreed Field Development Plan. The JV partners have appointed a contracting company to assist SPT in acting as operator on such terms and conditions as they may agree. The operator’s duties include acquiring a l l necessary permits, submitting the Field Development Plan and developing the work programs and budgets for i t s implementation. Each party has the obligation to pay, when due, i t s share ofjoint expenses, including cash advances and interest pro rata in relation to their interest in the PPA and JOA at that time. Where any party defaults on i t s obligation to pay i t s proportion o f the joint expenses, the other parties may, after 60 days’ unremedied default, require the withdrawal o f the defaulting party from the JOA. SPT i s required to own, design, construct and operate the CPF in accordance with the Field Development Plan. CMH and SPT have agreed to se l l natural gas jointly on terms set out in the GSA. The aggregate amount received by the joint venture as the sales price of natural gas under the Gas Sales Agreement shall be allocated between the partners according to their respective interests in the JV.
2 1. and CMH, and the Buyer, Sasol Gas Limited, a wholly-owned South African subsidiary of Sasol for the sale and purchase of natural gas from dedicated reserves in the Pande and Temane Fields. The start date for delivery of gas shall be between July 1,2003 and June 30,2004. The supply period shall be at least 25 years. The Sellers are required to make available gas to the inlet flange o f the Gas Pipeline. The gas volumes wil l increase from 72.45 MGJ/a during the f i rst contract year to reach 120 MGJ/a during the plateau period. The GSA secures a revenue stream for the sellers through an adequate take-or-pay obligation of the buyer. The price for the gas consists o f two components: a wellhead price and a CPF processing fee. Under the GSA, the gas price formula consists of: (i) the wellhead price indexed to a weighted average of the Dubai crude oil, gas oil, and fuel oil; (ii) the processing fee i s indexed to both US, and RSA inflation and exchange rates in addition to the weighted average of Dubai crude oil, gasoil, and f u e l oil. Details for the gas pricing formula are available in the Bank’s Project Files.
Gas Sales Agreement. The GSA regulates the commercial relationship between the Sellers, SPT
22. Gas Transportation Agreement. ROMPCO as the Transporter and Sasol Gas as the Shipper are parties to the GTA which was concluded in December 2002. ROMPCO has been incorporated in South Africa as a special purpose vehicle for the investment in the gas pipeline. Currently, ROMPCO i s 100% owned by Sasol Gas Holdings and iGas and CMH have an option to acquire up to 50% of ROMPCO on a combined basis from Sasol Gas Holdings through a deferred participation scheme. The Start Date for the transportation of gas under the GTA wil l be between July 1 , 2003 and June 30,2004. The Shipper i s obliged to ensure the start date for transportation of gas i s the same as the start date for the delivery o f gas under the GSA. Provisions i s made such that gas available for commissioning o f the gas pipeline prior to
55
the start date o f the GTA and the transportation period is to be at least 25 years. The Transporter i s required to be able to deliver 72.45 MGJ/a in the first Contract Year, increasing to 120 MGJ/a during the plateau period (commencing immediately after the end o f the Fourth Contract Year until the expiry o f the term o f the GTA). The GTA secures a revenue stream for the shipper through an adequate ship or pay obligation o f the shipper.
23. Engineering Procurement, Construction and Management Contract (EPCm). The EPCm is between SPT and Foster Wheeler South Africa (Pty). The EPCm Contract i s a date certain contract. The EPCm Contractor has undertaken to carry out project management by appointing a project manager, detailed engineering and design, procurement for and on behalf o f the Contractor Group, construction management and commissioning assistance required for the gas gathering system and construction o f the CPF (the “Work”). In particular, the Contractor i s required to obtain all permits and licenses required to carry out the Work, and ensure that the Work i s carried out in accordance with approved plans. The Contractor i s only exempted from i ts obligations in the event o f force majeure (natural causes, wars and hostilities or other events o f similar seriousness beyond the Contractor’s reasonable control) in which case the time for performing such obligation w i l l be extended in relation to that delay. The Contractor’s obligations are supported by a letter o f guarantee from i t s parent company, Foster Wheeler Energy Limited.
24. and a consortium consisting o f Grinaker LTA McConnell Dowel1 and Consolidated Contractors International Company (GLMC), who have incorporated a South African company named Wedelin Investments 46 (Pty) Limited. It i s a fixed-price, date certain contract with completion schedule consistent with the PA and incorporates a guarantee for pipeline performance. The Contractor has undertaken to design, build and complete the gas pipeline. The Contractor provides the usual construction warranties for this type o f Project. In particular, the Contractor i s required to obtain all permits and licenses required to carry out the work (other than in relation to planning permission and land which ROMPCO i s required to obtain). The Contractor i s only exempted from its obligations in the event o f force majeure (natural causes, wars and hostilities or other events o f similar seriousness beyond the Contractor’s reasonable control). The Contractor i s entitled to an extension o f time for events such as force majeure, delay o f ROMPCO in giving possession o f the site or breach o f any o f ROMPCO’s obligations. The Contractor’s obligations are supported by the constituent shareholders o f the Contractor being jointly and severally liable as sureties and co-principal debtors to ROMPCO and a parent company guarantee from the shareholders’ parent companies for the obligations and performance o f the Contractor, as well as on demand performance bonds from financial institutions acceptable to ROMPCO.
Engineering Procurement, Construction Contract (EPC). The EPC contract i s between ROMPCO
25. transaction and the allocation o f commercial, technical and political risks i s acceptable, consistent with the structure o f the Project. In the review o f Project Agreements, the legal counsel for the commercial, bilateral and multilateral lenders have expressed the view that the Project Agreements are generally o f high quality. I t was examined whether there were any obligations o f the G o M that were particularly onerous or whether there was any fundamental imbalance in any o f the documents to which the G o M i s a party. It was concluded that this was not the case.
Review o f Contracts. The Bank’s review concluded that the contractual structure o f the
26. key contracts, the EPC for the pipeline, the EPCm for the CPF and the line pipe supply contract were awarded following competitive procedures. For the EPC contract, about 25 firms submitted pre- qualification bid information and six were pre-qualified for bidding. The bid process for the EPCm was based on solicitation o f proposals from 7 short-listed firms. Thus, the summary information on the procurement procedures submitted by the sponsor indicate that the process i s in accordance with the Bank’s policy requiring economy and efficiency in private sector projects.
The economy and efficiency i s the procurement standard for guarantee operations. The award o f
56
Annex 3 (a): Estimated Project Costs MOZAMBIQUE: Southern Africa Regional Gas Project
Field Development - Drilling
Indicative Costs (US$ Million) Cost Component
UPSTREAM
118
I 4
- Management and Support Services - Pre-operating Costs - Other - Contingency
Total Field Development Central Processing Facility (CPF)
- EPCm Contract - Internal and External Development Costs - Spares - Pre-operating Costs - Others
- Contingency Total Field Development Central Processing Facilitv (CPF)
4 140
95 49 7
18 2
10 6 2
- Contingency Total CPF
6 177
140
Total Upstream
- EPCm Contract - Internal and External Development - Spares - Pre-operating Costs - Others
317l
costs
Transmission Pipeline Development - EPC Contract
95 49 7
18 2
138
- Contingency Total Baseline Costs Pipeline
28 404
Total Baseline Costs for the Proiect 72 1
- Sastech Services - - Equipment - Pre-operating Costs - Others
Internal and External Development Costs 14 48
133 25 18
O f this about US$96.7 represents Sunk Costs incurred by Sasol prior to October 2000. 1
57
Annex 3 (b): Project Financing Plan . MOZAMBIQUE: Southern Africa Regional Gas Project
IBRD Enclave PRG MIGA ECAs
Upstream Development - Unincorporated Joint Venture
20.00 27.00 50.00
CMH Equity Debt Facilities
Total CMH IFC SPT'
Equity Debt Facility2
Total SPT
IBRD Enclave PRG
Investments in Upstream Project Gas Pipeline wholly-owned by Sasol Equity Debt Facilities3 Investments in the Gas Pipeline TOTAL Financing Required for the Project
10.00
Funding Origin JS$ Mill ion
18.00 38.00
IBRD Enclave PRG
148.00 182.00
10.00
285.00 320.00
MIGA ECAs
Total US$ Mil l ion
45.00 77.00
56.00 10.00
MIGA ECAs
330.00
396.00
45.00 77.00
605.00 1001.00~
Includes Sunk Cost o f US$96.7 million. 1
The difference between the estimated project costs of US$721 million and the total required financing o f 4
US$1,001 million arises from: (a) the inclusion o f US$130 million in capitalized finance charges for two years (including the costs o f advisers) in Sasol's financing plan; and (b) a US$l50 million exchange rate gain resulting from the significant strengthening o f the SA Rand against the US$ in the past one and half years from about Rand 13/US$ to Rand 7.5/US$. Most project expenditures were incurred during this period in US$, Euro and SA Rand. Taking the actual exchange rates as well as the rates for forward exchange contracts which were used to cover capital expenditures incurred in US$ against further depreciation of the Rand, the Project Costs (US$ equivalent) amount to US$721 million. However, the financing plan was prepared in Rand as the Project will be mainly funded in Rand. Converting the Rand financing plan to US$ at the current approximate exchange rate of Rand 7.50NS$ results in a higher US$-equivalent hnding requirement.
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Annex 4: Economic Analysis’ MOZAMBIQUE: Southern Africa Regional Gas Project
1. region i s limited. To date, Mozambique has not been able to exploit i t s gas reserves since gas was discovered in the early 1960s. In order to conduct the economic assessment, several alternative uses were considered for the gas reserves at Pande and Temane, with a view to maximize the value o f gas and economic benefits to Mozambique. The proposed Project emerged from an evaluation o f several o f the following alternative choices:
While Mozambique has large natural gas resources, the demand for gas in the Southern Africa
Generation o f Power and Exporting to Neighboring Countries. It was found that natural gas- based power w i l l not be competitive against either hydro resources which are abundant in Mozambique, or with low-priced coal in South Africa at a reasonable net-back for some time. The major market for power exports, South Africa, does not require new generation capacity until year 2007/2008. This option would delay the realization o f benefits from gas exports for Mozambique by about 3 - 4 years.
Production o f GTL or LNG for Export Markets. There are insufficient reserves to support such applications and their returns are uncertain to sustain such a build up o f infrastructure.
Sale o f Natural Gas within Mozambique. The market for natural gas in Mozambique for gas distribution to households or fuel o i l and some diesel o i l substitution i s very small in relation to the gas reserves. Fuel oi l consumption in Mozambique i s about 20,000 tons per annum so that local gas grids w i l l have l i t t le economic merit at first. There i s no certain prospect in the foreseeable future for the development o f major, new gas-intensive industries to Mozambique that could serve as “anchor” users for gas development.
Export o f Natural Gas for Use in South Africa. The eventual choice o f exporting natural gas to South Africa had the greatest potential benefit to Mozambique because it: (a) enables Mozambique to access a larger market for this resource at reasonable prices, with potential to increase the volume o f exports as additional gas reserves become available; (b) allows Mozambique to derive benefits from the gas more speedily than the option o f producing and exporting power; (c) offers the country the opportunity to both export natural gas and to utilize some o f it for the domestic market via several off-take points along the pipeline. In the short- to medium-term, Sasol i s the only buyer in South Africa with in-depth technical expertise, the financial wherewithal, knowledge o f the gas market, and an existing adequate customer base to make the project viable.
Proiect Timing. A critical question that merits attention i s whether Mozambique i s better o f f utilizing i t s gas reserves for this Project right now, rather than waiting to use the gas at some future time in some possible alternative future uses (such as electricity generation). Analysis indicates that, on balance, this Project i s likely to be a better alternative than waiting to use the gas for future applications.
The economic analysis o f the Project represents the S t a f f s estimates o f the economic benefits o f the Project and has been derived from data provided by the GoM and the sponsors, and their advisers, as well as from the Bank’s own assumptions regarding critical variables such as crude oil prices, domestic inflation in Mozambique and South Africa, and international inflation.
1
59
Approach in Analyzing the Economic Benefits
U S Inflation RSA Inflation ZAR/US$l
3. For purposes o f this analysis, commercial production i s assumed from January 2004 for a 25 year period and the discount rate i s taken as 10%. Since the Project i s implemented by an unincorporated joint venture, the economic analysis i s based on the net benefits to the Government derived through its entities, CMH’s 25% participation in the upstream (field development and processing facility) and CMG’s proposed 25% participation in the pipeline. The fundamental assumptions for the base case are:
(a)
(b)
Price o f crude o i l i s taken as per World Bank forecasts starting with US$21.08harrel in 2004 to US$17.44/barrel in 2010, US$18.9l/barrel in 2015, and US$19,00/barrel from 2016 onwards.
Production o f gas i s based on proven (100%) and probable (50%) reserves at 100% o f the Annual Contract Quantity - 120 MGJ during the plateau period. Production o f Condensate i s assumed to start from 2005.
Inflation and exchange rate forecasts are assumed as follows: (c)
2005 2006 2007 2008 2009 2010 2015 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 9.29 9.54 9.80 10.07 10.35 10.63 12.18
Table 1: Inflation and Exchange rate Assumptions
4. both in the short- and in the long-term. Some are direct and some wil l bring indirect benefits to Mozambique from the development o f the Pande and Temane through:
Based on these assumptions, the proposed Project would generate economic and social benefits
(a) Direct benefits from royalties, income taxes, and dividend income through i t s participation in the Project through subsidiaries.
(b) Employment generation during both the construction and operational phases.
(c) The substitution o f expensive imported liquid fuels by locally produced low-cost natural gas.
(d) Additionally, gas infrastructure w i l l attract new gas-based industries over time, as has been the case elsewhere.
5. Value (NPV) o f economic rent i s US$197.04 mill ion at a discount rate o f 10%.
Under these conditions, the Mozambique’s share o f the economic rent i s 63.87% and N e t Present
6. The critical variables that significantly impact the economic analysis are:
(a) The price o f crude oil.
(b)
(c)
The interest rate as i ts relates to the discount rate.
The levels o f gas production.
60
7. share o f the economic rent ranges between 55% to 88%.
Sensitivity analysis based on the above variables show that the Government o f Mozambique’s
Economic Assessment o f Benefits
8. reap benefits from this Project through the operation o f the Project, the investments in the later years, and ancillary businesses that could arise because o f the upstream operations. As evidenced by the significant contribution (50%) o f mega projects such as the US$2.2 billion Mozal to economic growth, the construction and development o f the SARG Project should generate similar economic activity in the central region o f Mozambique, where the gas fields and the pipeline route are located (this i s mostly the South). Until now, only Maputo and its environs have mostly benefited from these international investments; this Project should begin to address this investment imbalance in the central region. Economic activities are being and w i l l continue to be generated as local contractors and personnel are employed both during Project construction and operations. Sasol has targeted about 15% o f the upstream cost (excluding imports) to be o f Mozambican local content. So far about 205 contracts worth US$68 mill ion have been awarded to the local Mozambican companies. Some 3,000 jobs have been created during the construction o f the facilities o f which about 1,000 are Mozambican nationals. While local employment would decline after initial construction, the Project development plans call for US$245 mill ion additional investment in the upstream component between 2005 and 2021.
Short-Term Benefits. A relatively under-developed region o f Mozambique would continue to
9. around the Project facilities. A Social Fund in the amount o f US$5 mill ion has been earmarked by Sasol for the communities in the three provinces o f Inhambane, Gaza and Maputo. For the purposes o f maximizing the benefits, Sasol has put in place, with the provinces and local communities, a formal detailed and regular consultation process on the best use o f funds and the decision on the proposed activities. Since the beginning o f the year the Social Fund has invested in a variety o f community-based activities such as water boreholes, clinics, schools, agricultural activities. In addition, as per contractual arrangements, about US$3 mill ion would be made available to support capacity building, training, and institutional development activities for both CMWENH and the Regulatory Authority during the next 15 years.
The Project i s accompanied by social development initiatives for the local communities located
10. Medium- to Lona-Term Benefits. The Project w i l l establish a gas infrastructure that i s essential to attracting investments into Mozambique for further exploration and related energy ventures. Once the gas pipeline i s built, i ts transmission capacity could be doubled through additional compression at relatively low cost. Moreover, additional gas i s expected to be found in the vicinity areas and third party access to pipeline would be available immediately for distribution and consumption within Mozambique and after ten years o f Project operations in South Africa. The pipeline design includes five gas take-off points in the Mozambican section (at Ressano GarcialMaputo, Magude, Macarratane, Chigubu/Funhalouro and Temane), thus providing an opportunity for Mozambique to develop the local gas markets and other areas o f the economy. This i s an appreciable benefit as Mozambique currently relies largely on imported liquid fuels. The availability o f royalty gas in Mozambique could lead to a substitution o f imported liquid fuels with natural gas in the domestic market resulting in significant foreign currency savings. In addition, international experience indicates that often the availability o f natural gas induces investments in gas-based industries. On the South African side, a major benefit o f the Project i s on the environment. Currently, Sasol i s operating its plant in Sasolburg with coal as the source fuel, Replacing coal with an environmental friendly gas w i l l be beneficial to the corporation and also to the population in the plant’s vicinity.
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Sharing of Economic Rent by the Government
1 1. In assessing the gas price and the economic benefits o f the Project to Mozambique, it i s important to note that: (i) the Mozambican gas reserves have been a “stranded” asset with no significant market opportunity for sale or distribution solely wi th in the country; (ii) the price Sasol i s prepared to pay for the gas i s influenced by the cost o f coal-derived synthetic gas which Sasol produces using coal from i t s own mines as wel l as f rom the pricing o f alternative/competing sources o f energy in South Africa; and (iii) unlike crude o i l for which an international reference price i s readily available, there i s no international benchmark for gas pricing, each project i s unique in terms o f alternative use and pricing o f alternative fuels. The price o f natural gas reflects to a large extent the bargaining power o f the buyer and the seller.
12. the Gas Transportation Agreement. The gas price formula consists o f two components: (i) the wellhead price i s indexed to a weighted average o f the Dubai crude oil, gas oil, and fuel o i l (Dubai crude price has a cap o f US$34/bbl and a floor o f US$16/bbl); and (ii) the processing price i s indexed to both U S and RSA inflation and exchange rates in addition to the weighted average o f Dubai crude oil, gas oil, and fuel oil. The gas price will be calculated and paid in U S dollars. The gas transmission tar i f f wil l be calculated as an agreed base tar i f f escalated quarterly on an agreed South African inflation index and paid in Rand.
The price for gas and for i t s transportation2 have been agreed as per the Gas Sales Agreement and
(a) Gas Production. Gas from the Pande/Temane fields wi l l be produced and through local gathering systems delivered to the central processing facility. The processed gas wil l be delivered and sold by the Sellers to the gas purchaser, Sasol Gas, at the inlet flange o f the Pipeline. Mozambique w i l l be entitled to: (i) 5% royalties on the gas production; (ii) dividend income from i t s equity ownership in CMH; and (iii) after netting the expenses, Mozambique wil l be entitled to income tax levied on C M H and SPT.
(b) Gas Transport. A base price for transporting gas from the field to SASOL’s main facility at Secunda (South Africa) has been set. The Mozambican portion is expected to account for 60% o f the pipeline cost. Mozambique wil l derive income tax proportional to i t s share o f the pipeline (the Mozambican portion o f the pipeline will not be owned by a separate subsidiary), income taxes wil l be derived on apari-passu basis. The Government i s in negotiation for loans so it could invest in the pipeline, giving it a 25% equity stake. Therefore, there i s the potential o f additional return to G o M in the form o f dividend income from the pipeline.
Valuation of Economic Rent to the Government (See Attachment 1)
13, are most liable to influence the outcome. These variables are price o f crude, discount rate and the level o f gas production. In the economic analysis, it i s assumed that Mozambique self-finances its share in the venture (the financial analysis on the other hand, reflects the terms under which Mozambique will finance i t s share in the venture).
The reliability o f the economic rent analysis has been tested for variations in the parameters that
The gas pricing and transportation formulae are described in more detail in the Project Files. The Project Files also provide the estimated gas prices based on the World Bank’s forecast o f crude oi l prices and the estimated delivered price of gas at Secunda in South Africa.
2
62
14. The economic analysis evaluates the sharing o f economic rent between the host country and the investors. For this purpose, it i s assumed that the benefits to Mozambique wil l comprise royalties, taxes and benefits o f equity participation both in the upstream and the pipeline. Mozambique’s share o f the upstream i s 25% and it plans to own 25% o f pipeline, through ENH’s subsidiary, CMG. Based on the base case assumptions Mozambique wil l receive 63.87% o f the economic take with a NPV o f US$197.04 mi l l ion (see Attachment 1).
Discount Rate 7.50% 10.00% 12.50%
15. different crude o i l prices and discount rates, which lead to the following results:
The table below iterates the sensitivity analyses o n the base case production scenario with
Crude Oil Price (US$/bbl) 19.5 2 1.08 22.5 25.0
57.0% 56.5% 56.1% 55.5% 65.3% 63.87% 62.8% 61.2% 88.3% 82.6% 78.8% 73.7%
Table 2: Sensitivity Analysis on Government’s Share of Economic Rent (YO) Based on Crude Oil Prices and Discount Rates
Base Case with N o
Condensate
66.7 $1,072.7
5.4
94.6
Production at 100% of ACQ - Proven
Reserves
67.3 $981.2
6.1
93.9
16. considered in the table below, which also gives variations in the NPV o f the net cash f l ow to the GoM. The results are summarized as follows:
Gas production levels also affect the government take o f the economic rent. Several scenarios are
Table 3: Sensitivity Analysis on Government’s Share of Economic Rent Based on Production Scenarios
Production Scenario
Share o f Economic Rent GoM (%) N e t Cash flow GoM (current) Percentage o f net cash flow to GoM Years 01 - 10 Percentage o f net cash flow to GoM Years 11 - 25 NPV @, 7.5% for GoM economic rent in US$ million N P V @, 10% for GoM economic rent in
Base Case (100% ACQ at 100% proven + 50%
probable)
63.9 $1 ,I 37.9
6.6
93.4
307.8
197.0
122.4
I 279.9 270.3
171.6
Production at
- Proven and Probable Reserves
$1,304.1
100% of ACQ
93.1
I
223.7
63
17. cash f l ow to G o M in years 01 - 10 versus years 1 1 - 25, under a l l the production scenarios, most o f the benefits to Mozambique w i l l accrue after the first six years o f commercial production. There are several reasons for this:
Timing. o f Revenues. As evident from the table above while comparing the percentage o f net
(a) Whi le the project wi l l start generating a positive cash f low by 2005, the Project i s scheduled to reach i t s full production capacity in the year 2008. This not only affects the revenues to the government but also the royalties charged on the gas production.
(b) The provisions o f reduced tax rates in the init ial years and loss, carry forward up to 8 years for upstream, and 10 years for pipeline, reduces the amount o f tax accrued to the government f rom the investors. An accelerated depreciation schedule also affects the tax paying ability o f the investors. All these provisions are as per the prevailing Mozambican fiscal regime under Decrees 14/82 and 48/95 and are in line with international petroleum tax code where the government grants incentives to the investors in terms o f the concessionary tax regimes.
Conclusions
18. The economic assessment indicates that the Project i s quite robust in delivering net economic benefits to Mozambique under the various scenarios. As the base case has made certain conservative assumptions, the true economic benefits realized by the Project could be much higher. The non- quantifiable benefits in terms o f overall growth in the central region and the capacity building in the longer-term i s estimated to contribute to overall regional economic growth.
64
Annex 4 Attachment 1
Page 1 of 1
65
Annex 5: Project Sponsors and Financial Analysis MOZAMBIQUE: Southern Africa Regional Gas Project
SUMMARY OF PROJECT PARTIES AND COSTS
Project Parties
1. The major parties involved in the Project are: (i) Empresa Nacional de Hidrocarbonetos (ENH) and i t s subsidiaries; and (ii) Sasol Limited (Sasol) and i t s subsidiaries. The upstream component o f the Project wi l l be undertaken by an unincorporated joint venture (UJV) in which Sasol owns 70% and ENH (through i t s subsidiary CMH) 30% of the gas field portion with an option to acquire a 30% interest in the CPF portion. IFC wi l l farm-in to the UJV for a 5% participating interest, reducing CMH’s shareholding to 25% o f the UJV. The gas pipeline i s currently 100% owned by Sasol, although the Government o f South Africa, through CEF and i t s subsidiary i-Gas, and ENH through i t s subsidiary CMG have the option to acquire shares jointly up to 50% on an aggregate basis in the pipeline portion o f the Project. The following i s a l i s t o f the partners’ respective project companies and subsidiaries involved in the Project: . Companhia Mocambicana de Hidrocarbonetos S.A.R.L. (CMH) i s a subsidiary of the
Mozambican state oil company Empresa Nacional de Hidrocarbonetos de Mogambique (ENH), 80% owned by ENH and 20% owned by the Government o f Mozambique. ENH was established in 1981 to be the vehicle for the Mozambican state participation in the exploration, development and production of petroleum in Mozambique. In the Pande and Temane fields these rights are exercised through CMH. Another special purpose company, CMG, wil l hold the shareholding in the pipeline.
Sasol Petroleum International (SPI), a wholly owned subsidiary of Sasol Limited, was formed to develop the Group’s interests in the exploration and production of oil and natural gas. A wholly-owned Mozambican subsidiary, Sasol Petroleum Temane Limitada (SPT) i s a Mozambican registered company housing SPI’s interests in the unincorporated joint venture related to the Temane and Pande Fields and the CPF.
Sasol Gas Holdings was formed to accommodate the Sasol Group’s gas interests. I t s subsidiary, Sasol Gas, i s the buyer under the Gas Sales Agreement and the shipper under the GTA. I t i s presently the major supplier o f pipeline gas in South Africa and over a period o f thirty years has developed a pipeline network covering more than 1,500 km and over 600 customers, mainly in the industrial sector (bakeries, the manufacture of steel, ceramics, glass, and a variety o f uses where gas has distinct advantages). For the period ending June 30,2002, Sasol Gas had a total revenue of US$150 million and generated an operating cash flow of US$53 million.
ROMPCO i s the South Africa registered special purpose company for the Mozambique to South Africa gas pipeline. Sasol’s interest in ROMPCO i s owned by Sasol Gas Holdings. ENH and the Government o f South Africa, through i t s Central Energy Fund (CEF) Pty, have the option to acquire up to 50% on an aggregate basis o f the shares in the pipeline company’ and plan to do so through their pipeline project companies CMG and i-Gas respectively.
Through a deferred participation scheme. 1
66
Project Costs and Financial Plan
2. The total cost over the 25-year l i fe of the Project (upstream and pipeline components) approximates US950 million, consisting o f Us237.6 million for the development o f the Gas Fields, US$301.6 million for the construction and operation o f the CPF, and US404.0 million for the construction o f the 865 km pipeline from Temane in Mozambique to Secunda in South Africa. These figures include sunk costs o f US93.6 million for the development o f the Gas Fields and sunk costs o f US$3.1 million for the development o f the CPF incurred by Sasol prior to October 2000.
3. phases, shown in Table 1 below:
Project costs are spread out over a number o f years and have been broken up into the following
Table 1: Capital Expenditure Schedule (US$ Millions)’
Sasol Funding Period Total Future Total Sunk Costs 2000-2004 Initial Funding Funding
Period (pre-October (2005-2021) Up to
2000) 2021 Fields 93.6 42.6 136.2 101.4 237.6 CPF 3.1 171.5 174.6 127.0 301.6 Upstream Pre- -- 6.2 6.2 _ _ 6.2 operating Expenses Total Upstream 96.7 220.3 317.0 228.4 545.6 Pipeline -- 404.0 404.0 404.0 Total 96.7 624.3 721.0 228.4 949.6
4. Production wil l commence in January 2004. Costs incurred after 2005 during the Future Funding phase wil l be financed by the cash flows generated internally from the Project and from contributions by the sponsors. Prior to October 2000, US96.7 million in sunk costs were incurred and financed solely by Sasol. From 2000 to 2003, however, the partners wi l l incur construction costs for the upstream project without the benefit of cash flows from production. Although the Project wi l l generate revenues during 2004, cash flows from sales in that year wi l l not be sufficient to cover the UJV’s capital expenditures. As a result, costs incurred during the Initial Funding phase from 2000 to 2004 wi l l be financed by external means. As shown in Table 1 above, the Project cost for the upstream project during the Initial Funding phase (through 2004) i s estimated to be US$220.3 million and consists o f the development o f the Temane gas fields, the CPF, and pre-operating expenses. The pre-operating expenses relate to start-up expenses to be incurred by Sasol prior to achievement of First Gas in January 2004, including operating expenses related to testing and commissioning o f the upstream facilities in the second half o f 2003. The development costs related to the pipeline i s expected to be approximately US404.0 million.
These costs do not include capitalized finance charges or interest during construction. 2
67
Upstream Financing Plan
5. shown in Table 2 below:
The financing plan under Base Case assumptions for the upstream UJV through Initial Funding i s
Table 2: Financial Plan through December 2004 (US$ Millions)
Sunk Costs 2000-2004 Total Initial 1 (pre-October 2000) Funding Period
Sasol (SPT) 96.7 154.3 251.0 CMH -- 56.0 56.0 IFC _ _ 10.0 10.0 Financial Plan $96.7 $220.3 $317.0
The financing of the upstream component i s as follows:
e SPT: Sasol wi l l finance i t s 70% investment in the gas fields and the CPF via i t s subsidiary, Sasol Petroleum Temane Limitada (SPT). Sasol wi l l provide an equity investment into SPT and SPT wil l raise commercial debt financing from Standard Corporate Merchant Bank (SCMB), as lead arranger, and from the Development Bank o f Southern Africa (DBSA).
e CMH: CMH has decided to farm-out to IFC 5% o f i t s original 30% interest in the joint venture with SPT. It wi l l raise US$56 million financing for i t s 25% share of project expenditures from: (a) an upfront payment o f about US$6 million from IFC, representing CMH back costs; and (b) various domestic and international financing sources. In addition, CMH wil l need a further US$4 million for i t s own use to cover working capital needs, financing costs and contingencies. In case CMH cannot raise adequate financing, Sasol has agreed to provide a guarantee to enable CMH to obtain debt financing for i t s investment in the gas fields.
e IFC: In addition to its payments of back costs to CMH, IFC would finance i t s pro rata share of the Project costs.
Pipeline Financing Plan
6. pipeline assets. Sasol i s expected to fund ROMPCO through equity and debt financing from SCMB, EIB, and DBSA. The GoM and ENH through another subsidiary, Companhia Mocambicana de Gasoduto (CMG), and the Government o f South Africa, through CEF (Pty) Limited and its subsidiary iGas (pty)
Financing for the Pipeline. Currently Sasol owns 100% o f ROMPCO which wil l be holding the
Limited have an option to acquire, on an aggregate basis, up to 50% o f the ownership of the pipeline.
68
SUMMARY OF FINANCIAL ANALYSIS ON PROJECT SPONSORS
7 . This Annex summarizes the financial analysis conducted for CMH, Sasol, SPT and ROMPCO.
CMH Financial Analysis
8. owned by the Government o f Mozambique) and houses ENH’s upstream interests in the Project. CMH’s 25% participating interest in the upstream project i s i t s only asset. As a result, the company’s operating performance and cash flows are dependent upon the performance of the Project. CMH faces a US$60 million cash shortfall during the Initial Funding period for i t s share o f the Project costs and for i t s own administrative and development costs. CMH’s US$60 million financing need breaks down as follows:
CMH was established in October 2000 as a subsidiary o f ENH (80% owned by ENH and 20%
(a) (b)
US$56 million to fund i t s 25% share o f Project costs. US$4 million to fund i t s administrative and development costs, including personnel, equipment and utilities, and financing and legal fees.
9. CMH’s target mobilization plan includes a US$18 million equity component and a US$42 million debt component (30:70 equity:debt ratio). Several interested institutions have been identified.
IFC i s currently working with CMH to help it mobilize part o f the US$60 million. Currently,
10. For the equity portion in CMH’s Financing Plan, expected funding sources include the following:
(a) (b)
US$6 million from the farm-out o f 5% participating interest in the UJV to IFC. US$12 million in additional equity from local institutions and mezzanine finance providers.
1‘1. For the debt portion, several bilateral and multilateral institutions have expressed interest.
12. a guarantee to enable CMH to obtain financing for i ts investment in the gas fields.
In the event that CMH i s unable to raise adequate financing, Sasol has agreed to provide a loan or
13. base case assumptions described below.
Projected financial results for CMH have been developed given the above financing plan and the
Base Case Assumptions
Income Statement Assumptions
14. probable reserves of approximately 2,275 MGJ. Production begins in January 2004.
Gas Sales. Base case assumes that the production i s at the level o f 100% o f proven plus 50% o f
15. Price of Gas and Condensate. The Gas Price i s calculated as per the formulae negotiated in the Gas Sales Agreement, which consists of a price at wellhead and CPF tariff. The estimated wellhead gas prices and CPF processing fee used for financial projections under different scenarios o f Dubai crude oi l prices are available in the Project Files.
16. For the calculation of the gas price, the Dubai price o f crude oil i s taken as per nominal World Bank price projections with a US$l.OO/bbl discount. The forecast begins with US$21.08/bbl in 2004,
69
fluctuates between US$17.00/bbl and US$20.50 between 2005 and 2014, and remains flat at US$21.00/bbl f rom 2015 onwards.
Component
Gas Field Processing Transport
17. Condensate price i s assumed to be equivalent to that o f Brent crude. Projections for Brent crude have been derived based o n statistical regressions o f the historical relationship between Dubai and Brent o i l prices. The derived Brent prices begin at US$22.84/bbl in 2004, fluctuate between US$18.56/bbl and US$22.23/bbl between 2005 and 2014, and remain flat at US$22.76/bbl f rom 2015 onwards.
Life for Tax Depreciation - Init ial T a x Subsequent Tax Purposes (yrs) depletion rate Rates (from Rates
commercial production)
4 @ 100% 17.5% (6 years ) 32% 4 @ 100% 17.5% (6 years) 32% 10 @ 125% 27% (10 years) 32%
18. condensate fi-om 2005 onwards at proven reserves.
Condensate Sales. The base case assumes that the company will start commercial sales o f
19. regulation and agreements, which i s 5% o f the revenues from gas produced and sold at the wellhead price. Operating costs are taken as presented in the Sasol reports and indexed to U S inflation.
Operatine; Expenses. Royalty i s taken as agreed in accordance to the prevailing Mozambican
20. with the Mozambican regulations, specifically Decrees 14/82 and 48/95. For the Project, the rates are as follows:
Depreciation and Tax Rates. Similar to royalty rates, depreciation and tax rates are in accordance
Balance Sheet Assumptions
2 1. Cash. Cash i s calculated on a residual basis.
22. receivables for the l i fe o f the Project.
Accounts Receivable. N R balance has been calculated assuming 60 days for outstanding
23. been taken as provided by SASOL.
Fixed Assets. Data for investments in the processing plant, f ie ld development and equipment has
24. Accounts Payable. A/P balance has been assumed to remain at zero for the l i f e o f the Project.
25. tenure o f 14 years and 3 years grace at LIBOR + 400 basis points. Long-term LIBOR i s assumed to be 3%.
Long-Term Debt. Long-term debt i s assumed to be US$42 mi l l ion in senior debt with an average
26. Paid in Capital. T w o sources o f equityhemi-equity have been taken: (i) IFC’s payment o f US$6 mi l l ion for i t s 5% share in the jo in t venture; and (ii) US$12 mi l l ion in equity fi-om local institutions,
27. senior lenders and are thus not shown.
Dividends. CMH’s dividend distribution pol icy i s under negotiation in light o f covenants with
70
CMH Projected Financial Results
28. Financial projections for C M H under the base case scenario can be summarized as follows:
Summary of Financial Results for CMH
(Figures in US$ Million, unless otherwise stated)
29. base case scenario.
The returns to C M H on i t s investment in the upstream project are approximately 22.9% under the
Conclusion
30. strong financial returns to C M H o f 22.9%. Finally, the Project generates significant cash flow for C M H to be able to declare dividends, subject to lenders’ covenants and i t s Board-determined dividend policy.
C M H i s able to service i t s debt throughout the l i fe o f the Project. The Project also generates
Summary of Sasol Financial Analysis
3 1. Africa, was founded in 1950, and privatized and listed on the Johannesburg Stock Exchange in 1979. It i s the fifth largest South African company, with a market capitalization o f US$8 billion. From an original focus on the production o f synthetic fuel from coal, Sasol has diversified into the production o f high value chemical products with world-leading technology. Sasol’s strategy consists o f leveraging unique technologies and exploiting as well as cost optimizing an upstream thrust into hydrocarbon exploration and production. The SARG Project forms an important element o f this strategy. It acquired in 1998 an interest in the Temane field but could only consolidate i t s position and establish the desired economies o f scale after two key developments in 2000. The first significant breakthrough occurred when Sasol acquired the interests o f Arc0 Mozambique, a subsidiary o f A R C 0 International O i l and Gas Company (USA) and Zarara Petroleum Resources from the United Arab Emirates. The second turning point arose when Sasol purchased the rights o f the Pande gas field from Enron O i l and Gas Corporation (USA).
Sasol, the private sponsor and the leading petrochemicals and liquid fuels company in South
32. For the financial year ending June 30, 2003 Sasol’s operating profits were derived 68% from synthetic fuels, 19% from chemicals and the rest from crude o i l and coal mining activities. It i s now becoming a multinational with interests in Europe, Middle East, Asia, Australia, Africa and the Americas. It currently supplies some 40% o f South Africa’s liquid fuel requirements both through coal conversions and conventional crude o i l imports and refining.
33. credit rating o f BBB from Standard and Poor’s for long-term foreign currency and A-2 for short term
In Apri l 2003, Sasol was listed on the New York Stock Exchange and has received a corporate
71
foreign currency. It i s to date the only South African energy company to be listed on an international stock exchange market and rated by an internationally reputed firm. The outlook i s stable. The ratings on Sasol incorporate currency transfer risks associated with those o f Republic o f South Africa. When Sasol received i t s credit rating, i t s ratings were one notch higher than the Republic o f South Africa’s sovereign rating o f BBB-/A3. (S & P has since upgraded South Africa by one notch to BBB but the sovereign’s short-term rating remains at A-3). S & P’s reasoning for rating Sasol above the sovereign ceiling was that even in the case o f severe foreign exchange restrictions, the company would be able to service i t s foreign currency debt for a period o f time. It i s aiming to generate 30% o f total cash from foreign operation by 2005. S & P’s ratings reflected Sasol’s: (i) high and increasing free cash flow generation at i t s unique synthetic fuel business, and generally strong market positions in the domestic o i l and chemical industries; (ii) increasing exports and overseas diversification, mainly in chemicals; (iii) healthy profitability coupled with low maintenance capital spending requirements, notably in i t s fuel businesses; (iv) proven resilience o f i t s free cash flow generation, as demonstrated during the very volatile 1999-2002 operating environment; and (v) very conservative credit measures and financial policies.
2000
34. The following table provide a summary o f the financial results for the past four years:
2001 2002 I 2003
Revenues 25,762 I 41,289 I 59,590 I 64,555
35. remain within 30% to 50% o f equity and further debt-financed acquisitions are expected to be o f modest size and are to take place in the core business area. It should be noted, however, that the current strength o f the Rand against other major world currencies, especially the U S Dollar, i s forecasted to reduce Sasol’s earnings. Sasol’s S & P’s rating has remained unchanged after the recent trading update.
Sasol’s financial policy i s conservative. Debt, adjusted for project finance debt, i s expected to
72
Summary of SPT and ROMPCO Financial Analysis
Loan Facility
DBSA EIB SCMB
36. equivalent, inclusive o f capitalized finance charges and exchange rate gains (see Annex 3(b)). At present, Sasol i s financing the full cost o f construction from: (i) a bridge loan from DBSA which wil l be rolled over into a long-term facility at financial close; and (ii) from i t s own bridge equity. A portion o f the bridge equity w i l l be refinanced out via long-term loans at the first draw down to achieve a targeted debt:equity ratio o f 50/50 for SPT and ROMPCO. For the Sasol bridge equity, MIGA has provided in December 2002 equity cover amounting to US$27 mill ion for Sasol’s investment into SPT and US$45 mill ion for investment into ROMPCO. Sasol i s converting the 90% o f the MIGA bridge equity guarantee into a debt guarantee on the SCMB loan.
Sasol’s Rand financing requirements for SPT and ROMPCO are estimated at US$935 mill ion
Amount Tenor (Years from Grace Period Terms
US$l 10 mill ion 12 2 JIBAR + margin €100 mill ion 12 2 LIBOR + margin
US$204 mill ion 12 2 JIBAR + margin3
Financial Close)
37. facilities:
The permanent senior debt financing i s expected to be provided in Rand from the following
Table 4: Senior Debt Financing
38. This i s not a non-recourse project finance transaction. SPT and ROMPCO are financially supported via a Debt Service Support Agreement by Sasol where upon a commercial debt service default the lenders have recourse to the parent company. SPT and ROMPCO are single purpose companies in a start-up enterprise. Their financial strength i s derived from the Sasol’s financial support.
39. The lead arranger has prepared the financial models for both SPT and ROMPCO to analyze the Project’s financial position over the l i fe o f the Project. The financial projections provided therein have been based on the Project contracts; proposed financing plan and related finance terms; technical assumptions; fiscal regimes; and the macro-economic assumptions. The financial projections are in line with those o f the lead arranger, SCMB. The cash flow and debt service coverage are tight in the early years when the Project i s ramping up production and when there are substantial additional capital improvements. Sasol’s financial support remains in place for SPT and ROMPCO for the l i f e o f the SCMB loan.
Conclusion
40. The financial underpinning for the Project i s the financial strength o f Sasol and i t s prominent position in the South African gas market. Sasol’s debt i s investment grade and it i s listed on the New York Stock Exchange. Sasol has the internal and external financing resources to support i t s financial obligations to SPT and ROMPCO. More important, Sasol has a captive gas market that would absorb the bulk o f the gas production from Mozambique. If Sasol manages to increase i t s third party gas sales and develop new markets, the revenues for SPT, ROMPCO and C M H would be above the current financial projections.
Excluding PRG and MIGA pricing. 3
73
Annex 6: Project Financial Performance of IFC Equity Investment MOZAMBIQUE: Southern Africa Regional Gas Project
Proposed IFC Investment
1. interest in the unincorporated joint venture developing the upstream project has been proposed. The investment would consist of: (i) an up-front payment o f US$6 million to CMH which i s meant to compensate it for past costs incurred in bringing the Project to this stage; and (ii) a payment of approximately US$10 million as IFC's share of the capital expenditures that wi l l be incurred until December 3 1,2004.
An equity investment o f up to US$18.5 million for the proposed acquisition o f a 5% participating
2. Although based on current estimates, the aggregate payments to be made by IFC amount to approximately US$16 million, an investment of up to US$18.5 million is being proposed so as to cover contingencies and cost escalations. IFC i s also expected from time to time to re-invest, such portion o f i t s share o f the cash generation as may be necessary to meet IFC's share o f project costs, operating costs and other obligations arising out o f annual agreed work programs and budgets, and such additional investments as may be required to meet IFC's obligations as an unincorporated joint venture partner in accordance with normal oil industry practice.
Base Case
3. Base case financial projections for the upstream UJV have been prepared on a nominal U S Dollar basis. The base case assumes natural gas reserves equivalent to proven reserves plus 50% o f probable reserves (approximately 2,275 MGJ). First gas i s assumed to be achieved by January 1,2004, and annual sales are projected to be equal to 100% of the annual contract quantity (ACQ) under the Gas Sales Agreement (approximately 120 MGJ/a). Moreover, the base case assumes that sales o f condensate commence in 2005, with sales of such condensate assumed to be made at spot prices o f Brent crude oil.
4. taken up at financial closing with the price calculated as the CPF capital expenditures as defined in the Joint Operating Agreement. IFC's share o f costs for the upstream project incurred prior to financial closing are assumed to be repaid to Sasol at financial closing, plus interest accrued from January 1 , 2003 to October 3 1, 2003.
CMH's option to purchase 30% of the CPF (of which 5% i s farmed-out to IFC) i s assumed to be
5. The price of natural gas under the GSA consists o f two components: a wellhead price and a CPF processing fee, both of which wil l be paid in US Dollars. As per the GSA, for the f i rst ten years of the Project's operations (until 2014), Dubai crude price has a floor o f US$lG/bbl and a ceiling o f US$34/bbl. The projected prices of Gasoil and HSFO are derived based on statistical regressions o f the historical relationship of Dubai FOB with Gasoil and HSFO, respectively. The wellhead price i s calculated by fixing the Dubai FOB price at the nominal World Bank oi l price forecast with a US$l.OO/bbl discount to adjust for the price of Dubai crude. Operating and capital expenditures have been inflated at an assumed U S PPI long-term inflation rate o f 2%.
6. financial rate o f return to IFC under the base case scenario.
Results for the upstream UJV. The projected results for the UJV indicate an approximate 15%
74
7. returns even in various downside scenarios. IFC has analyzed project returns based on the following downside scenarios:
,Sensitivity Analysis. Sensitivity analysis demonstrates that the Project can deliver acceptable
(i) (ii) (iii)
(iv)
An overrun in operating costs by 15%. An overrun in capital expenditures by 15%. Production stoppage for one month every three years due to market disruptions, including force majeure events. A low gas price driven by a depressed Dubai crude price at floor o f US$lG/bbl for the l i fe o f the Project.
In all four downside scenarios, while the returns to IFC i s negatively impacted, the minimum FRR to IFC remains at around 13%.
75
Annex 7: Project Processing Timetable MOZAMBIQUE: Southern Africa Regional Gas Project
Project ID: GU-PO82308
Project Schedule
Time taken to prepare this Project (months)
RVPIROC/OC Sign-off
EA Received in Infoshop
Planned Actual
11
0211 712003 02/24/2003
07/22/2003 07/22/2003
Appraisal
Negotiations
Effectiveness
* As i s the practice for guarantee operations and in accordance with OP 14.25, appraisal o f the operation was carried out over a period of time and was considered completed by August 18,2003.
*
08/06/2003 08/06/2003
11/30/2004
76
The World Bank Group staff who have worked on the Project are listed below:
G u l r e z Hoda COCDl Team Leader, Principal Investment Officer Edward Alan Pollett CESIG Senior Social Development Specialist Rosa Orellana CESIG Environmental Specialist Ahmed Kebaili COCDl Principal Engineer Judith Wong COCD 1 Investment Analyst
Name I Unit 1 Specialty I I
Nomaan Mirza Helen Chandran Elizabeth Hickman
I I IBRD
CSMFC Associate Investment Officer CLEOG Principal Legal Counsel COCDl Program Assistant
Quality Enhancement Team Michel Wormser Suman Babbar
AFTP 1 Sector Director PPF Adviser
Ananda Covindassamy Tjaarda Storm Van Leeuwen Petter Nore
AFTP 1 Adviser MNSIF Consultant Economist, Peer Reviewer
Lead Financial Analyst, Peer Reviewer
77
Annex 8: Southern Africa Regional Gas Project
33.8 32.0 26.7 26.8 32.6 16.3 27.6 27.7
.. 7.6 15.3 15.4 33.6 51.7 45.7 45.5
97 7 104.6 76.4 80.1
Mozambisue at a dance
i: -20
811 5/03
14.1 12.6 10.8 11.0
POVERTY and SOCIAL Mozambique
V G D I +GDP
2002 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions)
Average annual growth, 1996-02
Population (%) Labor force 1%) Most recent estimate (latest year available, 199642)
Poverty (% ofpopulation below national poverty line) Urban population (% of total population) Life expectancy at birth (years) Infant mortality (per 7,000 live births) Child malnutrition (% ofchildren under5) Access to an improved water source (% of population) Illiteracy (% ofpopulation age 75+) Gross primary enrollment (% of school-age population)
Male Female
KEY ECONOMIC RATIOS and LONG-TERM TRENDS
GDP (US$ billions) Gross domestic investmenVGDP Exports of goods and services/GDP Gross domestic savingsiGDP Gross national savingslGDP
Current account balance/GDP Interest paymentsiGDP Total debVGDP Total debt serviceiexports Present value of debtlGDP Present value of debtiexports 11
(average annual growth) GDP GDP per capita Exports of goods and services
1982
3.6 6.0 8.3
-1 1.9 -10.8
-15.9 0.0 3.5 0.0
1982-92 1992-02
2.4 8.1 1.3 5.7 1.8 15.3
18.4 210 3.9
2.1 2.2
69 42 42
125 26 60 60 71 63 60
1992
2.0 15.6 13.9
-17.2 -10.5
-37.8 2.2
230.6 13.3
2001
13.0 10.6 50.1
Sub- Saharan
Africa
674 470 317
2.5 2.6
32 47 91
55 37 78 85 72
2001
3.4 26.5 21.6 12.8 11.6
-24.0 0.3
69.9 4.7
38.9 133.3
2002
8.3 6.1
12.3
LOW- income
2,511 430
1,069
1.9 2.3
31 59 76
76 37 96
103 68
2002
3.6 23.7 23.5
8.9 9.2
-23.3 4.9
75.4 4.6
31.4 124.4
2002-06
9.6 7.9
19.1
Development diamond.
Life expectancy
I T GN I Gross
capita nrollment per primary
Access to improved water source
--Mozambique Low-income group
Economic ratios.
Trade
T
L
indebtedness
-Mozambique - Low-income group
STRUCTURE of the ECONOMY
(% of GDP) Agriculture Industry
Services
Private consumption General govemment consumption Imports of goods and services
Manufacturing
1982 qg92 2o01 zoo2 1 Growth of investment and GDP (%) 1
‘982-92 199242 2o01 2o02 1 Growth of exports and imports (%) faveraae annual growth) I Agriculture Industry
Services
Private consumption General govemment consumption Gross domestic investment Imports of goods and services
Manufacturing
3.1 6.7 12.6 7.2 -3.7 17.3 20.1 15.1
.. 18.8 27.2 6.2 8.6 3.1 8.1 0.3
0.2 4.3 -2.1 10.9 0.0 5.4 17.9 14.7 5.6 12.0 -10.0 3.9
-1.9 4.3 -14.9 16.6
60 I I
40
20
0
.20
Note: 2002 data are preliminary estimates. Group data are through 2001. *The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will
I / As percent of 3-year moving average of exports of goods and non-factor services. be incomplete.
78
Mozambique
PRICES and GOVERNMENT FINANCE
Domestic prices (% change) Consumer prices Implicit GDP deflator
Government finance (% of GDP, includes current grants) Current revenue Current budget balance Overall surplusldeficit
TRADE
(US$ millions) Total exports (fob)
Cashew nuts and raw cashew Prawn Manufactures
Total imports (cif)
Export price index (1995-100) Import price index (1995=100) Terms of trade (1995-100) I /
BALANCE of PAYMENTS
(US$ millions) Exports of goods and services Imports of goods and services Resource balance
Net income Net current transfers
Current account balance
Financing items (net) Changes in net reserves
Memo: Reserves including gold (US$ millions) Conversion rate (DEC, local/US$)
EXTERNAL DEBT and RESOURCE FLOWS
(US$ millions) Total debt outstanding and disbursed 21
IBRD IDA
Total debt service 21 IBRD IDA
Composition of net resource flows 21 Ofriciai grants Official creditors Private creditors Foreign direct investment
World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers
1982
17.7 17.5
19.2 3.2
-5.0
1982
229 44 39
90 110 81
1982
337 893
-556
-20 0
-576
435 141
31 37.8
1982
125 0 0
0 0 0
0 0 0
0 0 0 0 0 0
1992
45.1 44.8
20.3 4.4
-10.0
1992
139 18 65 14
745
90 93 97
1992
304 860
-556
-183 0
-736
778 -40
233 2,433
1992
4,514 0
417
48 0 3
499 168
-2 25
289 106
0 106
3 103
2001
9.0 10.6
18.2 3.7
-16.5
2001
703 31 81 13
1,063
87 82
106
2001
1,008 1,578 -570
-254 0
-824
828 -3
727 20,704
2001
2,402 0
777
49 0 7
469 103
0 255
229 52
3 49 4
44
2002
16.8 10.6
18.0 2.2
-15.8
2002
682 51
108 13
1,263
85 81
106
2002
1,187 1,837 -650
-190 0
-841
1,033 -192
736 23,667
2002
2,716 0
985
56
12
428 223
372
180 149
6 143
6 137
Inflation (Oh) 'I
97 98 99 00 01 02
-GDP deflator ' 0 - C P I
I Export and import levels (US$ mill.) 1.500 T
0 I 1,000 : 500
I O2 I 96 97 98 99 00 01
B# Exports lmpolts
I Current account balance% GDP(%)
0
5
-10
-1 5
-20
-25
-30
Composition of 2002 debt (US$ mill.)
E: 1,029
A . IERD E - Bilateral E - IDA D - Other multilateral F - Private C - IMF G -Short-term
~ _________
Development Economics 811 5/03 11 includes aluminum price 21 Public and Publicly Guaranteed Data for 2001 includes implementation of November 2001 Pans Club under the Enhanced HlPC Initiative Data for 2002 includes all signed agreements under the Enhanced HlPC Initiative signed by end 2002 Excludes private non-guaranteed debt estimated at US$ 1 6 billion in 2001 and 2002
79
Annex 9 (a): Indicative Terms and Conditions of the IBRD Guarantees
Southern Africa Regional Gas Project (the “Project”)
A. SPT IBRD-SUPPORTED FACILITY TERMS
SPT IBRD-SUPPORTED FACILITY UNDER THE SPT COMMERCIAL FACILITY AGREEMENT
1. Borrower: Sasol Petroleum Temane Limitada (“SPT”).
2. IBRD Guaranteed The Standard Bank o f South Africa Limited, acting though i t s division Standard Corporate and Merchant Bank (SCMB). SCMB plans to syndicate the SPT IBRD-Supported Facility to commercial banks after financial close.
Lenders:
3. Loan Amount: 200,000,000 ZAR’.
The loan will benefit from the SPT IBRD Guarantee (as described in Schedule B (SPT IBRD Guarantee Terms)).
4. Guarantor: International Bank for Reconstruction and Development (“IBRD”).
5. Use of Proceeds: To fund IBRD eligible costs.
Proceeds o f the SPT IBRD-Supported Facility may only be used to fund costs incurred for assets located in Mozambique and may not be used for:
(a) or use o f land for the Project.
Costs, charges and expenses relating to the acquisition, leasing
(b) facilities and plant sites.
Costs in connection with the acquisition o f the existing
(c) Mozambique or in connection with goods and services or on the importation, manufacture or procurement thereof.
Value-added tax or other taxes payable by SPT and levied in
(d) military or luxury items.
Costs in connection with the acquisition or use o f nuclear,
(e) Fees, commissions, expenses or other financing costs (including interest) unrelated to the SPT IBRD Guaranteed Facility or the SPT IBRD Guarantee.
( f ) Development fees.
The exact amount may change due to exchange rate changes, but is capped at US$20 million. 1
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6. Tenor:
(g) or services supplied from the territory o f any country which i s not a member o f IBRD.
Any payment in or expenses incurred in, or in respect of, goods
December 2014, subject to a maximum of a 24-month extension in the event that the obligations of the Sasol Limited (“Sasol”) or Sasol Financing (Proprietary) Limited (“Sasol Financing”) (together, the “DSS Providers”) under the SPT Commercial Debt Service Support. Agreement to provide debt service support payment for the loan are suspended as a result o f the occurrence of an event, which would, with the passing o f time, give a rise to a claim under any political insurance policies, including the SPT IBRD Guarantee (a “Pre-Trigger Event”).
7. Availability Period: Until March 3 1 , 2005, subject to a maximum o f a 24-month extension in the event that a Pre-Trigger Event has occurred, and SPT and Sasol subsequently give a notice to the Agent that the Pre-Trigger Event no longer exists.
8. Repayments: In semi-annual installments commencing on the first repayment date which will be scheduled for December 15,2005.
9. Margin: To be determined.
10. Interest Rate: JIBAR plus the Margin, to be determined.
11. Interest Period: Variable interest period o f 1, 3 or 6 months.
12. Cash Conservation In the event that a notice o f Pre-Trigger Event i s served, SPT shall use all reasonable endeavors to conserve i t s cash reserves until such event has been cured (“Cash Conservation Period”). During the Cash Conservation Period, SPT shall not make any distributions to shareholders, other than payments to shareholders under commercial contracts, as reasonably determined by the Agent o f all such payments does not exceed Rand 10 million or i t s equivalent, (escalated annually in accordance with the South African consumer price index in any financial year) and may not pay any voluntary uncommitted expenditures or incur any commitment for expenditure other than in the ordinary course o f business and in accordance with good industry practice.
Period:
13. Commercial Facility To be determined. Agent:
14. Conditions Precedent to each Disbursement:
As specified in the common conditions precedent for al l facilities provided to SPT, including:
(a) N o event o f default i s outstanding or would result from the loan.
(b) Representations made by DSS Providers, SPT and shareholders o f SPT (the “Shareholders”) are true and correct in all material respect.
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(c) advance loans to SPT.
The Shareholders are in compliance with their obligations to
(d) covenants under the SPT Common Terms Agreement.
Sasol i s in compliance with the ratios set out in the financial
(e) has not given notice that such Pre-Trigger Event no longer exists.
No notice o f a Pre-Trigger Event has been served where Sasol
In addition:
(a) I t shall be a condition precedent to the first draw down under the SPT IBRD-Supported Facility that the Commercial Facility Agent shall have received an executed original o f the SPT IBRD Guarantee.
(b) SPT IBRD-Supported Facility that the SPT IBRD Guarantee remains in full force and effect.
It shall be a condition precedent to each draw down under the
15. Governing Law: English.
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B. Proposed SPT IBRD GUARANTEE TERMS
SPT IBRD GUARANTEE AGREEMENT
1. Borrower:
2. Guarantee Holder:
3. Guarantor:
4. Maximum Aggregate Liability:
5. Use o f Proceeds:
6. Scope of Guarantee:
7. Guarantee Not Accelerable:
8. Provisional Payment:
Sasol Petroleum Temane Limitada (''SPT'').
The Commercial Facility Agent, on behalf o f the IBRD Guaranteed Lenders.
International Bank for Reconstruction and Development ("IBRD").
The aggregate amount of: (i) up to ZAR 200,000,000 of principal, subject to the cap of US$20,000,000 ("Maximum Guaranteed Principal"); and (ii) interest (other than default interest) accrued on such principal amount under the SPT IBRD-Supported Facility.
See item 5 (Use o f proceeds) in Section A (SPT IBRD-Supported Facility Terms).
Except for Provisional Payment (see item 8) and subject to the IBRD Guaranteed Lenders assuming a f irst loss of an amount equal to five percent o f the Maximum Guaranteed Principal and six month interest payment for the period preceding the demand notice any scheduled principal and interest payments (excluding default interest) which are in default under the SPT IBRD-Supported Facility that are provided for in an arbitral award ("Award") rendered against Mozambique for Breach of Contract (see item 19), shall be compensated under the SPT IBRD Guarantee.
The SPT IBRD Guarantee i s not accelerable even if the underlying Guaranteed Loan has been accelerated. It i s payable in accordance with the original payment schedule applicable to the IBRD Guaranteed Facility . IBRD may in i t s reasonable discretion make Provisional Payments for scheduled payments less an amount equal to five percent o f the Maximum Guaranteed Principal and the most recent six months interest payment preceding the Demand Notice under the guarantee for the applicable period if the dispute resolution for a loss in respect o f such scheduled payments has been prevented or interrupted by the Government o f Mozambique for a period, in aggregate, o f six (6) months despite the best endeavor of SPT and the IBRD Guaranteed Lenders; provided that the SPT IBRD Guaranteed Lenders have provided IBRD with irrevocable stand-by letters o f credit to repay IBRD on call the amount o f the Provisional Payment and interest thereon in the event that the Award subsequently determines that the liability o f the Government o f Mozambique i s less than the full amount o f the Provisional Payment. The IBRD Guaranteed Lenders' obligation to repay the Provisional Payments expire after three (3) years if dispute resolution continues to be interrupted.
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9. Guarantee Fee:
10. Front-end Fees:
11. Initiation/Processing Fees:
12. Conditions Precedent:
The f i rst installment o f the Guarantee Fee shall be payable by SPT in Rand on : (i) the sixtieth (60th) day from signature of the SPT IBRD Guarantee Agreement; or (ii) the date of effectiveness o f the SPT IBRD Guarantee Agreement, whichever occurs earlier; and
(a) Prior to the end o f the Availability Period the following guarantee fee shall be payable on every March 15, June 15, September 15, and December 15.
(i) 0.75% per annum of the aggregate scheduled committed amount o f the SPT IBRD-Supported Facility.
(ii) 2.00% per annum of the aggregate scheduled disbursed amount o f the SPT IBRD-Supported Facility.
(b) After the end of the Availability Period until the Final Repayment Date, 2.00% per annum o f the principal amount of the SPT IBRD-Supported Facility scheduled to be outstanding shall be payable on every June 15 and December 15.
(c) On or after the final Repayment Date, 2.00% per annum o f the aggregate principal amount o f the IBRD Guaranteed Loan outstanding shall be payable annually.
IBRD wil l charge SPT a one-time front-end fee o f 1% o f the amount covered under the SPT IBRD Guarantee, payable in Rand on: (i) the sixtieth (60th) day from signature of the SPT IBRD Project Agreement; or (ii) the date o f effectiveness of the SPT IBRD Guarantee Agreement, whichever occurs earlier.
IBRD wil l charge SPT a one-time, non-refundable Initiation Fee o f Rand equivalent to US$66,700, payable on the signature of the SPT IBRD Project Agreement, to cover IBRD’s internal Project preparation and development costs.
IBRD wi l l also charge SPT a Processing Fee equal to two-thirds o f the aggregate amount o f any reasonable out-of-pocket expenses incurred by IBRD in connection with the entry into the SPT IBRD Guarantee Agreement, the SPT Commercial Facility Agreement, the ROMPCO IBRD Guarantee Agreement, the ROMPCO Commercial Facility Agreement and other finance documents, up to 0.50% o f the aggregate principal amounts of the SPT IBRD Guaranteed Facility and the ROMPCO IBRD Guaranteed Facility. The Processing Fee shall be payable in Rand and due within 10 business days o f receipt o f written demand from IBRD (which would be provided following approval o f guarantee by the IBRD Board of Executive Directors).
Usual and customary conditions for a financing of this type including the following:
(a) Execution o f all project documents and finance documents.
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(b) Delivery o f al l legal opinions.
13. Exclusions:
(c) to be in effect at financial close and the naming o f finance parties as co- insureds under those insurance policies and o f IBRD for public liability insurance.
Effectiveness o f insurance required by the finance documents
In addition to the conditions precedent noted above under the SPT IBRD Guaranteed Facility, the following conditions will apply to the provision o f the SPT IBRD Guarantee:
(a) SPT IBRD Project Agreement.
Execution and delivery o f the Indemnity Agreement and the
(b) f i rst installment o f the Guarantee Fee.
Payment o f Front-end Fee, the InitiationProcessing Fee and
(c) Effectiveness o f ROMPCO IBRD Guarantee.
Guarantor i s not liable for payment o f any amount which i s due to:
(a) the SPT Guarantee Agreement or events occurring prior to such date.
The applicable laws in effect in Mozambique as o f the date o f
(b) IBRD Guaranteed Lender or SPT.
Action or omission attributable to the Guarantee Holder, an
(c) Corrupt Practices as defined in the SPT Guarantee Agreement.
14. Suspension of If any of the following events occur and i s continuing, IBRD may, by written notice to the Guarantee Holder, deny guarantee coverage to subsequent draw downs, if any:
Additional Coverage:
(a) or any event which constitutes a breach o f Material Obligations (see item 19).
Termination event pursuant to Clause 26.2 of the PPA by SPT
(b) the SPT IBRD Project Agreement.
Breach by SPT o f any o f its material obligations to IBRD under
(c) Development Association (“IDA”) to Mozambique.
Suspension o f lending by IBRD or the International
(d) IBRD, IDA or the International Monetary Fund.
Suspension or lapse of Mozambique from membership in
15. Termination by The SPT IBRD Guarantee Agreement may be terminated immediately IBRD: if:
85
(a) in a demand.
The Guarantee Holder intentionally makes an untrue statement
16. Subrogation:
(b) engages in Corrupt Practices.
The Guarantee Holder, an IBRD Guaranteed Lender or SPT
The SPT IBRD Guarantee Agreement will also be terminated:
(a) Lender or SPT i s in material violation o f the laws and regulations of Mozambique or the IBRD Environmental Guidelines and Safeguard Policies applicable to SPT.
Upon IBRD’s notice of termination if an IBRD Guaranteed
(b) Payment Date, if any Guarantee Fees are not paid on or before the tenth day following notice o f non-payment.
Effective on the day immediately preceding the Guarantee Fee
(c) Effective on sixtieth day after IBRD’s notice o f termination, the Guarantee Holder defaults on any other obligation under the SPT IBRD Guarantee Agreement.
(d) Guaranteed Lender transfers, assigns or encumbers, without IBRD’s prior consent, any rights under the SPT IBRD Guarantee Agreement, the SPT IBRD Guaranteed Loan, or an Award.
Effective as o f the date the Guarantee Holder or any IBRD
If and to the extent IBRD makes payment under the SPT IBRD Guarantee and i s not reimbursed by Mozambique under its Indemnity Agreement within 60 days o f notice from IBRD, then IBRD will be subrogated immediately to the IBRD Guaranteed Lenders’ rights under the SPT IBRD-Supported Facility. Until IBRD has fully paid out under the SPT IBRD Guarantee Agreement, IBRD will not be so subrogated in order to exercise voting rights or realize on security under the SPT IBRD-Supported Facility.
17. Right to Offer to If there is a call on the SPT IBRD Guarantee, IBRD shall have the right, at i t s sole discretion, to limit its obligation to guarantee interest payments by acquiring the SPT IBRD Guaranteed Loan from the SPT IBRD Lenders for an amount equal to the unpaid principal and interest (not including default interest). In the event that IBRD acquires the SPT IBRD Guaranteed Loan, IBRD, at i t s discretion, will have the right under its Indemnity Agreement with Mozambique to cause Mozambique to make immediate payment to IBRD o f the outstanding SPT IBRD Guaranteed Loan amount together with interest thereon.
Purchase the SPT IBRD Guaranteed Loan:
18. Demand Process: Demands must be made no less than thirty days nor more than ninety days from the date on which the Award is rendered. IBRD will pay within sixty days after IBRD’s receipt o f such notice. No Demand may be filed after the fifth anniversary of the Final Maturity Date.
86
Demands for Provisional Payments must be made no more than nine months after the due date of the scheduled payment that i s in default.
19. Breach of Contract: A breach directly arising from the obligations o f the Government o f Mozambique in respect of the provisions specified in Annex 10 (a) (“Material Obligations covered by the SPT Partial Risk Guarantee”).
20. Dispute Resolution: Disputes will be settled by arbitration in accordance with UNCITRAL Arbitration Rules.
21. Governing Law: English.
SPT IBRD PROJECT AGREEMENT
1. Parties: IBRD, SPT, Sasol and Sasol Financing.
2. Representations and SPT wil l represent, inter alia, that (to the best o f i t s knowledge and belief) it i s in compliance with Applicable World Bank Environmental Guidelines and Safeguard Policies and SPT, Sasol and Sasol Financing wil l represent that they have not made or received any payment in respect o f Corrupt Practices.
Warranties:
3. Covenants: SPT will covenant that it wi l l use the proceeds of the SPT IBRD Guaranteed Loan only for the agreed purposes and comply with, inter alia, Applicable World Bank Environmental Guidelines and Safeguard Policies applicable to SPT, and SPT, Sasol and Sasol Financing wil l covenant that they wi l l not engage in any Corrupt Practices and provide regular accounts and reports to IBRD.
4. Governing Law: English.
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Annex 9 (b): Indicative Terms and Conditions of the IBRD Guarantees
Southern Africa Regional Gas Project (the "Project")
A. ROMPCO IBRD-SUPPORTED FACILITY TERMS
ROMPCO IBRD-SUPPORTED FACILITY UNDER THE ROMPCO COMMERCIAL FACILITY AGREEMENT
1. Borrower: Republic of Mozambique Pipeline Investments Company (Proprietary) Limited ("ROMPCO").
2. IBRD Guaranteed The Standard Bank o f South Africa Limited, acting though i t s division Standard Corporate and Merchant Bank (SCMB). SCMB plans to syndicate the ROMPCO IBRD-Supported Facility to commercial banks after financial close.
Lenders:
3. Loan Amount: 100,000,000 ZAR'.
The loan wil l benefit from the ROMPCO IBRD Guarantee (as described in Section B (ROMPCO IBRD Guarantee Terms)).
4. Guarantor: International Bank for Reconstruction and Development (YBRD").
5. Use o f Proceeds: To fund IBRD eligible costs.
Proceeds of the ROMPCO IBRD-Supported Facility may only be used to fund costs incurred for assets located in Mozambique and may not be used for:
(a) or use o f land for the Project.
Costs, charges and expenses relating to the acquisition, leasing
(b) facilities and plant sites.
Costs in connection with the acquisition o f the existing
(c) levied in Mozambique or in connection with goods and services or on the importation, manufacture or procurement thereof.
Value-added tax or other taxes payable by ROMPCO and
(d) military or luxury items.
Costs in connection with the acquisition or use o f nuclear,
The exact amount may change due to exchange rate changes, but i s capped at US$10 million. 1
88
6. Final Maturity Date:
7. Availability Period:
8. Repayments:
9. Margin:
10. Interest Rate:
11. Interest Period:
12. Cash Conservation Period:
13. Commercial Facility Agent:
14. Conditions Precedent:
(e) (including interest) unrelated to the ROMPCO IBRD Guaranteed Facility or the ROMPCO IBRD Guarantee.
Fees, commissions, expenses or other financing costs
(f) Development fees.
(g) or services supplied from the territory o f any country which i s not a member o f IBRD.
Any payment in or expenses incurred in, or in respect of, goods
June 15,201 5, subject to a maximum o f a 24-month extension in the event that the obligations o f the Sasol Limited (“Sas01’~) or Sasol Financing (Proprietary) Limited (“Sasol Financing”) (together, the “DSS Providers”) under the ROMPCO Commercial Debt Service Support Agreement to provide debt service support payment for the loan are suspended as a result o f the occurrence of an event, which would, with the passing o f time, give a rise to a claim under any political insurance policies, including the ROMPCO IBRD Guarantee (a “Pre-Trigger Event”).
Until March 3 1,2005, subject to a maximum of a 24-month extension in the event that a Pre-Trigger Event has occurred, and ROMPCO and Sasol subsequently give a notice to the Agent that the Pre-Trigger Event no longer exists.
In semi-annual installments commencing on the first repayment date which will be scheduled for December 15,2005.
To be determined.
JIBAR plus the Margin, to be determined.
Variable interest period o f 1, 3 or 6 months.
In the event that a notice o f a Pre-Trigger Event i s served, ROMPCO shall use all reasonable endeavors to conserve its cash reserves until such event has been cured (“Cash Conservation Period”). During the Cash Conservation Period, ROMPCO shall not make any distributions to shareholders (other than the cost of providing services under commercial contracts) and may not pay any voluntary uncommitted expenditures or incur any commitment for expenditure other than in the ordinary course o f business and in accordance with good industry practice.
To be determined.
As specified in the common conditions precedent for all facilities provided to ROMPCO, including:
89
(a) N o event of default i s outstanding or would result from the loan.
(b) Representations made by D S S Providers, ROMPCO and shareholders of ROMPCO (the “Shareholders”) are true and correct in all material respect.
(c) advance loans to ROMPCO.
The Shareholders are in compliance with their obligations to
(d) covenants under the ROMPCO Common Terms Agreement.
Sasol i s in compliance with the ratio set out in the financial
(e) No Pre-Trigger Event exists.
In addition:
(a) ROMPCO IBRD-Supported Facility that the Commercial Facility Agent shall have received an executed original o f the ROMPCO IBRD Guarantee.
It shall be a condition precedent to the first draw down under the
(b) ROMPCO IBRD-Supported Facility that the ROMPCO IBRD Guarantee remains in full force and effect.
It shall be a condition precedent to each draw down under the
15. Governing Law: English.
90
B. ProDosed ROMPCO IBRD GUARANTEE TERMS
ROMPCO IBRD GUARANTEE AGREEMENT
1. Borrower:
2. Guarantee Holder:
3. Guarantor:
4. Maximum Aggregate Liability:
5. Use of Proceeds:
6. Scope of Guarantee:
7. Guarantee Not Accelerable:
8. Provisional Payment:
Republic o f Mozambique Pipeline Investments Company (Proprietary) Limited (''ROMP"'').
The Commercial Facility Agent, on behalf o f the IBRD Guaranteed Lenders.
International Bank for Reconstruction and Development ("IBRD").
The aggregate amount o f (i) up to ZAR 100,000,000 o f principal, subject to the cap o f US$10,000,000 ("Maximum Guaranteed Principal"); and (ii) interest (other than default interest) accrued on such principal amount under the ROMPCO IBRD-Supported Facility.
See item 5 (Use o f proceeds) in Section A (ROMPCO IBRD-Supported Facility Terms).
Except for Provisional Payment (see item 8) and subject to the IBRD Guaranteed Lenders assuming a f irst loss of an amount equal to five percent o f the Maximum Guaranteed Principal and the most recent six month interest payment for the period preceding the Demand Notice, any scheduled principal and interest payments (excluding default interest) which are in default under the ROMPCO IBRD-Supported Facility that are provided for in an arbitral award ("Award") rendered against Mozambique for Breach of Contract (see item 19) shall be compensated under the ROMPCO IBRD Guarantee.
The ROMPCO IBRD Guarantee i s not accelerable even if the underlying Guaranteed Loan has been accelerated. It is payable in accordance with the original payment schedule applicable to the IBRD Guaranteed Facility.
IBRD may in i t s reasonable discretion make Provisional Payments for scheduled payments less an amount equal to five percent o f the Maximum Guaranteed Principal and the most recent six month interest payment preceding the Demand Notice under the guarantee for the applicable period, if the dispute resolution for a loss in respect o f such scheduled payments has been prevented or interrupted by Mozambique for a period, in aggregate, of six (6) months despite the best endeavor o f ROMPCO and the IBRD Guaranteed Lenders; provided that the ROMPCO IBRD Guaranteed Lenders have provided IBRD with irrevocable stand-by letters o f credit to repay IBRD on call the amount o f the Provisional Payment and interest thereon in the event that the Award subsequently determines that the liability o f Mozambique is less than the full amount of the Provisional Payment. The IBRD Guaranteed Lenders' obligation to repay the Provisional Payments expires after three (3) years if dispute resolution continues to be interrupted or prevented.
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9. Guarantee Fee: The f i rst installment o f the Guarantee Fee shall be payable by ROMPCO in Rand on: (i) the sixtieth (60") day from signature of the ROMPCO IBRD Guarantee Agreement; or (ii) the date of effectiveness of the ROMPCO IBRD Guarantee Agreement, whichever occurs earlier; and
(a) guarantee fee i s payable every March 15, June 15, September 15 and December 15.
Prior to the end of the Availability Period the following
(i) 0.75% per annum o f the aggregate scheduled committed amount o f the ROMPCO IBRD-Supported Facility; and
(ii) 2.00% per annum of the aggregate scheduled disbursed amount o f the ROMPCO IBRD-Supported Facility.
(b) Date, 2.00% per annum of the principal amount of the ROMPCO IBRD-Supported Facility scheduled to be outstanding shall be payable on every June 15 and December 15.
After the end of the Availability Period until the final Repayment
(c) On or after the final Repayment Date, 2.00% per annum o f the aggregate principal amount o f the IBRD Guaranteed Loan outstanding shall be payable annually.
10. Front-end Fees: IBRD wil l charge ROMPCO a one-time front-end fee o f 1% of the amount covered under the ROMPCO IBRD Guarantee, payable in Rand on: (i) the sixtieth (60th) day from signature of the ROMPCO IBRD Project Agreement; or (ii) the date o f effectiveness o f the ROMPCO IBRD Guarantee Agreement, whichever occurs earlier.
11. InitiationProcessing IBRD wil l charge ROMPCO a one-time, non-refundable Initiation Fee of Rand equivalent to US$33,300, payable on the signature of the ROMPCO IBRD Project Agreement, to cover IBRD's internal project preparation and development costs.
Fees:
IBRD wil l also charge ROMPCO a Processing Fee equal to one-third of the aggregate amount of any reasonable out-of-pocket expenses incurred by IBRD in connection with the entry into the ROMPCO IBRD Guarantee Agreement, the ROMPCO Commercial Facility Agreement, the SPT IBRD Guarantee Agreement, the SPT Commercial Facility Agreement and other finance documents, up to 0.50% of the aggregate of the principal amounts o f the ROMPCO IBRD Guaranteed Facility and the SPT IBRD Guaranteed Facility. The Processing Fee shall be payable in Rand and due within 10 business days o f receipt o f written demand from IBRD (which would be provided following approval o f guarantee by the IBRD Board of Executive Directors).
92
12. Conditions Precedent: Usual and customary conditions for a financing of this type including the following:
(a) Execution of al l project documents and finance documents.
(b) Delivery of al l legal opinions.
(c) to be in effect at financial close and the naming of finance parties as co- insureds under those insurance policies and o f IBRD for public liability insurance.
Effectiveness of insurance required by the finance documents
In addition to the conditions precedent noted above under the ROMPCO IBRD Guaranteed Facility, the following conditions wil l apply to the provision o f the ROMPCO IBRD Guarantee.
(a) Agreement and the ROMPCO IBRD Project Agreement.
Execution, delivery and effectiveness of the Indemnity
(b) f i rs t installment o f the Guarantee Fee.
Payment o f Front-end Fee, the Initiatioflrocessing Fee and
(c) Effectiveness of SPT IBRD Guarantee.
13. Exclusions: Guarantor i s not liable for payment o f any amount which i s due to:
(a) The applicable laws in effect as o f the date of the ROMPCO IBRD Guarantee Agreement or events occurring prior to such date.
(b) IBRD Guaranteed Lender or ROMPCO.
Action or omission attributable to the Guarantee Holder, an
(c) Corrupt practices.
14. Suspension of If any of the following events occur and i s continuing, IBRD may, by written notice to the Guarantee Holder, deny guarantee coverage to subsequent draw downs, if any:
Additional Coverage:
(a) event which constitutes a breach o f Material Obligations (see item 19).
Termination event pursuant to the PA by ROMPCO or any
(b) the ROMPCO IBRD Project Agreement.
Breach by ROMPCO o f any of i t s obligations to IBRD under
(c) Development Association (,‘IDAyy) to Mozambique.
Suspension o f lending by IBRD or the International
(d) IBRD, IDA or the International Monetary Fund.
Suspension or lapse of Mozambique from membership in
93
15. Termination by The ROMPCO IBRD Guarantee Agreement may be terminated IBRD: immediately if:
(a) in a demand.
The Guarantee Holder intentionally makes an untrue statement
(b) ROMPCO engages in Corrupt Practices.
The Guarantee Holder, an IBRD Guaranteed Lender or
The ROMPCO IBRD Guarantee Agreement will also be terminated:
(a) Lender or ROMPCO i s in material violation o f the laws and regulations o f Mozambique or the IBRD Environmental Guidelines and Safeguard Policies applicable to ROMPCO.
Upon IBRD’s notice o f termination if an IBRD Guaranteed
(b) Payment Date, if any Guarantee Fees are not paid on or before the tenth day following notice of non payment.
Effective on the day immediately preceding the Guarantee Fee
(c) Effective on sixtieth day after IBRD’s notice o f termination, the Guarantee Holder defaults on any other obligation under the ROMPCO IBRD Guarantee Agreement.
(d) Guaranteed Lender transfers, assigns or encumbers, without IBRD’s prior consent, any rights under the ROMPCO IBRD Guarantee Agreement, the ROMPCO IBRD Guaranteed Loan, or an Award.
Effective as o f the date the Guarantee Holder or any IBRD
16. Subrogation: If and to the extent IBRD makes payment under the ROMPCO IBRD Guarantee and i s not reimbursed by Mozambique under its Indemnity Agreement within 60 days of notice from IBRD, then IBRD will be subrogated immediately to the IBRD Guaranteed Lenders’ rights under the ROMPCO IBRD-Supported Facility. Until IBRD has fully paid out under the ROMPCO IBRD Guarantee Agreement, IBRD will not exercise voting rights or realize on security under the ROMPCO IBRD- Supported Facility.
17. Right to Offer to Purchase the ROMPCO IBRD Guaranteed Loan:
If there i s a call on the ROMPCO IBRD Guarantee, IBRD shall have the right, at i t s sole discretion, to limit its obligation to guarantee interest payments by acquiring the ROMPCO IBRD Guaranteed Loan from the ROMPCO IBRD Lenders for an amount equal to the unpaid principal and interest (not including default interest). In the event that IBRD acquires the ROMPCO IBRD Guaranteed Loan, IBRD, at its discretion, will have the right under its Indemnity Agreement with Mozambique to cause Mozambique to make immediate payment to IBRD of the outstanding ROMPCO IBRD Guaranteed Loan amount together with interest thereon.
94
18. Demand Process: Demands must be made no less than thirty days nor more than ninety days from the date on which the Award i s rendered. IBRD wil l pay within sixty days after IBRD’s receipt o f such notice. N o Demand may be filed after the fifth anniversary of the Final Maturity Date.
Demands for Provisional Payments must be made no more than nine months after the due date of the scheduled payment that is in default.
19. Breach of Contract: A breach directly arising from the obligations of Mozambique in respect o f the provisions specified in Annex 10 (b) (“Material Obligations covered by the ROMPCO Partial Risk Guarantee”).
20. Dispute Resolution: Disputes wil l be settled by arbitration in accordance with UNCITRAL Arbitration Rules.
21. Governing Law: English.
ROMPCO IBRD PROJECT AGREEMENT
1. Parties: IBRD, ROMPCO, Sasol and Sasol Financing.
2. Representations and ROMPCO wil l represent, inter alia, that it i s in compliance with Applicable World Bank Environmental Guidelines and Safeguard Policies applicable to ROMPCO, and ROMPCO, Sasol and Sasol Financing wil l represent that they have not engaged in any Corrupt Practices.
Warranties:
3. Covenants: ROMPCO wil l covenant that it wi l l use the proceeds of the ROMPCO IBRD Guaranteed Loan only for the agreed purposes and comply with, inter alia, Applicable World Bank Environmental Guidelines and Safeguard Policies, and ROMPCO, Sasol and Sasol Financing wi l l covenant that they wi l l not engage in any Corrupt Practices and provide regular accounts and reports to IBRD.
4. Governing Law: Eng 1 ish.
95
Annex 10 (a): Summary of Material Obligations' to be Covered by the SPT Partial Risk Guarantee MOZAMBIQUE: Southern Africa Regional Gas Project
\ ,
4.2 (d)
Operations-in the Petroleum Production Area.
Breach o f the representation and warranty that the PPA satisfies the terms and conditions o f the Petroleum Law.
4.3,4.4,4.5 and 4.6
Reduction o f the Field Development Period and the Field Production period o f 30 years and the two (2) five-year extension periods.
5.2 (b) Termination o f Sasol as the operator, or cancellation o f Sasol's exclusive authority to act on behalf o f the Contractor.
5.3 Failure by the Government to honor i t s indemnity given to the Contractor where the Government has caused the Contractor to suffer any injury, loss or damage.
6.2
96
Failure by the Regulatory Authority to approve a proposed Field Development Plan which satisfies the criteria set out in Article 6.1 (b). Failure to submit to or abide by any determination o f a sole expert in relation to a proposed Field Development Plan.
6.3
7.1
10
Unreasonably withholding or delaying i t s consent to any proposed Variation.
Failure by the Regulatory Authority to appoint members to the Management Committee.
Refusal to honor tax and customs exemptions and dispensations.
14.1
20
Failure by the Government to provide the necessary permits and other approvals required for the employment and admission into Mozambique o f Expatriate Personnel o f ROMPCO and the Sub-contractors for the purpose o f the PPA.
Unreasonably withholding or delaying its consent to assignment by the Contractor o f i t s rights and obligations under the PPA or an undivided proportionate part thereof.
22 Failure by the Government to ensure that the procedures and formalities relating to dealings in foreign exchange in force in Mozambique at any time in any way diminish the rights accorded to the Contractor under Article 22.
ARTICLE PETROLEUM PRODUCTION AGREEMENT I
I 23.3 I
24.1
I 24.4 r
Refusal to honor foreign exchange control dispensation with regard to repatriation o f profits.
The appropriate exchange control authority o f the Government unreasonably withholding i t s consent to the Contractor or the Operator crediting an offshore account with the proceeds o f sale o f Mozambican currency.
Cancellation or termination o f rights to freely dispose, se l l and export o f Petroleum or to be the owner o f the Petroleum produced under the PPA at the Wellhead.
Frustration o f the right to have access to and from the Petroleum Production Area.
Failure to expedite all formalities regarding the Contractor's registration to do business in Mozambique and the new registration o f any leases, contracts or other documents.
Failure to ensure (to the extent that circumstances and resources permit) the Contractor and i ts employees and property enjoy reasonable protection in Mozambique.
Withdrawal of, or cancellation o f rights, consents and authorizations.
Refusal to abide by Government undertakings specified in Article 24.1 including:
0 Expropriate, nationalize or intervention with the assets. 0 Revocation or amendment o f the Authorization granted. 0 Amend or modify the provisions o f the agreement or taking any other action to prevent or hinder Contractor from enjoying the rights accorded to it under the agreement.
Refusal to abide by the stabilization Article.
Failure to ensure that during the l i fe o f the Pipeline Operations, measures taken in the interest o f safety, health, welfare or the protection o f the environment accord with conditions (l), (2) and (3) as set out in Article 24.3.
Refusal to honor the covenant set out in Article 24.4.
Cancellation and termination o f the agreement not in accordance with the breach provisions.
Relying on sovereign immunity in respect o f any proceedings under Article 27 or any proceedings to enforce any award or decision or from the execution o f any such award or decision over property or assets o f Mozambique which are used for a commercial purpose.
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Annex 10 (b): Summary of Material Obligations' to be Covered by the ROMPCO Partial Risk Guarantee
MOZAMBIQUE: Southern Africa Regional Gas Project
L. 1
2.2
3.4 (8) and 3.4 (lO)(b)(ii)
4.1
4.4
7
11.1
17.1 (b), 17.2, 17.3
19.2 and 19.3
20.2
Withdrawal o f the authorization to finance, construct, operate and own the Pipeline System.
Reduction o f the concession period o f 30 years (or 35 or 40 years if the conditions for the extension periods are met).
Refusal to enter into good faith negotiations to extend the Authorization.
Refusal to submit to the determination o f an Independent Commission o f Experts in respect o f a decision whether or not third party gas should be transported.
Unreasonably withholding or delaying i t s approval o f nominated operator.
Failure by G o M to honor i t s indemnity given to ROMPCO where G o M has caused ROMPCO to suffer any injury, loss or damage.
Refusal to honor tax and customs exemptions and dispensations.
Failure to provide necessary permits or other approvals required for the employment and admission into Mozambique o f Expatriate Personnel o f ROMPCO and the Sub- contractors for the purpose o f the Pipeline Agreement.
Unreasonably withholding or delaying i t s consent to the matters set out in those Articles including:
(a) Authorization.
ROMPCO's assigning i t s entire interest in the pipeline Agreement and the
(b) or the beneficial interest therein or appointing or changing the identity o f the Operator.
Any Shareholder assigning or transferring or charging i t s Participating Interest
Refusal to honor foreign exchange control dispensation with regard to repatriation o f profits.
Failure to ensure that new settlements are not created within pipeline corridor, thereby affecting throughput.
The description o f the material obligations i s intended to convey the substance o f the obligations undertaken by the GoM, but does not represent a reproduction o f the clauses in the PA.
1
98
ARTICLE NUMBER
20.1
21.1
21.2
21.3
21.4
23
24.0
PIPELINE AGREEMENT
Withdrawal o f land use rights under land law.
Failure to ensure that no special license authorizing activities within the pipeline corridor i s issued to third parties without prior written consent o f ROMPCO.
Refusal to abide by Government undertakings specified in Article 2 1.1 including:
Failure to grant an approval, license, permit, or other expeditiously and without undue delay. Expropriate, nationalize or intervention with the assets of ROMPCO. Revocation or amendment of the Authorization granted to ROMPCO to transport Natural Gas through the Pipeline System. Amend or modify the provisions of the agreement or taking any other action to prevent or hinder ROMPCO from enjoying the rights accorded to it under the agreement.
Refusal to abide by the stabilization Article.
Failure to ensure that during the l i fe o f the Pipeline Operations, measures taken in the interest o f safety, health, welfare or the protection o f the environment accord with conditions (l), (2) and (3) as set out in Article 21.3.
Refusal to honor representations and warranties set out in Article 21.4.
Cancellation and termination of the agreement other than in accordance with the provisions of Article 23.
Relying on sovereign immunity in respect o f any proceedings under article 24, or any proceedings to enforce any award or decision over property or assets o f the Republic o f Mozambique which are used for a commercial purpose.
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Annex 11: Statement of Loans and Credits Mozambique: Southern Africa Regional Gas Project
Mozambique Operatlons Portfollo (IBRDIIDA and Grants)
As Of septamtmr 1,2003
Closed Projects 27
1IRDIIDP.. Total Disbursed (Active)
Total Diabunad (Closed)
Total Disbursed (AC11ve + Closed)
of YmiCh has been repaid
ofwhich has been repaid
of which has been repaid
Total Undisbursed (Active) Total Undisbursed (Closed) Total Undirbutred (ACtIve + Closed)
428 44 0 00 1 ,443 48 702 85 1,871,817,640 31 702 851,697 76
648 96 0 00 646,981,408 83
~ ~~
Active Protects Difference Between Expected and Actual
supervision Rating Oriainal Amount In US$ Millions Disbursements' eveio ma t eciyesn Project ID Proiect Name stlOn Fiscal Year IBRD IDA GRANT Cancel Undisb Orig F n Rev'd
PO01799 Agnc Sector (PROAGRI) S s 1999 30 1896 184
PO49874 Enterpnse Development S s 2000 26 1705 1321 PO01786 Education Sector S s 1999 71 5636 51 39 PO69824 Higher Education S HS 2002 60 6041 -353
14 9 1428 008 Communication Sector R e f o n S s 2002 PO73479 PO49878 EMPSO S 120 63 5 -3 5 S 2003 PO01806 Municipal Development S 33 6 31 34 448 s 2002 PO01785 Roads and Bndges S 162 171 85 3749 s 2002 PO01608 Mineral Resources S 18 1679 206 s 2001 PO39015 National Water I S 36 23 7 2046 s 1998 P 0 5 2 2 4 0 National Water I/ S s 1999 75 6702 3228 PO42039 Railway & Port Restructunng S s 2000 100 7085 4553 -1 44 PO78053 HIV/AIDS S 55 55 S 2003 PO72080 Public Sector Reform S 25 5 25 5 S 2003
32 8 32 8 PO69183 Energy Reform and Access S S 2004 Overall Result 785 805 512 73039 27252 2225
PIO.,*BES
PO70305 Coastal Management (IDA) S 5 6 498 487 s 2000
100
Mozambique Statement o f IFC's
Held and Disbursed Portfolio As o f September 1,2003 (In US Dollar Millions)
Held Disbursed
FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1998 BIM-INV 0.00 0.30 0.00 0.00 0.00 0.30 0.00 0.00 2000 BMF 0.00 0.20 0.00 0.00 0.00 0.20 0.00 0.00 1997/200 1 MOZAL 69.55 0.00 58.50 0.00 57.87 0.00 58.50 0.00 1999 MaragraSugar 10.30 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1992 Polana Hotel 0.18 0.00 0.00 0.00 0.18 0.00 0.00 0.00 2000 SEF Ausmoz 0.72 0.00 0.00 0.00 0.45 0.00 0.00 0.00 1997 SEF CPZ 1.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 1997 SEF CTOX 0.73 0.00 0.00 0.00 0.73 0.00 0.00 0.00 2000 SEF Cab0 Caju 0.58 0.00 0.00 0.00 0.51 0.00 0.00 0.00 200 1 SEF Grand Prix 0.46 0.00 0.00 0.00 0.27 0.00 0.00 0.00 1999 SEF ROBEIRA 0.16 0.00 0.00 0.00 0.16 0.00 0.00 0.00
Total Portfolio: 83.68 0.50 58.50 0.00 61.17 0.50 58.50 0.00
Approvals Pending Commitment - US$ Million Loan Equity Quasi Partic
1996 BIM 10.00 0.00 0.00 0.00
Total Pending Commitment: 10.00 0.00 0.00 0.00
101
Mozambique - IFC and MIGA Program, FY 2000 - September 1,2003
IFC approvals (US%m)
Sector (YO)
ACCOMODATION & TOURISM SERVICES AGRICULTURE & FORESTRY FINANCE & INSURANCE FOOD & BEVERAGES HEALTH CARE INDUSTRIAL & CONSUMER PRODUCTS 0IL.GAS & MINING PRIMARY METALS
Investment instrument (YO) Loans Equity Quasi-Equity Other Total
MIGA guarantees (US%m)
158.24
2.20 1.90 9.60 9.70 0.40 0.00 0.30
75.90 100.00
25.30 0.04 0.20
0.00 0.00 0.00 0.00 0.00 1.60 0.00
98.40 100.00
0.00 0.00 0.00 0.00 0.00
100.00 0.00 0.00
100.00
0.00 0.00
100.00 0.00 0.00 0.00 0.00 0.00
100.00
57.60 56.90 100.00 100.00 25.00 2.00
0.60 41.10 16.80
100.00 100.00 100.00 100.00
42.82 0.00
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Annex 12: Environment and Social Assessment Management Plans and Monitoring MOZAMBIQUE: Southern Africa Regional Gas Project
Introduction
1. provisions o f OP 4.01- Environmental Assessment. The Project has also triggered the analyses and mitigation actions required by OP 4.04 - Natural Habitats; OPN 1 1.03 - Cultural Property, OP 4.12 - Involuntary Resettlement ( IBRDADA policy); OD 4.30 - Involuntary Resettlement (IFC policy); and OP 4.09 - Pest Management. During the preparation of the Project, Sasol conducted a number o f independent expert studies to evaluate the social and environmental effects o f the Project. These studies have been prepared in accordance with the requirements o f environmental legislation in South Africa and Mozambique and with consideration o f relevant andor applicable Wor ld Bank guidelines and policies. In addition, provision has been made for international best practice. Other project participants such as EIB and AfDB may accept a project when there i s compliance with IDA/ IFC and host countries EIA processes.
IDA and the IFC placed the Project in an environmental screening Category A consistent with the
Suite of Documents (Boxes 1 - 9 in Attachment 1 to this Annex)
2. Impact Assessments (EIAs) required for different components o f the Project. A total o f seven ELAS were conducted for the Project. This separation was deemed necessary to accommodate the geographic spread o f the Project’s activities across the national and provincial borders, to facilitate effective project management, and to meet the relevant legal requirements. The EIAs and EMPs are considered to be in compliance with the relevant Operational Policies o f the Wor ld Bank Group and to the best o f our understanding are also in compliance with and take cognizance o f the applicable:
Various independent expert consultants were retained by Sasol to perform the Environmental
e
e South African legal requirements. e Mozambican legal requirements. e e
Guidelines o f the World Health Organization. Guidelines from the US Environmental Protection Agency.
Sasol Safety Health and Environmental Policy. International legal principles, where relevant.
3. recommendations, Sasol completed a Regional Environmental and Social Assessment (RESA) to look beyond the immediate zone o f direct impacts o f the Project; and a Resettlement Planning and Implementation Program (RPIP) according to which resettlement and compensation was executed. To provide sustainable community development in the regions where the Project conducts i t s business operations, Sasol also put together a Social Development Act ion Plan (SDAP). Al l the environmental and social-related documentations are summarized in a consolidated Executive Summary and Update, including a summary o f public consultation and disclosure with regard to the Project. As mentioned above, an overview o f the comprehensive environmental and social documentation for the Project i s shown in Boxes 1 - 9 in Attachment 1 to this Annex.
In addition to the Project-specific EIAs and EMPS, in accordance to Wor ld Bank Group
103
Legislative and Environmental Impact Assessment Process
4. Mozambique. The EIA process i s administered by the Ministry for Coordination o f Environmental Affairs (MICOA). In 1995 MICOA drew up a National Environmental Management Program (NEMP) and the Mozambican Government subsequently passed the Framework Environmental Law (“Environmental Law 20/1997”) in 1997. The Environmental Law and regulations are applicable to al l public and private activities in Mozambique that may directly or indirectly influence or affect the environment. The Environmental Law requires licensing o f activities (listed in the regulations) that are liable to cause significant environment impacts. The granting o f environmental authorization (Record o f Decision - ROD) is subject to the preparation and approval o f an appropriate EIA, undertaken on behalf of the applicant by an organization registered with the government. The undertaking of EIA’s, public consultation in the EIA’s, and environmental authorization procedures are governed by Regulations on the Procedure for Environmental Impact Assessment (Decree 76/1988). In terms o f regulations, an EIA must comprise, amongst other things, the identification and assessment of mitigatory measures and an environmental management plan, including the monitoring o f impacts. This must be submitted to MICOA as a report. The technical review o f the report forms the basis for the approval o f the proposed activity and the issuing of a Record o f Decision (environmental authorizatiodlicenses).
5. administered by the Department o f Environmental Affairs and Tourism (DEAT). The National Environmental Management Act 107 o f 1998 (NEMA) provides the principles that must be heeded for purposes o f granting environmental authorizations. The Act also obligates persons (natural or juristic) to exercise a duty o f care in the instance where their activities pose a risk of significant pollution or environmental degradation. The development and implementation o f an EMP related to EIA required for listed activities would be considered as legal compliance with this duty of care. The requirements for and specifics regarding EIAs and authorizations are contained in the Environment Conservation Act 73 o f 1989 and the related environmental impact assessment regulations. Prior to the undertaking o f activities specified in the regulations, environmental authorization from DEAT i s required. The ROD i s generally issued and based on the EIA and must include conditions on measures to mitigate, control and manage environmental impacts. The submission o f an environmental management plan and adherence to it i s generally a condition o f a ROD.
South Africa. The EIA process and granting o f environmental authorizations (ROD’S) are
6. World Bank Group. Some o f the primary reference documents that were utilized and considered to provide guidance in the preparation o f the EIA’s and other related environmental and social documents were:
0
0
0
0
0
0
Procedure for Environmental and Social Review o f Projects (IFC, 1998). Guidance for the Preparation o f a Public Disclosure Plan (IFC, 1998). Occupational Health and Safety Guidelines (IFC, 1998). Handbook for preparing a Resettlement Action Plan (IFC, Environmental and Social Department, April 2002). World Bank Operational Manual (World Bank). Pollution Prevention and Abatement Handbook (World Bank, 1998).
7. International Legal Principles. Provisions were also made for relevant and appropriate principles of best practice reflected in various multilateral environmental agreements ratified either by South Africa or the GoM.
104
Public Consultation and Disclosure Activities
8. undertaken as an integral part o f the various EIA processes and as part o f the development and implementation of the RPIP and SDAP. In i t s PCD activities, Sasol has used culturally sensitive means to communicate with stakeholders, for instance, the use o f Portuguese in Mozambique, and English, Sesotho and Afrikaans in South Africa. There is a three tier liaison structure:
Overview. The public consultation and disclosure (PCD) activities started in 1998 and were
At a strategic level: The Mozambican Ministerial Task Group comprising ministerial representatives of the government and Sasol’s Executive Management.
At the planning and coordinating level: The Project Liaison Committee comprising 26 members representing Mozambique and Sasol.
At an implementation level: Seven individual Task Groups, covering employment and training of labor resources, environmental rehabilitation, public liaison, social development, resettlement and compensation, local content, and complaints management.
9. provision has also been made for NGO involvement.
A l l levels of governments from the national level to the local village chiefs are involved. Specific
Consultation and Disclosure in the EL4 Process
10. undertaken separately. The following methods were used:
The initial public consultation processes for the various components of the Project were
e
e e
Key stakeholder and authority workshops. Public open days. Public meetings. Personal meetings. Community meetings and focus group discussion with local government and community leaders, NGOs and influential people in the study area. Semi-structured interviews with local leaders, farmers, fishermen, hunters and other community role players. Formal questionnaire surveys. Distribution of background information material.
1 1. In Mozambique the communication at the Central Government level was primarily through the Project Liaison Committee which met monthly and was guided by, inter alia, suggestions o f the environmental consultants. The stakeholders were identified in the early phases of the pipeline and gas field EIAs, and were kept informed during the course o f the studies. Open daydpublic meetings with graphic illustrative displays were held in a number o f venues along the pipeline route and at the gas field. Transport assistance was provided for local and provincial Government officials to attend. In addition, communication with directly affected communities was initiated and was continued through the course of the EIA.
105
12. In South Africa, stakeholders (excluding landowners) were identified through initial consultations and through newspaper advertisements inviting participations. For Secunda and Sasolburg, the identified stakeholders were notified by mail. After an initial workshop, open days were held in various venues along the pipeline route and around the affected site. As the South African section o f the pipeline was routed through privately owned land, documentation concerning the Project was distributed directly to all affected landowners in the course o f the EIA preparation. After disclosure o f the Draft EIA, personal communication wi th key stakeholders was undertaken.
Public Disclosure of the EIA Documents for Mozambique and RSA
13. The Project has complied with the South African and Mozambican requirements and World Bank policies and guidelines for public disclosure o f the EIAs. In Mozambique, announcements about the location o f the reports and the venues for the public hearing were made in the national and local press and on local radio, and key stakeholders were invited directly. Key stakeholders were provided with full sets o f reports.
14. In South Africa, information was made available to landowners, communities surrounding the pipeline and associated infrastructures, and other interested and affected parties at different stages through the process. Stakeholders were informed o f the availability o f the full reports. Stakeholders were also informed in national and local press and on local radio stations where applicable. Reports were lodged at convenient and applicable locations for public review. All environmental and social documents (as per Annex 12, Attachment 1) are available on the Sasol website at http://w3 .Sasolcom/natural gas//.
Consultation
15, Sustainable community development i s provided for through Sasol’s Social Development Action Plan (SDAP) and are funded from its Social Development Fund. SDF’s primary focus i s the communities that are affected by the Project. In consultation with communities, 32 community projects have been identified and implemented and a further 35 projects are under consideration to secure social uplifiment, In addition, NGOs (e.g. Care International) and Government are consulted on the utilization o f funds and the delivery o f sustainable projects.
Disclosure o f the Executive Summarv, RESA and the RPIP
16. Overarching project documents, (required as safeguards documents) such as the RESA, the RPIP and the Consolidated Executive Summary and Update are disseminated to interested and affected parties:
e
e 0
Through a newspaper advertisement in national Mozambique and South African newspapers. By publication at the World Bank Infoshop and at the Sasol project Internet site. By lodging the documents in various venues in Mozambique and South Africa for public viewing.
106
Venues at which Environmental Documents are available for Review in Mozambique and the RSA
VENUE LOCATION
1 Mozambique 1 I World Bank Offices Impact0 Lda Ministry for Coordination o f Environmental Affairs Direqiio Nacional de Carviio e Hidrocarbonetos fDNCH1
Maputo Maputo Maputo, Xai Xai, Inhambane, Matola Maputo
Sasol Petroleum Temane Limitada Municipal Offices, Temane, Matola, Inhassoro Governors’ Offices District Administration Offices
Maputo Vilanculos Matola, Xai Xai, Inhambane Vilanculos, Inhassoro, Funhaloro, Mabote,
Public Libraries
Ongoing Public Interaction
Chokwe, Moamba, Chigubu, Maputo, Maputo, Matola
17. Special efforts are made to ensure the registration and management o f grievance and complaints from local communities affected by the Project. The issues and their resolutions are discussed at the monthly Environmental Task Team meetings. Sasol has also established a Community Liaison Forum to manage and coordinate the various interfaces o f the Project with affected communities. Sasol has appointed representatives for each interface (communication, labor, resettlement and compensation, environmental management, local content and social development), as well as representatives from the main contractors to serve on this forum which meets monthly.
South Africa
Public Libraries
Mark Wood Environmental Consultants Sasol Petroleum International (Pty) Ltd. Sasol Technology (Ply) Ltd. Communitv Center. Zamdela
Resettlement Planning and Implementation Program (RPIP)
Bethal, Badplaas, Barbeton, Johannesburg, Kanyamazane, Komatipoort, Malelane, Nelspruit, Sasolburg Honeydew, Johannesburg Rosebank, Johannesburg Secunda, Sasolburg Zamdela. Sasolburg.
18. A Joint Task Group with representatives from GoM and Sasol was constituted in May 2001 and a draft Resettlement and Compensation Procedure was developed for the Project. The main purpose o f the Task Group i s to compile procedures for resettlement and compensation, to determine the formulae to be used in the calculation o f compensation, and to monitor resettlement activities. Baseline surveys were undertaken at the gas field and along most o f the pipeline corridor. The entire pipeline route in Mozambique was flown and a video filmed. All information was given to the engineering team to enable the alignment o f Project infrastructure to minimize social impact. The RPIP comprises Volume 1 - Resettlement Planning and Implementation Program, Volume 2 - Land Settlement Plans, Volume 3 -
107
Land Use Plans, and Volume 4 - Monitoring and Evaluation Program. The Program as contained in Volume 1 was agreed with the Mozambican Government and meets the World Bank requirements for a Resettlement Action Plan under OP 4.12 and has already been publicly disclosed. Volumes 2 - 4, which wi l l provide additional information, wi l l be disclosed when they are available, but were not required to meet OP 4.12 for disclosure 60 days prior to Board.
Compensation Methodology and Principles
19. with relevant World Bank policies and procedures are applied:
General compensation principles (as adopted by the Joint Task Group in the RPIP) consistent
Replacement of homesteads: Homesteads wil l be replaced by a new brick house or as otherwise indicated by and agreed with the affected homestead owner. Land for resettlement: New land wil l be identified by authorities and the owner, developed and made available to parties to be resettled. Alternative subsistence farmingplots: If loss of land-use opportunities and rights occurs, alternatives farming plots wil l be identified, surveyed and developed, and made available to those losing land. Transitional support: To be provided to those moved of f their land as a result o f resettlement or during construction, and during the period of re-establishment. Crop losses: Compensation for loss o f crops and trees wi l l be determined at the time of resettlement or construction and paid as soon as possible thereafter (the same amount o f lost trees are replaced). Graves: The exhumation and reburial of graves wil l be treated in accordance with the wishes of the next o f kin, with activities and compensation negotiated on an individual basis.
The Joint Task Group has approved these principles as fair and equitable. The Task Group i s s t i l l active.
20. Monitoring, Evaluation and Auditing
Following resettlement, independent auditors appointed by Sasol monitor and evaluate the resettlement process, for what i s envisaged to be a four-year period, and the re-establishment o f sustainable livelihoods by those affected by resettlement . This i s done in accordance with the specific monitoring and auditing program of the RPIP. It has been projected that up until 2004, resettlement wi l l cost about US$l.6 million inclusive of a 10% contingency. GoM officials also have been monitoring the resettlement activities and wil l continue for the duration of the implementation of the RPIP. The Joint Task Group will receive reports if remedial actions are needed and execute the corrective or remedial actions. The Joint Task Group also undertakes direct interviews and inspections. N o serious non- compliance has been observed or reported thus far. Subsequent to resettlement and during the construction phase of the Project, expected to continue into the first quarter o f 2004, an independent environmental auditor undertakes twice yearly audits of compliance with the Resettlement and Compensation Procedures and the implementation o f the RPIP. Ongoing monitoring and evaluation wil l be undertaken for what i s envisaged to be a four-year period, commencing immediately following resettlement.
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Environmental Impact Assessments
21. A total o f seven separate EIAs' were conducted for:
0 Temane/Pande Gas field exploration. 0 Temane/Pande Gas field development. 0
0
0
0
0 Sasol Network Conversion.
Pipeline between Temane and Ressano Garcia. Pipeline between Komatipoort and Secunda. Natural Gas Expansion at Secunda. Conversion of the Sasol Plant.
EIA on Temane/Pande Gas Field Exploration
22. Pande exploration areas are:
The key objectives for the seismic and exploration drilling activities within the Temane and
0
0
0
0
To identify and evaluate the potential impacts of the seismic exploration and development of drilling activities within the exploration area. To identify means of mitigation negative impacts and enhancing positive spin-offs. To compile and update EMPs. To ensure that Sasol complies with Mozambican law regarding EIAs.
(a) Alternatives Examined
0
0
0
Two dimensional versus three dimensional seismic grid: The lower impact two dimensional grid was selected for the 200 1 seismics. Alternative energy sources: The lowest impact alternative was selected for the 2001 seismics (vibroseis as opposed to explosive methods). Alternative grid design: Ten of the seismic lines (equivalent to 1 1%) were removed from the grid in order to avoid areas of high environmental sensitivity.
(3) Conclusions of the EIA
A detailed summary of the main impacts as foreseen in the EL4 i s provided in Table 3 o f the Consolidated Executive Summary (Executive Summary) and the summary o f EMP Recommendations and Mitigatory measures i s provided in Table 4. Impacts were divided in three groups: those occurring as a result o f seismic activities, those occurring as a result o f the drilling o f exploration wells, and those occurring as a result o f the development of base camps. The most enduring of the impacts i s related to the activities o f people who could gain access to previously inaccessible parts o f the exploration area. Some o f the land within the exploration area was thought to have good arable soils and the potential to support commercial agriculture, as well as traditional settlement and croppings. The EIA also identified considerable opportunities for harvesting o f natural resources such as hardwoods, medicinal plants and game. The local inhabitants were strongly in favor o f the lines being le f t open for community use. The EL4 expressed concern that providing poor communities better access to previously inaccessible natural
DEAT in South Africa granted Sasol an exemption for preparing an EIA and an EMP on the Secunda Interface component o f the Project because the impacts are minimal and not significant.
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resources may not be sustainable without effective management, and that leaving seismic lines open would run a risk o f permanent impact on sensitive sites within the study area.
23. Some key actions taken following the recommendations o f the EM:
0
0
Certain seismic lines were not included in the seismic program. The bush clearing teams ensure the cut line width generally i s not more than 6 meters. An Environmental Site Officer has been present during bush clearings. On completion o f seismic testing, all the clear areas have been le f t to regrowhevegetate in accordance with approved EMP Waste and material handling procedures according to EMP recommendations. With modifications to the exploration plan, seismic line-realignment no infrastructure or homesteads have been impacted.
0
0
EIA on Temane/Pande Gas Field Development
24. The EIA was undertaken:
0
0
0
To identify and evaluate the potential impacts o f construction and operation of the gas field. To identify the means o f mitigating the negative impacts and enhancing positive spin-offs. To ensure Sasol complies with Mozambican regulations and policies.
(a) hydrocarbon fuels) were not considered as this was beyond the terms o f reference o f the EIA. Specific process and location alternatives were examined in detail in the preliminary design work for the Project. These related to the:
Alternatives Examined. Strategic alternative energy sources (other hydrocarbon and non-
0 CPF process design. 0
0
Alignment and construction method o f flow lines and locations o f wellheads. Screening o f alternative locations for the CPF.
(b) Conclusion. A detailed summary o f the main issues foreseen in the EL4 and managed in terms of the EMP i s provided in Tables 5,6, and 7 o f the Consolidated Executive Summary and Update. The EIA found no fatal flaws associated with the proposed development o f the gas fields.
25. During Construction. Of the direct social impacts during construction, the EIA identified the impact on employment as the most significant. The impact o f employment, on one hand, benefits local people and promotes sound relationships between the Project and local communities and, on the other hand, could cause disputes and lasting divisions among the stakeholders. Specific recommendations are outlined in RESA to mitigate the impact. Resettlement impacts were also considered to be very significant. The EIA concluded that minor shifts to the final alignments of the flow lines would reduce the resettlement impact to near zero. The recommendation was followed. The resettlement that has occurred, has resulted from the implementation o f the buffer area around the CPF and not from the flow lines. All the impacts affecting family agriculture and compensation for lost resources were considered to be highly significant in the absence o f sound management practices. These problems were considered to be manageable as long as compensation procedures were fair and were carefully planned and implemented. Of the other social impacts during construction, malarial risk, HIV AIDS, social pathologies caused by in-migration and impacts on cultural traditions were all considered to be potentially significant. With appropriate management, their significance was considered to be low. Biophysical impacts during construction were considered to be generally less significant than social issues, subject to appropriate mitigation and management.
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26. occur during the operational phase could be reduced to a low level o f significance. The EIA forecasts very limited social effects in communities surrounding the CPF. Since the CPF i s situated at a remote location, it wi l l be almost totally self-reliant with respect to service provision. The EIA considered the most significant impacts potentially affecting the Project to be indirect, and related to the opening up o f access into previously remote areas.
During Operations. The EIA forecasts that most o f the direct impacts o f the Project that would
EIA on Pipeline between Temane and Ressano Garcia: Mozambique
27. The EIA objectives were:
0
0
0
To identify and evaluate the potential impacts o f the construction and operation o f the pipeline. T o identify means o f mitigating the negative impacts and enhancing positive spin-offs. T o ensure that activities comply with the Mozambique regulations and policies.
(a) Alternatives Examined. The alternatives considered in the EIA are route alternatives and process alternatives. Route Alternatives. The EIA involved the refinement o f various widely-separated corridors to a detailed route alignment. The pipeline route was realigned to avoid settlement, to improve river crossings, to avoid wetlands and pans, and to avoid seasonally inundated areas. Process Alternatives. This included the method o f trench digging and alternative methods o f river crossings. Whi le open cut was considered to be an acceptable method for most river crossings, as most rivers would probably be dry in the winter construction period, the EIA recommended that horizontal directional drilling (HDD) should be investigated as an option for the Limpopo and Changane Rivers.
(b) EMP i s provided in Table 9. Most o f the issues raised by the Project are related to construction and the access created by construction. The key actions taken in addressing the issues raised in the EIA study are:
Conclusions. The summary o f the EIA findings i s in Table 8 o f the Executive Summary and the
0
0
0
The pipeline alignment has been modified to avoid homesteads along the route, so none were affected. Sasol’s Public Liaison team together with other task groups has permanent staff members in the field to work with other teams to manage community issues during construction. An archaeological survey o f the route was conducted by a professional archaeologist. The small collection o f Stone and I ron Age artifacts that were excavated during construction i s now stored in the archaeology department o f the Eduardo Mondlane University. All the river crossings were completed using open cut trenching during dry (no flow) conditions. The Sabie River and the Limpopo River crossings wil l be constructed using HDD. The geo-fabric recommended to ensure the continuity o f sub-surface drainage is being installed. Thirteen Baobabs (trees) have been transplanted into adjacent areas. Efforts have been made to prevent the persecution o f wild animals by reinforcing employee education.
0
0
0
0
EIA on Pipeline between Komatipoort and Secunda: South Afr ica
28. The EIA objectives were:
0 T o meet all the requirements o f South Africa’s National Regulations and legislation on the environment.
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e
e e
e
To follow the Integrated Environmental Management procedures promulgated by the DEAT and to test the approach. To provide an independent analysis o f the impacts. To conduct an open discussion with interested and affected parties and to determine the scope of work for the specialists based on the issues raised. To avoid and/or minimize any negative impact o f the proposed activities.
29. and 11 of the Executive Summary. The key post EIA actions taken to address the recommendations arising from the EIA are:
The summary of the issues foreseen in the EIA and the key elements of the EMP are in Tables 10
e e e
e e e
e
e e
e
e
Change in alignment to avoid a proposed natural heritage site. Route change to avoid four intended crossings of the Kaap River. The construction management procedure i s being implemented as specified by the Record o f Decision and also involve the Construction EMP. Quarterly independent audits o f construction activities are being undertaken. Emergency response and management regulations have been compiled and discussed. An environment management system for the Project and the implementation o f the relevant EMP has been prepared according to requirements. Specialist archaeological input has been involved to avoid 1 7'h century Iron Age sites and grave sites. Final checks for threatened species have been made. Post-construction monitoring of sedimentation impacts has shown low level impact and no irreversible impact. Specialist bio-assays of the water used to hydro-test the pipeline are being undertaken and the additives to the water have been accordingly altered*. The appointment o f a rehabilitation expert by the contractor i s being finalized.
EIA on Secunda Plant Expansion
30. increase in gas load. Existing coal use wi l l remain unchanged with coal to gas conversions remaining a central activity. During i ts pre-feasibility studies, Sasol considered several alternative ways of increasing the gas loads at the Sasol Secunda plant. These included: using coal from i t s own coal mines, using coal from other coal mines, use of natural gas from Mozambique (feasible), using alternative technologies (not feasible). The technically and financially most feasible option i s to use natural gas from Mozambique as a raw material to generate the increase in gas loads.
Sasol's Secunda plant i s the f i rst point at which gas wil l be used to provide feedstock for a 3%
3 1. in Table 14 and 15 o f the Executive Summary. The key impacts are: (i) air quality and human health impact i s very low; (ii) the net effect on the surface water environment i s favorable; (iii) the increase in solid waste i s negligible; (iv) the natural gas expansion wil l not significantly reduce unemployment in the area in the long-term; the contractors are advised to use local labor during the construction and
The summary of the main issues foreseen in the EIA and the key mitigation recommendations are
Due to the absence o f sulphate reducing bacteria in the water sources, the recommendation was followed to add Bulab 9570 to adjust the pH and scavenge 02. It contains no biocide. The Department for Water Affairs and Forestry, as the designated authority, approved the quality o f water for release.
2
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maintenance o f the plants and they are also advised in the contracts to use local products if available; and (v) the macro-economic impact i s that an estimated US$86 million will be invested locally; however, the income base i s not expected to change until the local economy becomes more diversified.
E M on Sasolbure, Plant Conversion
32. The conversion o f the Sasolburg plant from coal to natural gas as a feedstock would create an anchor market for natural gas, enabling the overall Project to be economically viable, whilst the South African market for natural gas i s developing. The objectives o f the EIA were to:
0
0
0
0
Provide the Free State Department o f Tourism, Environmental and Economic Affairs with sufficient information to produce a Record o f Decision regarding Project authorization. Assist the Project engineering team from an environmental planning perspective. Ensure the concerns o f the public and the authority are considered in Project planning. Provide a conceptual EMP to provide management measures to mitigate significant negative impacts.
33. Conclusions. The main impacts foreseen in the EL4 and the recommended management measures are provided in Tables 16 and 17 o f the Executive Summary. The principal negative impact arising from the Sasolburg plant conversion to natural gas i s the social implication for the economy and employment in the area. The closure of the plant at Sasolburg would lead to direct job losses and would also reduce the income o f the plant’s service providers and suppliers. As a worst case, the Project would lead to approximately 1,135 job losses in the Vaal Triangle Industrial Area. These job losses are significant in light o f the already high and increasing unemployment in the area. The current unemployment rate o f 47% would rise by 4.1 %. The Sasolburg plant would seek to minimize the jobs lost by redeploying employees within the Sasol Group. The retrenched employees will be provided outplacement services and financial courses with regard to the investment o f their pension funds. The monitoring o f the employment impact i s being done through consulting and communication forums. Sasol has sited the Butanol Complex and the Acrylates Complex in Sasolburg to provide job opportunities in light o f the job losses. The environmental impact o f the plant conversion i s positive. The Project would reduce the levels o f sulphur dioxide, nitrogen oxides and particulates. The hydrogen sulphide emissions (odor) will decrease by almost 100%. The Project would reduce the amount of water that the Sasolburg plant takes from the Vaal River and improve the water quality. The conversion would also have a positive impact on road traffic volumes.
EIA on Natural Gas Network Conversion
34. through an underground pipe network. The Project will enable Sasol to supply i t s gas users with natural gas instead o f hydrogen rich gas. Due to the nature o f the existing infrastructure, there i s l i t t le room for consideration o f alternatives for the conversion process. The summary of the main issues foreseen in the EIA and the recommended management measures are provided in Tables 18 and 19 of the Consolidated Executive Summary and Update. Key actions post EIA that have been taken to address the recommendation in the EIA:
Sasol currently supplies hydrogen-rich gas from its plant in Sasolburg to about 500 gas users
0
0
0
The EMP has been completed and procedures have been implemented. An independent Environmental Auditor has been appointed for the preparation phase. The audits are done on a weekly basis on the preparation sites o f the pipeline. Reports are issued on a weekly basis to the contractor and the Project team for the Network Conversion.
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Regional Environmental and Social Assessment (RESA)
35. impacts o f the Project and to address induced and cumulative impacts in the geographic areas affected by the Project, The objectives o f the RESA, the scope o f which was agreed with the World Bank are to:
The purpose o f the RESA was to look beyond the immediate zone o f direct social and economic
0
0
0
0
0
Broaden rather than deepen the findings o f the existing EIAs. Provide dimension to the issues and indicate appropriate steps to be taken. Rely on existing scoping effort and consultation outcomes. Provide a framework for the tracking and managing o f impacts and allocate proposed responsibilities for doing so. Propose time frames for the implementation o f all recommended actions.
36. of management responsibility including those, directly linked to Sasol’s activities in the Project, over which Sasol has control, and agree to take such responsibility. Attachment 2 contains a summary o f Sasol’s commitment to implement those recommendations o f the RESA which are under i t s control. The RESA also contains observations with regard to other areas o f responsibility, where parties other than Sasol could be identified as possible responsible parties.
The RESA i s intended only as a regional assessment and the purpose i s to identify potential areas
Regional Impacts in Mozambique
Biophysical Environment
37. The RESA found that the Project would have a range o f impacts on the local natural environment that need to be managed using the tools defined in the Project-specific EIAs. A t a regional scale, the key concerns relate to the indirect consequences o f opening lines o f access into previously remote areas, as a result o f pipeline cut lines, permanent access roads and seismic lines. This opening o f access could result in the escalation o f natural resource use and exploitation, particularly with respect to hardwoods, as well as bush meat and medicinal plants.
38. takes place in most areas affected by the Project, even in the apparently remote localities. Access therefore already exists and it i s uncertain to what extent the improvement caused by the NGP wi l l accelerate resource extraction. It i s possible that the improved access may also result in increased settlement and associated bush clearing for arable use, although the RESA deems this to be unlikely.
The RESA nevertheless acknowledges that very significant (pre-Project) resource harvesting
39. natural resource management in the Province under effective control. Sasol wi l l need to play i ts part in this by monitoring the use o f i t s access roads for resource extraction and by improving knowledge about the areas o f greatest natural resource sensitivity in the places that could be indirectly affected by the Project. This knowledge wi l l assist in formulating management objectives and actions in the future. Protocols with the GoM wi l l need to be developed, which formalize how information provided by Sasol’s monitoring o f access lines wi l l be followed up and acted upon.
The RESA recommends that there i s an integrated effort to bring hardwood harvesting and
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40. The design philosophy that Sasol has committed to regarding the discharge o f liquid effluent from the CPF i s sound. With the necessary management, water pollution risks that may be caused by the plant should be minimized. Sasol has accepted that no significant impact whatsoever will be permissible on the Govuro River system as a result o f treated effluent discharges from the factory. The final design, operation, management and monitoring o f the water treatment plants will be based on compliance with this requirement.
4 1. approximately one kilometer from the Govuro River. Design and operating mechanisms have been established that will ensure that this system i s fail safe. The criteria used for the evaluation o f effluent discharge quality will be benchmarked against the World Bank Effluent discharge guidelines for domestic wastewater and for industrial wastewater from oi l and gas facilities. In addition, the RESA recommends that Sasol undertake a long-term program o f biodiversity monitoring around the discharge point and in the Govuro River i tsel f in order to verify the absence o f direct impacts on the Govuro river system.
Sasol proposes to contain and proof all effluent before discharge into a wetland east o f the EN-1,
42. Apart from the issues raised above, the RESA found few significant regional concerns about the impact o f the Project on the natural environment in Mozambique. The Project’s impacts do not combine spatially with any other large industrial or mining developments planned in the foreseeable future. The Project will, however, together with the growth o f other mining industrial projects, and economic and tourism growth in general, impact on the capacity o f the environmental authorities responsible for industrial evaluation and management (MICOA). The RESA thus recommends that consideration i s given to ways of assisting MICOA. While assistance and training by Sasol in some o f the company’s plants in South Africa might be considered to result in conflicts of interest, the experience would be invaluable in building environmental capacity in MICOA. Other industry wide options could be considered in order to remove the stigma o f assistance from one donor only.
Social Environment
43. The main socio-economic benefit that Mozambique will derive from the NGP will be the government’s receipt o f taxes and royalty payments. The geographical areas in which the royalty benefit i s experienced will depend on decisions made by the GoM. On the basis o f the agreement with Sasol, the GoM will receive 6 MGJ/a o f natural gas from the Project, at peak production. This may be taken in kind or as the cash equivalent. Any royalty payment taken in cash will accrue to the Central Government and will be spent in accordance with national priorities.
44. proximity to the Project. Provision for five take-off points along the main pipeline between Temane and the Mozambique border town o f Ressano Garcia has been included in the agreement. One o f these i s allocated to the field area to upgrade ENH’s existing gas turbine-driven supply of electricity to the communities between Inhassoro and Vilanculos. A further possibility i s the use o f the gas to generate bulk power supply in Inhambane Province. The GoM i s currently identifying a preferred concessionaire to investigate the feasibility o f a 30 - 40 MW gas fired power station. There has also been a request by the Limpopo Valley SDI to investigate the opportunities for gas use in the Limpopo valley, where there i s a drive to restore agricultural production to pre-war levels and to rebuild several agricultural processing plants. A take-off point has been situated at this location.
The amount taken in kind i s more likely to hold some direct benefit for the communities in
45. The most significant demand for gas in the short- to medium-term will almost certainly be in Maputo. Potential users o f the gas include the Mozal Aluminium Smelter and a number o f smaller industries. Advanced planning o f a pipeline to Maputo from the take-off point at Resanno Garcia has already started. However, the RESA considers that for gas use to grow in Mozambique as a whole, there
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would need to be large anchor projects to carry the cost o f the major gas supply infrastructure. Once an anchor is in place, gas distribution to surrounding users becomes a more realistic commercial prospect and opportunities increase for the development o f small and medium size enterprises, both linked to the anchor (as service providers) and independently o f it. Given the existing levels o f industrial activity in Mozambique, and the lead time required for the planning and implementation of ‘mega-projects’, it i s unlikely that gas use will grow in the short- to medium-term in urban areas other than Maputo.
46. The RESA indicates that a possible mechanism to make gas more affordable for small and medium enterprises would be to cross-subsidize them through the use o f carbon credits. An initiative i s currently underway to investigate revenue generation by means o f carbon credits that may accrue with the development o f the gas industry.
47. the operation o f the plant will be low. Apart from the possibilities referred to above, with respect to power supply, the Project will employ only 50 people with a further 100 on contract, supplying the plant with services. While Sasol has committed to source and train all o f these people over a period o f time from Mozambique, the numbers are small and are roughly one order o f magnitude less than other projects o f comparable capital investment, such as Mozal and Corridor Sands. Economic multipliers in the towns nearest to the production facility will be very limited.
For communities living around the Project, the socio-economic benefits resulting directly from
48. at peak production, about 470 cubic meters o f condensate will be produced per day. Sasol favors road transport o f this condensate to a local port, probably Beira. Approximately one tanker every twenty minutes to half-an-hour during daylight hours would be necessary to transport this quantity. Should the option o f road transport be chosen, then a full EL4 will be conducted, which will include investigation o f the pavement capacity o f the road to Beira and a transport risk assessment. Sasol will participate in the determination o f the terms of reference o f this EIA in order to ensure that these issues are systematically addressed, although the responsibility for preparing the EIA itself will l ie with the selected tenderer for the condensate.
Some additional employment may be created by the transport o f condensate. Sasol estimates that
49. In summary:
The RESA concludes that social disruption caused by the operation o f the Project will be small.
0
0
0
Less than 15 homesteads have been resettled for the entire Project, including the gas field development and the pipeline to South Africa. The numbers o f staff and contracted personnel (a total o f 150) for service requirements are too low to create significant demands on local or regional infrastructure. The project will be almost totally self-sufficient with respect to all services, including power supply, water supply, solid waste disposal, sewerage treatment, health care, emergency services and accommodation. Risk management limitations determining the use o f land near the CPF and pipelines are not onerous and should not restrict future development in any material way.
0
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Regional Impacts in South Africa
Biophysical Impacts
50. Sasolburg plant. The emission reductions at Sasolburg w i l l include 10,300 tons per annum o f sulphur dioxide, 8,500 tons per annum of nitrogen oxides, 20,600 tons per annum o f hydrogen sulphide (emissions reduce to nil) and 1,400 tons per annum o f particulate matter. These reduction wi l l significantly reduce the Sasolburg plant’s contribution to air pollution in the Vaal Triangle industrial area. The introduction o f natural gas to South Africa wi l l also result in fuel substitution in other industries which wi l l reduce air pollution emissions andor prevent an increase in emissions. Out o f a total o f 40 MGJ/a o f fuel oils currently sold in heavily industrialized areas, up to 30 MGJ/a wi l l be replaced with natural gas. Natural gas has the added advantage o f generating insignificant air pollution at source. Collectively the reduced or emissions, imply carbon emission reduction credits o f some 4.7 tons per annum. The coal gasification process i s a significant consumer o f water. Coal mining operations also pump a large quantity o f group water. The total water savings o f some 3,712 MI per annum wi l l be realized with the conversion to natural gas. In terms o f biodiversity and land potential, some 52 hectares a year, which would otherwise have been affected by coal mining, w i l l remain unaffected as a result o f the introduction o f natural gas.
The introduction of natural gas wi l l result in significant air pollution emission reductions at the
Social Impacts
5 1. redundant. A t present, it appears that all o f the affected employees should be able to be redeployed. The conversion from coal to natural gas wi l l also reduce the demand for coal at the affected colliery. Sasol estimates that some 700 positions could be lost as a result o f the switch. Approximately 30 percent o f the affected employees can potentially be re-deployed. Sasol has prepared an Action Plan to minimize the impact of job losses at Sigma Collieries, and i s working with respective unions to minimize actual losses within the Sasol group o f companies.
The conversion o f the Sasolburg plant to natural gas w i l l result in some 600 jobs becoming
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Annex 12: Attachment 1 - Overview of Suite of Technical Reports for the Southern Africa Regional Gas Project
CONSOLIDATED EXECUTIVE SUMMARY AND UPDATE
(July 2003)
PROJECT SPECIFIC
* TemanePande Gas Field Exploration TemaneiPande Gas Field Development
* Temane-Ressano Garcia Pipeline. Mozambique Komatipoort-Secunda Pipeline: South Africa
* Secunda Interface Secunda Plant Expansion Sasolburg Plant Conversion - Natural Gas Network Conversion
Box 1: TEMANERANDE GAS EXPLORATION
GENERIC
* Regional Environmental and Social Assessment Summary o f Public Consultation and Disclosure Resettlement Planning and Implementation Program
* Social Development Action Plan
Briefing Document and Terms o f Reference as in TemanePande Gas Field Development Seismic Exploration Exploratory and Development Drilling Environmental Impact Study (January 2001)
Environmental Management Plan - Chapter 10
Record o f Decision (February 2002)
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Box 2: TEMANERANDE GAS FIELD DEVELOPMENT ____ ~~
Briefing Document (July 2000) Terms o f Reference for an Environmental Impact Study Revised 2002 (January 2001) Environmental Impact Study Volume 1 - Main Report (August 2001) Environmental Impact Study Volume 2a - Specialist Reports (August 200 1) Specialist Report 01 : Environmental Design Review Specialist Report 02: Impact on Air Quality Specialist Report 03: Impact on Hydrology Specialist Report 04: Impact on Flora and Fauna Specialist Report 05: Impact on Socio-Economics Specialist Report 06: Impact on Land Rights, Agriculture and Settlement Specialist Report 07: Impact on Public Health and Social Pathologies Specialist Report 08: Impact on Archaeology Specialist Report 09: Impact on Public Safety Specialist Report 10: Impact on Noise Specialist Report 1 1 : Impact on Sense o f Place Specialist Report 12: Impact on the Marine Environment Environmental Management Plan: Design (November 2002) Environmental Management Plan: Construction (February 2002) Environmental Management Plan: Operation (May 2003) Record o f Decision (February 2002)
Box 3: PIPELINE BETWEEN TEMANE AND RESSANO GARCIA: MOZAMBIQUE
Briefing Document (May 2000) Corridor Screening Report (August 2000) Terms o f Reference for an Environmental Impact Study (October 2000) Environmental Impact Study Volume 1 - Main Report (August 2001) Environmental Impact Study Volume 2 - Specialist Reports (August 2001) Specialist Report 01 : Impact on Terrestrial Habitats, Flora and Fauna Specialist Report 02: Impact on River Systems Specialist Report 03: Impact on Agriculture, Settlement and Other Land Use Specialist Report 04: Socio-Economic Impacts Specialist Report 05: Impact on Cultural Heritage Specialist Report 06: Impact on Public Health and Safety Environmental Management Plan - Part 1 : Design (November 2001) Environmental Management Plan - Part 2: Construction (February 200 1) Environmental Management Plan - Part 3 : Operation and Decommissioning (November 2001) Environmental Management Plan - Part 4: Environmental Impact Monitoring (November 2001) Environmental Management Plan - Part 5 : Supporting Documentation (November 200 1) Record o f Decision (February 2002)
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Box 4: PIPELINE BETWEEN KOMATIPOORT AND SECUNDA: SOUTH AFRICA
Briefing Document (March 1999) Corridor Screening Report (January 1999) Draft Scoping Report & Environmental Impact Assessment Plan o f Study Volume 1- Main Report (November 1999) Draft Scoping Report & Environmental Impact Assessment Plan o f Study Volume 2 - Appendices (November 1999) Comments Report on the Draft Scoping Report & Environmental Impact Assessment Plan o f Study (March 2000) Draft Scoping Report & Environmental Impact Assessment Plan o f Study (March 2000) Specialist Report 01 : Soils -Vegetation Specialist Report 02: River and Wetland Crossings Specialist Report 03 : Selected Terrestrial Habitats Specialist Report 04: Threatened Plants Specialist Report 05: Threatened Mammals Specialist Report 06: Red Data Birds Specialist Report 07: Reptiles and Amphibians Specialist Report OS: Agriculture and Forestry Specialist Report 09: Archaeological Study Specialist Report 10: Air Quality and Risk Assessment Comments Report on the Draft Scoping Report & Environmental Impact Assessment Plan o f Study (October 2001) Final Environmental Impact Assessment - Main Report (October 2001) Environmental Management Plan - Part 1 : Design (October 2001) Environmental Management Plan - Part 2: Construction (October 2001) Environmental Management Plan - Part 3: Operation and Decommissioning (October 2001) Environmental Management Plan - Part 4: Project Database (October 2001) Environmental Management Plan - Part 5: Amendment (October 2001) Record o f Decision (April 2002)
Box 5: SECUNDA INTERFACE
Application for Authorization (October 2000) (Exemption) Record o f Decision (December 2001)
I I
Box 6: SECUNDA PLANT EXPANSION
Final Environmental Impact Assessment for the Sasol Natural Gas Expansion Project (February 2000) Environmental Management wi l l be done in accordance with the Environmental Management System ( I S 0 14001) Record o f Decision (June 2001)
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Box 7: SASOLBURG PLANT CONVERSION
Final Scoping Report (January 2001) Environmental Impact Report Volume 1 (December 200 1) Environmental Management Plan - Chapter 5 Specialist Report 01 : Social Impact Assessment (August 2001) Specialist Report 02: Economic (August 2001) Specialist Report 03: Air Quality Impact Assessment (August 200 Specialist Report 04: Human Resources (August 2001) Specialist Report 05: Impact o f Noise (July 2001) Specialist Report 06: Solid Waste Management (October 2001) Specialist Report 07: Surface Water Impacts (September 2001) Risk Assessment Review for the Environmental Impact Assessment (200 1) Record o f Decision (September 2002)
Box 8: NATURAL GAS NETWORK CONVERSION
Final Scoping Report (August 2001) Environmental Management Plan (October 2002) Record o f Decision (December 2001)
Box 9: GENERIC DOCUMENTATION
Resettlement Planning and Implementation Program (Volume 1 - July 2003) Regional Environmental and Social Assessment o f the Sasol Natural Gas Project (July 2003) Social Development Action Plan for Mozambique (December 200 1)
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Annex 12: Attachment 2 - Summary of Actions for Implementation of the RESA Southern Africa Regional Gas Project
Description of Action
Table 1: Sasol’s Commitment to the Recommendations Contained in the RESA
Responsibility
Sasol welcomes the opportunity to have participated in and to have made resources available for the development o f the RESA. Sasol considers the contents o f the RESA to provide a framework for and information according to which the cumulative and regional impacts o f the Natural Gas Project can be managed. Sasol takes note o f the contents o f the RESA and the proposed recommendations, findings and observations made in the document. Sasol recognizes that the NGP’s operations and activities, as well as those o f i t s partners, may have cumulative and regional impacts, as indicated in the RESA. As a responsible global company, operating both locally and internationally through various business units, Sasol accepts responsibility to manage the regional and cumulative impacts directly associated with the NGP, that are within its control, in order to ensure the long-term sustainability o f the Project during i ts l i fe cycle.
2
Sasol further recognizes that this commitment w i l l require a dynamic approach, which w i l l be adaptable, adjusting to changing circumstances and including the availability o f new information and the sharing o f knowledge and further consultation with stakeholders, including partners and the governments concerned.
Reach agreement with responsible Government ministries about procedural steps in the event that logging vehicles begin to use Project cut lines and roads for access.
Impacts on Natural Resources in Mozambique Accelerated Hardwood Exploitation - 1 Prepare and implement a long-term program to manage and monitor third party
use o f the pipeline right-of-way and other access created by the Project. An outline o f a managementimonitoring approach i s provided in the RESA.
Sasol
Sasol, GoM
I I
Accelerated Wildlife and Other Natural Resource Exploitation - 3
4
Prepare a natural resource inventory for the Exploration Area. Define areas o f natural resource sensitivity. Plan future development o f the gas field infrastructure to minimize impact on these areas.
Evaluate and, where necessary, close all lines o f access created for the Project that are: (a) not permanent (seismic lines); and (b) open access into sensitive and remote habitats. Do this in consultation with local communities in accordance with the procedure established in the Exploration EMP.
Sasol
Sasol
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5 Encourage sustainable resource use in local communities around the Project by assisting local NGOs involved in community education.
Prepare baseline-monitoring report o f land cover along Project l ines o f access in the Exploration Area and along the pipeline to South Africa. Prepare monitoring report after three years. If no significant change i s measured over a decade, then consider altering the frequency or extent o f the monitoring program.
Sasol
Assess the risk, caused by any areas o f increasing settlement activity, to the known areas o f natural resource sensitivity (refer to Item 3 above). Notify MICOA in the event o f an increasing level o f risk to areas o f conservation significance.
12 Sasol to declare in its annual statements the royalties and taxes paid to the GoM in Mozambique.
ition Effects Caused by Discharge of Effluent into the Govuro River System
Sasol
Develop baseline records in the receiving water (Govuro River) before operation o f the CPF begins.
13
Employ a method o f monitoring that establishes the impact o f the CPF effluent discharge on the biodiversity o f the Govuro River System and associated wetland and which verifies that any changes are localized and o f limited magnitude and
Maximize upstream service provider opportunities in all facets o f the Mozambican gas production operations at Temane.
Sasol
significance.
14 Include requirements for a full EIA and risk assessment o f road-based condensate transport options in the tender documents o f bidders for use o f the condensate.
If material/significant changes are identified that are directly linked to the contaminants from the effluent system o f the CPF, then modify the design and/or operating conditions o f the waste water treatment plant(s) to produce a higher standard o f treated effluent. The definition o f material/significant changes in river biodiversity to be determined with reference to a point o f departure that biological and social impacts should be negligible.
Sasol
Prepare annual independent audits o f all aspects o f effluent management and disclose the findings to MICOA and Ara Sul.
Socio-economic Effects in Mozambique Upstream and Downstream Economic Growth Opportunities
Sasol
Sasol
Sasol
Sasol
Sasol
Sasol
123
15 1 Support a capacity building program to assist MICOA to train environmental 1 Sasol, GoM officers. This could, among other things, include experience at Sasol installations in South Africa or elsewhere.
I I 1 Impacts on Tourism in and around Vilanculos
Implement a task team to monitor the closing phase o f the construction contracts and to ensure the smoothest possible transition due to employment layoffs.
20 Involve NGOs, as part o f the SDAP, in planning and implementation o f subsistence farming programs in the areas made more accessible by Project access.
Continue social development spending in the local communities around the CPF during the construction layoff phase so as to help offset perceived grievances about temporary job losses.
Sasol
Maximize local opportunities for SMMEs to provide services to the Field Production Operations.
21
Contribute to capacity building o f MICOA staff through secondment to Sasol environmental units in South Africa and other appropriate means o f assisting to capacitate the Mozambican environmental authority.
Incoming investors in SDI’s close to the pipeline are to be made aware o f the alignment and the restrictions on development in proximity to the pipeline (particularly important for land intensive investments/developments such as commercial agricultural estates, agricultural processing plants and conservation areas).
Impacts on Agricultural Development around the Temane and Pande Gas Fields
Sasol
Sasol
Sasol
Sasol, GoM
Sasol, GoM
I I
Impacts o f Safety Restriction Zones around the Pipelines on Settlement
Sasol’s Public Liaison Team (PLT) to develop the post-construction communication strategy. The PLT to ensure that it includes the necessary ongoing communication with relevant stakeholders in areas where the risk o f illegal settlement and o f agricultural development over the pipeline are more likely.
Sasol to develop a monitoring strategy to check that settlement or other actions that could compromise the safety o f people or the efficient functioning o f the pipeline are timely identified and managed.
Sasol and the Government o f Mozambique to agree on remedial protocols should the integrity o f the exclusion zones be compromised.
Sasol
Sasol
Sasol, GoM
124
25
26
Impacts on Natural Resources in South Africa Effects on Air Quality
Continue to participate and assist in the HIV forum in Inhambane Province.
Develop and implement a long-term HIV/AIDS awareness program in conjunction with the Mozambican authorities and NGOs.
Sasol
Sasol
27
28
Sasol
Sasol, DEAT
Further investigate and promote the possibility o f carbon credits under CDM with a view to encouraging wider use o f natural gas rather than other fuels.
Promote the use o f natural gas as a replacement for coal and/or fuel oil. Sasol to initiate discussions with the Air Pollution Directorate o f the National Department o f Environmental Affairs and Tourism, with a view to promoting fuel substitution as a means o f emissions abatement in industries where the presence o f piped gas make this economically feasible.
29 Continue to investigate water savings so as to ensure that the savings brought about by natural gas are realized to the full.
, Socio-economic Effects in South Africa Impacts on Job Creation
Sasol
30
3 1
Implement the planned labor re-deployment strategy.
Provide assistance to employees who may be redundant between old plants being de-commissioned and new plants being commissioned.
Sasol
Sasol
Social Interventions Planned by Sasol I 32 Continue to publicize Sasol’s efforts to prevent job losses as a result o f the
Project and pro-actively manage media attention in this regard. Sasol
Sasol
~
33
34 Sasol I
Continue to develop and refine the procedures and approach to social development spending in areas affected by the Project. Document changes to the procedures, based on experience.
Continue consultation with NGOs and other community representatives in the sub-region and make specific attempts to reach agreement with them about approaches to community development that satisfy al l party’s needs. Develop a protocol for working with NGOs and community representatives.
35
125
Continue to involve NGOs in the SDAP. Sasol
36
37
Table 3: RESA - Summary of Observations to be Noted by the World Bank for Purposes of Further Discussions with Third Parties if Applicable and Required
Implement an annual workshop dealing with lessons learned in social development, to which key Government, NGOs and community stakeholders should be invited.
Fund some projects that are strategically driven.
Sasol
Sasol
Description of Recommended Actions
- H
Recommended Responsibility
A
B
Complete the hardwood resource inventory for Inhambane Province.
Estimate (using independent field checks) the existing extent o f harvesting in excess o f official quotas and consider ways o f managing this.
Evaluate ways o f ensuring that the benefits o f sustainable hardwood use are not alienated from local communities as a result o f the concession system.
Review existing capacity to manage hardwood extraction in the province and implement capacity building and training programs.
C
D
126
GoM, World Bank GoM, World Bank
GoM, World Bank
GoM, World Bank
E Promote large-scale developments in Maputo/Southern Mozambique and elsewhere that can act as a base load usedanchor for the supply o f greater quantities o f gas into the local market.
Present information on the planned and actual use o f gas royalties and taxes in a transparent manner.
F
GoM
GoM
G Examine ways o f strengthening the institutional capacity o f the government agencies with environmental mandates (MICOA, DWFF, Ara SUI).
GoM, World Bank
Periodically review the strategic plans for tourism and other development in and around Vilanculos. Encourage balanced growth which promotes opportunities in the key development sectors, particularly tourism. Monitor and categorize any significant changes in settlement patterns and other land use that do not meet the criteria for the promotion o f sustainable development in the area.
GoM
I
Impacts on Natural Resources in South Africa Effects on Air Quality
The LVSDI and ENWMGC devise a strategy for the multi-use o f gas for LVSDI initiatives.
J
K
DEAT
DME, DEAT
National DEAT to consider initiating a process to establish a national emissions database in the immediate future (information on national air pollution emissions i s extremely limited.
Re-consider the possibilities for the promotion o f natural gas use in the domestic environment, particularly in the former townships, taking into consideration the possibility o f carbon credits as an incentive scheme.
L Re-examine the feasibility o f domestic gas use in South Africa, including means o f overcoming barriers to more widespread domestic use.
127
DME
