world bank document of the world bank ... sector director, lcsfp- m g. sri-ram aiyer task manager:...

Document ofThe World Bank

Report No. 16769-BR

PROJECT APPRAISAL DOCUMENT

ONA

PROPOSED LOAN

IN AN AMOUNT OF US$130 MILLION

TO

TRANSPORTADORA BRASILEIRA GASODUTO BOLIVIA-BRASIL S.A.

FORA

GAS SECTOR DEVELOPMENT PROJECT - BOLIVIA-BRAZIL GAS PIPELINE

NOVEMBER 26, 1997

Finance, Private Sector, and infrastructure DepartmentBrazil DepartmentLatin America and the Caribbean Region

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-11-

CURRENCY EQUIVALENTS

(Exchange Rate Effective June 1997)

Currency Unit = Brazilian Reais (R$)US$1 = R$1.03

WEIGHTS AND MEASURES

Metric System

FISCAL YEAR

January 1 - December 31

ABBREVIATIONS AND ACRONYMS

APC ...... Advance Payment Contract - a financial contract betweenPetrobris and YPFP for financing the Bolivian portion of thePipelme

BCM . .. . . Billions of cubic metersBHP ....... ... B........................... BHP Petroleum, a subsidiary of an Australian companyBNDES .... Brazilian National Development BankBOLT JV...... ........ A joint venture company formed by Shell, Enron, and Transredes

to invest in GTBBritish Gas . British Gas Americas, Inc., a subsidiary of a U.K. companyBTB Group . BHP, El Paso (old Tenneco), and British Gas as collectively

knownBtu . British Thermal UnitCAF . Andean Development CorporationCAS .. ..... C.. .... .. .. ..... Country Assistance StrategyCSFB .. .. .............................. Credit Suisse First Boston, Financial Advisor to PetrobrasEA .......................... .... .. Environmental AssessmentECA. . . Export Credit AgenciesEIB ................................. European Investment BankEl Paso ... . El Paso Energy, a US companyEMP .Environmental Management PlanEnron ....... ................ ... . ... Enron (Bolivia) C V., a subsidiary of a U.S. companyEnron Joint Venture . A joint venture between Enron and YPFB superseded by

Vice President, LAC: ShahidJavedBurkiCountry Director Brazil: Gobind T. NankaniSector Director, LCSFP- M G. Sri-Ram AiyerTask Manager: Nelson de Franco

-111-

BOLT JVEPC .............. Engineering, Procurement, and Construction - a fixed price,

turnkey contractGASPART .............. Individual Brazilian InvestorsGTB .............. Gas Transboliviano S.A., the gas transport company on the

Bolivian sideGSA .............. Gas Sales Agreement - Gas sale agreement between Petrobras

and YPFBHSFO ............... High Sulfur Fuel OilIDB .............. Inter-American Development BankIDC .............. Interest During ConstructionIERR .............. Internal Economic Rate of ReturnIFRR .............. Internal Financial Rate of ReturnIPDP .............. Indigenous Peoples Development PlanJexim .............. Japanese Export-Import BankLNG .............. Liquefied Natural GasLPG .............. Liquefied Petroleum GasLSFO .............. Low Sulfur Fuel OilMarubeni .............. Japanese Trading Company, MarubeniMMCMD or MMcm/d .............. Millions of cubic meters per dayMME .............. Ministry of Mines and EnergyNPV .............. Net Present ValuePipeline .............. Bolivia-Brazil Gas Pipeline ProjectPIM .............. Preliminary Information MemorandumPension Funds .............. Bolivian pension funds: Previsi6n BBV S.A. and

Futuro de Bolivia S.A.Petrobras .............. Petr6leo Brasilero S.A., the Brazilian petroleum companyPetrofertil .............. A subsidiary of Petrobras responsible for gas projectsPSS .............. Private Sector StrategyShell .............. Shell Gas (Latin America) B.V., a subsidiary of a

U.K./Netherlands company.TA .............. Technical AssistanceTBG .............. Transportadora Brasileira Gasoduto Bolivia-Brasil S.A., the gas

transport company on the Brazilian sideTCO .............. Transport Capacity Option - refers to 6MMcm/d of pipeline

capacity above TCQTCQ .............. Transport Capacity Quantity - refers to the contractual volume

under the GSA plus up to 2 MMcm/dTCX .............. Pipeline capacity above TCQ and TCOTransredes .............. Tranasporte de Hidrocarburos S.A., a Bolivian gas transport

company formed as a result of the capitalization process andinheritor of YPFB interests in the Pipeline.

YPFB .............. Yacimentos Petroliferos Fiscales Bolivianos, the Bolivianpetroleum company

UNICAMP .............. University of Campinas, Sao Paulo

-iv-

BrazilGas Sector Development Project - Bolivia-Brazil Gas Pipeline

CONTENTS

Block 1: Project Description

1. Project development objective ................................... 32. Project Components ................................... 33. Benefits and Target Population ................................... 34. Institutional and Implementation Arrangements ................................... 3

Block 2: Project Rationale

5. CAS Objectives Supported by the Project .56. Main Sector Issues and Government Strategy .57. Sector Issues to be Addressed by the Project and Strategic Choices .58. Project Alternatives Considered .69. Major Related Projects Financed by the Bank and/or Other Development Agencies .6

10. Lessons Leamed and Reflected in Proposed Project Design .611. Indications of Borrower Commitment and Ownership .712. Value-added of Bank Support .7

Block 3: Summary Project Assessments

13. Economic Assessment .814. Financial Assessment .915. Technical Assessment .916. Institutional Assessment .917. Social Assessment .1018. Environmental Assessment .1019. Participatory Approach .120. Sustainability .1221. Critical Risks .1222. Possible Controversial Aspects .14

Block 4: Main Loan Conditions

23. Loan Conditions ....................... 14

Block 5: Compliance with Bank Policies ........................... 15


CONTENTS

Annex 1: Project Design Summary .................................................. 16Annex 2: Detailed Project Description .................................................. 19Annex 3: Estimated Project Costs .................................................. 20Annex 4: Economic Evaluation .................................................. 21Annex 5: Financial Summary .................................................. 36Annex Sa: Summary of Terms for the World Bank Guaranteed Bond Issue ......................... 54Annex 6: Procurement and Disbursement Arrangements .................................................. 58Annex 7: Project Processing Budget and Schedule .................................................. 62Annex 8: Documents in the Project File .................................................. 63Annex 9: Statement of Loans and Credits .................................................. 65Annex 10: Country at a Glance .................................................. 70Annex 11: Supervision Plan .................................................. 72Annex 12: Sector Policy Letter .................................................. 73Annex 13: Environmental Assessment - Executive Summary ............................................ 78

Maps IBRD 28860 and 28861

INTERNAT1ONAL BANK FOR RECONSTRUCTION AND DEVELOPMENTINTERNATIONAL DEVELOPMENT ASSOCiATION

Latm America and the Caribbean Regional OfficeBrazil Department

Project Appraisal Document


Date: November 3, 1997 | Draft [l FinalTask Manager: Nelson de Franco Country Manager: Gobind T. NankaniProject 1D: BR-PA-6549 Sector: Energy POC: PVLending Instrument: Specific Investment Loan PTI: El Yes 0 No

Project Financing Data 3 Loan O Credit 3 Guarantee O Other [Specify]

For Loans/Credis/Others:Amount (US$m/SDRm): IBRD Loan of US$130 million

Proposed Terms: El To be defined El Multicurrency 3 Single currencyGrace period (years): 3 0 Standard Variable 0 Fixed E1 LiBOR-based

Years to maturity: 15Commitment fee: 3/4 %

Service charge: 0 %

Financing plan (US$m): 2,086 million El To be defined_US$ Million

Sourme vTBG Total(Bolivia) (Brazil)

Shareholders Equity 75.00 310.00 385.00Petrobris Transport Capacity Option - TCO (with CAFIBNDES financing) 81.00 302.00 383.00PetrobrAs Loan (with Jexim/Marubeni and BNDES financing) - 348.00 348.00Petrobras Advance Payment Contract (with Jexim/Marubeni financing) 280.00 - 280.00IBRD Loan - 130.00 130.00IBRD Partial-Credit Guarantee for Bond Financing - 180.00 180.00Inter-American Development Bank (IDB) - 240.00 240.00Corporaci6n Andina de Fomento (CAF) - 80.00 80.00European Investment Bank (EIB) - 60.00 60.00

436.00 1,650.00 2,086.00

Borrower: Transportadora Brasileira Gasoduto Bolivia-Brasil S.A. (TBG)Guarantor: Government of Brazil

Responsible agency (ies): TBG

Project Appraisal Document Page 2Brazil: Gas Sector Development Project - Bolivia-Brazil Gas Pipeline

Estimated Disbursementsfor the Bank Loan (Bank FY/USS million): FY1998 FY1999 FY2000

Annual 12.00 80.00 38.00Cumulative 12.00 92.00 130.00

For Guarantees: 3 Partial Credit El Partial Risk

Proposed coverage:Project sponsors: Petrobras, Enron/Shell, British Gas, El Paso Energy, BHP, Bolivian Pension Funds, and GASPARTNature of underlying financing: Capital Market Bond FinancingTerms of financing:

Principal amount (US$m): US$180 millionFinal maturity: 15-18 years

Amortization profile: Balloon

Financing available without guarantee: X Yes ] NoIf yes, estimated cost or maturity: 5-6 year of maturity; LIBOR + 450 bpEstimated financing cost or maturity with guarantee: 15-18 year of maturity; LIBOR + 150 bp

Expected Effectiveness Date: Closing Date:

March 1998 December 31, 2000


Block 1: Project Description

1. Project development objectives (see Annex I for key performance indicators):

Project development objectives are to:* develop a gas market in South/Southeast Brazil; and* help create an export alternative for Bolivian gas.

2. Project components (see Annex 2for a detailed description and Annex 3for a detailed cost breakdown):

Component Categry Indicative Costs (SSM) % of Total

A. Construction of a 557 kmsection of the pipeline inBolivia from Rio Grande PhysicaVOther 436 21%in Bolivia to CorumbA inBrazil as well as soft costsincluding IDC andworking capital.

B. Construction of 2,593 kmof the pipeline in Brazilextending from Corumbato Porto Alegre including Physical 1,421 68%PenApolis compressionstation and expropriationof land.

C. All soft costs for theBrazilian section Other 229 11%including IDC andworking capital.

Total 2,086 100%

3. Benefits and target population:

The proposed project and ongoing complementary reform of the energy sector would help diversify energy supply in Braziland provide direct economic benefits to the Bolivian economy through increased investment in upstream gas exploration andproduction activities. In the case of Bolivia, gas exports to Brazil through the proposed pipeline are expected to reach 25% of totalcurrent exports within eight years. The Brazilian export market for Bolivian gas has also become important because of the expectedtermination of the Bolivia-Argentina gas export contract in 1998.

In the case of Brazil, the direct beneficiaries of the project will be the population in South/Southeast Brazil which will reaphealth benefits from the substitution of polluting fuels (e.g. high-sulfur fuel oil, wood, etc.) by gas at competitive prices. The gas

would also be used in power generation and thus address the looming power shortages in Brazil. But above all, the project would beused as a vehicle to address sectoral constraints through private sector investment and participation in the hydrocarbon sector.

4. Institutional and implementation arrangements:

Petrobras and YPFB entered into a Gas Sales Agreement (GSA) in 1993 for the sale of Bolivian gas to Brazil. This has ledto plans for the construction of a gas pipeline from Bolivia to the consumption centers in Brazil.


Gas would be transported from Bolivia to Brazil by two separate national transport companies: Gas Transboliviano S.A.

(GTB) and Transportadora Brasileira Gasoduto Bolivia-Brasil S.A. (TBG) who will be the owners of Bolivian and Brazilian sides of

the Pipeline respectively (together known as TransCos).

While GTB currently exists as a subsidiary of Enron and Bolivian pension funds, the new ownership structure will include:

Petrobras, BBP, El Paso Energy, British Gas, Enron/Shell Joint Venture, Bolivian Pension Funds, and Bolt JV.

TBG has been created as a subsidiary of Petrofertil which in turn is a subsidiary of PetrobrAs responsible for gas operations.Petrofertil plans to reconstitute the company with a 49% private-ownership structure by March 1998. Petrofertil will initially have a

51% stake in the reconstituted company. No later than six months before the end of the construction of the Pipeline, Petrofertil will

submit a plan to the Bank to fumther reduce its participation in the Pipeline to a minority level. With the exception of a 20%

shareholding Ifnked to the YPFB-assigned private sponsors, the rest will be owned by Petrobras, BTB Group, and some private

investors (see below for a complete ownership structure).

Important decisions affecting the project are undertaken by a management board constituted of all sponsors. As a result of

negotiations to mitigate project risks, Petrobras has agreed to undertake, on a turnkey basis, the engineering, design, materialsprocurement and construction of the Bolivian side of the Pipeline on behalf of GTB for a fixed price of US$350 million.

Construction of the Brazilian side of the Pipeline will be undertaken through an owner-managed arrangement, pursuant to which

significant components of the engineenng, procurement, and construction will be provided under contracts with various parties. TheBank loan will support the construction activities on the Brazilian side of the pipeline between Sao Paulo and Porto Alegre.

F_GTB100%

85% 6% 9%

BOLT JV BTB PETROFERTIL

60% 40% 1 100% I

F _ l33.3%1 33.3o% PETROBRAS

Transredes SHELUENRON BHP EL PASO BRITISH GAS

50% 50%

I .ISHELL/ENRON Bol. Pension Funds

TBG

100%

20% 25% 51 %o 4%

BTB PETROFERTILYPFB-assigned private 100%

sponsors - under .negotiation S3. 3% 33.3% 33.3 PETROBRAS Private

Investors

BHP EL PASO BRITISH GAS


The project implementation plan provides the proposed TBG organizational structure which was reviewed during Appraisalfor compliance with the Bank's financial and auditing requirements. It was further agreed that implementation of an effectiveorganizational structure, including appointment of key corporate staff, will be a condition for loan effectiveness.

Block 2: Project Rationale

5. CAS objective(s) supported by the project:

Brazil: Bank/IFC CAS/PSS discussed on June 12, 1997 (Report No. 16582-BR)Bolivia: CAS discussed on February 8, 1994 (Report No. P-6095-BO)

Brazil CAS objective is to support GOB's strategy of infrastructure development by helping to mobilize private capital for neededinvestments, with a secondary emphasis on financing critical infrastructure in areas where market-based funding is not feasible atthis time.

Bolivia CAS objective is to foster Bolivian economic growth by developing the productive and export potential of its most importantnatural resources - hydrocarbons, minerals, and land.

6. Main sector issues and Government strategy:

Main sector issues are: (i) high investment needed to expand energy supply to meet looming power shortages in Brazil; and(ii) the limited financial capacity of the sector under its current structure and federal and state ownership. The Government ofBrazil's strategy to meet increasing energy needs in a sustainable manner is to: reform the hydrocarbon sector by introducingincreased competition and private participation; reduce energy waste through efficient supply and use of energy; and diversify itshydrocarbon fuel sources by encouraging the use of environmentally friendly fuels.

The Government's goal is to increase the participation of natural gas in its primary energy supply from 2% to at least 10%by 2010. This could have a number of desirable effects which include: (i) amelioration of atmospheric pollution through thereplacement of less clean fuels (e.g fuel oil, wood) in some of the major cities; and (ii) provision of gas supplies to theSouth/Southeast industries which currently depend on expensive alternative fuels (e.g. LPG, wood, charcoal) It would also allow theconstruction of gas-fired power plants, which Eletrobras considers a key component of its policy to avoid an energy deficit in theshort-term in South/Southeast Brazil. The Project will, through the introduction of a new energy source in the southern states andincreased supply to other southeastern states, enhance the conditions for inter-fuel competition in the near-term and development ofgas to gas competition in the longer-term.

To ensure the long-term sustainability of reforms in the hydrocarbon sector, the Govermnent is in the process of significantstructural changes in the economy. These reforms, which are being implemented mainly through constitutional amendments andcomplementary regulations include the following: (i) reformulating the role of the state in the economy; (ii) giving flexibility toprivate sector participation in state monopolies; (iii) eliminating restrictions on foreign participation, by establishing clear andpermanent rules; (iv) introducing monetary and fiscal discipline; and (v) reforming the tax system.

The Lawfor Public Concessions already allows majority private participation for gas distribution concessions at State level.In this respect, the Bank is assisting with the privatization of the gas distribution companies of Rio de Janeiro, Minas Gerais and SaoPaulo. The Hydrocarbon Law of August 6, 1997 intends to dismantle the Federal monopoly of Petrobras and further open the sectorto private competition. While this law is an important step forward in establishing a legal framework for private participation in thehydrocarbon sector, it is not specific on the regulatory aspects. This shortconing could be overcome by the establishment of theregulatory agency and its procedures. In this respect, the Bank's technical assistance (under an existing loan) would support theGovernment's efforts. The recent progress made withfuel price deregulation includes the freeing of downstream distribution ofgasoline, alcohol and LPG, and removal of transport equalization for diesel. The Government expects to extend the fuel pricederegulation to the interior regions of Brazil and has an agenda to bring prices into line with international levels.

A letter of the Government's policy undertakings in the hydrocarbon sector is attached in Annex 12.

Project Appraisal Document paw 6Brazil: Gas Sectr Developmert Project - 5o01m-Brazi Gas Pipeline

7. Sector issues to be addressed by the project and strategic choices:

The ongoing reform of the hydrocarbon sector is providing a favorable climate for private participation in the sector. Thespecific issues to be addressed by the project would include:

a) design and implementation of a gas sector federal regulatory agency;

b) design of supporting gas sector regulations;

c) design of model concession agreements for gas transmission and distribution; and

d) deregulation of hydrocarbon fuel prices.

8. Project alternatives considered and reasonsfor rejection: El To be definedA number of project alternatives were considered, including: (a) using gas to produce electricity in Bolivia and bringing it

to the industrial centers of SouthtSoutheast Brazil through a High Voltage Direct Current (HVDC) line; (b) ending the main trunk-line from Bolivia in Sao Paulo and building another pipeline from Argentina to provide energy in South Brazil; (c) structuring theproject only for power generation; (d) building a smaller diameter pipeline; and (e) using alternative fuels methods of transportinggas such as LNG or using LPG. Most of the cases did not meet one of the main developmental objective of the project, namely,providing an outlet for the Bolivian gas. In other cases, the alternatives proved to be too expensive and benefited a narrow range ofpopulation. After careful comparisons with other options, the current project design was preferred because of its relatively higheconomic rate of return and desirable environmental benefits, and smaler increase in capital cost compared to advantages of havinga bigger diameter pipeline.

9. Major relatedprojectsfinanced by the Bank andlor other development agencies (completed, ongoing andplanned).

Set*rIse Prow Laest Form 90

(Bank-financed projects__ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ ___ _ _ _ ___ onlvj

Bank-fmanced IP DO

Sustainable energy supply, pricing reform, techmcal Sao Paulo Gas Distribution Project S Sregulations. (3043-BR)

Sustainable energy supply, environmental management. Hydrocarbon Transport and Processing S SProject (3376-BR)

Institution building, privatization Argentina Public Enterprise Reform S SExecution Loan - PEREL (3292-AR)

Trans-national pipeline, use of escrow accounts, cross- Bolivia: Gas Pipeline Project (0635-BO) S Sborder risks, limited-recourse finance

Institutional development, diversification of energy mix Tunisia: Second Natural Gas Pipeline S SProject (1864-TU)

Private-sector participation, cross-border risk mitigation Chad-Cameroon oil pipeline(under preparation)

10. Lessons learned and reflected in proposedproject design:

With the exception of the Yacuiba (Bolivia/Argentina Gas Pipeline Project -0635-BO) and Tunisia (Second Natural GasPipeline Project- 1864-TU) pipelines, constructed 25 and 17 years ago respectively, the Bank has not financed other trans-national oil or gas pipeline projects in recent history. This is due to considerations such as: risk mitigation between the countries,

Project Appraisal Document Page 7Brazil: Gas Sector Development Project - Bolia-Brazil Gas Pipeline

harmonition of financial parameters, and the need for policy coordination along the whole gas chain. Since the proposed projectwill be the Bank Group's first project supporting a trans-national gas pipeline with financial support from private sector sponsors,public sector, and official creditors, there is no specific experience in Brazil or elsewhere which applies to the proposed project.TheBank's oil and gas lending strategy recognizes the difficulties in funding and implementing such projects, and has identified them ashighest priority for Bank support. Soundings of the market have unequivocally demonstrated that any private participation in debtfinancing is dependent on and takes substantial comfort from direct multilateral participation.

The Bank's experience in gas sector projects in Brazil primarily relates to the Sao Paulo Natural Gas Distribution Project.This was adversely affected by: (i) serious delays in project implementation due to deficient internal procurement procedures withinCOMGAS; (ii) lack of commercial orientation within COMGAS which, together with a freeze of tariffs imposed by the FederalGovernment for macroeconomic reasons, resulted in failure to meet the Bank's financial covenants; and (iii) interference from theState Government. However, procurement problems were solved with the adoption of standard procurement documents and financialconditions are improving as a consequence of improved efficiency. COMGAS is now preparing for privatization and a largeexpansion in its distribution activities. The proposed project is to be managed by a committee formed of both the private and publicsector partners who are all world-renowned oil and gas companies with well-defined commercial objectives. Since the project alsocounts on private risk capital and is structured through back-to-back take-or-pay contracts along the gas supply chain, the privatesector partners will not accept delays in project implementation and have sufficient incentive to expedite procurement on a timelybasis. In addition, the project seeks to implement a legal and regulatory framework which will preclude arbitrary interventions by theGovernment on fuel pricing in the future.

Other lessons derived from recent energy projects in Brazil, are: (i) linking effectiveness of loans and loan disbursements tothe adoption of macroeconomic or sectoral measures (e.g. financial rehabilitation) has not been effective in past operations in Braziland has undermined the credibility of the financial covenants. The approach used in the proposed project is to work in parallel, butseparately, on macroeconomic/sectoral issues and project (pipeline) specific issues. To this end, the Bank is financing technicalassistance activities for the hydrocarbon sector through an existing loan (3376-BR); (ii) successful projects have heavily relied onstrong project management teams with authority to make timely and difficult decisions; and (iii) the commitment of the borrower,especially in terms of the timely availability of counterpart resources, is a must for successful completion of the project.

The Bank's Public Enterprise Reform Loan for Argentina (PEREL - approved in 1991) was aimed at providing TA tosupport the Government's program to privatize most of the country's inefficient public enterprise sector, including oil and gas. Theloan included conditions to implement: (i) fully deregulated prices, with free imports and exports of petroleum products and naturalgas; and (ii) policy making and regulatory agencies to be restructured in a way satisfactory to the Bank. Many features of theseconditions have direct applicability to the proposed project and have been included in the project design. In addition, the PERELunder-estimated the funds required to finance the sector reform studies, requiring additional funds to be sought. To address this, thefunds currently assigned under loan 3376-BR will be increased depending on the actual cost of the proposed studies.

11. Indications of Borrower Commitment and Ownership:

The project is govemred by a number of contractual agreements from the production of gas to putting it through the pipelineand to its final sale to the distribution companies. On the supply side there is a ship-or-pay contract between Petrobras and theTransCos. which requires Petrobras to purchase gas provided it is tendered. Similarly, on the distribution end, Petrobras has signedlong-term take-or-pay contracts with the state distribution companies. Failure to meet contractual obligations will result insubstantial financial penalties. To ensure timely completion of the pipeline on the Bolivian side, the penalties are specific as to per-day delays in the completion of the works.

Furthermore, TBG will be initially 49% owned by the private sector. Over the life of the project, the private sector isexpected to increase its participation in the project to become the majority owner. The project, thus, contains strong incentives fortimely completion.

12. Value added of Bank support.

In determining its new lending strategy for the oil and gas sector, the Bank concluded that almost all proposed trans-national pipeline projects in developing countries have been in a state of flux over the last 5-10 years. Despite their substantialbenefits to exporting and importing countries and the involvement of reputable sponsors, they do not go forward. The main difficultyis that the perceived risks and complexities increase exponentially when a lumpy investment is physically hooked to the supply inone country and to the markets in another country. Attracting equity and debt financing would thus require a coincidence offavorable plitical and economic conditions in two countries, which can be much more difficult to achieve than in one country.

Prolect Appraisal Document Page 8Brazil: Gas Sector Development Project - Bolivia-Brazil Gas Pipeline

Development of trans-national projects has thus been concentrated in countries offering more stable conditions, either withindustrialized economies on both sides, or with an industrialized country as an importer which has a track record of good institutionsand pricing policies. The Bank's dialogue with potential investors and financiers clearly shows that projects involving twodeveloping countries are unlikely to materialize unless strongly supported by the respective Govermments and by global and regionaldevelopment banks. This applies especially to the Bolivia-Brazil gas pipeline since Brazil does not have a history of soundinstitutional and pricing policies, nor a gas distribution infrastructure in place. Even if Brazil could have such policies fully in placetomorrow, the project could not be implemented for a protracted period without multilateral financing.

While IBRD financing in Bolivia is not an option due to its status as IDA country, we are considering this project in itsentirety. The Bank's involvement in Brazil is thus to be seen as the key element of comfort for sponsors and financiers on both sides.Also, our support strengthens the credibility of Petrobras which is the driving force for both the Bolivian and Brazilian portions. Theprivate equity partners of the pipeline companies consider the Bank's participation instrumental to ensure that institutional reformsin the gas sector and downstream are implemented. A pipeline company shareholder agreement is not yet in place and its conclusionwill depend on mobilization of the financing. Continued involvement of the private partners is thus doubtful without the Bank on theBrazilian side.

Additionally, the Bank has been supporting the reform, and the increase in private-sector participation in the energy sector,through its country dialogue. The proposed project is an important effort by the Government to attract private capital to thehydrocarbon sector. The Bank's direct participation in the project will allow the Bank to continue to exercise its leverage toimplement these refornns. This would be through technical assistance linked to the restructuring of the sector (under an existingloan), and the design and implementation of a rational fuel pricing system which recognizes the environmental costs and benefits ofcompeting hydrocarbon fuels.

Over a course of 3,150 km distance, the pipeline crosses through more than one hundred municipalities and some sensitiveenvironmental ecosystems which harbor endangered species. The Bank's participation in the project will ensure that the projectmeets the appropriate environmental standards in order to minimize any adverse aspects arising from the project.

Block 3: Summary Project Assessments (Detailed assessments are in the projectfile. See Annex 8)

13. Economic Assessment 1 Cost-Benefit Analysis I Cost Effectiveness Analysis E Other [Specify](See Annex 4)

ProiectNPV = US$1,225 Million@12%

IERR = 21%

Southern Leg:NPV = US$707 Million@12%

IERR = 27%

The base case internal economic rate of return (IERR) for the project is estimated at 21%. Project costs include the gaspipeline from Santa Cruz to Porto Alegre, the compressor stations required to meet the full TCO condition, new gas distributionsystems and consumer conversions. The cost of gas equals the volume under the Transport Quantity (TCQ or up to 18MMcm/d ofship-or-pay contract between PetrobrAs and the Transcos) at the price specified in the GSA, plus the volume under the TransportCapacity Option (TCO or up to 6MMcm/d) at a higher price to reflect additional transport costs from Southern Bolivia/NorthernArgentina. Project benefits are based on the net benefits of using natural gas in the various consuming sectors, which takes account ofthe cost of alternative fuels displaced by gas, adjusted for efficiency and other cost differentials. Where gas displaces High-sulfur FuelOil (HSFO), an environmental premium is included.

Sensitivity Analysis: The base case economic evaluation is based on up to 80% capacity utilization of the pipeline and a crudeoil price of US$181bbl. Based on these assumptions, the IERR was calculated to be 21% for the pipeline as a whole and 27% for thesouthern leg. The project becomes marginal only if (a) capital and operating costs are 70% more than used in the analysis, or (b)

Project Appraisal Document Page 9Brafil: Gas Sector Developme Project - Bolivia-Brazil Gas Pipeline

benefits are reduced by 25%.

Fiscal Impact: No taxes will be levied on construction of the pipeline in Brazil. During operations however, TBG will befully taxable. Based on current tax rates, the Brazilian Government wiU receive over 20 years taxes from pipeline operations and valueadded taxes from gas sales amounting to about US$2,550 million in current or US$670 million in present value terms. Further taxeswil be paid at the level of state gas distribution companies and end consumers. However, at this point no estimates on the amount ofthese additional taxes are available. On the Bolivian side most construction expenses will be exempt from taxes. GTB will be fullytaxable during operations, however. Based on current tax rates, the Bolivian Government would receive about US$180 million incurrent or US$40 million in present value terms from the pipeline operations over 20 years. While the tax effects of upstream gasproduction activities are expected to be considerably higher, they have not yet been assessed.

14. Fnancial Assessment (see Annex 5): NPV@1o20/% = 226-1,423 Million (nominal, after-tax)

IFRR= 9.0%/o-14.5% (real, after-tax)= 12.90/o-18.5% (nominal, after-tax)

The low estimate of the IFRR (internal financial rate of return), based on financial projections for TBG (Annex 5), takes intoaccount only costs and revenues related to the contractual gas quantities (TCQ), which build up to 18 MMcm/d. The tariff used for thecalculation was the tariff contractually agreed for the TCQ, which will be adjusted by only 0.5% p.a. in nominal terms. The NPVdiscount rate was determined by the assumed return of an alternative long-term low-risk investment in Brazil (e.g. Brazilian Dollar-denominated government bonds). If cash flows linked to additional gas volumes (TCO plus excess capacity-an additional 12MMcm/d) are taken into account, and tariffs for these volumes are assumed to be unregulated (increasing in line with internationalinflation), the IFRR would amount to 18.5% in nominal or 14.5% in real terms. Depending on the additional volumes realized andtariffs implemented, the IFRRs will be somewhere within that range.

The IFRRs are noticeably lower than the IERRs because they do not capture the environmental benefits of the project and donot take into account taxes paid by TBG. However, they are considered to be adequate since there is only minimal downside risk forTBG and the expected equity returns, even purely on the TCQ-basis (18.1% nominal after-tax), have been sufficient to attract privateinvestment. In addition, also for the TCQ-case, the projections show satisfactory coverage ratios for senior debt, amounting to aminimum of 1.38:1 in 2002 and an average of 2.84:1 in the base case, with low sensitivity for the major risks the borrower couldbefacing.

15. Technical Assessment.

The main issue is if gas reserves in Bolivia are sufficient to meet the contractual commitments with Petrobras. Independentcertification has shown that known Bolivia reserves cover about 80% of the 105 bcm needed under the GSA. The risk is mitigated bythe good potential for new discoveries in Bolivia (less than 20% having been explored), where the Bank's records show that if the pastlevel of exploration is maintained, sufficient reserves could be built up to satisfy the contract. Also, the two private productioncompanies which resulted from YPFB's capitalization have committed to yearly expenditures of US$70 million each, exceedingYPFB's past records by two thirds. Petrobras is confident of future discoveries in Northern Argentina from its own explorationlicenses, and has already purchased compressor stations for the pipeline in anticipation of this.

The construction and operation of the pipeline will use standard and well-proven technology and there are no issues. Severalmajor items have already been the subject of international competitive bidding including the pipes, the construction of the trunkline,and several major compressor stations. The project cost estimate is therefore considered reliable.

16. InstitionalAssessment:

Hydrocarbon Law: In 1995, Congress approved a constitutional amendment which lays the basis for abolishing thehydrocarbon monopoly exercised by Petrobris. However, the termination of the monopoly and the implementation of a regulatoryframework for open access required enactment of a new Hydrocarbon Law. This law which includes provision for open access to and afirm timetable for fuel price deregulation was also enacted on August 6, 1997.

Open Access: The main issues affecting open access (defined as access of any shipper to the pipeline) are: (i) the lack ofprovision for open access in the pipeline project agreements and (ii) Petrobras' preferential option in the GSA to purchase gassupplied at Santa Cruz up to the maximum capacity of the pipeline (30 MMcm/d), which could be used to preclude free access toothers. To address these concerns, the Bank has received a policy letter from the Government agreeing to include in the transport

Project Appraisal Document Page 10Brazil: Gas Sector Development Project - BolMa-Brazil Gas Pipeline

authorization a provision of an obligatory open access beyond the uncommitted capacity.

The Regulatory Framework: The implementation of an autonomous federal regulatory agency with supporting regulationsis essential to ensure that meaningful competition is introduced. The Bank has allocated funds from an existing loan (3376-BR) forstudies to design and implement the regulatory framework, and Terms of Reference have already been prepared and agreed with theBank. The Government agreed to present to the Bank not later than December 31, 1998 a proposal for the regulatory framework.

Executing Agencies: The Brazilian section of the Pipeline will be executed by TBG. While TBG will be the borrower of theloan, the actual implementation will be undertaken jointly by SEGEN (Engineering Department of Petrobras) and the private sectorpartners. All sponsors are qualified oil and gas companies with extensive experience in building and operating gas pipelines.

Project Management: The project will be managed by a management committee made up of representatives from allsponsors and responsible for making important decisions regarding the project and the operation of the pipeline. The details on theresponsibility of the Committee were agreed among the sponsors. SEGEN will be responsible for the construction of the pipelineproject

17. SocialAssessment:

Impacts of construction and maintenance operations on local populations will be minimized by locating camps away fromsmaller towns and utilizing local labor. There are several groups of indigenous people, mainly along the Bolivian Pipeline corridor,who are likely to be impacted by the Project. Even if their territories will not be directly crossed by the Pipeline itself, there could beindirect impacts by opening up previously inaccessible areas of forest, which would reduce the forest areas for indigenous use. Sincepartial clearance of the right-of-way in 1993, no evidence of colonization has been detected, although some has been detected in theeastern are of the Kaa-Iya National Park (Gran Chaco). Moreover, impacts on indigenous people have been mitigated by theestablishment of the Kaa-Iya National Park, a protected area, and their participation in the public consultation process on the projecthas been assured. However, in order to prevent any unexpected issues, an indigenous peoples development plan has been prepared forboth segments, and a community relations program will be implemented under the project. Although the indigenous people in theBrazilian pipeline area have had many years of contact with other groups of Brazilian society and are integrated into regional life, theconsultation program concluded that an indigenous people's development program was entailed for indigenous groups in Mato Grossoand Santa Catarina. Minimization of the effects on those inhabitants will be assured by review of additional access roads needed andtheir impact. No resettlement is envisaged along the pipeline alignment.

1& EnvironmentalAssessment: Environmental Category: 3 A [l B El CA full Enviromnental Assessment was prepared for the entire length of the pipeline. Although separate EAs were prepared

under different environmental institutional frameworks, an integrated EA report was produced thus guaranteeing that the sameenvironmental and social impact analysis criteria were applied to both Brazilian and Bolivian segments of the pipeline.Environmental licensing processes have been completed in both countries as well as in the Brazilian States crossed by the pipeline.All studies have been either carried out or updated as necessary following Bank's environmental and social policies and guidelines.Enmironmental benefits of the project include improved air quality due to the use of clean burning natural gas in Brazil, increasedemployment opportunities in both countries and increased public revenues for Bolivia.

Perhaps the main environmental mitigation measure for the entire project has been a careful selection of the pipelinecomdor. Environmental considerations have played a key role in defining the right-of-way in both countries. After the primaryobjective of transporting natural gas from the supply sources to market demand centers had been established, the pipeline route waslaid out based upon envirownental sensitivity mapping. The route was further refined based upon environmental conditions identifiedthrough field work. Ecologically sensitive areas and areas of high population density were avoided to the extent possible in bothcountries. For instance, the route avoided the Canon de la Victoria area in Bolivia. Also, the crossing of the Pantanal area in Brazil,where the alignment was deviated to the south following the existing highway through previously impacted ranching and agriculturalareas, resulted in a longer and hence more costly route.

Direct and indirect impacts were identified and analyzed and appropriate mitigation and compensation measures have beenproposed and included in project planning and costs. In Bolivia, for instance, the project sponsors will make a direct contribution toCABI (the legally constituted entity to represent the Izozog communities and administer the Kaa-Iya Park) and revenues from thiscontribution will be earmarked for the management of parks in the Santa Cruz Department, primarily the Kaa-Iya national Park.

Projet Appraisal Document Page IIBrazil: Gas Sector Development Project - Bolivia-Brazil Gas Pipeline

Construction impacts to terrestrial and wetland/aquatic plant and animal species identified as species of special concern areexpected to be minimal and temporary. Temporary displacement of some species from the construction area will occur, and themovement of some species across the right-of-way will be hampered during construction activities. Another major issue identified wasthe impact of camp location and construction crew behavior on small rural and indigenous communities, specially on the Boliviansegment of the pipeline. An Environmental Construction Plan describing basic environmental construction techniques for the projecthas been developed. This plan includes pre-construction planning and environmental construction methods; erosion andsedimentation control practices, restoration and revegetation; specialized construction methods including waterbody and wetlandcrossing procedures and site specific construction methods for environmentally sensitive areas; measures to prevent, contain andcontrol spills; criteria for camp location and management, and worker behavior norms (hunting, fishing, controlled access to wildlifeareas, etc.).

An indigenous peoples' development plan was prepared for the Bolivian segment of the pipeline. Under this plan, indigenousland titling programs will be financed for groups in the area of influence of the project. The plan also includes natural resourcemanagement and education programs. A similar, yet much simpler plan is being developed (and will be available prior to loaneffectiveness)for the Brazilian side targeting indigenous peoples groups in the states of Mato Grosso and Santa Catarina.

Increased and accelerated gas exploration in Bolivia may lead to upstream impacts in ecologically and culturally sensitiveareas in the country. A Strategic EA analyzed upstream and downstream impacts of gas development and transport and theircumulative impacts vis-a-vis other development projects in the Bolivia-Brazil region. A regional environmental EA, including anenvironmental management plan for gas development activities in the most critical gas development area in Bolivia will beundertaken in the context of the project. This activity will complement Bank-financed programs for the development of environmentalregulations for gas and oil activities in sensitive areas. The Bolivian Government has committed to implement regional environmentalmanagement programs in critical areas.

A comprehensive Environmental Management Plan has been developed for the entire pipeline. Environmental managementand control during project implementation will be guaranteed through: (i) an independent environmental supervision and monitoringfirm that will ensure compliance with all construction related mitigatory measures; (ii) an environmental unit within the supervisionfirm organization that will coordinate all ecological and social compensation program; and (iii) an independent environmentalauditing team that will report directly to project sponsors and multilateral organizations. All these activities have been provided withthe necessaxy budget and resources.

The project's EA report was sent to the Bank and reviewed by the then existing Latin America Region Environment Division(LATEN). A copy of the EA reports has been placed in the Bank's Public Information Center. The reports are available to interestedparties in both countries in addition to the extensive community consultation and public hearings that have been carried out. Anexecutive EA summary in English has been prepared and was distributed to the Board on November 18, 1997 (the full EA was sent tothe PIC before project Appraisal). The EAIA reports are also available on the Internet An Environmental Committee withrepresentatives from the World Bank, IDB, and CAF has worked closely with the government agencies throughout the preparation ofthe extensive environmental work that has been carried out for this project.

19. Aar0cW* try Approach (-n BPlvina andBrD Preparation Implementation Operation

Beneficiaries/community groups (e.g. unions, business IS/CON COL CONleaders, religious leaders, land owners)

Intermediary NGOs (national, local) IS/CON COL CON

Academic institutions IS/CON

Local governments (state, municipal) IS/CON COL CON

Other donors IS/CON CON CON

[Note: IS = Information sharing, CON = Consultation, COL = Collaboration]

Propet Appiaiaal Document Page 12Brazil: Gas Sector Development Project - BolMa-Brazil Gas Pipeline

20. Sustainabiiy

Technically and economically, sustainability of the project's benefits depends on successful gas exploration in Bolivia, and onimplementation of the energy sector reforms in Brazil which will ensure market entry for gas. Socially and environmentally, theproject will be sustainable if during construction and operation environmental rules and regulations of both countries are adhered to,international good practice is followed, and the environmental and social measures are implemented as included in the project.

21. Criicd Risks (see fourth column ofAnnex 1):

Risk Risk Rating

Project outmuts to develonment obiectives

Continued macro-economic stability in Brazil Medium Multilateral technical and financial support

Economic stability and low interest rates in external Medium Exogenousmarkets

Implementation of the hydrocarbon law Medium The Bank is supporting the implementation through thehelp of experienced consultants as well as a number ofrelated studies.

Continued commitment by the Government to reform Low On-going technical assistance to incorporateof the hydrocarbon sector. environmental penalties on polluting fuels and wide

. ____________ dissemination of the benefits of natural gas.

Appropriate regulatory environment Medium Bank-financed technical assistance to support anindependent regulatory agency

Proiect components to outputs

Construction delays and cost overruns Low EPC contract carried out by Petrobras on the Bolivianside and by sponsor-management on the Brazilian side;completion guarantees and cost overrun coverage bysponsors. Provision of delay penalties and liquidateddamages; appropriate construction all-risk insurance.

Technological Low Use of well-known standard technology which isapplied world-wide in similar projects.

Technical, operating and maintenance Low Pipeline projects imply by design low technical risks;operations and maintenance are straight-forward; thetwo pipeline companies will be staffed and assisted bythe sponsors which have extensive experience inoperating similar projects world-wide. Appropriateinsurance cover will be obtained. Sensitivity of cashflows to operating costs is minimal.

Revenues Low Minimum tariff revenues, guaranteed by Petrobris,assure sufficient cash flow for operations and debtservice, if gas available. Contractual obligation to starttariff payments even when start of operations delayed.

Project Appralsal Document Page 13Brazil: Gas Sector Development Project - Bolivia-Brazil Gas Pipeline

Supply: Proven reserves are currently not sufficient for Medium Tariff revenues are guaranteed by YPFB pro-rata forcontractual period; possibility of supply interruptions. any gas shortfall. While YPFB is financially weak, the

risk of non-compliance is mitigated by the businessstrategy of the newly capitalized gas production andtransport companies in Bolivia, by experience of theirprivate shareholders, and their commitment to investUS$ 835 million,

Pricing Low Transportation tariffs have been set to assure adequatecash flow of transportation companies; gas purchaseprice and adjustment formula are in line withinternational prices; end-price to consumer isinternationally and domestically competitive.

Markets High PetrobrAs has concluded agreements with GasDistribution Companies in five states covering itsminimum gas purchase commitment, as well asunderstanding to supply new power plants; marketsurveys and evidence from field visits show marketdemand considerably exceeding contractual quantities.

However, distribution networks are incomplete and theirexpansion is not part of the project.

Inflation Low Domestic inflation affects only some operating costswith minimal effect on financial viability and debtservice. Impact of international inflation gas prices willbe similar to movements of other energy prices, givenBrazil's objective to fully implement market-basedpricing.

Devaluation Low Tariff revenues and debt service obligation are definedin US $.

Interest Rates Low Interest on the project debt will be fixed to the extentpossible.

Non-Convertibility Low Considerable weight of multilateral agencies' fundingin project financing plan; higher availability of foreignexchange through displacement of imports, long historyof Petrobras access to foreign exchange for its core andrelated businesses.

World Bank Guaranteed Bond Issue High The interest rate spread/tenures for the Brazilian debthave deteriorated recently in the wake of the recentcrises in the Asian capital markets. If these conditionspersist, it may not be possible to have a bond issuecompatible with the needs of the Project. Under thisscenario, different options will need to be evaluated tocover the financial gap, including new multilaterallending in support of the project.

Overall proiect risk ratin!

Outputs to objectives Medium

Components to outputs Medium


22. Possible Controversial Aspects:

No external controversial aspects are foreseen at this time of project preparation. There are, however, concerns within theBank Group whether the Bank should be at all involved with the construction of the Pipeline, or should it be done entirely in theprivate sector using commercial financing

There are basically only two financing structures which can be considered for this operation:

a) A project financing structure (limited recourse) where all the financing is provided by the private sector;

b) Sovereign guaranteed debt from multilateral/bilateral sources with some equity participation from privatesector.

Even if it were possible to restructure the project and use a project finance structure, it would raise the following issues:

* Restructuring would require more time ( at a minimum two years) to mobilize financing than available underthe current schedule.

* Private commercial financing would be of shorter duration and more expensive, thereby requiring a higher citygate gas price.

* Under the project finance structure the Brazilian Government/Petrobras would have to underwrite the sovereignrisks including some nsks in Bolivia as well as the demand risk. The benefit to the Government in terms of risksharing will therefore be very limited.

* Any change in structure would require a commitment from the Brazilian Government and the private partnersto restructure the transaction, backed by commensurate resources. The current equity investors would need totake lot more risk than under the current structure.

In view of the above, the current financing plan for the Brazilian portion is based on the second structure. Moreover, becauseof the long gestation and low revenue in the initial build up period, the project would need multilateral debt which has substantiallylonger tenor than the bilateral debt.

Block 4: Main Loan Conditions

23. Significant Loan Conditions:

A. Conditions of Effectiveness

* Environment/Social: Employment of environmental supervision consultants

* Environment/Social: Employment of an independent environmental auditor.

* Environment/Social. Issuance of the Brazilian IPDP.

* Gas Sector Studies: Commencement of the consulting services.

* Project Arrangements: Effectiveness of the Brazilian Project Agreements and sponsor equity commitments.

* Partial-credit Guarantee: Issuance of a request for proposals to a short-list of potential arrangers for the Bondissue.

* TBG Structuring: Engagement of the key technical, administrative, and financial staff.

Project AWppraa Document Pag 15Bad: G Sector Dwelopment Projec - E0 Ma-Brazl Gas Pipeline

B. Loan Conditions* Environment/Social: Execution of the EMP and IPDP on both the Brazilian and Bolivian sides.

* Environment/Social: Receipt of environmental supervision and environmental audit reports every two monthscovering both the Brazilian and Bolivian sides.

* Environment/Social: Contractual arrangements for the ecological compensation programs under the BrazilEMP by July 31, 1998.

* Environment/Social: Submussion of a Vegetation Management Plan by July 31, 1998.

* ProjectArrangements: Submission of a plan for pipeline operation by July 31, 1998.

* ProjectArrangements: Demonstration of contractual arrangements with Bolivian transport entity 12 monthsafter the Signing Date.

* ProjectArrangements: Submission of a report describing risks and recommending insurance coverage sixmonths after the Effectiveness Date.

* Financial covenants as described in 1133, Annex 5

* Receipt of project progress report every four months.

* Issuance to operate the Brazilian portion of the Pipeline in accordance with agreed principals.

* No later than November 30, 1998 furnish plans to reduce Petroferil's participation in TBG to a minority level.

* Hold meetings with the Bank in June and December 1998 to access progress in the actions to be taken underthe Policy Letter.

Block 5: Compliance with Bank Policies

3 This project complies with all applicable Bank policies.

[T.he following exceptions to Bank policies are recommended for approval: . The project complies with allother applicable Bank policies.]

Task Manager , Country ManagerNelson de Franco 27" Gobind T. Nankani

Project Appraisal Document Page 16Bragl: Gas Sector Devlpment Project - BolMa-Bmzil Gas Pipeline

Annex 1Project Design Summar

Nwgrrtive SOMA Ke Arfurnmeideateni AMonitorlng ad~ SWervluio Cri*cal A=sumption. Risk

CAS Objective

1. Brazil: To support 1.1. Level of private Economic data collected by the 1.1. The Governmentinfrastructure investment in the gas Brazilian Government continues to undertake keydevelopment by helping to sector in Brazil policy reforms to cut fiscalmobilize private capital deficit.for needed investments, 1.2. Level of privatewith a secondary emphasis investment in Brazil 1.2. External environmenton financing critical continues to be favorableinfiastucture in areas with low interest rates.where market-basedfunding is clearly 1.3. The Government does notimpossible to obtain at this reverse the economictime. liberalization efforts.

2. Bolivia: To develop the 2.1. Export performance of Data submitted by YPFB 2.1. Capitalization program isproductive and export Bolivian hydrocarbon concluded successfully.potential of its most sector after the flow of gasimportant natural to Brazilian market. 2.2. No big discoveries ofresources - natural gas inhydrocarbons, minerals South/Southeast Brazil.and land.

Project DevelopmentObjectives

1. Develop a gas market in Total gas consumption DNC statistics Support of Government policySouth/South East Brazil South/Southeast Brazil for the use of gas in powerand create an export generation.market for Bolivian gas. Prevention of investments in Eletrobras information

expensive energy alternatives Sufficient gas reserves inBolivia.

Level of Bolivian hydrocarbon Data from upstreamexports producers/Bolivian

Government.

Project Outputs

1. opening of the 1.1. Operation of the Pipeline Government data 1.1. Passage of thehydrocarbon sector to based on "open access" for hydrocarbon law;private investments and the uncommitted capacity Verification by Bank missionsincrease competition; of the pipeline 1.2. Continued macro-

Trade publications economic stability in1.2. Establishment of the Brazil;

needed distributionnetworks through majority 1.3. Falling and low realprivate-sector led finance interest rates in Brazil;

Baseline and targeted values should be shown, with the latter divided into values expected at nid-term, end of project and full inpact.

Form: PAD


Annex 11.3. Establishment of an 1.4. Economic stability and

independent & transparent low interest rates inregulatory agency external markets;

1.4. Level of investment in the 2.1. Continued comnmitmentbyhydrocarbon sector. the Govermnent to reform

the hydrocarbon sector;2. removal of economic 2.1. Adoption of a formula to

distortions in the automatically adjust the 2.2. Non-discriminatory policyhydrocarbon sector; ex-refinery prices of in the power sector;

products in line withinternational prices; 3.1. Continued commitment by

the Government to combat2.2. Removal of cross subsidies environmental pollution;

in petroleum productsrelated to transport and 4.1. Aggressive demanddistribution margins; growth (about 5-6% per

year)2.3. Adoption of distance-

based gas transport tariffsfor the Bolivia-Brazilpipeline for uncommittedcapacity (above TCQ);

2.4. Establishment of rationalhydrocarbon fuels pricingpolicy that takes intoaccount environmentalconsiderations;

3. substitution of high sulfur 3.1. Reduction of the sulfurfuel oil (HSFO) and other content of fuel oil in a costpolluting fuels by natural effective way;gas;

4. mitigation of looming 4.1. Capacity of gas-firedpower shortages in Brazil. power plants in

construction or planningin South/Southeast Brazil

Project Components

1. Construction of the Gas (US$2, 086Million) Verification by Bank missions 1.1. Timely financial closurePipeline; of the pipeline project

1.1. First flow of gas to SaoPaulo market by the end of1998.

1.2. First flow of gas to PortoAlegre market by the endof 1999.

2. Institutional and 2.1. ex-refinery prices ofRegulatory Reforms petroleum products in line

with their import parityprices

Form: PAD

Project Appraisal Document Page 1sBrazil: Gas Sector Development Project - Bivia-Brazil Gas Pipeline

Annex 1

2.2. free imports and exportsof petroleum products;

2.3. Non-discriminatory accessby independent importersand exporters to storageand marine terminalfacilities;

2.4. Establishment of anindependent andtransparent regulator

2.5. Separation of Petrobras oiland gas activities

Form: PAD

Project Appraisal Document Page 19Bnmil: Gas Sector Development Project - Bolivia-Brazil Gas Pipeline

Annex 2

Detailed Project Description

The Project comprises a 32-inch gas pipeline from Rio Grande in Bolivia to Sao Paulo inBrazil, continuing with a smaller diameter southern leg (24 to 16 in.) to Porto Alegre. Thepipeline is 3,150 km in total, of which 2,593 km is in Brazilian territory. The total investments inthe pipeline, including financial costs but excluding phased compression costs, are estimated atabout US$2.1 billion of which about US$1.6 billion would be in Brazil. The capacity of thepipeline will be 30MMcm/d which compares with a gas supply ceiling of 16MMcm/d specified inthe gas import agreement with Bolivia. Gas would be transported from Bolivia to Brazil by twoseparate national transport companies with participation from all sponsors. Petrobris' ship-or-payagreement with the transport companies is for up to 18MMcm/d (Transport Contract Quantity -TCQ). The project sponsors have agreed to proceed with the larger capacity pipeline on thelikelihood that larger supplies will become available at a favorable incremental cost. TheTransport Capacity Option (TCO) related to part of the extra-capacity of the pipeline beyondTCQ up to the amount of 6MMcmd/d was purchased by Petrobras at a cost of US$383 million.

Project Component 1 - US$436 million

This component is related to the cost of developing and constructing the project on theBolivian side. Petrobris has won a turnkey contract for the construction of the Bolivianportion of the 557 km pipeline from Rio Grande in Bolivia to the Bolivian Border nearCorumba in Brazil at a cost of US$350. Other costs under this component include'working capital, interest during construction, development, and management costs. Thiscomponent will not be financed under the Bank loan.

Project Component 2 - US$1,421 million

This component support the construction of the main trunkline from Corumba to SaoPaulo (Campinas), continuing with a smaller diameter southern leg to Porto Alegre andlateral line between Campinas and Guararema. The cost of the component includes:construction cost of the main trunk-line and the southern leg, construction of onecompression station at Penapolis, procurement of pipe, valves, fittings, and installation oftelecommunication and SCADA system The Bank loan will finance the construction costof the southern leg.

Project Component 3 - US$229 million

This component includes all the soft costs related to the Brazilian section of the pipelinewhich include: interest during construction, development and management costs, debtservice reserve fund, and working capital.

Form: PAD

Project Appraisal Document Page 20Brazil: Gas Sector Development Project - Boivia-Brazil Gas Pipeline

Annex 3

Estimated Project CostsBrazilian Section(Current US$ Million)

7 aba Campinas- Campinas-Cfflq*W PON Akgrm4 6'upgar

Direct CostsPipe 335 129 21 485Valves 11 3 - 14

Trunk-line Compression 48 16 64SCADA 4 2 - 5City Gates/Measuring Stations 13 10 3 26Construction Works 305 220 24 549River crossings/Primary setup 29 12 1 42

Land Expropriation 13 18 - 31

758 410 49 1,216

Engineering/ManagementProject Design 2 1 - 3Studies 2 1 0 3Management 41 15 1 57Environment Management 16 9 - 25

61 26 1 88Soft/Financial Costs

IDC 84 52 10 146Upfront/Commitment Fees 12 4 1 17Working Capital 2 2 - 4Deferred Development/Transaction Costs 38 22 60Miscellaneous 2 - - 2

138 80 11 229

Total Base Costs 957 516 61 1,532

Physical Contingencies 58 24 4 87Price Contingencies 12 17 1 30

Total Costs 1.027 557 66 1,650

Form. PAD


Annex 4

Economic Evaluation

A. Background

1. A cost-benefit analysis is presented which evaluates the economic benefit to Brazil of theproposed project. Project benefits are estimated by calculating the net benefit of using gas (thenetback value) based on the cost of alternative fuels displaced and adjusted for efficiency andother cost differentials, plus an environmental premium where natural gas displaces more pollutingfuels. Where alternative fuels are tradable, benefits are based on the border prices plus internaltransportation costs. Project costs include the cost of gas supply at the inlet of the pipeline inBolivia, the investment and operating costs of the pipeline, the costs of gas new gas distributionsystems in Brazil, and the cost of converting existing consumers of alternative fuels to natural gas.All costs exclude taxes, duties and financial costs. The distortions in the exchange rate and thesignificance of wage rates in the overall costs are not deemed sufficient to justify the use ofshadow prices.

2. Both the cost of gas supply, and the value of gas in the market, are defined at the point ofthe City Gate, according to the following relationships in terms of US$/MMbtu:

Cost of Gas = Gas Cost (Bolivian Contract) + Cost of PipelineTransportation

Gas Netback = Value Fuels Displaced - Conversion Cost - DistributionValue Cost

The Gas Netback Value at the City Gate is calculated as the discounted value of the fuelsdisplaced by natural gas, less the cost of converting existing installations to natural gas, less thecost of gas distribution.

3. The evaluation calculates the internal economic rate of return (IERR) for the project in itsentirety and the net present value (NPV) of the benefits assuming an opportunity cost of capital of12%. Also, the IERR's for the project in its main component parts are calculated which comprise:(i) the trunkline from Santa Cruz to Campinas (Sao Paulo) and, (ii) the southern leg fromCampinas to Porto Alegre viewed as a marginal project. Sensitivity analyses are included to showhow the economic viability of the project would be affected by variations in project benefits,availability of gas supply, cost overruns and delays in project implementation.

B. Proiect Alternatives

4. The following alternatives to the project were considered:

(i) No Importation of Gas: This represents a scenario of increasing reliance onimported petroleum fuels. Currently, Brazil is large importer of diesel and LPG. Fueloil is more or less in balance, with about I million tons/y exported. Since 1994, there

Project Appraisal Document Poeg 22Brazil: Gas Sector Development Project - Bolivia-Brazil Gas Pipeline

Annex 4

has been an increase in the consumption of natural gas by 33%, LPG and diesel by20%, and of fuel oil by 11%. Petrobras' refinery strategy is driven by the growingdemand for diesel oil and LPG, and is implementing a refinery upgrading program toconvert heavy residual oils to the lighter products (which reduces the availability offuel oils). The growth in demand for these fuels is expected to continue, boosted bythe demand for thermal power generation (see below). Gas importation will displaceLPG and take up growth in the demand for fuel oil, which could remain as smallexportable surplus or become deficit if used for therrnal power generation. Importedgas will also displace fuelwood and some charcoal. Since the delivered economiccost of Bolivian gas is less than the economic cost of alternative fuels, the do nothingalternative can be rejected.

(ii) Pipelinefrom Yacuiba (Bolivia) to Campinas via Paraguay: This so-calledsouthern route was studied early on by Petrobras and rejected in favor of thenorthern route from Santa Cruz to Campinas, on grounds of higher cost (by US$200million), and the complexities of involving three countries rather than two.

(iii) Pipeline from Uruguaiana to Parana (Curitiba): This represents an alternativeproject to the Southern Leg. Petrobras intends to acquire 2 MMcmld gas from YPFto supply a new power plant at Uruguaiana (at the border with Brazil). The projectrequires a new 400 km gas supply pipeline linking into the existing transmissionsystem north of Buenos Aires. The source of gas is the Cuenca de Neuquen locatedsome 1000 km from Uruguaiana, and the gas will be transported to Uruguaiana usingthe existing Argentinian transmission system and the new supply line. There is onlyspare capacity in the Argentinian system during the summer, and the power plant willbe supplied on a seasonal basis. An extension of the project to supply 6 MMcm/d tothe three states on the southern leg would require over 1000 km of new transmissionand compression reinforcements from Neuquen to Buenos Aires, and to Urugaiana,plus a new 580 km pipeline with compression from Uruguiana to Porto Alegre.Comparison of the investment and operating costs shows this scheme would result ina higher gas price to the Southern Leg than the current project. For similar reasons,an extension of the project to supply 2 MMcm/d to Porto Alegre only is rejected.

(iv) High Power Alternative on the Trunkline: This assumes that the gas designated forthe Southern Leg under the base case economic analysis would instead be used fornew gas fueled power generation in Sao Paulo, and therefore represents analternative project to the Southern Leg. The economic base case already assumes1,350 MW of gas fueled power generation will be constructed on the trunkline toaccept gas transported under the TCO, and the diversion of all the gas from theSouthern Leg would require a further 2,500 MW to be constructed in Sao Paulo. Itis expected that most of this additional capacity would need to operate incomplementarity to hydropower to avoid spilling water, which would necessitate thedevelopment of an equivalent secondary industrial market in Sao Paulo. However,the development of a dedicated secondary market of such large size (9.5 MMcm/d)in Sao Paulo is not considered feasible.

Project Appraisal Document Page 23Brazil: Gas Secor Development Project - BolMa-Brazil Gas Pipeline

Annex 4

(v) Importation of LNG to Santos: There is currently insufficient international spareLNG capacity to supply the proposed gas sector expansion in Brazil. In spite of this,an LNG reference price regasified on the Brazilian coast of about US$3.5/MMbtucould be expected, which would not be competitive with the city gate price ofBolivian gas.

(vi) Power Generation in Bolivian with Power Export to Brazil: This would require theconstruction of a gas pipeline from Santa Cruz to the border with Brazil, to transportthe base case volumes to some 6000 MW of new generation capacity. The powerwould then be exported to Sao Paulo with multiple 750 KV electrical transmissionlines. Order of magnitude estimates show that investment cost for this concept wouldbe US$2.5 billion, compared to the cost of the trunldine to Sao Paulo under thecurrent project of about US$1.4 billion, which indicates the transporting energy bypipeline is the lower cost option. Irrespective of this, such power plants would needto be base loaded (there is no secondary market for gas in Bolivia), which wouldrequire large spillage of water under favorable hydrological conditions in Brazil,without meeting the requirements of the industrial sector for an environmentallyclean fuel which is price competitive with existing fuels.

(vii) A Gas Pipeline from N. W Argentina to S-SE Brazil: This would start from the gasfields of N.W. Argentina and extend through the North Eastern part of Argentina tothe S-SE states of Brazil. The concept would rely on the development of existingfields and future discoveries in N.W. Argentina, and require the development of newgas markets in the N.E. provinces of Argentina, Paraguay, and Brazil. It would notmeet the developmental objective to fully exploit Bolivian reserves, and is considereda possible future complementary supply source for S-SE Brazil rather than a directalternative to the current project.

C. Gas SUPDIy and Demand

5. Gas Demand in S-SE Brazil: Bolivian gas will be supplied to Mato Grosso do Sul, SaoPaulo, Parana, Santa Catarina and Rio Grande do Sul, primarily for industrial use and powergeneration. The potential market for gas is shown in Table 1, together with the market in Rio delJaneiro and Minas Gerais', since together these seven states form an interconnected gas market inS-SE Brazil.

6. The potential market for each of the five states is based on recent market surveys withinareas located close to the proposed pipeline, and includes only those fuels which can betechnically substituted by gas (e.g., fuel oils, LPG, fuelwood, manufactured gas). Gas will also beconsumed in relatively small quantities as a transport fuel and in commercial uses. Fuels with a

IIncluded are the markets currently supplied with domestic gas in Sao Paulo (3MMcm/d) and Rio (3.8MMcm/d).


Annex 4

very low economic cost (e.g., bagasse) are excluded, and a growth in energy demand of 3-4%.p.a. is assumed. Market penetration in the industrial sector will be largely determined by the rateat which new gas distribution networks can be constructed and consumers hooked up. Therealizable demand for industry is taken as the gas volumes which the states have committed toabsorb under the take or pay contracts already signed with Petrobras, and which accounts for14.3 MMcm/d (Attachment 1).

7. With respect to power generation, a recent joint study by the Bank and Eletrobras showsthat 3,600 MW of gas fueled power generation can be economically inserted into the S-SE powersystem by 2005, but much of this would operate in complementarity to hydropower. However,the realizable demand for gas in power generation is constrained by the rate at which independentpower plants (IPP's) can be brought on stream, and demand forecasts are thus based on a numberof specific projects currently under development. These include three plants to be developed onthe trunkline (Mato Grosso do Sul, Rio de Janeiro and Sao Paulo) under an agreement betweenPetrobras, Eletrobras and BNDES, for capacity totaling 1,350 MW. These will be supplied underthe TCO and consume up 6 MMcm/d natural gas, with first units onstream by 1999 and fullcapacity assumed by 2004. Several other projects are under development by private consortia and900MW of these are assumed implemented by 2004, utilizing transport capacity under the TCQ(up to 3.5 MMcm/d). The total realizable demand for gas in power generation is thereforeestimated at 9.5 MMcm/d.

8. Gas Supply includes domestic production and gas supplied through the import pipeline.Domestic production from known fields includes free gas from Santos (Merluza) and associatedgas from Campos. Excluding gas from new discoveries, this is expected to reach about13 MMcm/d by 2005.

9. The Gas Sale Agreement between YPFB and Petrobras specifies a gas volume of8 MMcm/d initially and increasing linearly to 16 MMcm/d by the eighth year of operation, andremaining at that level for the 20-year duration of the contract. This represents a commitment todeliver 105 bcm. Certified reserves in Bolivia indicate that, taking account of Bolivia's ownrequirements, about 82 bcm would be available for export to Brazil from proven, probable andpossible (risked) reserves. The known reserves are located in the area between Santa Cruz and theArgentine border and are sufficient to fulfill the contracted deliveries for at least the first 10-12years of the contract with a shortfall of about 20 bcm thereafter.

10. The potential for new discoveries in the Bolivian Sub-Andean are estimated at 160 bcm,and development of a typical new discovery (45 bcm) within a ten year time-frame wouldeffectively eliminate the shortfall noted above. The capitalization of YPFB commits the privatesector to invest substantially in exploration and production in Bolivia, and the risk that theadditional gas will not be discovered and developed is considered slight.

11. Gas supply under the TCQ would increase the utilization of the pipeline to 18.3 MMcm/dand under the TCO to 24 MMcm/d. The additional gas is expected to come from North-WesternArgentina and cost around 25% more due to the incremental transport costs to Santa Cruz.

Project Appraisal Document Page 25Brazil: Gas Sector Development Project - BolivMa-Biazil Gas Pipeline

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Petrobras expects to secure additional volumes from North-Western Argentina from its own andother exploration interests and has already purchased compressor units in readiness for this.12. Considering the total reserves in existing fields (about 79 bcm), plus the development ofdiscoveries already under appraisal (about 121 bcm), would allow gas availability to meet theTCO condition for at least 12 years allowing for internal consumption in Argentina. The initialsupply availability of Northern Argentine exports for Brazil is dependent on the market for the gasand the intensity of the development to produce the gas. For the base case, the supply under theTCO is assumed to commence at 3 MMcm/d in 1999, reaching 6 MMcm/d by 2004, which bringsthe total gas supply to 37 MMcrn/d over the planning horizon.

Table 1: Potential Market and Supply for Gas in S-SE Brazil(MMcm/d)

2000 2005 2010

Market:

Sao Paulo* 12.92 14.78 16.99

MG do Sul 0.55 0.65 0.78

Parana 1.95 2.32 2.75

Santa Catarina 2.01 2.39 2.83

Rio Grande do Sul 1.99 2.36 2.80

Rio de Janeiro* 4.09 4.15 4.21

Minas Gerais 2.05 2.12 2.51

Petrochemicals 1.0 1.0 1.0

Power Generation 4.0 16.0 24.0

TOTAL Potential Market 30.56 45.77 57.87

Supply:

Domestic (Campos, Santos) 13.6 12.9 12.8

Bolivia (GSA) 8.0 13.7 16.0

Bolivia - Northern Argentina (TCQ) 1.2 1.9 2.3

Northern Argentina (TCO) 3.0 6.0 6.0

TOTAL Supply 25.8 34.5 37.1* includes current natural gas consumption

D. Economic Benefits

13. The economic benefits to the project are calculated through the net benefit (netbackvalues) of fuels displaced by natural gas in industry, and for gas is use in power generation.

Pojedt Appraisal Document Page 26Brazil: Gas Sector Development Project - BolMa-Brazil Gas Pipeline

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Industry

14. Economic Cost of Fuels: For industry, the most important fuels in terms of volumedisplaced by natural gas are fuel oils, fuelwood and LPG, with a lesser contribution from otherfuels such as charcoal which is used to make manufactured gas for the ceramics industry.Relatively small amounts diesel (used by industry and as a transport fuel) and electricity (used infirnaces) will also be displaced.

15. The economic cost of fuel oils, LPG and other tradable petroleum products are calculatedfrom border prices plus inland transportation costs. Border prices are based on fob USGC pricesplus sea freight to Santos (or the closest port to the market), insurance, port unloading and losses.Inland transport and in-city distribution costs are added to give the economic cost at the factorygate, with all taxes and duties excluded. Based on an international crude oil price of US$18/bbl,the economic costs delivered to the industrial consumer in Sao Paulo is estimated atUS$3. lIMMbtu for HSFO (3.5% Sulfur), US$3.4/MMbtu for LSFO (1% Sulfur), and aboutUS$7/MMbtu for LPG. For fuelwood, economic costs are based on estimates of the cost of land,stumpage, logging, transport and handling in Sao Paulo, Santa Catarina and Rio Grande do Sul. Abenchmark economic cost for fuelwood is estimated at US$4.5/NCMbtu. This compares to officialprices of about US$3.6/MMbtu in Sao Paulo and Parana (although actual prices may vary), andthe economic evaluation uses this price as a conservative estimate of the economic cost.

16. Natural Gas Netback Values in Industry: The gas netback values are estimated at thepoint of city gate, using the delivered economic costs of the fuels displaced. This takes account ofdifferences in the net heat content and thermal efficiencies between natural gas and the competingfuel. Where natural gas displaces fuel oil, a convenience premium (US$0.2/MMbtu) is included toreflect the avoided costs of fuel oil storage and handling. In the case of HSFO, a premium(US$0.3Mlbtu) is also included which is equivalent to the international price differentialbetween HSFO(3.5%) and LSFO(1%) over the last decade. This sets the value of gas on par withLSFO which is considered the major industrial competing fuel within mature gas industries ofdeveloped countries, and the premium is considered a proxy to reflect the environmental benefitsof gas over HSFO. The premium is considered conservative with respect to reducing sulfur levelsat the refinery level, or at the end consumer level, and results in a city gate netback2 value ofUS$3.24/MMbtu where gas displaces HSFO.

17. The ceramics industries in Santa Catarina represent high value markets for natural gas.During the last three years, many of the ceramics industries have switched to LPG, instead ofmanufacturing their own gas from charcoal or coal feedstock. Where LPG or manufactured gas isused, the opportunity cost of natural gas in substitution is set at the economic cost of LPG,resulting in a city gate gas netback value of US$5.5/MMbtu.

18. The Competitivity of Natural Gas on the Trunkline and the Southern Leg; Theeconomic evaluation uses the following city gate netback values for gas use in industry in the five

2 All netback values are presented in terms of Lower Heating Value


Annex 4

states, expressed in terms of lower heating values: Mato Grosso do Sul (US3 .36/MMbtu), SaoPaulo (US$3.541MMbtu), Parana (US$3.991MMbtu), Santa Catarina (US$4. 16/MMbtu) and RioGrande do Sul (US$3.67/MMbtu). These are derived from a weighted average of the competingfuels to be substituted by gas and include the premia described above. The elasticity of industrialgas demand to price is shown in Attachment 2.

Power Generation

19. The 1,350 MW gas-fueled power plants noted earlier are expected to operate at or closeto base load. For these, the value of gas is calculated assuming combined cycle plant with smallturbines (about 150 MW) with investment cost excluding taxes, with continuous operation at 75%load. The economic benefits reflect the marginal cost for generation expansion in the S-SE Brazil(US$40/MWh), which results in a city gate netback value of US$3 .4/MMbtu.

20. Other plants are expected to operate in complementarity to hydropower. Over the nextfive years the risk of deficit in the S-SE is substantially higher than the 5% planning level used byEletrobras, and the system dispatch would permit gas fueled plants to operate at load factorstypically 75%. Five to ten years out, the plants could be economically dispatched at average loadfactors closer to 60%.

21. However, the operational load factor in any single year is unpredictable. If the plantoperates at low load factor, the generators will have to pay the full firm cost of gas as thoughoperating at high load factor (comprising the reserved pipeline capacity charge plus the gascommodity charge), and divert the excess gas to secondary industrial markets when the plants areturned down. As such, the gas demand for these plants should be taken as if they were operatingat base load. The insertion of such a plant will upgrade a block of secondary energy (assumed tobe worth US$5/MWh) to firm energy (valued at US$40/IWh), equivalent to the capacity of theinserted plant no matter what load factor the plant actually operates. This serves to increase thevalue of gas substantially when used in this way. Where excess gas is diverted to the industrialmarket, it will likely displace high sulfur fuel oils and be sold at a discount to the price of firm gasto reflect its unpredictable supply characteristics. As such the value of gas in these industrialapplications excludes a convenience premium and will only require inclusion of a marginal cost forgas distribution expansion. Here the weighted average gas netback value (power and industry) isestimated at US$4.4/MMbtu for operation of the power plant at 60% load factor and this valuewas used for the economic evaluation.

E. Costs

22. The project investment costs are summarized in Table 2 The major items of line-pipe forthe entire project and construction works for the trunkline have already been subject tointernational competitive bidding and their cost is known with accuracy. The cost of compressorstations reflects the requirement to meet the TCO flow condition, and includes two stationsbetween Santa Cruz and Corumba, five stations between Corumba and Campinas, and threestations on the Southern Leg.


Annex 4

Table 2: Project Investment Costs(US$ Million - January 1997)

Pipeline Compressors Construction E & M Contingenc

y

Rio Grande- 164.8 46.0 143.9 16.9 24.4CorumbaCorumba- 363.5 115.0 334.2 48.7 99.2CampinasCampinas-Porto 143.0 53.0 231.1 17.1 65.9AlegreTOTAL 671.3 214.0 709.2 82.7 189.5

Note: Costs exclude Campznas -Guararema section estimated at US$61. 7m; contingency includes cost of land

23. The operating costs for the entire pipeline are estimated at US$33 million per year whenoperating under the full TCO condition, which includes fixed and variable costs and compressorfuel

F. Results of Economic Evaluation

24. The economic evaluation is presented for the entire project, and for the trunkline and thesouthern leg viewed as separate components. The results of the economic evaluation for each ofthese are presented in Attachments 3, 4 and 5 and summarized below:

The Pipeline from Santa Cruz to Porto Aleure:

25. The base case for the entire project uses a gas flow following the TCQ profile plus aramp-up of the TCO to its maximum of 6 MMcm/d by 2004, with costs of gas and competingfuels based on US$18/bbl for crude

26. Project Costs include (a) volumes of Bolivian gas at Rio Grande according to the GSAcommencing at US$1. I/MMbtu with price increasing in line with the GSA, (b) TCO volumes ofgas from Southern Bolivia or Northern Argentina at US$1.45/MMbtu at Santa Cruz, (c) thecapital cost of the 32 inch trunkline plus the southern leg including contingency, (d) the cost ofthe Campinas-Guararema pipeline (US$61.7 million), and (e) the necessary compressor stations tomeet the TCO condition (US$192 million). New gas distribution systems plus the costs ofconverting existing consumers to gas are estimated at US$0.65fMMbtu.

27. Project Benefits are estimated using the net benefit of natural gas according to volumesspecified in the gas supply agreements between Petrobras and the five states. Industrial useaccounts for 14.8 MMcm/d of gas supplied under the TCQ, with power generation accounting forthe remaining 3.6 MMcm/d of the TCQ plus the TCO volumes. Where gas displaces High SulfurFuel Oil, environmental and convenience premia are added.


Annex 4

Entire Project IERR = 21%NPV (at 12% discount rate) = US$1.23 billion

The Trunkline from Santa Cruz to CamDinas:

28. The base case for the trunkline uses 8.6 MMcm/d contracted for Mato Grosso do Sul andSao Paulo, plus 6 MMcm/d for power generation supplied under the TCO.

29. A 10% reduction in the cost of the trunkline is assumed to reflect the marginal cost oftransportation capacity assigned to the southern leg, with compressor station investment andoperating costs reduced accordingly.

Trunkline IERR = 17%NPV (at 12% discount rate) = US$0.48 billion

The Southern Lee from Campinas to Porto Alezire:

30. The base case for the southern leg uses 6.2 MMcm/d contracted for the three southernstates, plus a build up of gas consumption for power generation rising to 3.5 MMcm/d by 2007,and operating in complementarity to hydropower.

31. The southern markets are viewed as essential to assure early absorption of the gasvolumes already contracted with Bolivia, and the costs include the marginal cost of gas transportthrough the trunkline, plus the full costs of the southern leg.

Southern Leg IERR = 27%NPV (at 12% discount rate) = US$0.75 billion

Sensitivity Analyses

32. The sensitivity of the project's economic viability to variations in the major assumptionsare summarized below:

33. Shorfall in Gas Supply: The loss of TCO gas from the base case (and any correspondingTCO gas purchase commitments by Petrobras) reduces the IERR of the entire project from 21%to 17%, which then represents the IERR for the TCQ case. The GSA with YPFB requires thedelivery of 105 bcm over 20 years, of which an estimated 80 bcm will come from proven,probable and possible (risked) reserves. Assuming just the 80 bcm can be delivered to fill the earlyyear requirements of the TCQ (which requires 115 bcm in total), the IERR falls only a furtherpoint since the major shortfall is assumed during the final few years.

34. Lower than Expected Demand: The loss of the TCO power generation market reducesthe IERR of the entire project to 17%. In their gas supply contracts with Petrobris, the stateshave agreed take or pay conditions starting at 55% in year one and increasing to 90% by year six.

Project Appraisal Document Pae 30Brazil: Gas Sector Development Project - Bolivia-Brazil Gas Pipeline

Annex 4

An across the board reduction in demand under the TCQ (and corresponding gas purchasecommitments by Petrobras) equivalent to these minimum take percentages further decreases theIERRto 14%.

35. Fall in Crude Oil Prices: The base case economic analysis uses an international crude oilprice of US$18/bbl, which is close to the current level and consistent with the Bank's long termforecast. The IERR for the project is quite robust to changes in crude oil prices, buffered by themarket for gas power generation the substitution of those fuels which are not affected by the priceof crude.

36. Delay in Project Implementation: A delay in implementing the entire project by twoyears results in a decrease in NPV of about US$0.2 billion at the discount rate considered. Thetimely implementation of the southern leg and associated gas distribution systems are necessary toensure that Petrobras' contractual commitments to take Bolivian gas can be met, and that the gascan be onsold in the market. A delay in the construction of the southern leg is unlikely to result ina big increase in realizable demand within the industrial sector of Sao Paulo, since this would bedetermined by the rate of construction of distribution networks. If the trunkline is implemented ontime, and the southern leg delayed by two years, the NPV of the southern leg is decreased by US$0.12 billion at the discount rate considered.

Switchine Values

37. Switching values were determined to assess the impacts on the economic viability causedby variations in the main inputs. It is concluded that the project will become marginal(IERR=1 2%) only if: (a) capital and operating costs are 70% more than used in the analysis, (b)benefits are reduced by 25% with respect to the values used in the base case.

Project Appraisal Document Page 31Brzil: Gas Sector Development Project - Bolivia-Brazil Gas Pipeline

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Attachment 1

Realizable Market for Natural Gas(MMcm/d Natural Gas Equivalent)

Power Generation Industry Trunkline Industry Southern Lea(Under TCO) (under TCQ) (under TCQ) (under TCQ)

Enersul Comgas Compagas SC Gas SulgasM.G.do Sul Sao Paulo Parani Santa Cat RG do Sul

1997 0 0.00 0.00 0.00 0.00 0.00 0.001998 0 0.00 0.00 0.00 0.00 0.00 0.001999 0 0.65 0.36 4.00 0.00 0.00 0.002000 3 0.19 0.37 4.60 1.00 1.80 1.202001 3 0.47 0.38 5.20 1.10 1.85 1.382002 4 0.79 0.50 5.76 1.20 1.90 1.502003 4 1.34 0.52 6.35 1.30 2.00 1.582004 6 1 81 0.52 6.93 1.45 2.05 1.652005 6 2.00 0.53 7.52 1.60 2.15 1.752006 6 2.74 0.53 8.10 1.75 2.20 1.852007 6 3.55 0.53 8.10 1.90 2.30 1.952008 6 3.55 0.53 8.10 1.90 2.30 1.952009 6 3.55 0.53 8.10 1.90 2.30 1.952010 6 3.55 0 53 8.10 1.90 2.30 1.952011 6 3.55 0.53 8.10 1.90 2.30 1.952012 6 3.55 0.53 8.10 1.90 2.30 1.952013 6 3.55 0 53 8.10 1.90 2.30 1.952014 6 3.55 0.53 8.10 1.90 2.30 1.952015 6 3.55 0.53 8.10 1.90 2.30 1.952016 6 3.55 0.53 8.10 1.90 2.30 1.952017 6 3.55 0.53 8.10 1.90 2.30 1.952018 6 3.55 0.53 8.10 1.90 2.30 1.95


Annex 4

Attachment 2

Sensitivity of Industrial Gas Demand to Price

The industrial gas demand (as aggregated over the five states) drops substantially as thegas price exceeds US$2.4/MMbtu as shown below. The main reason for the drop is that naturalgas is likely to lose its competitiveness above this level.

Industrial Gas Demand v City Gate Gas Price: 2000-2010

35.00

30.00

2 25.00

20.00 .. 20~u2005

D 15.00 \-\201O

, 10.00

Ez 5.00

0.00

2 2.5 3 3.5 4 4.5 5 5.5

City Gate Gas Price (US$/MMBTU)

The Government of Brazil has adopted a policy of uniform price (US$2.7/MMbtu) for allcity gates along the pipeline, up to the volumes of Bolivian gas agreed in the GSA. At this price,natural gas is competitive with LPG diesel oil, charcoal, fuelwood and LSFO over the trunkdineand the southern leg. For HSFO, the price competitivity is tighter. However, market surveys inSao Paulo show that consumers are willing to pay up to 15% more for natural gas for itsconvenience in use over fuel oil and where environmental regulations are enforced. If this is takeninto account, there is a shift in the above demand curve to the right which allows the capture ofHSFO at US$2.71MMbtu. The inclusion of such premia sets the value of gas more on par withLSFO, which is considered the main competing fuel within the industrial sector of mature gasindustries in developed countries. It is expected that increasing environmental pressures in Brazilwill tend to influence consumer choice towards using natural gas or LSFO rather than HSFO. Theeconomic costs (and prices) of HSFO in Sao Paulo and over the southern leg are close(notwithstanding variations in internal transport costs), which means that natural gas would bevery competitive with HSFO in these locations with the premia internalized. If the southern leg isviewed as a marginal project, the cost of gas transport to the southern states can be assigned asthe sum of the marginal transport cost over the trunkline plus the full cost over the southern leg.In this case, although the resulting transport costs and therefore the city gate prices of natural gaswould be similar, they would not be exactly equalized.


Annex 4

Attachment 3

Economic Assessment for the Entire Project

Gas Commodity Capital & O rating Cost Total Total Net

Year Flow Gas Cost Trunk-line Southern Leg Cost Benefits Benefits(MMcmtd) (US$MM) (US$MM) (US$MM) (US$MM) (US$MM) (US$MM)

1997 690 36 65.94 756.30 (756.30)1998 - - 589.74 204.79 794.53 - (794.53)

1999 5.00 73.85 53.00 205.37 332.22 222.55 (109.67)2000 12.15 194.77 55.52 19.39 269.68 539.55 269.87

2001 13.38 214.46 56.72 19.47 290.65 596.78 306 13

2002 15.65 . 254.67 35.02 4.80 294.49 696.96 402.47

2003 17.09 278.22 35.92 26.81 340.95 766.19 425.24

2004 20.41 339.30 37.32 5.91 382.53 911.31 528.78

2005 21.55 356.88 27 74 5.93 390.56 964.15 573.592006 23.17 384.17 29.14 5.96 419.27 1,043.14 623.87

2007 24.33 404.81 29 14 6.05 440.00 1,103.74 663.742008 24.33 404.81 29.14 6.05 440 00 1,103.74 663.742009 24.33 407 27 29.14 6.05 442.46 1,103.74 661.282010 24.33 409.74 29.14 6.05 444 92 1,103.74 658.81

2011 24.33 412.20 29.14 6.05 447.38 1,103 74 656.35

2012 24.33 414.66 29.14 6.05 449.85 1,103.74 653.892013 24.33 414.66 29.14 6.05 449.85 1,103.74 653.892014 24.33 417.12 29.14 6.05 452.31 1,103.74 651.432015 24.33 419.58 29.14 6.05 454.77 1,103.74 648.972016 24.33 419.58 29.14 6.05 454.77 1,103.74 648 97j 2017 24.33 422.04 29.14 6.05 457.23 1,103.74 646.51

NPV @ 12% = 1,232.55IERR = 21%

Project Appraisal Document Pape 34Brazil: Gas Sector Development Project - Bolivia Brazil Gas Pipeline

Annex 4

Attachment 4

Economic Assessment for the Trunk-line

Gas Cost of CAP-OPEX Total Total NetYear Flow Gas Trunk-line Cost Benefits Benefits

(MMcm/d) (US$MM) (USSMM) (US$MM) (US$MM) (US$MM)

1997 640.04 640.04 (640.04)1998 - - 534 82 534.82 - (534.82)

1999 4.36 64.32 45.76 110.08 187.94 77.862000 7.97 132.40 47.94 180.34 337.21 156.872001 8.58 142.24 48.73 190.97 363.64 172.672002 10.26 172 85 31.19 204.04 433.97 229.932003 10.87 182.95 31.78 214.74 460.17 245.432004 13 45 231.85 32.71 264 55 567.43 302.872005 14.05 241.11 24.88 265.99 593.42 327.432006 14.63 251.22 25.81 277.03 618.58 341.552007 14.63 252 38 25.81 278.19 618 58 340.392008 14.63 252.38 25.81 278.19 618 58 340.392009 14.63 253.54 25.81 279.35 d 618.58 339.232010 14.63 254.70 25.81 280.51 618.58 338.072011 14.63 255.86 25.81 281.67 618.58 336.912012 14.63 257.02 25 81 282.83 618.58 335.752013 14.63 257.02 25.81 282.83 618 58 335.752014 14.63 258.18 25.81 283.98 618.58 334.592015 14.63 259.34 25.81 285.14 618.58 333.432016 14.63 259.34 25.81 285.14 618.58 333.432017 14.63 260.49 25.81 286.30 618.58 332.28

NPV @ 12% = 488.05[ERR = 17%

Projec Appraisal Document Page 35Brazil: Gas Sector Devebpment Project - Bolivi-Brzil Gas Pipeline

Annex 4

Attachment 5

Economic Assessment for the Southern Leg

Gas Cost of CAP-OPEX Total Total NetYear Flow Gas Southem Leg Cost Benefits Benefits

(MMcmId) (US$MM) (US$MM) (US$MM) (US$MM) (US$MM)

1997 _ _ 116.26 116.26 _ (116.26)1998 - - 259 70 259.70 - (259.70)

1999 0.65 9.53 212.61 222.14 34.62 (187.52)2000 4.19 62.37 26.97 8934 202.34 113.002001 4.80 72.22 27.45 99.68 233.13 133.462002 5.39 81.82 863 9045 263.00 172.542003 6.22 95.27 3095 126.22 306.02 179.802004 6.96 107.46 10.52 117.98 343.88 225.902005 7.50 115.77 8.79 124.56 370.73 246.172006 8.54 132.95 9.30 142.24 424.56 282.322007 9.70 152.43 9.38 161 81 485.16 323.352008 9.70 152.43 9.38 161 81 485.16 323.352009 9.70 153.73 9.38 163.11 485.16 322.052010 9.70 155.04 9.38 164.41 485.16 320.742011 9.70 156.34 9.38 165.72 485.16 319.442012 9.70 15764 9.38 167.02 485.16 318.142013 9 70 157.64 9.38 167.02 48516 318.142014 9.70 158.94 9.38 168.32 485.16 316.842015 9.70 160.25 9.38 169.63 485.16 315.532016 9.70 160.25 9.38 169.63 485.16 315.532017 9.70 161 55 9.38 _ 170.93 _ 485.16 314.23

NPV @ 12% = $754.50IERR = 27%

Project Appraisal Document Pap 36Brazil: Gas Sector Development Project - Bolivia-Brazil Gas Pipeline

Annex 5

Financial Summary

Transportadora Brasileira Gasoduto Bolivia-Brasil S.A.(US$ Million, As ofJune 1997)

Implementation Period Operational Period1997 1998 1999 2000 2001 2002 2003 2004

Project CostsInvestment Costs 604.4 700.8 344.8 49.5 8.7 0.2 22.2 34.1Recurrent Costs 19 1 24.3 25.1 26.0 26.9

Total 604.4 700.8 344.8 68.6 33.0 25.3 48.2 61.0

Financmg SourcesIBRD 55.0 63.7 31.3IBRD Guarantee 65.9 76.5 37.6IDB 87.9 101.9 50.2CAF 22.0 25.5 12.5

EIB 220 25.5 12.5

Petrobras (Jexim/ 127.5 147.8 72.7BNDES)

Shareholders Equity 113.5 131.6 64.9

Petrobras TCO 110.6 128.3 63.1Operating Revenues 187.1 210.5 232.2 256.0 278.1Export Credit Agencies 7.4 0.2 18.9 29.1

Total 604 4 700.8 344.8 191.9 217.9 232.4 274.9 307.2

L Proiect Financing Issues

1. Introduction

1. The World Bank Group's involvement will be the key to mobilization of debt financingand thus implementation of the project, since a suitable commercial financing solution would notbe feasible in the near future. This is principally due to the project's size and complexity, lenders'country risk considerations, the project's cross-border nature, its long gestation period, thenovelty of the regulatory framework in Bolivia, the uncertain timing of scheduled deregulation inBrazil, and a lower degree of proven gas reserves and confirmed gas demand than generallyrequired by commercial lenders.

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Annex 5

2. Private Debt Financing

2. The key obstacles to private debt financing can be demonstrated by a brief review of twoprincipal financing vehicles:

1) Corporate loans raised separately by the sponsors on their own account would not becompatible with normal business practice and balance sheet policies of private sectorcompanies under the given conditions. Based on financial and risk managementconsiderations relating to a project of this size and complexity, private sponsors willseek a limited-recourse solution which allows mobilization of debt financing onaccount of the project, requires only limited sponsor support, and restricts the impacton the sponsors' balance sheets essentially to their equity contributions.

2) A completely private limited-recourse financing package would under current marketconditions not be available for this project, primarily because: (i) the requiredmaturities of at least 15 years are far beyond what external commercial lenders havebeen willing to accept for Brazil, let alone for Bolivia, due to country risk restrictions;(ii) even for shorter maturities (8-10 years) of Brazilian exposure, which are inprinciple feasible, external financial markets require excellent corporate quality of theborrower and are generally not willing to accept the credit risks of a new projectcompany without substantial recourse to the sponsors; (iii) Brazilian financial marketshave neither the experience nor the depth to provide the necessary amounts andmaturities needed to fund the whole investment; (iv) the Brazilian energy markets arenot yet sufficiently deregulated and the gas market not enough developed to pennitdebt providers at this point a reliable assessment of the market prospects; (v) whileBolivia's gas potential is substantial, the current level of proven reserves would not beconsidered adequate by commercial lenders to enter into long-term financingcommitments; and (vi) recent experience shows that mobilization of debt finance isparticularly difficult for transnational gas pipelines. Indeed, the Bank's new oil and gaslending strategy recognizes such difficulties as serious constraints and, accordingly,specifies transnational gas pipelines as the area of highest priority for Bank financialsupport.

3. Even if- despite the project-and country-specific obstacles mentioned above - amarket-based private financing package could be secured, it would under the currentcircumstances' not be suitable for this project. We have simulated the consequences of such afinancing structure, assuming a 10-year final maturity and interest rates approximately at levelsrequired for good-quality Brazilian corporate borrowing (10-year treasury + 350bp), not takinginto account any premium for project risk. The calculation shows that under these assumptionsthe equity returns of the sponsors would decrease from around 18% to 15% (nominal) and wouldthus make the project marginal for private participation. More seriously, however, as a result of

I The following assessment is based on the situation before the serious deterioration of emerging financial marketsin October 1997. The comparative margins at the time of this report would be substantially - at least 50% - higher.However, it is unlikely that commercial debt for the required amount could be raised at all.

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the short maturity, the project would not be in a position to fully service its debt until 2004 andwould thus require additional equity contributions from the sponsors in the early years, leading toan altogether lower financial leverage. This, however, would further reduce the equity returns,and thus the project's attractiveness for private investment.

4. In order to maintain debt service coverage in the early years and preserve attractive equityreturns under these financing conditions, the transport tariff would have to rise by at leastUS$0.20 pushing gas sales prices up to US$2.90/MMbtu and thus beyond the current competitivelimit of US$2.70/MMbtu. Although the transport tariff could be reduced again, when the debtservice levels off, the impact of this structure would counteract the basic objective of the projectby impeding the introduction of gas into the market. This bias would be further compounded bythe fact that gas is competing with fuels (mainly high sulfur fuel oil) whose tariffs do not yet fullyreflect their environmental costs.

5. An alternative to a private financing structure might be fully Government-guaranteed loansor bonds raised on international capital markets. While Brazilian Government and Petrobras(which is seen in the markets as equivalent to sovereign risk) have recently successfully tapped theinternational bond market, only the last sovereign issue of US$ 3 billion (June 1997) had amaturity beyond 10 years and of that amount about US$ 2 billion represented refinancing ofexisting bonds. Given the limited scope for long-term sovereign bond issues, particularlyfollowing the October 97 turnoil in the financial markets, Government backing of bond financingfor the entire project could interfere directly with the Government's external borrowingrequirements. Moreover, due to back-ended repayments, an entirely bond-based financingstructure would have disadvantages for a project with a fairly constant cash flow. An appropriatefinancing plan for the project would thus require a substantial amount of loan funding. However,Brazil's access to international loan markets, even for sovereign borrowing, is even more limited.The first medium-term (3 years) loan to a Brazilian borrower since 1982 was syndicated only inApril, 1997, amounting to US$ 275 million in the name of BNDES. It would therefore bedifficult, even with Government guarantees, to mobilize the necessary amounts of debt under afinancing structure suitable for the project.

6. Finally, as another option Petrobras might have tried to raise the project debt entirely in itsown name. While Petrobris has recently successfully tapped international financial markets, it hasonly in September started preparing for a US$ 200 million bond issue beyond 10 years maturity.Even without the interference of the recent turmoil in financial markets, it is highly unlikely thatPetrobrAs could have raised at this point the entire debt funding needed at terms and maturitiessuitable for the project. In addition, this option would have been incompatible with soundcorporate finance practices since it would have provided full balance sheet support for a projectcompany in which Petrobras has only a 51% stake, that is planned to be reduced to a minorityshare in the near future. Moreover, such borrowing strategy would have increased Petrobras'leverage and thus restricted its capacity to raise financing for its corporate core business. It wouldthus have been inconsistent with the approach needed to meet the challenges of a changingenvironment due to the abolishment of Petrobras monopoly, increasing competition, andpreparation for further privatization of ownership.


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3. Bilateral Sources

7. A financing plan relying mainly on bilateral official sources would not be feasible either,since the agencies responsible (mostly export credit agencies) would principally aim at supportingtheir respective countries' exporters. However, more than half of project costs in both Brazil andBolivia would be for construction and other local expenses and would thus not be eligible forbilateral support. Moreover, these agencies will expect strong commercial or multilateral lendersleading the transaction. In absence of a purely commercial solution, their participation will thus toa large extent be contingent on the comfort they derive from the presence of the Bank Group.

4. World Bank Group

8. For the reasons outlined above, the preliminary financing plan is predicated on substantialmultilateral lending including a traditional IBRD loan, that will be extended to the Brazilianproject company with Government guarantee, and similar loans provided by the IDB and CAF.However, within the context of the needed multilateral support, the preliminary financing planaims at maximizing private financing sources through a bond placement by the Brazilian projectcompany with a partial IBRD credit guarantee. While the exact amounts for the privateparticipation will have to be determined by the markets, initial soundings have resulted in thefigures reflected in the preliminary financing plan. They have also clearly demonstrated that anyprivate participation in debt financing depends on and takes substantial comfort from IBRD'sdirect participation in the project's funding.

5. Financing Plan

9. The total project cost of US$2.09 billion comprises about 21% for the Bolivian part and79% for the Brazilian side. The preliminary financing plan contemplates a 63:37 debt to equityratio. The sponsors' equity contribution amounts to about US$768 million of which US$383million (18%) represents the purchase, by any of the sponsors, of future transportation services.This arrangement, the Transport Capacity Option-TCO, enables the buyer(s) to ship up to6MMcm/d of gas (above the Transportation Contract Quantity-TCQ, which builds up to18MMcm/d) for 40 years without payment of fixed transportation tariffs. Petrobras hascommitted to purchasing the entire TCO. The equity portion, excluding the TCO, amounts toUS$385 million (19%) and consists of share equity and subordinated shareholder loans. Theshareholder loans represent quasi-equity, as they would rank in all respects below senior debt.

10. The equity amounts and composition (excluding TCO) are predicated on the need toassure investors a return on their capital (equity plus subordinated loans) commensurate withmarket expectations. The returns are based on cash flows derived from the contractual TCQ-gasvolumes and transport tariffs and amount for this scenario (base case) to about 18% pre-home-country-tax in nominal, or 14% in real terms. The private partners in the project are multinationalcompanies from different countries with world-wide experience in the energy business. As theyhave various domestic and foreign investment alternatives, any investment of the type proposedmust be weighed against those options. As a point of reference, regulatory agencies of the US andCanada permit nominal after-tax returns of up to 14% in the regulated pipeline business. Given

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the country risks involved, the cross-border nature of the pipeline, the untried regulatoryframeworks in Bolivia and Brazil, the limited development of the Brazilian gas market andconstraints of demonstrated gas reserves, the TCQ case equity returns appear to be in line withthe perceived investment risks.

11. For the Brazilian side, the preliminary financing plan shows equity sources of US$3 10million, a share of the TCO of US$302 million, and US$1,038 million debt which is foreseen to befinanced by direct loans from IBRD (US$150 million), IDB (US$240 million), CAF (US$60million), EIB (US$60 million), Petrobras (US$ 348 million-Jexim and BNDES loans passed on toTBG), and a US$180 million bond placement with an IBRD partial credit guarantee for a bulletredemption at maturity. BNDES has agreed to finance Petrobras' purchase of the TCO. TheBolivian side of the pipeline is expected to be financed through a mixture of US$75 millionequity, a US$81 million share of the TCO, and senior debt of US$280 million provided byPetrobras (of which US$ 150 million from Jexim passed on to GTB. CAF has agreed to financePetrobras' purchase of the TCO.

IL Financial and Risk Analysis

1. Backeround

12. The Government has asked the Bank to lend to the Brazilian project company,Transportadora Brasileira Gasoduto Bolivia-Brazil S.A. (TBG). The request is based onPetrobras' corporate strategy to take only those commitments on its balance sheet for which itcarries full responsibility. While Petrobras is prepared to extend far-reaching support forconstruction and operation of the pipeline, it would like to benefit financially from the joint-venture and risk-sharing nature of the project. Moreover, Petrobras has expressed concern that, ifit were to be the borrower of record for the bulk of the project debt, it would risk violating loancovenants of the Bank-financed Hydrocarbon Transport and Processing Project (Loan 3376-BR).

13. The designated borrower TBG is a recently created corporate entity which at this pointhas only minimal share capital, employs no staff, and lacks any credit or performance history. Thejustification for lending to TBG therefore stems from the arrangements which will enable thecompany to implement the project as planned and to fulfill its financial obligations. Thesearrangements are reflected in a tightly-knit contractual framework which secures the borrower'sfuture financial viability, and which involves strong commitments by the private shareholdersBritish Gas, El Paso Energy, Broken Hill Proprietory (the BTB consortium), Enron, Shell, andBolivian Pension Funds, and by the state companies YPFB in Bolivia and Petrobras in Brazil.2

The contractual obligations under this framework are designed to (i) ensure a reasonable equityreturn, (ii) provide for sufficient debt service cover, (iii) protect the borrower against major risks

2 The financial position of the borrower on the Bolivian side, Gas Transboliviano S.A. (GTB), is determined by thesame parameters and contractual agreements that muror those on the Brazilian side.

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beyond its control, particularly in construction, supply and off-take, and (iv) ascertain appropriatemanagement, know how, and human and technical resources.

14. The expected financial performance of the borrower and its creditworthiness rest solely onarrangements relating to the Transportation Contract Quantity (TCQ) which builds up to 18MMcm/d. An additional 6 MMcm/d of capacity, the Transportation Capacity Option (TCO), isavailable for purchase to the sponsors (with Petrobras committed to buy the entire option) againsta US$383 million payment for part of the investment costs of the project. As cash payment, theTCO does not require any debt service or dividend from the borrower. It also does not generateany revenues for TBG which has to provide the agreed transportation capacity to the buyer freeof fixed charges. The TCO is therefore neutral to the borrower's financial situation. Theconditions for use of the remaining 6 MMcm/d, the Excess Capacity (TCX), have not beendefined yet. While they do not imply any risk for the borrower, they could represent an upsidepotential, resulting in higher equity returns and an increase in debt service coverage. However, theGovernment's intention in implementation of the new hydrocarbon law is to regulate the pipelinebusiness in Brazil on the basis of maximum equity returns. If these were aligned with the TCQ-returns, any additional TCX-benefits would be passed on to the consumers.

15. The project will be governed by 15-20 agreements in both countries which have eitherbeen concluded or are at an advanced draft stage. These agreements are embedded in andsupported by (i) the contracts underlying the Bolivian capitalization process entailing investmentsof US$835 million, and operating commitments, by the private partners on the production (YPFand Perez Companc from Argentina, Amoco from the US) and on the transportation side (Enronand Shell), (ii) long-term sales contracts between Petrobras and five state gas distributioncompanies in Brazil, and (iii) gas supply agreements (under negotiation) with major prospectiveclients in industry and power. The borrower is thus largely shielded from risks beyond its control,which are distributed among various participants upstream and downstream.

2. Assumvtions for Financial Proiections

16. Financial projections for the borrower were carried out with the help of a forecastingmodel designed by Credit Suisse First Boston, the financial adviser to Petrobras. The modelincludes projections both for TBG and GTB, as well as consolidated forecasts for the pipelineoperations in both countries. The model assumptions are essentially identical for both companiesthrough equal shares in investment and operating costs, as well as revenues. However, minordifferences in the financial projections result from different financing terms for the two financingpackages, as well as from slightly varying tax and accounting rules. The model includes pro-formaincome and fund flow statements, as well as projected balance sheets and all necessary scheduleswith background calculations.

17. Construction Cost. The construction period of the project is expected to span a total ofapproximately 30 months. The first portion of the project, which includes the segment from RioGrande, Bolivia, to Campinas/ Paulinia, Brazil, is anticipated to come on line by the end of 1998,the remainder, which includes the segment from Campinas/ Paulinia to Porto Alegre/Canoas, byJune 30, 2000. Total Project cost is estimated to be approximately US$2.09 billion, of which US$

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1.65 billion for Brazil and US$0.44 billion for Bolivia. About US$1.77 billion of total is hard costand 0.32 soft costs, including interest during construction, upfront and commitment fees,development and transaction costs as well as a 3-month senior debt service reserve. The Bolivianconstruction contract is fixed-price lump sum. On the Brazilian side construction will be managedby Petrobras under an agreement with TBG. About 10% contingencies have been included. Thisis considered adequate and on the Brazilian side offers or quotations for most of the equipment(about 40% of project hard cost) have already been obtained, soundings on construction costshave been carried out, international inflation is low, and the bulk of construction is scheduled tobe completed within two years. After the initial construction period, additional compressionfacilities along the pipeline will be required to increase gas throughput. The model assumes that allsuch additional costs would be financed by export credits and internally generated cash. Anyadditional capital expenditures associated with the TCO volumes will be the responsibility of theTCO purchaser(s) and are thus excluded from the model.

18. Capital Structure. The target capital structure of TBG comprises 63% senior debt, 19%equity and subordinated shareholder loans, and 18% TCO payment. The model is based on thepreliminary financing plan and assumes that the subordinated debt will carry a nominal interestrate of 15% (of which 8.75% will be deductible for income tax purposes), and that its principal isrepaid in ten equal annual installments commencing in the 11th year of operations. To the extentthe Project generates insufficient cash in the early years of operations to pay subordinated interest,such interest will be capitalized and repaid over the remaining term of the debt.

19. Gas Volumes. Pursuant to the Transportation Agreement with TBG, Petrobras as theshipper will have the ship-or-pay obligations for the TCQ if gas is tendered by YPFB at theborder:

TCO-Volumes(MMcmd)

Year 2000 2001 2002 2003 214 J 200 J 2006 207+

Volume 9.040 10.328 11.622 | 12.914 14.205 15.497 16.788 | 18.080

As the sponsors' intention is to transport gas as soon as possible on acceptable terms, the modelassumes that during 1999, before the portion of the pipeline extending from Campinas/ Paulinia toPorto Alegre/Canoas is completed, Petrobras will contract to reserve at least an average of 5.0MMcmd of firm capacity. The model further assumes that the tariff revenues thus received areapplied to construction cost. The TCQ-volumes listed above form the basis of the revenue streamfor the project, as they are contractually fixed. The TCO purchaser has the right to utilize 6MMcmd of Pipeline capacity over and above the TCQ free of fixed capacity charge. Theborrower would receive additional revenues only for transporting volumes over and above theTCQ and TCO (excess capacity-TCX). However, the shipment of TCX-quantities has not beentaken into account for calculation of TBG's financial projections since contractual agreements orunderstandings on their utilization have not been finalized yet.

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20. TariffPricing. The fixed capacity charge (tariff) for the TCQ covering both the Bolivianand Brazilian stretches will be US$1.5352/ MMBtu per day in 1996 terms, which is escalated at acontractually agreed rate of 0.5% per annum. It is designed to cover projected debt service andfixed operating costs, provide a fair return to the project sponsors, and leave a security cushion.Capacity payments are assumed to be made for the entire TCQ independent of the actualthroughput, as stipulated in the project agreements. The tariff profile is defined in the followingtable:

TCO Tariff (Fixed Capacity Char2e)(US$ per MAMBbtu per day)

....... ...................... . . ... .

year Tar4o Year Tanff

1996 1.5352 2006 1.6137

1997 1.5429 2007 1.6218

1998 1.5506 2008 1.6299

1999 1.5583 2009 1.6380

2000 1.5661 2010 1.6462

2001 1.5740 2011 1.6545

2002 1.5818 2012 1.6627

2003 1.5897 2013 1.6710

2004 1.5977 2014 1.6794

2005 1.6057 2015 1.6878

The fixed tariff will be split between TBG and GTB in a way so that both companies will realizesubstantially similar pre-tax unleveraged and equity returns, as well as debt service coverageratios. In accordance with the contractual arrangements the tariff split in the financial projectionshas been assumed to be US$1.2096/MMBtu per day (78.8% of total) for TBG andUS$0.3256/MMBtu per day (21.2% of total) for GTB for 1996. The shippers Petrobras (Brazil)and YPFB (Bolivia) are also required to pay a minimal throughput charge to cover the variableoperating costs. In addition, the shippers will be responsible for providing the fuel associated withthe actual throughput. Variable operating costs are thus pass-through items for bothtransportation companies.

21. The fixed tariff for the TCO has been agreed between Petrobras, BNDES and Eletrobrasto be set at US$ 1.00 in 1996, escalated by the US Consumer Price Index (CPI). Moreover, theBank agreed with the Government during appraisal, that this tariff would be an average rate fromwhich distance-based tariffs would be derived for different sales points along the pipeline. Noarrangements have been made yet for TCX-tariffs. However, it should be stressed that, in

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accordance with the new hydrocarbon legislation, the Government intends to regulate the pipelinebusiness based on maximum equity return criteria. Since additional investments to realize the TCXwould be minimal (around US$ 105 million), the fixed TCX-tariff required to achieve regulated(assumption: TCQ) equity returns would total only US$ 0.30-0.351MMBtu per day. In that case,in order to avoid considerable tariff distortions, an average tariff would have to be set jointly forTCQ and TCX. The TCO-tariff may not be affected by the regulation as it is not directly relatedto the services of the gas transportation company.

22. Inflation. An inflation rate of 3.5% p.a. is used in the model to escalate all constructionand operating costs. Depreciation for book purposes has been set at twenty year straight-line.The TCO prepayment is equally amortized over the full 20-year term of the Project on a straight-line basis.

23. Taxes. In Brazil, the income tax rate is currently 25%. Only 30% of pre-tax income maybe offset by prior year losses. A 15% tax on interest income currently applies, for which Petrobrasas a domestic company is also liable, but no withholding tax on dividends is levied. The 13.64%ICMS tax on total revenues is a passthrough for the borrower since revenue is grossed-up by thesame amount. Furthermore, a PIS/COFINS tax of approximately 2.65%, inclusive of the ICMSgross-up, is currently levied on total revenues, and an additional 8% social contribution tax ontaxable income is applied, which is deductible for income tax purposes.

24. In Bolivia, the income tax rate amounts also to 25% but no restriction on offsetting ofpast losses applies. Foreign companies are currently subject to a 12.5% dividend withholding taxand a 12.5% interest withholding tax. Because of the capitalization program, YPFB and itssuccessors are assumed in the model to be liable for withholding taxes as well. A hydrocarbonstransportation tax of 1% would be levied on the total revenues of GTB. The following tablesummarizes the various current taxes that are applicable to the two transportation companies:

Tax Rates

Tax Brazil Bolivia

Construction taxes none none

Income tax 25% 25%

Dividend withholding tax - 12.5%

Interest withholding tax - 12.5%

Tax on interest income 15% -

ICMS 13.64% -

PIS/COFINS 2.65% -

Social contribution tax 8% -

Hydrocarbons transp. tax 1%

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25. Senior Debt Service Coverage. The coverage ratios determined by the model arecalculated by dividing all cash flows (i.e. revenues less cash operating and capital costs) by totalsenior debt service (i.e. interest and principal payments), both on a yearly basis and as averageover the total debt repayment period. A three-month senior debt service reserve is assumed to befunded in cash at the end of construction and to be maintained in full up to maturity. The modelassumes that any funds in the reserve earn interest at 5% p.a.

3. Financial Proiections

26. Financialprojections for TBG were calculated based on the assumptions outlined aboveand on the preliminary financing plan, and are summarized in the table attached to this Annex. TheTCQ-case, which is the basis for the financial projections, shows coverage ratios for senior debtof a minimum of 1.38:1 in year 3 post-construction (2002) and an average of 2.84:1. Even withrelatively low coverage ratios in the early years, the borrower's debt service capacity is consideredsatisfactory, given the project's low risk profile (Chapter 4) and the comfortable average debtservice cover over loan maturity. The equity returns to the shareholders show an equalized after-tax rate of return of 18.1% in nominal terms, which provides virtually no upside, but has beensufficient to attract strategic private partners into the project, given the low risks.

27. Thefinancial structure is designed to allow for the gradual increase of Bolivian gasdeliveries, taking into account the status of gas reserves, the need for new investments in Boliviato increase reserves through further exploration, and the lead time for introducing the gas into theBrazilian market. This gradual build-up is reflected in a slowly increasing revenue and cash flowcurve. While long-term loans by multi- and bilateral financing institutions were the only feasibleway of funding the project, their repayment requirements still put a relatively high burden on theproject in the early years in view of the slow build-up of its debt service capacity. In order toachieve an acceptable match of risk and debt service coverage for the borrower, the sponsorsdecided to fund the TCO as separate investment and to exclude certain capital expenditure neededfor the TCX from the initial project design. The coverage ratios were further enhanced byintroduction of a Bank-supported partial credit guarantee for a bond issue which balances some ofthe effect of the more front-loaded repayment schedules of the official lenders and thuscontributes to achieving a financial structure adapted to the project's needs.

28. Thefinancial rate of return (FRR) for 1BG after-tax amounts to 12.9% in nominal terms(9.0% in real terms) based on the TCQ only. While this is relatively low, it should be consideredadequate since there is only minimal downside risk (Chapter 4). However, the project's overallrate of return-potential is expected to be considerably higher, if rapid increase of gas throughputdue to dynamic market developments is taken into account and if market-based tariff levels andadjustments are applied. In order to assess this potential, the following alternative assumptionsregarding the possible build-up of gas shipments beyond the TCQ were made:

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TCO and TCX-Volumes(MMcmd)

Year 2000 2001 2002 2003 2004 2005 2006 207+

TCO(L) 3.000 3.000 4.000 4.000 6.000 6.000 6.000 6.000

TCO(H) 6.000 6.000 6.000 6.000 6.000 6.000 6.000 6.000

TCX(L) 1.000 2.000 3.000 4.000 5.000 5.500 5.920 5.920

TCX(H) 2.160 8.172 10.378 11.086 9.795 8.503 7.212 5.920

L=Low, H=THgh

29. In a first alternative, a set of scenarios was tested, in which the TCQ-tariff was applied tothe TCQ and the TCX, and the agreed TCO-tariff was used. As a second alternative, one mainscenario was tested, in which it was assumed that after full liberalization the competitive positionof gas would permit TCO and TCX-tariffs based on the 1996 TCQ-level, but escalated byinflation (the US CPI, projected at 3.5% p.a.). The tariff structure for the TCQ was assumed toremain unchanged for the analysis since it has been set through binational agreements. It should bestressed that (a) a TCO tariff-structure has been agreed between Petrobras, BNDES andEletrobras and may not be easily adaptable, even if market conditions permit, and (b) after thenew hydrocarbon legislation comes into effect, the Government intends to regulate the pipelinebusiness based on maximum equity return criteria. In that case the project may not be able torealize its overall rate of return-potential due to regulatory considerations. The results of theanalysis combining alternative assumptions on gas volume build-up and transportation tariffs aresummarized in the following table (NPV figures in US$ million).

Real FRR Nominal FRR Real NPV Nom. NPV

1. TCQ only 9.0% 12.9% -113 226

2. Low Tariffs

TCQ + TCO (L) 9.1% 12.9% -161 368

TCQ + TCO (L) +TCX (L) 10.1% 14.0% -48 597

TCQ + TCO (H) + TCX (L) 10.5% 14.4% 5 658

TCQ + TCO (H) + TCX (H) 12.0% 15.9% 190 885

3. High Tariffs

TCQ + TCO (H) + TCX (H) 14.5% 18.5% 535 1,423

30. The economic rate of return (ERR) has been determined including the TCQ and TCO butnot the TCX It is noticeably higher than the corresponding FRR since it is based on a much widerspectrum of benefits. The ERR assesses the impact of gas transport and sales, while the FRR

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reflects the return of the transport operations only. For this reason the ERR, due to the use ofnet-back values for gas, captures the benefits of replacement of high-value fuels, as well as theenvironmentalpremium attached to gas vis-a-vis the bulk of competing fuels. In addition, theERR does not take into account taxes paid by TBG.

4. Risk Analysis

31. Construction delays and cost overruns. Petrobras has entered into a fixed-price lump sumconstruction contract with GTB on the Bolivian side, which provides for a maximum constructionperiod, a completion date (in December 1998) subject to a comprehensive completion test, andthe possibility to cancel the contract with penalties if construction is not completed 12 monthsbeyond the due date. Liquidated damages and penalties amount to about two years of debtservice. Moreover, Petrobras has to start paying fixed capacity charges to GTB from December1999 even if construction is not completed. It is exempted from this obligation only if non-completion or interruption of pipeline operations is caused by force majeure or by GTB's fault.

32. On the Brazilian side, Petrobras will be the construction manager under supervision of anindependent engineer and and will report to a construction committee appointed by the sponsors.Petrobras will hire construction contractors following ICB-procedures and will ensure appropriatecontract provisions with regard to performance, liability and insurance. While TBG would notreceive a comprehensive completion guarantee, far-reaching provisions for cost overruns wouldlargely protect the borrower against negative financial impacts due to unforeseen events duringconstruction: (i) contingencies of about 10% of project hard costs have been built into theconstruction budget; (ii) the sponsors have agreed to provide jointly US$ 200 million or 14% ofhard costs as standby facility in the form of equity and shareholder loans; and (iii) another US$200 million of standby subordinated debt is assured by Petrobras. The total overrun reserves thusamount to 37% of hard costs, or 62% of cost items for which firm offers are not available yet.

33. Given Petrobras' and the sponsors' experience in large engineering and constructionprojects, and firm orders or offers amounting to 40% of project hard costs, the risk of delays orcost overruns is small. In addition, due to the equity and shareholder contributions and theconsiderable interest of the sponsors in upstream and downstream investments, their commitmentto timely and on-cost completion of the project will be very strong. Moreover, through thecontingencies and overrun funding facilities, TBG is essentially protected from the financialconsequences of construction risks if they occur in the normal course of business. However,residual risks would arise from force majeure, which could result in cancellation of contracts,limitation of claims on liquidated damages and overruns possibly exceeding the generouscontingencies and funding reserves.

34. Technology, operations, and maintenance. The pipeline will utilize well-known standardtechnology which is applied world-wide in similar projects and which is supported by customaryproducers' warranties. The operation and maintenance of pipeline projects is straight-forward andimplies by design low technical risks. Nevertheless, these areas are under direct responsibility ofthe borrower. The occurrence of any related risk could reduce tariff payments and thus affect theborrower's cash flows. In order to minimize these risks, the two pipeline companies will be staffed

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and assisted by the sponsors which have extensive experience in operating similar projects world-wide. In addition, appropriate insurance cover will be obtained. The staffing and operatingarrangements are summarized in the Borrower Inplementation Plan.

35. Tariff revenues and gas delivery. Petrobras will pay to TBG a monthly fixed capacitycharge equal to US$ 1 .2096/MMBtu, in 1996 US$, adjusted annually by 0.5%, multiplied by thenumber of days per month and by 100% of the TCQ. Petrobris thus assumes all market risk vis-a-vis TBG independently of the actual gas flow. Moreover, Petrobras has to start paying fixedcapacity charges from pre-determined dates even if construction is not completed. It is exemptedfrom this obligation only if non-completion or interruption of pipeline operations is caused byforce majeure or by TBG's fault. However, if gas is not tendered on the Bolivian side, YPFB3 asaggregator has to pay the share of the fixed capacity charge that corresponds to the share ofcontractual quantities not delivered. YPFB thus assumes all supply risk vis-a-vis TBG. From thepoint of view of the borrower, Petrobris' commitments offer a higher degree of security thanthose of YPFB, given the difference in size and financial strength of the two companies.Nevertheless, substantial or extended supply interruptions are considered unlikely because of theconsiderable interest and financial commitments of the newly privatized gas production andtransport companies on the Bolivia side, whose future essentially depends on the proposed projectand which have committed substantial resources for development of their facilities. The mainresidual risk would consist of force majeure which would prevent Petrobras, YPFB, the borroweror GTB from fulfilling their contractual obligations.

36. Gas reserves. Bolivia's proven, probable and possible reserves deliverable within the initial20-year term of the Gas Supply Agreement amount to 101 BCM, while the TCQ requires aminimum of 119 BCM. From the borrower's point of view, any insufficiency of reserves does notpresent a supply risk but a performance risk of YPFB, which is contractually obliged to pay theshare of the fixed capacity charge that corresponds to the share of contractual quantities notdelivered, thus assuring the borrower's debt service capacity and shareholder's returns. WhileYPFB may financially not be strong enough to cover the tariff payments for substantial reserveshortfalls, its non-compliance risk is mitigated by the business strategy of the newly privatized gasproduction and transport companies in Bolivia, by the experience of their private shareholders,and by their commitments to invest US$ 835 million over approximately five years, substantiallymore than YPFB's past record of US$ 60 million/year. Since Bolivia's market potential is smalland exports to Argentina will cease in 1998/99, the strategy of the private YPFB- successors willbe entirely focussed on gas exploration and production for the Brazilian markets. The ultimatefall-back position would be to supplement Bolivian gas by imports from Argentina.

37. Pricing. The financial position of the borrower depends entirely on the transport tariff andis not linked to the commodity price for gas. Moreover, there are not expected to be any grosseconomic distortions which would prevent market penetration of gas and could make support offinancial operations of the borrower unacceptable to the main risk-takers. The basis for the gas

3 YPFB is a small part of the forner YPFB which was not capitalized, has retained certain assets, and is stillowned by the Bolivian Govemment.


Annex 5

purchase prices from Bolivia and its adjustments are contractually fixed in the Gas SalesAgreement. As shown in the economic analysis, the gas prices to the end consumer resulting fromthe transport tariff and the gas commodity prices are internationally and domestically competitiveand thus in line with the gas marketing strategy of Petrobras and the state gas distributioncompanies. The econcomics of gas pricing is thus not considered to imply any long-term indirectrisk for the financial viability of the borrower. Petrobras assumes the full market risk vis-a-visTBG through its commitment to pay fixed capacity charges based on the fill TCQ. Petrobris inturn has concluded agreements with gas distribution companies in five states covering volumesthat increase from 55% to 90% of the TCQ in the first six years of operations. Since these gobeyond its minimum gas purchase commitments under the Gas Sales Agreement with YPFB,Petrobras, while assuming some of the tariff risk, has shifted the market risk essentially to the gasdistribution companies.

38. Economic risks. All of the project debt, shareholder loans and equity is contracted andrevenues are determined in US$. Moreover, revenue increases are pre-determined in US$ throughthe escalation formula for fixed capacity charges. Variable operating costs are mostly energy, andthus US$-based, and are passed on in the gas prices. Only some fixed costs (e.g. wages) would bein local currency and thus affected by domestic inflation. Since these costs have to be coveredfrom the fixed capacity charge, any increase has to be borne by the borrower. However, as theyrepresent only a small and over time decreasing (from 25% to 13%) share of total revenues, theresulting risk to the borrower from domestic inflation is acceptable. For the reasons listed above,devaluation of the Real would not impact negatively on TBG's financial position. Theshareholders' intention is to reduce the risk of increasing interest rates by interest rate fixing asmuch as possible. To that effect the Government and Petrobras have asked for US$ fixed-rateloans from the multilateral lenders and aim at a fixed-rate bond issue under the partial creditguarantee. Interest rate movements would thus only have an effect on the borrowers financialposition to the extent that they occur before the respective interest-fixing dates of disbursementsand before placement of the bond. Furthermore, the borrower will not be affected by the risk ofnon-convertibilty as most of its debt is contracted from multilateral institutions with Governmentguarantee. In addition, the project would result in higher availability of foreign exchange for thecountry through displacement of fuel imports. The long history of Petrobras' access to foreignexchange for its core and related businessess also mitigates this risk.

5. Sensitivities

39. Sensitivity analysis was carried out from the point of view of the borrower. It wastherefore based on the TCQ only, since the TCO represents capacity pre-purchased by Petrobraswithout any financial impact on the transportation company. It also did not take into account theTCX. The sensitivity analysis focused on the two essential parameters of project stability - debtservice coverage ratios and equity returns - which were tested against major risks the borrowercould face in accordance with the analysis above. While TBG is largely protected againstconstruction cost overruns and delays, there is a small chance of occurrence these risks as a resultof force majeure or of unlikely gross negligence on the part of the borrower. The table belowshows that even cost increases by 5% and 10% or a completion delay of one year would reduceequity returns by not more than 1.5 percentage points, and would only minimally affect the


Annex 5

borrower's debt service coverage ratios. Operating cost increases of 10% were assumed toreflect the impact of high domestic inflation on local fixed cost elements (e.g. labor), as well as ofunforeseen operating problems (e.g. force majeure, work stoppages). They would reduce equityreturns by only 0.3 percentage points and barely affect the debt service coverage. The borrower'sfinancial situation is most sensitive to the risk of delayed revenue receipts. This could happen ifconstruction were not completed in time because of force majeure or if YPFB did not promptlypay its share of fixed tariff revenues in the case of gas supply interruptions. A full year's revenuedelay would reduce equity returns by 3.5 percentage points. While this would most likely bebelow the sponsors' target equity returns, the debt service cover ratios of 1.2:1 (minimum) and2.4:1 (average) would remain satisfactory. Finally, if no additional gas reserves were found, gassupplies would run out in year 17 of operations. However, this would reduce equity returns byjust 0.8 percentage points and would only marginally affect debt service cover.

Sensitivity Analysis

Eqmit Retuantca_e __S__omin) Si SCR Average SCR

TCQ 18.1% 141 2.8:1

Construction Cost + 5% 16.6% 1.4:1 2.7:1

Construction Cost + 10% 14.7% 1.4:1 2.7:1

Completion Delay by One Year 17.0% 1.4:1 2.8:1

Operating Cost +10% 17.8% 1.4:1 2.7:1

Revenue Delay by One Year 14.6% 1.2:1 2.4:1

No Additional Reserves 17.3% 1.4:1 2.8:1

6. Financial Conditions

33. It is proposed that the Loan and Guarantee Agreements include the following financialconditions:

Before effectiveness of the Bank Loan, all project agreements have to be signed and effective, andthe availability of counterpart funds has to be documented in a legally binding way (e.g. sponsorfunding agreements). Starting with signing of the Loan Agreement, and during the period of itseffectiveness, the borrower will: (i) submit to the Bank annually audited financial statements; (ii)submit to the Bank annually financial projections which demonstrate that it has the resources tocarry out and operate the project and comply with its debt service and other financial obligations;(iii) declare and pay dividends only if it: 1) is in full compliance with its project-related financialobligations, 2) has demonstrated availability of sufficient financial resources to comply with all itsfinancial obligations over the Loan Maturity, and 3) has cumulative distributable net profits orunencumbered liquid assets at least equal to the proposed dividend payments; (iv) not contractany debt with maturity beyond 12 months in addition to the sources provided for in the project

Proje Appmsl Document Page 51Brad: Gas Sector Development Proct - BolMa-Braa Gas Pipeline

Annex 5

financing plan, if this additional debt would result in 1) a projected minimum senior debt servicecoverage ratio of less than 1.5, and/or 2) a projected maximum long-term-senior-debt/equity ratioof more than 67:33; and (v) acquire shares of its subscribed capital or reduce its subscribed capitalwithout demonstrating to the Bank that this would not have a material adverse effect on theBorrower's financial obligations.

Project Appraisal Document Page 52Bmzil: Gas Sector Development Project - BolMaBrazil Gas Pipeline

Annex 5

TBG Financial ProjectionsYears Ending 2000 through 20184

an Millions of Current US$)

Average2000 2001 2002 2003 2007' 20185 Annual

Growth

Income Statement ItemsUnit Volume (000'cmd) 9,159 10,378 11,653 13,089 18,332 18,332Revenues 187 211 232 256 367 387Operating Income 163 185 206 229 336 341Net Income (46) (28) (7) 13 105 113

Funds Statement ItemsInternal Sources 94 113 132 149 228 180Borrowings 5 7 19Equity Investments

Total Sources 99 120 132 168 228 180Capital Expenditures 6 9 22Working Capital IncreaseDebt Service 81 97 123 123 117

Total Applications 91 112 123 146 117SurplusCash(dividends 8 8 9 22 111 180

distributions)Balance Sheet Items

Net Current Assets 28 35 35 36 36 4Other Assets7 8 16 25 47 149 119

Net Fixed Assets 1,434 1,364 1,285 1,228 937 34Total Assets 1,470 1,415 1,345 1,311 1,118 157

Debt including TCO 1,210 1,183 1,120 1,073 810 15Equity and Quasi-Equity 260 232 225 238 308 142Total Liabilities and Equity 1,470 1,415 1,345 1,311 1,118 157

Financial Ratios

Data for all years are ForecastL

Key yeams after the start of nonnal operation of the projecL

Year before end of conractual joint-vcnture amnnements

7Cash accumulation due to restiictions on disributicns; asumed to be temnorarily lent to sponm.

Project AWpraisal Document Page 53Brail: Gas Sector Develpnt PrJct - Boivia-Brazil Gas Pipeline

Annex 5

Operating Income as a% of Revenue 87 88 89 89 92 88

Net Income as a% of Revenue (25) (13) (3) 5 29 29

Return on Capital Invested (Net (3.1) (2.0) (0.5) 1.0 9.4 72Income as % of Total Assets)

Debt Service Coverage 1.43 1.37 1.30 1.42 2.28 NA 2,748Multiple of Total Capital 15.7 12.6 NA 6.8 NA NAExpenditures financed byInternal Sources

Current Ratio9

Debt as%of Total 82 84 83 82 72 10CapitalizationDebt excluding TCO as % of 63 64 64 64 56 0Total Capitalization

Averag DSCR 2000-2015

9Currat Rabo not povided since cu iabilities amed to be minal and thus not incuded Mn pFojections.

Project Appraisal Document Page 54Brazil: Gas Sector Dvelopment Project - BolMa-Brazil Gas Pipeline

Annex 5a

Summary of Terms for the World Bank Guaranteed Bond Issue

Issuer: Transportadora Brasileira Gasoduto Bolivia-Brasil S/A

Guarantor: International Bank for Reconstruction and Development (The WorldBank): Payment of Principal only at stated maturity. Coupon isguaranteed by the Government of Brazil'.

Investors: To be determined.

Lead Managers: To be selected.

Currency: US Dollars

Amount: US$ 180 million

Use of Proceeds: The net proceeds of the Bonds will be used exclusively for partialfunding of the Brazilian portion of the Brazil-Bolivia Gas Pipelineproject.

Drawdown: The project company will receive the full amount of the proceeds lessfees, conumissions and any other expenses for underwriters andadvisors, legal and out of pocket expenses (agreed in the mandateletter), and World Bank Guarantee fees at closing date of the issue.

Maturity: 18 years.

Repayment: Bullet repayment at maturity.

Spread: To be determined at bid.

Interest Rate: To be determined at bid.

Commission: To be determined at bid.

Trustee: To be determined at bid.

Paying Agent: To be determined at bid.

Listings: To be determined at bid.

Taxes and Other Deductions: All payments to be made under or concerning the Bonds to be free andclear of any Brazilian taxes, withholdings, or other deductions.

The Bank would consider covering one or two interest payments under the Guarantee, if needed to get the issue rated. Anyadditional provisions required by the Bank in case of interest coverage would be indicated after the decision regarding thestracture is made.

Project Appalsal Document Page 55Brazil: Gas Sector Development Project - Bolivia-Brazil Gas Pipeline

Annex 5a

Documentation: Standard Documentation including: Offering Circular, Terms, andConditions of Bonds and Guarantees, Trust Deed, WarrantyAgreement, Paying Agency Agreement, and Subscription Agreement.All provisions would reflect the Bank's participation as partialguarantor of principal at maturity. The offering circular discloses (i)material information on the Bank and its Loan, audit and recordkeeping to demonstrate proper use of the proceeds. (ii) the counter-guarantee and indemnity arrangements between TransportadoraBrasileira Gasoduto Bolivia-Brasil S/A, Government of Brazil and theBank, (iii) other sources of financing and the remedy provisions in theBank's Loan Agreement, Indemnity Agreement and Project Agreementwith TBG.

Bonds: The Bonds would be unconditional and unsubordinated obligations ofTransportadora Brasileira Gasoduto Bolivia-Brasil S/A. Allmodifications to the terms of the Bonds would require prior writtenapproval from the Bank. Bondholders will covenant not to enter intoany repackaging arrangement, i.e. an arrangement that separates therights to payment of principal from those to payment of interest. TheBonds can be redeemed before maturity for taxation reasons byTransportadora Brasileira Gasoduto Bolivia-Brasil S/A.

World Bank Guarantee Scope: The terms of the Bank's Guarantee would be set out in theProvisions: Trust Deed constituting the Bonds and are outlined in the offering

circular and in conditions endorsed on the Bonds. The guarantee willcover payment of principal only at maturity in 2016 and is notaccelerable in case of default by Transportadora Brasileira GasodutoBolivia-Brasil S/A to pay principal on Bond redemption before statedmaturity. The maximum amount payable under the Guarantee wouldbe the principal amounts of the Bonds. Upon either regular redemptionof the Bonds by the Issuer or upon payment under the Guarantee, theBank will be discharged automatically from all obligations withrespect to that redemption or payment. The Bank does not guaranteethe due execution or authenticity of the Bonds. The Guarantee is ofthe payment and not collection of funds.

Call: Demand under the Bank's Guarantee can only be made afternotice has been given by the Trustee that the Paying Agent has notreceived repayment monies from Transportadora Brasileira GasodutoBolivia-Brasil S/A, who is required to pay Interest installments andPrincipal (on redemption) to the Paying Agentfive business days inadvance of the due date. Transportadora Brasileira Gasoduto Bolivia-Brasil S/A and the Bank would receivefifteen-day advance notificationof payment dates. This mechanism would allow early warning of anypotential call on the Bank's Guarantee. Any call on the Bank'sGuarantee should be made within ten days of the maturity date.

Proiect Appraisal Document Page 56Brazil: Gas Sector Development Project - Bolivia-Brazil Gas Pipeline

Annex 5a

Subrogation: If the Guarantee is enforced, the World Bank would beentitled to stand in the place of the Trustee and Bondholders to seekreimbursement from the Issuer. A specific provision on subrogationwill clearly stipulate that the World Bank would be entitled to exerciseits rights of subrogation immediately. The Bank's claims throughsubrogation will rank equally to all other bondholder claims.

Currency Indemnity: The Bank will not provide any Issuer CurrencyIndemnity.

Negative Pledge: The Bank's Guarantee will rank parn passu with theBank's other unsecured unsubordinated obligations. The Bank willgive a standard negative pledge in relation to the guarantee enjoyingthe same security as may be granted by the World Bank in respect ofits other unsecured and unsubordinated obligations.

Amendments: Any amendment to the Guarantee provisions wouldrequire the consent of all parties, including the World Bank.

Counter-Guarantee and As required under the World Bank's Articles of Agreement, FederativeIndemnity Agreement: Republic of Brazil will enter into a Counter-Guarantee and Indemnity

Agreement with the Bank. Pursuant thereto, Brazil agrees toreimburse and indemnify the Bank in respect of any amount paid out inrespect of principal (or other liabilities incurred) under the provisionsof the guarantee, on demand or as the Bank may otherwise direct. Inthe event that the Bonds are redeemed, canceled, or exchanged in aneventual privatization of Transportadora Brasileira Gasoduto Bolivia-Brasil S/A, the Bank's guarantee will be discharged. Breach of theAgreement by TBG or Brazil would constitute an event of suspensionwith respect to Brazil's borrowing program. The Bank will notGuarantee any Issuer Currency Indemnity.

Guarantee Fee: The fee represents 0.25% per annum, charged on the guaranteedexposure on present value basis, using the Bank's cost of funds asdiscount rate. The fee is payable in advance by TBG at financialclosure date, out of the proceeds of the Bonds. Fee payment would beguaranteed by Brazil. In the event of early redemption of the Bonds(or part thereof), a precalculated refund of a prorated part of theguarantee fee will be made by the Bank. The Principal Paying Agenthas responsibility for notifying the Bank on redemption andcancellations of the Bonds. The Payment of the Guarantee Fee wouldbe a condition precedent to effectiveness.

Governing Law & Jurisdiction: The terms and conditions of the Bonds, the Guarantee and allagreements with the commercial parties to which the Bank is a party,are subject to the laws of the [State of New York in United States ofAmerica] Non-exclusive jurisdiction will be vested in the courts ofNew York, subject to the Bank's statutory right to transfer any

Projact Appraisal Document Page 57Brazil: Gas Sector Development Project - Bolvia-Brazil Gas Pipeline

Annex 5a

proceedings to the appropriate US District Court and to certainimmunities granted under the charter.

The Counter-Guarantee and Indemnity Agreement with TBG andBrazil contains the dispute resolution provision common to all Bankagreements with member countries and would follow the usual legalregime for Bank legal documentation with its sovereign borrowers.


Annex 6

Procurement and Disbursement Arrangements

Table A: Project Costs by Procurement Arrangements

(US$ Million)

Total CostExpenditure Category Poturement Method (ncluding

Contingencies)

ICB N-F.

1. Works

Construction & Assembly Trunkline 361.0 361.0

Construction & Assembly Southern Leg 241.4 241.4

(130.0) (130.0)

Compression Stations 70.4 70.4

Metering, City-Gates, SCADA/Tel. 80.3 80.3

Right of Way 31.0 31.0

2. Goods

Pipes 533.5 533.5

Valves, Rectifiers and fittings 15.4 15.4

3. Services

Basic Design 6.0 6.0

Management 82.0 82.0

4. Miscellaneous

Interest during construction 146.0 146.0

Working Capital 4.0 4.0

Other Develop. & Trans. Costs 79.0 79.0

Total 241.4 1,408.6 1,650.0

(130.0) (130.0)

Note: N B.F. = Not Bank-financed.Figures in parentheses are the amounts to be financed by the Bank loan.

ProeJt Appraisal Document Page 59Brail: Gas Sector Development Project - Bolivia-Brazil Gas Pipeline

Annex 6

Table B: Thresholds for Procurement Methods and Prior Review

xpeenditiMre Contract Value Procrement Contracrg Subject toI C*eory (resh) I Method PiorReview

1. Works >3,000,000 ICB All

The Bank loan will finance the construction of the Southern Leg (Campinas-PortoAlegre). All the bidders have been pre-qualified and the process has been reviewed by the Bank.As the bidders may submit proposals for any combination of the five spreads (depending on theirpre-qualication status for each spread), the winner(s) will be selected on the basis of overallminimum cost of the construction for the entire Southern Leg. Thus, the number of contracts canrange from one to five. The bid opening is currently scheduled for December 2, 1997.

Form: PAD


Annex 6

Table C: Allocation of Loan Proceeds

:-Amottntin M F"InancingExpenditure Category ntin USriagemilio~n Perventage

1. Civil Works Southern Leg 130 54%

Total (Project) 130 6%

To expedite project execution, a Special Account would be opened in a Braziliancommercial bank under terms and conditions acceptable to the Bank with an authorized allocationof up to US$17 million equivalent. This account would be replenished for the amount ofwithdrawals on account of eligible expenditures. The disbursement arrangements will be discussedand agreed upon during negotiations.

As TBG is a new company, only the proposed organizational structure was reviewedduring appraisal and was considered adequate to carry-out the project on a sustainable basis. Theimplementation of the organizational structure, including appointment of key financial andauditing staff will be a condition of Loan Effectiveness.

Form: PAD

Table D: Procurement Schedule (Brazilian Section)

Contrad Value Type of No. of Type of B id Popal Contrad InidaiOf of______ ._____ ._______ $x 10_0 Contract Contrads Biddg g Receiving Signature Works

1 - WORKSMain Line - Construction & Assembly

Spreads # 3 - 8 (Trunline) 388,364.97 Works Several NBF 01/97 04/97 07/97 07/97Spreads # 9 - 13 (Southern Leg) 241,422.12 Works Several ICB 08/97 11/97 02/98 04/98

Compression StationsSpread # 6 - Penapolis 34,327.92 Turkey 1 NBF 10/96 04/97 05/97 05/97

Special CrossingsSpreads # 3 - 7 7,871.16 Works 1 NBF 02/97 06/97 08/97 08/97

Metering Stations 7,715 50 Turnkey 1 NBF 07/97 09/97 10/97 10/97City-Gates 8,160.80 Turkey 1 NBF 07/97 08/97 10/97 10/97SCADA System 11,128.98 Turnkey 1 NBF 06/97 08/97 10/97 10/97Telecommunications System 719.98 Turnkey 1 NBF 06/97 08/97 09/97 12/97Right of Way 32,161.17 Works 1 NBF 10/96

2- GOODSPipes 1

Spreads # 3-7 356,973.41 Goods NBF 09/97 12/97 05/97Spreads # 9 - 13 134,215.43 Goods NBF 09/97 12/97 02/98

valves 1Spreads # 3 - 7 5,350.26 Goods NBF 11/97 03/97 06/97Spreads # 9 - 13 1,789.71 Goods NBF 11/97 03/97 01/98

Rectifiers 1Spreads # 3 - 7 1,028.80 Goods NBF 02/97 04/97 05/97 05/97Spreads # 9 - 13 892.98 Goods NBF 02/97 04/97 05/97 05/97

Scrapers/Fittings 1Spreads # 3 - 7 6,410.32 Goods NBF 05/97 06/97 07/97 07/97Spreads # 9 - 13 1,075.49 Goods NBF 05/97 06/97 07/97 06/98

3.SERVICES 60,391.00 Other Several NBF I

TOTAL 1,300,00p00

Note: TCB = Bank-financed International Competitive Bidding NBF = Not Bank Finance


Annex 7

Project Processing Budget and Schedule

A. Project Radget (US$000)(t fialPCD stge)

350

A Project Schedule t fnal CD sage)AdS

Time taken to prepare the project (months) 9

First Bank mission (identification) 10/23/1996 10/23/1996

Appraisal mission departure 06/20/1997 06/28/1997

Negotiations 11/20/1997 11/22/1997

Planned Date of Effectiveness 03/01/1998 / /19

Prepared by: Petrobris, TGB

Preparation assistance: LAC's administrative budget, Canadian Trust Funds

Bank staff who worked on the project included: Nelson de Franco (Principal Power Engineer),Moazzam A. Mekan (Financial Analyst), Suman Babbar (Principal Operations Officer), Stephanvon Klaudy (Senior Financial Specialist), Peter Law (Energy Specialist - Economic Evaluation),Juan David Quinterio (Senior Environmental Specialist), George Ledec (Ecologist), EstanislaoGacitua-Mario (environmental consultant), Jose Augusto Carvalho (Senior Legal Counsel),Andrew Fitchie (Legal Counsel), Antonio Estache (Senior Economist), Antonio Visintini(regulatory specialist consultant), Rowland Harrison (regulatory specialist consulntat), HosseinRazavi (peer reviewer), Nina Shapiro (peer reviewer), Catalina Gomez (staff assistant), IrisMoreno (staff assistant), and Margarita Lannon (staff assistant)

Form: PAD


Annex 8

Documents in the Project File

Gas Supply and Markets

* Estimate of Reserves, Gas Deliverability, and Future Revenue for 34 Major FieldsNetherland Sewell & Associates, Inc., 1/96

* Natural Gas-More Energy to Sao Paulo (COMGAS)* The Natural Gas Industry in Brazil, ABEGAS, 9/96* Boletim de Tarifas de Energia Eletrica, 8/96

Project Information

o Protocolo Gasoduto Brasil-Bolivia, 12/96* Preliminary Information Memorandum Bolivia-Brazil Gas Pipeline (P1M), CSFB 11/96- TBG Project Implementation Plan, CSFB, 9/97

Environment

* Environmental Impact Study for Bolivia-Brazil Gas Pipeline Project, includingIndigenous Peoples Development Plan (Bolivian Portion), Dames & Moore, 9/97

* Environmental Impact Study, Bolivia/Brazil Gas Pipeline (Brazilian Portion),Petrobris, 11/96

* Environmental Impact Study-Executive Summary, 11/97* Gasoduto Bolivia-Brazil (Trecho Brasileiro), Plano de Gestao Ambiental, Vol I-IHI,

Petrobris, 9/97* Gasoduto Bolivia-Brazil, Avaliacao Ambiental Estrategica do Projeto, Relat6rio Final,

Vol I-II Petrobras-Segen, 7/97

Project Contractual Framework

* Framework Arrangement Bolivia-Brazil Natural Gas Pipeline Project-Outline of KeyDocuments, 10/97

* Term Sheet for the TBG Sponsor Funding Agreement, 10/97* Term Sheet for the TBG Shareholders' Agreement, 10/97* Term Sheet for the Gas Transportation Agreement between Petr6leo Brasileiro S.A.

and Brazilian Transportation Company (TBG), 10/97* Term Sheet for the Brazil TCO Agreement, 10/97* Term Sheet for the Brazil TCO Funding Agreement, 10/97* Term Sheet for the Construction and Project Management Agreement, 10/97* Term Sheet for the Bolivian Transportation Agreement, 9/96

Project Appraisal Document Page 64Bmzil: Gas Sector Development Project - ivia-Brazil Gas Pipeline

Annex 8

* Agreement for the Engineering, Procurement and Turnkey Construction of theBolivia-Brazil Gas Pipeline, Bolivian Section, 9/96

* Advance Payment Contract, 9/96* Gas Supply Agreement, 8/96* Funding Agreement Term Sheet, 9/96* Gas Sale Agreement between Petrobras and COMGAS* Gas Sale Agreement between Petrobras and Companhia de Gas de Santa Catarina

Annual Reports

* The Broken Hill Proprietary Company Limited (BHP), 8/28/96* El Paso Natural Gas Company, 12/31/96* Enron Corp, 3/24/97* Petr6leo Brasileiro S.A. (Petrobris), Annual Financial Statements for FY 1991-1996

Project Appraisal Document Page 65Brazil: Gas Sector Dwelopment Project - Bolivia-Brazil Gas Pipeline

Annex 9

BrazilSTATEMENT OF IFC's

Committed and Disbursed PortfolioAs of 30-Sep-97

(In US Dollar Millions)

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic1973/78/83 CODEMIN 0.00 4.34 0.00 0.00 0.00 4.34 0.00 0.001975/96 Oxiteno NE 30.00 0.00 0.00 0.00 30.00 0.00 0.00 0.001980/87 Ipiranga 0.00 6.32 0.00 0.00 0.00 6.32 0.00 0.001980/88 OPP .93 1.64 0.00 .40 .93 1.64 0.00 .401980/92 DENPASA .29 1.00 .12 0.00 .29 .96 .05 0.001981 Brasilpar 0.00 .04 0.00 0.00 0.00 .04 0.00 0.001982/84/86 PISA 0.00 3.90 0.00 0.00 0.00 3.90 0.00 0.001982/86 Cimento Caue 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001983 SOCOCO 0.00 0.00 2.50 0.00 0.00 0.00 2.50 0.001987/92/96 MBR 12.67 0.00 10.00 14.83 12.67 0.00 10.00 14.831987/96 Perdigao 35.00 10.00 0.00 20.00 35.00 10.00 0.00 20.001987/96/97 Duratex 22.00 0.00 0.00 78.00 22.00 0.00 0.00 78.001987/97 SP Alpargatas 26.60 0.00 5.00 .40 22.30 0.00 5.00 .401989 COPENE 4.55 0.00 0.00 0.00 4.55 0.00 0.00 0.001989 ELUMA 1.00 0.00 4.00 0.00 1.00 0.00 4.00 0.001989 Politeno Linear 3.10 0.00 0.00 0.00 3.10 0.00 0.00 0.001990 ENGEPOL 1.53 0.00 0.00 0.00 1.53 0.00 0.00 0.001990 Ripasa 7.14 5.00 0.00 0.00 7.14 5.00 0.00 0.001990/91/92 Bahia Sul 18.57 20.97 0.00 10.00 18.57 20.97 0.00 10.001991 Bradesco-AL 26.03 0.00 0.00 0.00 0.00 0.00 0.00 0.001991 Bradesco-Bahia 6.00 0.00 0.00 0.00 6.00 0.00 0.00 0.001991 Bradesco-Eucatex 7.50 0.00 0.00 0.00 7.50 0.00 0.00 0.001991 Bradesco-Petrofl 7.50 0.00 0.00 0.00 7.50 0.00 0.00 0.001991 Bradesco-Romi 2.78 0.00 0.00 0.00 2.78 0.00 0.00 0.001991 Rhodia-Ster 11.43 5.95 0.00 0.00 11.43 5.95 0.00 0.001992 Brazil Inv. Fund 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001992 CRP-Caderi 0.00 2.00 0.00 0.00 0.00 .75 0.00 0.001992/93 TRIKEM 0.00 12.86 0.00 0.00 0.00 12.86 0.00 0.001993 BACELL 13.00 10.70 0.00 28.80 13.00 10.70 0.00 28.801993 Coteminas 0.00 4.00 0.00 0.00 0.00 4.00 0.00 0.001993 CEBRACTEX 2.40 0.00 0.00 0.00 2.40 0.00 0.00 0.001993 Macedo Alimentos 19.25 0.00 0.00 0.00 19.25 0.00 0.00 0.001993 Votorantim 16.86 0.00 0.00 1.43 16.86 0.00 0.00 1.431993/96 CEVAL 58.57 10.00 10.00 131.43 58.57 10.00 10.00 131.431994 GAVEA 10.63 0.00 5.50 0.00 10.63 0.00 5.50 0.001994 GP Capital 0.00 18.50 0.00 0.00 0.00 17.60 0.00 0.001994 ParaPigmentos 30.00 9.00 0.00 35.00 25.50 8.14 0.00 29.751994 Portobello 17.00 5.00 0.00 0.00 14.00 5.00 0.00 0.001994/95/97 Sadia 54.00 10.00 10.00 212.44 54.00 10.00 10.00 212.441994/96 CHAPECO 25.00 0.00 0.00 5.00 25.00 0.00 0.00 5.001994/96 S.A.I.C.C. 0.00 7.85 6.87 0.00 0.00 7.70 6.87 0.001995 Bradesco-Hering 7.50 0.00 0.00 0.00 7.50 0.00 0.00 0.001995 Brahma - BRA 35.00 0.00 0.00 98.40 35.00 0.00 0.00 98.401995 Cambuhy/MC 24.38 0.00 0.00 0.00 24.38 0.00 0.00 0.00

Generated by the Operations Information System (OIS) on November 26, 1997

Project Appraisal Document Page 66Brazil: Gas Sector Development Projed - Bolivia-Brazil Gas Pipeline

Annex 9

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic1995 Lojas Americana 28.00 0.00 5.00 20.00 28.00 0.00 5.00 20.001995 LATASA - Brazil 18.33 0.00 0.00 4.00 18.33 0.00 0.00 4.001995 Politeno Ind. 19.00 0.00 0.00 0.00 19.00 0.00 0.00 0.001995 Rhodiaco/PTA 27.50 0.00 0.00 27.00 27.50 0.00 0.00 27.001995/96 Globocabo 35.00 18.06 0.00 118.00 35.00 18.06 0.00 118.001996 Banco Bradesco 40.00 0.00 0.00 60.00 0.00 0.00 0.00 0.001996 Banco Liberal 10.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001996 Mallory 8.00 3.96 0.00 0.00 8.00 3.96 0.00 0.001996 TIGRE 25.00 0.00 5.00 23.50 25.00 0.00 5.00 23.501996/97 Lightel 25.00 18.17 0.00 0.00 25.00 18.17 0.00 0.001997 Copesul 40.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001997 Rodovia 35.00 0.00 0.00 79.50 0.00 0.00 0.00 0.001997 Samarco 18.00 0.00 0.00 16.00 10.59 0.00 0.00 9.411997 Sucorrico 15.00 0.00 0.00 0.00 15.00 0.00 0.00 0.001997 Wentex 15.00 10.00 0.00 20.00 0.00 0.00 0.00 0.00

Total Portfolio: 897.04 199.26 63.99 1,004. 711.80 186.06 63.92 832.7913

Approvals Pending Commitment

Loan Eauity Ouasi Partic1996 AGUAS LIMEIRA 17.00 1.00 0.00 23.001998 BANCO ICATU 30.00 0.00 0.00 0.001997 BOMPRECO 25.00 0.00 5.00 0.001998 BSC 14.00 0.00 0.00 7.501997 COPESUL BLINC. 0.00 0.00 0.00 45.001997 CTBC 35.00 0.00 0.00 150.001996 GLOBOCABO II 0.00 0.00 0.00 38.001997 GUILMAN-AMORIM 30.00 0.00 0.00 90.001997 IPIRANGA EXPANS. 35.00 0.00 5.00 150.001997 IPIRANGA RI 0.00 .32 0.00 0.001997 NOVA DUTRA 0.00 0.00 0.00 10.00

BLINC1996 OXITENO/ETHYLO 0.00 5.00 0.00 0.001997 SP ALPARGATAS II 0.00 0.00 0.00 30.001997 UNIBANCO LIVESTO 50.00 0.00 0.00 0.001998 VARGA 20.00 0.00 3.00 15.00

Total Pending Commitment: 256.00 6.32 13.00 558.50

Generated by the Operations Information System (OIS) on November 26, 1997

Status of Bank Group Operations in BrazilIBRD Loans and IDA Credits in the Operations Portfolio

Difference Betweenexpected

Original Amount in US$ Millions and actual

Loan or Fiscal disbursements a/

Project ID Credit Year Borrower Purpose

No. IBRD IDA Cancellations Undisbursed Orig Frm Rev'd

Number of Closed Loans/credits: 193

Active Loans

BR-PE-35728 IBRD42320 1998 STATE OF BAHIA BAHIA WTR RESOURCES 51.00 0.00 0.00 51.00 0.00 0.00

BR-PE-39197 IBRD42110 1998 STATE OF RIO DE JANEIRO RJ ST.PRIV. 250.00 0.00 0.00 250.00 250.00 0.00

BR-PE-34578 IBRD41650 1997 RIO GRANDE DO SUL RGS HWY MGT 70.00 0.00 0.00 70.00 70.00 0.00

BR-PE-38896 IBRD41200 1997 STATE OF RGN R.POVERTY(RGN) 24.00 0.00 0.00 24.00 24.00 0.00

BR-PE-39196 IBRD41390 1997 STATE OF RIO GRANDE DO SU RGS ST.REFORM 125.00 0.00 0.00 75.00 75.00 0.00

BR-PE-42566 IBRD41220 1997 STATE OF PERNAMBUCO R.POVERTY(PE) 39.00 0.00 0.00 39.00 39.00 0.00

BR-PE-43868 IBRD42410 1997 STATE OF RGS RGS LAND MGT/POVERTY 100.00 0.00 0.00 100.00 100.00 0.00

BR-PE-43871 IBRD41210 1997 STATE OF PIAUI (PIAUI)R.POVERTY 30.00 0.00 0.00 30.00 30.00 0.00

BR-PE-43873 IBRD41690 1997 FED.REP.OF BRAZIL AG TECH DEV. 60.00 0.00 0.00 60.00 60.00 0.00

BR-PE-46052 IBRD41900 1997 CEARA WTR PILOT 9.60 0.00 0.00 9.60 0.00 0.00

BR-PE-48870 IBRD41890 1997 THE STATE OF MATO GROSSO MT STATE PRIV. 45.00 0.00 0.00 45.00 45.00 0.00

BR-PE-6475 IBRD41470 1997 FED. REP. OF BRAZIL LAND RFM PILOT 90.00 0.00 0.00 90.00 90.00 0.00

BR-PE-6532 IBRD41880 1997 FEDERAL GOVERNMENT FED HWY DECENTR 300.00 0.00 0.00 300.00 300.00 0.00

BR-PE-6562 IBRD41400 1997 STATE OF BAHIA BAHIA MUN.DV 100.00 0.00 0.00 94.99 94.98 0.00

BR-PE-37828 IBRD40600 1996 STATE OF PARANA (PR)R.POVERTY 175.00 0.00 0.00 175.00 175.00 0.00

BR-PE-40028 IBRD40460 1996 FEDERATIVE REPUBLIC OF BR RAILWAYS RESTRUCTURG 350.00 0.00 0.00 167.69 167.69 0.00

BR-PE-6512 IBRD39240 1996 CVRD ENV/CONS(CVRD) 50.00 0.00 0.00 35.94 35.94 0.00

BR-PE-6554 IBRD40470 1996 FED. REP. OF BRAZIL HLTH SCTR REFORM 300.00 0.00 0.00 264.75 264.75 0.00

BR-PE-35717 IBRD39170 1995 GOVT OF BRAZIL RURAL POV. (BAHIA) 105.00 0.00 0.00 71.51 71.51 0.00

BR-PE-38882 IBRD39150 1995 FED REPUBLIC OF BRAZIL RECIFE M.TSP 102.00 0.00 0.00 98.72 98.72 0.00

BR-PE-38884 IBRD39180 1995 GOVT OF BRAZIL RURAL POV.- CEARA 70.00 0.00 0.00 58.44 58.44 0.00

BR-PE-38885 IBRD39190 1995 GOVT OF BRAZIL RURAL POV.-SERGIPE 36.00 0.00 0.00 24.93 24.93 0.00

BR-PE-6436 IBRD37890 1995 STATE OF CEARA ZIL CEARA UR.DV/WATER CO 140.00 0.00 0.00 117.26 117.26 0.00

Project Appraisal Document Page 67

Brazil: Gas Sector Development Project -Bolivia-Brazil Gas PipelineAnnex 9


original Amount in US$ Millions and actualLoan or Fiscal disbursements a/

Project ID Credit Year Borrower PurposeNo. IBRD IDA Cancellations Undisbursed Orig Frm Rev'd

BR-PE-6564 IBRD39160 1995 FED REPUBLIC/BRAZIL BELO H M.TSP 99 00 0.00 0.00 83.47 83.47 0.00

BR-PE-6452 IBRD36630 1994 MINISTRY OF EDUCATION NE BASIC EDUC III 206.60 0.00 0.00 99.52 99.52 0.00

BR-PE-6522 IBRD37670 1994 ST.OF ESPIRITO SANTO ESP.SANTO WATER 154.00 0.00 0.00 98.40 98.40 0.00

BR-PE-6524 IBRD36390 1994 ST.OF MINAS GERAIS MINAS MNC.DEVELOPMT 150.00 0.00 5.00 46.49 51.49 0.00

BR-PE-6543 IBRD37330 1994 GOVERNMENT M. GERAIS BASIC EDUC 150.00 0.00 0.00 84.90 84.90 0.00

BR-PE-6546 IBRD36590 1994 GOVERNMENT AIDS CONTROL 160.00 0.00 0.00 24.54 24.54 0.00

BR-PE-6555 IBRD37130 1994 STATE GOVTS STE HWY MGT II 54.00 0.00 18.00 22.42 206.42 48.48



BR-PE-6558 IBRD37660 1994 REPUBLIC OF BRAZIL PARANA BASIC EDUC 96.00 0.00 0.00 51.76 51.76 0.00

BR-PE-6378 IBRD35470 1993 STATE GOVERNMENTS STATE HWY MGMT 50.00 0.00 0.00 7.61 45.61 17.54

BR-PE-6378 IBRD35480 1993 STATE GOVERNMENTS STATE HWY MGMT 38.00 0.00 18.00 9.95 77.95 17.54

BR-PE-6427 IBRD36040 1993 MIN. OF EDUCATION N NE BASIC EDUC II 212.00 0.00 0.00 66.35 66.35 0.00

BR-PE-6540 IBRD35540 1993 MINAS GERAIS ST. WTR Q/PLN(MINAS GERA 145.00 0.00 5.00 46.03 51.03 46.02

BR-PE-6541 1BRD35030 1993 S.PAULO/PARANA STS. WTR Q/PLN(SP/PARANA) 9.00 0.00 0.00 6.38 242.38 0.00

BR-PE-6541 IBRD35040 1993 S.PAULO/PARANA STS. WTR Q/PLN(SP/PARANA) 119.00 0.00 0.00 43.71 169.71 0.00

BR-PE-6541 IBRD35050 1993 S.PAULO/PARANA STS. WTR Q/PLN(SP/PARANA) 117.00 0.00 0.00 56,98 184.98 0.00

BR-PE-6547 IBRD36330 1993 FED.REP.OF BRAZIL METRO TRANSP. RIO 128.50 0.00 0.00 47.83 47.83 0.00

BR-PE-6368 IBRD34420 1992 GOVERNMENT WATER SECTOR MODERNI 250.00 0.00 0.00 81.42 81.42 0.00

BR-PE-6379 IBRD34570 1992 GOB BRAZI METRO TRANSP.SPAULO 126.00 0.00 0.00 7.55 7.55 0.00

BR-PE-6505 IBRD34920 1992 GOVERNMENT OF BRAZIL MATO GROSSO NAT RES 205.00 0.00 0.00 96.03 96.03 0.00

BR-PE-6364 IBRD33750 1991 STATE OF SAO PAULO INNOV BASIC ED 245.00 0.00 0.00 62.13 62.13 0.00

BR-PE-6492 IBRD33760 1991 PETROBRAS BRAZI HYDROCARBN TRNSP/PRO 260.00 0.00 0.00 17.42 17.42 0.00

BR-PE-6403 IBRD31350 1990 FEDERATIVE REPUBLIC OF BR NE BASIC HLTH SRV II 267.00 0.00 50.00 15.77 65.77 15.76

BR-PE-6442 IBRD28831 1990 ELETROBRAS ITAPARICA 100.00 0.00 0.00 1.83 33.83 1.86

BR-PE-6446 IBRD31730 1990 FEDERATIVE REPUBLIC OF BR NAT ENVIRONMT 117.00 0.00 0.00 29.61 29.61 0.00

BR-PE-6453 IBRD31700 1990 FEDERATIVE REPUBLIC OF BR NE IRRIG I 210.00 0.00 69.00 50.79 119.79 50.81

BR-PE-6370 IBRD30130 1989 FEDERATIVE REPUBLIC OF BR NE IRRI JAIBA 71.00 0.00 0.00 6.81 6.81 0.00

BR-PE-6414 IBRD30430 1989 COMGAS, SAO PAULO NTRL GAS DIST 94.00 0.00 0.00 9.19 9.19 0.00

BR-PE-6360 IBRD29500 1988 GOVERNMENT OF BRAZIL IRR SUB-SECTOR 195.00 0.00 26.00 .46 26.46 .44

Project Appraisal Document Pae 68Bradl: Gas Sector Deveoment Project - BolMa-Brazil Gas Pipeline

Annex 9


Original Amount in US$ Millions and actualLoan oz Fiscal disbursements a/

Project ID Credit Year Borrower PurposeNo. IBRD IDA Cancellations Undisbursed Orig Frm Rev'd

BR-PE-6431 IBRD28100 1987 FEDERAL REPUBLIC OF BRAZI SKILLS FORMATION 74.50 0.00 58.90 .35 59.25 .36

Total 6,890.20 0.00 267.90 3,454.58 4,711.88 295.77

Active Loans Closed Loans Total

Total Disbursed (IBRD and IDA): 3,167.69 14,987.93 18,155.62

of which has been repaid: 338.94 11,870.43 12,209.37

Total now held by IBRD and IDA: 6,283.36 3,192.86 9,476.22

Amount sold : 0.00 45.83 45.83

Of which repaid : 0.00 45.83 45.83

Total Undisbursed : 3,454.58 75.38 3,529.96

a. Intended disbursements to date minus actual disbursements to date as projected at appraisal.b. Rating of 1-4: see OD 13.05. Annex D2. Preparation of Implementation Summary (Form 590). Following the FY94 Annual Review of Portfolio performance (ARPP), a letter

based system will be used (4S - highly Satisfactory, S = satisfactory, U = unsatisfactory, HU = highly unsatisfactory) : see proposed Improvements in Project andPortfolio Performance Rating Methodology (SecM94-901), August 23, 1994.

Note:Disbursement data is updated at the end of the first week of the month.

project Appraisal Document Page 69Brazil: Gas Sector Development Project - Bolivia-Brazil Gas Pipeline

Annex 9

Project Appraisal Document Pa.e. 70Brazil: Gas Sector Development Prjd - Solivia- I Gam Pipline

Annex 10

Brazil at a glancePOWl Ytt4$cN. w6*mdd¢le..S

3qt9 4$uIb~ ll pme dOmvt ndnPopulatinm d4991i(mhSbe), ¶0t 4 4*GtltM per reapita 98(Ub $) f4. VW70 4" ULifeepectancy

Gt9#~o~1J111 1,7 zmnAvetapmiituaT grotIlq41

P '1.4 i GNP Gmossper primay

most e¢¢h¢ttimat ("tVSWA *% 1 capi\ enroDment

wan popuIatnflot Fq hn) It 74 UtJcexpeb nc atbitt&ura 1? 19 69"IntanfmortefltyOt6r 1~O00IA.~t*1hb.t 44 ,37 of Acces to safe water

Actosafeeqrtpop*afo 12 60 .0IIilth %naft~(~o4puIe*lonagS4) - 17 11 I1s

1.14 110 107 A * ilMalh ,, + --Upper-mldl-ljcregropFemabl

KEY ElONOIIC Aw1OS aOnS-TlllIP

GOP (W1gns 11$) 121A 222 716. 740 Economk ntioOrmss domestic Jvem t *4A 12 2Q1 IV.iEcr1sotgood.uni1edsatvice OI 7.5 12.2 V,} 8.6 OpennesofUconnny

229 24A 19* A112Gross nathonai smInlGDP 2t.t 1k3 ItS 1 3 .

Cimentsccountt,abanela-P 4% 4* -S 43*Interest paymentaiGOP 1.7 3 1* 1.t 3"Il Safngs InYBbfTbtel 4&btfGDP *2A 4.0 5 232Total debt-setvo potts 435S s1k 43.1 4671PiesentV,luOfdebWlGP .. 22.1 .Pyesent vatueof d,,ots .. .. Indebbdnes

187.5 11111 1 4(eae annriatomwth - BazUlGOP 3,1 1 4,1 2f9 4. Upw- e grwpa2Npeorapita 10* -04 2.0 1.A 4.0Evcpsfg fooatds md rvice 106 0.8 -4A Ii 70 ____________

STRUCTURE of the ECONOMY____ ___________

1175 116 111 1116(9 of GDP) Grlwth rawds of output and lnvsbnnt (#A)Agriculture 12.1 11.5 14.4 14.4 ToIndustry 40.2 453 36.5 36A f

Manufacturing 303 33.7 23.8 ..Services 47.7 43.1 49.1 49.2 4 S3 S4 S go

Private consumption 66.5 65.8 64.9 65.7 -10General govemment consumption 10.6 9.9 15.9 16.1 - G01 -O GOPImports of goods and services 11.5 7.1 7.6 7.9

197686 1186-S 11 1996(average annual growth) Growth raes of exports and imports (#)Agriculture 4.3 2.6 4.9 3.1 40TIndustry 3.0 -1.1 2.1 2.3

Manufacturing 2.6 -1.5 2.1 .. 20Services 2.9 2.8 5.3 3.3

Private consumption 3.0 1.8 11.0 4.1 oGeneral govemment consumption 1.2 0.7 2.4 0.8 s1 X S5 SGross domestic investment -2.9 -0.6 9.4 0.0 *aoImports of goods and services -4.0 8.9 36.8 5.9 epoeds impoItSGross national product 2.5 1.1 42 2.9

Note: 1996 data are preliminary estimates. Figures in Itaics are for years other than tho specifed.The diamonds show four key indicators in the country Ojn bokld compared vwt its income-group average. N data are missing, the diamond diltbe incomplete.

Project Appraial Document Page: 71

BrFal: Gas Sector Development Project - Bolvia-Brazil Gas Pipeline

Annex 10

Brazil

PRICES and GOVERNMENT FiNANCE1975 1985 1996 1996

Domesticpike Inflation(%(% change) 3.000Consumerprces 25.0 226.9 67.0 2670 200

Implicit GDP deflator 33.9 231.7 74.9 11.11,000

(XdofGDP) o - el 92 93 U.4 9ssr

Cuednt revenue .. .. 31.5 32.4

Pnmary surplus/dicit .. .. 0.4 -0.1 GDP def. O CpIOperational surplus/deficit .. .. -4.8 -3.9

TRADE1975 1985 1995 1996

(rl/lons US$) Export and Import levels (mill. USS)Total exports (fob) .. 25,638 46,508 47,746 30 ow

Coffee .. 2.607 1,970 2,059Other food .. 2,645 3,89q6 4,665Manufactures 13,356 25,568 26,247 40,000

Total imports (cif) 13,153 49,663 53,286 F0FhwFbFNF1Food . .. 3,535 6,044 20,10Fuel and energy .. 6,176 4,649 5,752Capaitlgoods .. 2,480 19,688 19,804

Export price index (1967=100) 97 128 126 90 91 92 93 04 95 96

Import price index (1987=100) .. 79 124 125 0 Exports M ImporsTerms of trade (1987=100) .. 123 103 101

BALANCE of PAYMENTS1976 1965 1995 1996

(nmilbns US$) Current account balance to GDP ratIo f%)Exports of goods and services 9,418 27,713 47,960 49,558 ¶

Imports of goods and services 14,323 16,928 54,306 59,355Resourre balance -4905 10,785 46,346 -9,797

Net income -2,106 -11,213 -15,419 -17,402 % 10 t 92 v3 es 9s

Net current transfers -10 16 3,973 2,899 .1

Current account balance, -2before ofricial capital transfers -7,021 -412 -17,792 -24,300

Financing items (net) 5,956 1,826 30,779 32,935Changes in net reserves 1,065 -1,414 -12,987 -8,635 -4

memo.,:Reservesincluding gold (mill. US$) 4,166 11,613 51.469 59,663Conversion rate (locaWUSS) 3.OE-12 2.3E-09 0.9 1.0

EXTERNAL DEBT and RESOURCE FLOWS1976 1985 1995 1996

(mdllions USS) Compostdon of total debt, 1995 (mill. USS)Total debt outstanding and disbursed 27,329 103,601 159,130 178,131

IBRD 1,045 5,274 6,038 5,876 A cIDA o 0 0 0 G 6038 142 D

30494 3327Total debt sevice 4,320 11,470 22,328 ., 3327

IBRD 98 796 1,868 1,638 EIDA 0 0 0 0 19451

Composition of net resource flowsOflicial grants 9 34 64Official creditors 1,059 935 -1,378Private creditors 4,213 149 9,827Foreign direct investment 1.302 1,348 4.859Portfolio equity 0 0 4,411 .. F

99678World Bank program

Commitments 538 1,525 404 858 A -IBRD E- BilateralDisbursements 249 765 838 1,500 -IDA D - Other mulhlateral F - PnvatePrincipal repayments 26 406 1,377 1,222 C- IMF G -Short-termNet flows 224 359 -539 278 . .

Interest payments 72 391 491 416Net transfers 152 -32 -1,031 -138

Development Economics 8/28/97

Proect Appraisal Document Page 72Brael: Gas Sector Development Project - BolMa-Brazil Gas Pipeline

Annex 11

Supervision Plan

The supervision requirements will be more intensive in the first two years of the constructionperiod, then on supervision activity will decline in line with the start-up of the pipeline operations.

Durine the Construction Phase (First 2 Years) %Yearly Needs

Environmental Engineer 3 6

Ecologist 3 6

Social Scientist 3 6

Engineer/Task Manager 2 10

Regulatory Specialist 2 6

Financial Specialist 2 6

TOTAL J_15 40

After the Construction PhaseYearly Needs

Trips Swks

Enviromnental Engineer 1 3

Ecologist 1 3

Social Scientist 1 3

Engineer/Task Manager 1 6

Regulatory Specialist 1 3

Financial Specialist 1 3

TOTAL | 6 j 21


Annex 12

MXNISTitmO DE bMAS E ENERGIAGABINETE, DO MINSTRO

Oficio e 1146/GMBrasflia, 26 de novembro de 1997.

Senhor Diretor,

Em docorracia das trtativas quc vem sendo mantidas oom essa Institui9io,decomrTnte da implanta$ao do gasoduto Bolivia-Bmsil, informamos que o Govemo Federal, em

wonsonincia cum os ditamcs du Lei ne 9.478, de 6 de agosto de 1997, que zgulanmrm afleibiliza9o do monop6lio do petr6leo, ven realizando eswudos no semnido de estabelecer nmapolitica de preAOs para o per6leo, seus deivados basicos e gis natual, de modo a pronover aabertta desse setor no Brasil, bem como urma regulaigo voltada pam a compet 1o, a serestbelocida pela Agmnci Nacional do Petroleo - ANP, instda pela referida LeL

2. Os enudos mencionados consideram as diretizes que sorbo expiicitadas a seguir,devendo ser objetos de regulamentos especificos, ap6s discuss8es com os demas 6rgaosgovemwnentats e agentes econ6micos euoolvidos, quando for o caso, dentro dos proprios principiosestabecidos na Lei e 9.478/97.

I - Preros dos Combustiveis

3. Conforme Oficio n2 495. de 15 do julho de 1997, do Deatameno Nacional deComnbustiveis a essa Institui91o, varies medidas ji foam lementodas polo Governo Federal nosenido de estabelecer uma politica de pregos dos combustivcis em consonincia com os principiosde umn economia de marcado. AdicionInente, informamos as medidas que estio sendo estudadospar serem colocadas em pritica, durante o periodo detransi9lo de quo trata aLai n9 9.478/97:

a - os pregos do petr6leo de produ9bo naional deverbo refietir o preqo que o petr6leode cada cawpo conseguir no mercado, em firn9o de sua qualidade; essa politica sera colocada emprtica tbo logo sejam celebrados os prinmeiros conttos de concessio corn a Petrobras, previstospara o primeiro semestre de 1998;

b - os preOos dos derivados bisicos de petroo. ex-refinwia, sero fixados com basenos preos dos derivados bisicos importados, vanando de acordo com o prego do mercadointemacionul;

A Sua Senhoria o SenhorGORIND T. NANKANIDiretor para o DepaTtamento Brasil - Banco MundialSCN Q. Z Lote A, Rd. Corporate Financial Center s/ 3031304Brasilia - DF CEP 70712-900

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(Fls. 2 do Oficio n 114 6/MMF de26 denovembro de 1997)

c - para o GLP. aldm do oxplicilo no item b acima, deverio ser provistosmecanismos que suportem os subsidios ao produto, subsidios estos que sero reduzidosgdativumnte, edurante o periodo de transi9io, na medida em que os mesmos sejam repassados aoprero para o consumidor final; ap6s o periodo de wansi9 lo quaisquer subsidios ao GLP. paraatendimento as areas remnotas, sero aplicados mediante decisbo do Congresso Nacional, conformedetormina a Lei n2 9.478/97;

d - para o 6leo combustivel, alem do explicitado no item b acima, deverbo serpreviztos, no perfodo de mansi9bo, mccanismos para a desequalizaSbo gradativa do fiete do produto,bem como estudos que considerem mecanismzos de competitividade efe esse combustivel e o gasnaturaL levando em consideramio, dentre outros aspectos, as quest8es ambientais;

e - o prego do ilcool anidro combustivel continuari liberado em toda sua cadeia deprotduro;

f- o preSo do ilcool hidratado estar liberado, em toda sua cadeia de produ9io, at± ofinal do peiodo detransigio do que tmata a Lei ne 9,478/97;

g - o prego do gis natural is compVahias disinbuidoras de gas canalizado devon sercomposto por parsces quo reflitam o prego do produto e a tafifa de trasporte.

4. Ap6s encenrado o periodo de transi9io de que utata a Lei 9.478/97, todos os pregosdos combustiveis serbo regulados pelos mecanismos de mercado, voltados para a competi9bo.

U1 - Regulamenta.io do Setor GAs Natural

5. A Agncia Nacional do Petroleo - ANP, orgbo encarregado de regular a ind4stria dopetr6loo no Brasil, nos termos da Lei ne 9.478/97, ai incluido o gas naural, tlio logo implantada,deflnirn, com a brevidade possivl, a regula$o para o setor gis natural nos segmentos deoxplora9bo, produqio e tasporte, cabendo aos Estador da Fedemago, nor termos do Art. 25 daConstitui9o, a regulaio do segmento de distribuivbo.

6. Para definir esaa regulabSo, obedecendo aos principios e dirtrizes da Lei n2 9.478/97e as melhores priticas da industria mundial do petr6leo, a ANP contar com o apoio de consultoriainternacioDal especializda.

7. Especificamente para o gas natural, a ANP dever levar em consideragio asseguintes diretrizes, em consonicia com a Lei n 9.478/97:

a - competigo na oferta de gas natural, com a explicitacio da fiino dotranspotador de gas naural; provimento do livre acesso de tenaros aos gasodutos detransporte em bases nao discrimina6r±ias, a partir de uma remuneracao adequada aos proprietfiosdas instala9oes; e implantaoo de mecanismos visando evitar a hegemonia de um ou mais agenteseconfmicos na importa;do, produbo e transporte de gas natural, do modo a favorecer a competikoesperada na oferta do produto,

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(ls. 3 do Oficio n2 1146 6/MVB, de 26 denovembro de 1997)

b - Tiscos da constru1io e operamio de gasodutos de ansporte assumidos pelosagmntes econ8micos responsaveis;

c - pr&tica de tarifas do transporte, pelas companhias transportadoras, considerando adistincia ente a produgio c o consumo, o volume a ser trsportado, os custos de opera$o emanutenqo e tuna remunera$ao do capital compatfvel com projetos dessa naeza; essas tanifasso negociadas livremente entre o ofertante de gis e o consunidor, cabendo i ANP, seuabitramento em caso de confliEo ou incompatibilidade com o mercado,

d - igualdade de oportmidades a todos os agentes economicos interessados emparticipar do setor gas natual, pela arnpla publicidade da politica para o setor c dos interessesdesses agentes, de fonna que possam ser implantadas as melhores altemativas sob o ponto de vistat6cnico-econ<mico, ambiental e de seguran;a;

a - opmra00o dos gasodutos com a maxima efici8ncia, dentro de padroesintcrnacionais de seguran9a, obedecendo aos requisitos ambientais exigidos,

f- especificalo a ser obedecida para o gas natural, tanto de origem nacional comoimportado.

S. A ANP, durante o processo de regulagAo do setor de gas, devera se articular com os6rglos estaduais de regulac,o, responsivais pela definic,ao de regrus e normas para o segmento dedisWIbui95o de g6s, bem como com a Ag6ncia Nacionaal de Energia Eletia - ANEEL, no senido deuere estabelecidas premissas que permitam produzir um sistema de regula9io harm6nico para osetor. contnibuindo para o seu desenvolvimento e consolidaao.

m - Regulaplo Aplicivel ao Gasoduto Boliva-Brasil

9. Tendo em conta os compromissos contratuais ja estabelecidos entre a Petrobras e ascompanhias distnbuidoras de g6s canalizado, bem como as diretrizes gerais explicitadasauteniormn te para a regulalao do setor ghs naturl, a ANP devera observar os seguintes aspectos nariguIo5o das atividades de transporte de gas natural, proveDiente da impartalo desse produto,polo Brasil, en fiun0o dos diversos cenirios de vazoes estabelecidos para o projeto:

I - Cenarios de Vazoes

a - TCQ - Base Transportation Contract Quantity, com vaz5s m6dias variando de 9a 18 MM ml/ dia, ao longo do 8 anos, mantendo-se, ap6s esse perdoo, na vazio de 18 MM m3 /dia,por 20(vinte) anos;

b - TCO - Transportation Capacity Option, acrescenta vaz5es medias de 6 Mm3 /dia, levando a quanidade transportada para vazaes medias variando de 15 a 24 MM ni/dia, aolongo de 8 snos; mantendo-se, apos esse periodo, na vazao mixima, por 40 anos;

c - TCOD - Transportation Capacity Option to be Defined, acrescenta vaz5es ateatingir a capacidade de transporte do gasoduto de 30 MM m3 /dia.

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11 - Aspectos a serem considerados na Regulia,co

a - o gasoduto devera ser operado com a mrxima efici&ncia dentro de padroesinterncionais de seguranMa, obedecendo aos requisitos ambientais exigidos;

b - a operadora do gasoduto devert assumir todos os riscos economicos derivados doemprendirento;

c - a operadora do gasoduto deveri perniitir o livre acesso ao mesmo, para uso deterceiros, relativo a capacidade de transporte restante, acima da capacidade de tansporteestabelecida para o cenArio TCO, conforme regulamentaglo a ser estabelecida, decorrente da Lei ne9.478/97;

d - a detorminao, estabelecida no item "c" anterior, dever& ser implernentada para acapacidade de t-ansporte restante acima da capacidade de transporte estabelecida para o cenirioTCQ caso nro haja viabilizaglo do cenArio TCO;

e - a operadora do gasoduto deverk oferecer servico firme e continuO parm otransporte ate a capacidade do cenirio TCQ;

f - para o transporte acma da capacidade do cenirio TCQ, o servi9o poderi scr tantofirme como interuptivel;

g - as tarifas de transporte a serem praticadas pela operadora para os volumes acimada capacidade estabelecida para o cenirio TCQ deverao contsiderar a distincia cntre a produ;So e osciosgafts, o volume a sr trmnsportado, os custos de operago e manutencao adicionais c a.-e.uneracAo do capital compativel com projetos dessa natureza;

h - a operadora do gasoduto poderi realizar expans5es do mcsmo, desde queautorizado polo orgao regulador competente, A epoca, e desde que nbo hajam outros inteessados emconstruir e operr essas expans6es em condigOes mais adequadas e que resultem em melhorestaifas de tnsporte;

i - a operadora do gasoduto nao podera comprar, bon como uio poder vender gasnatural, exceto pars uso como cornbustivel em estaq8es de gasodutos; e

j - a participacio da operadora do gasoduto nas atividades de produbao e distnbuiode gAs natral dependerm da regula,co especifica sobre propriedade cruzada que advira daregulamonta9bo ida Lei n2 9.478/97.

10. Na Autorizacio de Operaaio a quo estari sujoita a operadora do gasoduto Bolivia,Brasil, a ser expedida pels ANP, devers constar a regulagio a que estani submetida a refeidaoperadora, dentro dos principios aqui considerados, bem como a obnigatoriedade da mesmaimplantar as medidas de controle ambiental estabelecidas nas respectivas licen9as ambientais.

I1. Adicionalmente, cumpre salientar que o Ministdrio de Minas e Enegia deverAelaborar plano, atd 30 de novembro de 1998, com a finalidade de tornar minoritiria a participa9ioda Unilo ns TBG, dentro dos principios estabelecidos no Art. 64 da Lei 9.478197. Esse plano serade conhecimeno dessa institui9bo tio logo elaborado.

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12. Estas sio, portanto, em linhas gerais, as direuizes que o Governo Federal pretendeaplicar no setor do cornbustiveis e, mais patcularmente, no setor de gis natural, ai incluldo ogasoduto Bolvia-Drasil de modo a atender os prmcipios que nortearam a flexibilizaqlo domonopolio do petr6Ieo, os quais estlo consignados na Lei n? 9.478/97, berm comao as medhorespr&ticas da indtisuia mundial do petr6leo.

13. Informamos, ainda, que o Governo brasileiro devera realizar, nos meses do junbo edezembro de 1998, reuni5es com essa insfitui5o para trocar inforragos sobre a cvoluio dapolitica de preoos dos combustivois, o plano pam tomar minoritiria a participagio da Uniio naTrausportadora lrmsileira Gasoduto Dolivia-BRrsil S. A. -TIG, bem como sobre a regulaq1o dosetor de gas natiraL A proposta de regulahio devero estar conchida antes da segunda rcuao.

14. Por oportuno, ressaltamos quo, cm 2 de julho de 1997, foi assinado o Despacho na010/97, c6piB cm anoxo, do Diretor do Departamcnto Nacional de Combustivcis, deste finist6rio,quo autoriza a empresa Transportadora Brasileira Gasoduto Bolivia-Brasil S. A. - TBG, aconstruir, no u-echo brasileiro, o gasoduto Bolivia-B2asil.

15. Gostariamos, tamb6rn, de ressaltar o papol relevante que desempenha o BIRD noprocesso de abertra da indxjstria do petroleo no Brasi o, mais especificamente, nodceuavolvimento do setor de gis natural.

Atenciosamente,

Ministro de

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Petr6leo Brasileiro S.A. - PetrobrasYPFB - Yacimientos Petroliferos Fiscales Bolivianos

BTB GroupENRON Corporation

BOLIVIA-BRAZIL GAS PIPELINE PROJECT

ENVIRONMENTAL ASSESSMENT

EXECUTIVE SUMMARY

November, 1997

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EXECUTIVE SUMMARY

TABLE OF CONTENTS

1.0 Background 1

2.0 Regulatory Fraework .2

3.0 Project Description .4

4.0 Environmental Baseline Condiions .8

5.0 Analysis of Altenatives .17

6.0 Environmental Impacts and Mtigation .18

7.0 Public Consultation .26

8.0 Environental Management .27

9.0 Conclusions .28

10.0 Bibliography ........... 30

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BOLIVIA-BRAZIL GAS PIPELINE PROJECT


EXECUTIVE SUMMARY

1.0 Background

The purpose of the proposed Bolivia-Brazil pipeline project is to transport natural gas producedin central Bolivia to major industrial centers in Brazil, opening a new and important market forexisting Bolivian reserves of natural gas and bringing an additional source of power to theBrazilian energy matrix. The project is being developed by Yacimientos Petroliferos FiscalesBolivianos (YPFB) and Petrobras, together with participating partners Enron Corporation, andthe BTB Group. The BTB Group represents a consortium comprised of Broken Hill ProprietaryCompany Limited (BHP), El Paso Energy, and British Gas.

In 1988 the presidents of Bolivia and Brazil signed a "Treaty for Integration of Energy" in whichBrazil committed to purchase electric power produced with Bolivian natural gas in a thermal plantto be erected on the border between the two countries. This Treaty was later followed byadditional negotiations and agreements for the transportation and sale of gas to the main industrialcenters of Brazil, delivered through the proposed gas pipeline.

In 1990 YPFB commissioned an Environmental Impact Study to be completed for construction ofthe Santa Cruz - Puerto Suarez gas pipeline and a thermoelectric power plant in Puerto Suarez.Environmental missions from the Inter-American Development Bank (IDB) and the World Bankvisited Bolivia in 1991 and submitted comments and recommendations to the government ofBolivia and YPFB upon completion of their missions. The Bolivian government gave its approvalto the project in 1991 by signing the Declaratoria de Impacto Ambiental and Resoluci6nMinisterial #269/91. In the intervening period since 1991, the scope of the project changedsubstantially. The Puerto Suarez power plant is no longer part of the project, and the pipeline hasbeen extended to include the Brazilian segment. Due to these changes and new environmentalregulations, additional environmental studies were required in Bolivia and a complete EIA wasrequired in Brazil.

Beginning in 1992, Petrobras commissioned a Brazilian consultant to produce an EnvironmentalImpact Assessment (EIA) and Risk Analysis (RA) for the Brazilian sector of the project. Thestudies were completed in two phases, the first segment being from Corumba to Curitiba and thesecond from Curitiba to Porto Alegre. In 1996 and part of 1997 the studies were revised,consolidated, updated and completed, when necessary, to comply with the requirements set out bythe World Bank's and IDB's Guidelines.

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Since 1992, the EIA, Risk Analysis and numerous supplemental environmental reports have beensubmitted to Brazil's federal environmental office and the environmental agencies in the fiveaffected states, and the licensing process has been completed.

In January, 1996, work commenced on an Environmental Impact Study for the Bolivian sector toreflect the current project scope and environmental conditions. The EIS was based upon acomprehensive review of existing information, field work, and community consultation toevaluate the biophysical and socioeconomic environments in the area of influence of the project.The report was completed and presented to Bolivia's Ministry of Sustainable Development andEnvironment in November, 1996, and an amendment to the environmental license has alreadybeen issued.

2.0 Regulatory Framework

Although the project will be constructed under two different environmental legal and institutionalframeworks, at design it was decided at the onset to treat the entire length pipeline as a singleproject rather than two altogether different segments. The environmental management plans, theenvironmental guidelines for construction, as well as compensation criteria have been uniformlyapplied to the entire length wherever possible. Environmental supervision and environmentalaudits will be carried out by consultant firms and auditors responsible for the whole length and allwork fronts.

Bolivia

Bolivia's Environmental Law No. 1333, enacted in 1992, established procedures forenvironmental management and regulatory compliance for activities potentially impacting theenvironment. Article 62 of the Environmental Law provided that indigenous populations, togetherwith public and private nonprofit institutions, social entities and traditional communities mayparticipate in the administration of Protected Areas. The Ministry of Sustainable Developmentand the Environment (Ministerio de Desarrollo Sostenible y Medio Ambiente - MDSMA),created in 1993, has recently enacted six environmental regulations associated with Law No.1333, addressing the following issues: Environmental Management (Reglamento General deGesti6n Ambiental); Environmental Prevention and Control (Reglamento de Prevenci6n y ControlAmbiental); Air Pollution (Reglamento de Contaminaci6n Atmosferica); Water Pollution(Reglamento de Contaminaci6n Hidrica); Hazardous Substances (Reglamento para Actividadescon Sustancias Peligrosas); and Solid Waste Management (Reglamento de Gesti6n de ResiduosS6lidos).

The Subsecretariat of the Environment (Subsecretaria del Medio Ambiente) was created tomonitor compliance with the new regulations and environmental legislation.

Hydrocarbon Law No. 1689, was signed in May, 1996. Environmental regulations necessary toenforce this new law have been proposed, but have not yet been promulgated. The law providesthat an administrative concession must be granted prior to construction and operation of a

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pipeline. The law also defines tariff requirements and responsibility for supervising and inspectingconcessionaires. Transportation of hydrocarbons by pipelines is governed by the principle of freeaccess.

Public Participation Law No. 1551 and its associated regulations were passed in 1994. The Lawand its regulations established procedures for encouraging and involving the indigenous, rural, andurban communities in the judicial, political and economic processes of the country. Law No.1551 transferred some levels of authority from the central government to municipal governmentsand provided for distribution of a portion of tax revenues collected from the central governmentto the municipalities.

In September, 1995, Supreme Decree No. 24122 gave protection status to over 3.4 millionhectares of land and established the Gran Chaco National Park and its Integrated ManagementAreas. The Decree defined the Bolivia-Brazil gas pipeline right-of-way as the boundary linebetween the park and the Integrated Management Area.

Bolivia's regulations related to archaeological heritage declare that all artifacts are property of theState and require authorization from the Ministry of Education and Culture prior to excavationactivities. The regulations also establish penalties for destruction, damage, removal, orexploitation of cultural resources.

There are a number of proposed laws which have not yet been passed, including laws onindigenous settlements, biological diversity, and environmental norms for the hydrocarbon sector,the latter being supported under a World Bank Technical Assistance project. Progress of theseproposed laws will be monitored by Project Sponsors to ensure compliance and identify anypotential areas of concern for the project.

Brazil

In the Brazilian Constitution (Carta Magna Brasileira) which was rewritten 1988, Chapter, No.VI, Article 225, was devoted to the environment, which confirmed the growing importance of thismatter in Brazil. The Constitution also allocated authority to legislate on environmental issuesbetween Federal and State levels.

The National Policy for the Environment (PNMA) was established under Article 2 of Federal LawNo. 6.938 dated August 31, 1981. The purpose of the Law was the preservation, improvementand recovery of environmental quality, to ensure conditions for socioeconomic development, incompliance with the interest of national security and for protection of the dignity of human life. In1990, Decree No. 99.274 created the National Environmental System (SISNAMA) as anorganization with responsibility for promulgating rules and regulations to enforce the NationalEnvironmental Policy..

From the array of directives consolidated into the PNMA stem the main guidelines related toenvironmental protection, through regulatory decrees, ordinances and resolutions enacted by thebodies and agencies that integrate the National System for the Environment

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The Consultant and Deliberative Body of the SISNAMA is the National Council for theEnviromnent (CONAMA). CONAMA has responsibility for advising on the establishment ofFederal environmental policies and issuing regulations to implement the National EnvironmentalPolicy.

CONAMA's first resolution, and one of the its most important, was 01/86, which imposed therequirement for an environmental impact study for projects which have the potential to impact thephysical, chemical or biological environment. These studies are a fundamental part of thelicensing process. Decree No. 99.274 established environmental licensing as a three-stageprocess, including a Previous License, Installation License, and Operating License.

CONAMA Resolution 06/86 provides that the request for environmental licenses must bepublished in the Official State Newspaper and in all major local newspapers in the project area.Resolution 09/87 requires that public audiences be held to review the environmental aspects ofmajor projects. In accordance with these CONAMA resolutions and various state resolutions,notice of the Bolivia-Brazil project was published in the official federal journal and in the majorregional or local newspapers in each state. The notices advised the public where the RIMA(environmental impact summary) for the project was available for review, normally in the locallibrary. Public audiences were held in each state to provide local citizens an opportunity tounderstand and evaluate the project.

3.0 Project Description

Route

The Bolivia-Brazil Gas Pipeline will extend approximately 3100 kilometers from a point near thecity of Santa Cruz de la Sierra, Bolivia, and terminating near the city of Porto Alegre in Brazil.The transmission system will originate at the Yacimientos Petroliferos Fiscales Bolivianos (YPFB)Rio Grande Natural Gas Plant located approximately 40 kilometers southeast of Santa Cruz andextend approximately 560 kilometers in an easterly direction to the town of El Carmen de laFrontera on the Bolivia-Brazil border. The Brazilian segment extends approximately 2500 kmthrough the states of Mato Grosso do Sul, Sao Paulo, Parana, Santa Catarina and Rio Grande doSul (see map nex page).

The Bolivian sector of the project will traverse the Baniados de Izozog, then cross thepredominantly flat tropical dry forest of the Bolivian Chaco region within the Department ofSanta Cruz. East of the Otuquis river, the pipeline will cross the northern portion of the Otuquisand Tacuaral marshes. In Bolivia the route crosses the Rio Grande, San Miguel and Otuquisrivers.

From the border, the route continues southeast crossing the Paraguay River and the Pantanalmarshland, running parallel to Highway BR-262. In the 700 kilometer segment through the state

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of Mato Grosso do Sul, the pipeline crosses the Miranda, Pardo and Verde rivers. The pipelinethen crosses the Parana river into the state of Sao Paulo, continuing southeast, and crossing theTiete river to the Petrobras REPLAN refinery at Campinas. From the refinery, the route turnssouth through Capao Bonito where it crosses the Paranapiacaba mountain range, then reaches theItapirapua river which separates the states of Sao Paulo and Parana. The route crosses theRibeira river and follows the right-of-way for existing oil pipelines into the state of SantaCatarina, then east of Curitiba and across the Tijucas Mountain Range and the Tijucas river.From this point, the route follows a new right-of-way, passing west of Florian6polis andterminating at the Alberto Pasqualini Refinery near Porto Alegre.

Environmental considerations played a key role in defining the route for the Bolivia-Brazil GasPipeline in both countries. After the primary objective of transporting natural gas from supplysources to market demand, the route was laid out based upon environmental sensitivity mapping.The route was further refined based upon environmental conditions identified through fieldreconnaissance.

Ecologically sensitive areas and areas of high population density were avoided to the extentpossible. For example, in Bolivia the route was relocated to avoid the Cafion de la Victoria areadue to its ecological importance. The Cafion de la Victoria is a hydrologic and biologicalconnection between the wetland systems of the Bafiados de Otuquis, in Bolivia, and the Pantanal,in Brazil. The route was modified to avoid crossing in this area which would impact a largenatural wetland and might affect the hydrologic connection between the systems.

In Brazil, many deviations were made to the route to reduce impa. in environmentally sensitiveareas. One notable example is in the Pantanal area. The original route in the Pantanal passed 40km to the north of BR-262. In order to avoid crossing in this ecologically sensitive area of thePantanal, the route was diverted to the south following the highway through previously impactedranching and agricultural areas. Although this resulted in a considerable increase in cost, it wasconsidered prudent in view of the environmental considerations.

Engineering Design

The pipeline system will have an initial contract demand of 8.0 million standard cubic meters perday with a maximum capacity of 30.0 million. Pipe will be manufactured in accordance with API-5L, X-70 and X-65 standards and will range from a maximum of 32 inches in diameter at the RioGrande Gas Plant in Bolivia, progressively decreasing to 16 inches at Porto Alegre. Wallthickness will range from 0.406-0.650 inches, depending upon the design factor. The pipeline willbe designed for a maximum allowable operating pressure of 1420 psi with a minimum deliverypressure of 450 psi. In order to increase its transportation efficiency level, the pipe will beinternally coated. Corrosion protection for the pipeline will be provided using external anti-corrosive coating and a cathodic protection system. Automatic reduced pressure shutdown valveswill be installed to ensure safety of the line. Locations of these valves will be determined during

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the detail design phase of the project. Pig launchers and receivers will be installed for the purposeof internal inspection and cleaning of the pipe

There will be two metering stations in Bolivia and five in Brazil. It is anticipated that thirty citygates will be installed by State concessionaires along the gas pipeline in Brazil. Four compressorstations are included in the system design for the Bolivian sector and twelve for the Braziliansector. Compressor station locations were selected based upon hydraulic studies and finalizedtaking environmental considerations into account. The stations will be constructed as requiredduring the life of the project to increase delivery volumes and maintain acceptable pipelinepressure. In the initial stage of the project only one station will be constructed in Bolivia and fourin Brazil. Compressor station sites will be restricted to a maximum 300 x 300 meter area inBrazil, with Bolivia requiring a smaller area, as the natural forest will mitigate noise from thecompression equipment.

Meter stations and compressor stations will be automated for remote monitoring and control. ASupervisory Control and Data Acquisition (SCADA) system will serve to monitor and control allpipeline facilities from two Gas Control Centers, located in Santa Cruz, Bolivia and Guarulhos,Sao Paulo, Brazil. Each compressor station and meter station, as well as some valves and otherremote facilities will be provided with electronic communication equipment for process controland data transmission to relay information to a host computer via the telecommunication system.

Logistics

Pipeline construction has been segregated into thirteen spreads - two in Bolivia and eleven inBrazil. Each spread will have one permanent camp and smaller camps which will move asconstruction progresses along the right-of-way. Camp site locations in Bolivia have beenidentified using the following criteria:

* Minimize disturbance of virgin ground* Maximize use of readily available access roads* Minimize number of camps and the size of the areas, primarily by 1) using areas for multiple

purposes such as camp and storage and 2) using one camp location for two constructionspreads at different times

* Minimize distance to storage yards

Location of camps in Brazil will be determined by the construction contractors, with the approvalof the Project Sponsors' environmental team. The camp site locations must also have approvalfrom the municipal governments and the local environmental authorities. Camps will be locatedaway from small towns, and will not be permitted in sensitive areas.

Extensive logistics studies have been conducted to determine methods for transportation of pipeand materials to the work sites. Seven possible sea ports have been identified for use in theproject - four in Brazil, two in Argentina, and one in Chile. Internal ports on the Paraguay rivernear the Bolivia-Brazil border will also be utilized for offloading. Pipe imported through ports inArgentina may be transported by river to the Bolivia-Brazil border, then by train or roadway to

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designated storage yards in Bolivia and Brazil. Materials may also be transported from Argentinavia the Beigrano Railway to Santa Cruz, then to storage sites by rail.

Pipe received through the four Brazilian coastal ports will be transported to storage areas bytruck. Pipe received through the port in Arica, Chile, will be transported by truck to Santa Cruz,then to storage yards by railway.

There will be two primary storage areas in Bolivia and four in Brazil. From the storage yards,pipe will be transported by truck to the right-of-way for stringing.

No new access roads are proposed for the project; however, in some cases existing access roadswill be upgraded. The majority of the required rework consists of drainage improvements andreshaping of existing roadways.

Construction

The construction right-of-way will be a maximum of 30 meters in Bolivia and 20 meters in Brazil.The additional width is required in Bolivia to provide free movement of construction equipment inthis area of limited road infrastructure. The permanent right-of-way will be reduced to 17 metersin Bolivia following construction. The pipeline will be installed approximately one meter belowgrade, or deeper in agricultural areas if required.

The pipeline construction will consist of several distinct phases, including clearing, grading,ditching, lowering-in, backfilling, hydrostatic testing and restoration. Highway crossings, rivercrossings and other unique topographic features may require the use of specialized constructiontechniques to mitigate and minimize environmental impacts.

An Environmental Construction Plan describing basic environmental construction techniques to beused for the project has been developed. The plan includes impact minimization techniques thatwill be employed during and after construction. These procedures have been designed to protectthe environment and to minimize any potential effects of pipeline construction. Topics covered inthe plan include:

* Preconstruction planning and standard environmental construction methods* Erosion and sedimentation control practices, restoration and revegetation* Specialized construction methods including waterbody and wetland crossing procedures and

site-specific construction methods for environmentally sensitive areas* Measures to prevent, contain, and control spills

During the detailed design phase of the project, the application of these procedures will be definedon a site-specific basis for the entire pipeline alignment. Construction of the pipeline is expectedto last 36 months.

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4.0 Environmental Baseline Conditions

The study area in Bolivia was defined as an area located 10 km to the north of the Santa Cruz toPuerto Suarez railroad and 10 km to the south of the proposed pipeline alignment. This studyarea incorporates both the proposed pipeline route and the main route alternative considered forthe project.

For the purpose of physical and biological baseline studies, the indirect influence area in Brazilcomprises a 20 km wide strip, which was established based upon technical and economicconsiderations. Various routing alternatives were analyzed within this area to identify theoptimum route from an environmental, technical, and risk perspective. The direct influence areawas defined as a 1,000 meter area on each side of the pipeline alignment.

For socioeconomic baseline information, the study area in Brazil includes the entire area of all themunicipalities crossed by the pipeline which have their administrative seats in the 20 km strip.The data was taken from official data sources, qualified when necessary by primary data collectedduring field research. Archeological data was collected from all the municipalities crossed by thegas pipeline, not just those with administrative seats within the 20 km indirect influence area.

4.1 Physical Environment

Climate, Air Quality and Noise

The entire area of influence of the project in Bolivia is within the Steppe Climate zone accordingto the Koppen classification system. In general, this climate is characterized by warm dry winters,with mean temperatures over 23 degrees Centigrade. The distribution of average annual rainfallvaries from about 700 mm/yr in the southwestern portion of the study area to more than 1000mm/yr in the east.

The gas pipeline in the Brazilian sector will run through two very distinctive climatic units. Thefirst unit is the region between Corumba in the state of Mato Grosso do Sul, and Campinas, in theState of Sao Paulo, where the climate is tropical with a wet summer and a dry winter. In thePantanal region there is a one to three month rainy season and a dry period which extends from90 to 270 days. In the second climatic unit from Campinas to Porto Alegre the climate isclassified as wet subtropical, controlled by tropical air masses with local changes due to steephills.

The majority of the gas pipeline route extends through undeveloped or agricultural and pastureland with minimal or no human activity. Consequently, the air quality and noise levels along thepipeline right-of-way are, in general, associated with the natural environment and correspond tolow levels of air pollution and noise. The proposed storage yards and compressor stations are tobe located within or in the vicinity of small, non-industrial urban areas. Air quality is good inthese areas, and noise levels are in the low to medium range.

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Geology, Geomorphology and Soils

The Llanura physiographic province in Bolivia is a broad, northwest-southeast trending troughwhich is bounded on the northeast and southwest by relatively elevated portions of the BrazilianShield and the Faja Subandina, respectively. The surface of the Llanura is characterized by anearly complete cover of quaternary aged sediments. These consist of varying thickness ofgenerally fine grained sediments (clay, silt, and fine sand with lesser amounts of medium to coarsesand and gravel), which were deposited by alluvial, fluvio-lacustrine, coluvial and eolianprocesses.

Lands surveyed in the Brazilian sector range from pre-cambrian to quaternary times.Approximately 75% of the route is through sedimentary and volcanic rock of the ParanaSedimentary Basin of the Paleozoic and Mesozoic ages. There are three environmentallysensitive areas from a geological perspective, 1) the section between Corumba and Aquidauana, inthe State of Mato Grosso do Sul in the Pantanal complex, 2) the region of Planalto deParanapiacaba, next to the border of the States of Sao Paulo and Parana, where there is thegreatest density of areas with high physical fragility, and 3) the uphill portion of the foothills ofSerra Geral, where there is a steep escarpment and the presence of rocks and deposits of taluswhich subject the hillsides to extreme instability.

The entire study area has a low degree of seismic activity which is confined to shallow surfacelayers, with a small probability of earthquakes due to the geotectonic configuration of the region.Coal deposits are present in some sections of the study area in Brazil, principally in the State ofSanta Catarina.

Hydrology and Water Resources

The study area in Bolivia lies on the drainage divide between the Amazon basin to the north andLa Plata basin to the south. The proposed pipeline route lies within the Llanura Chaquefia, whichis generally flat with very little relief, except where the plain is cut by occasional small streams andcreeks. The most significant rivers which cut the Llanura Chaquenia in Bolivia include the RioGrande and the Rio Parapeti, which drain the western portion of the region and flow northward tothe Amazon Basin; the southward flowing Rio San Miguel, which drains the central portion of theregion; and the eastward flowing Rios San Rafael/Aguas Calientes, Tucavaca, and Otuquis, whichdrain the Sierras Chiquitanas in the eastern portion of the region, draining south and east to theRio Paraguay.

Rivers, streams, and creeks in the Llanura Chaquefia generally lack well-defined channels, and areoften characterized by broad meandering floodplains, frequent bank erosion and channel shiftsduring periods of high flows. Large areas of the Llanura Chaquefia are subject to periodicflooding.

The proposed pipeline route in Bolivia also traverses two large wetland regions; the Bafnados deIzozog, associated with the Rio Parapeti and the Bafnados de Otuquis, associated with the RioOtuquis and the Pantanal area. The Cafion de la Victoria is an intermittent connection between

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two distinct wetland systems, the Bafnados de Otuquis in Bolivia and the Pantanal system inBrazil.

In Brazil the project will pass through the hydrographic basins of the Paraguay river, the Paranariver and the South Atlantic. The Paraguay river basin drains an area of approximately 500,000square kilometers. The Paraguay River is the main drainage vector of the Pantanal Complexwhich belongs to the Pantanal Depression geomorphologic unit. The extreme flatness of the area,with reduced hydraulic gradients is responsible for its very low drainage flow velocities. TheParaguay River is characterized by unstable banks and a meandering bed. The Miranda river is atributary of the Paraguay river within this basin.

The Parana hydrographic basin has a total area of 2,600,000 square kilometers and includes theSoutheast region of Brazil, Paraguay, Eastern Bolivia, and Northern Argentina. Its vast networkof rivers include the Pardo, Verde, Parana, and Tiete. The rivers are typical highlands rivers withflow directions following the topographic gradient of the region.

The hydrographic basins of the South Atlantic are small, comprised of numerous small rivers thatrun predominantly in a Southwest/Northeast direction in a course that is parallel to the coastline.These rivers have origins in the backlands of the Serra do Mar, and upon reaching lower lands,have meandering courses over sedimentary fluvial and marine deposits. The Itajai Acu river basinhas been impacted by high organic and chemical discharges from the textile, metallurgical, andfood industries located along the Blumenau/Brusque axis.

4.2 Biological Environment

FHora

Various types of vegetation cover are present throughout the study area in Bolivia, particularlysince the area is a transition zone between the biogeographic regions of the Cerrado and theAmazon to the north, the Chaquefna region to the south and the Andes to the west. The threemain vegetation types are:

Dry Forest - The area between the Rio Grande and Rio San Miguel is predominantly dryforest. The vegetation formations in this area are characterized by dense low shrubspecies and low altitude trees. Scattered emergent trees, approximately 20 meters inheight are embedded in a matrix of smaller trees with a relatively open understory. Theground cover stratum is dominated by shrubby vegetation, and dense thickets of terrestrialbromeliads are scattered throughout the forest.

Riparian Forest and Marshland - Riparian forests, characteristic of the Bafnados deIzozog region, grow along the Rio Parapeti. These tall, dense semi-deciduous forestsremain flooded the majority of the time. In addition to the arboreal stratum, the area ischaracterized by an abundant shrub stratum, vines and ferns. The understory is dominatedby tree saplings. Many palm species are also associated with the riparian forests and otherinundated areas such as the Tacuaral and Baniados Otuquis.

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Savannah - Forested Savannah is present in broad areas east and southeast of theserranias de San Jose de Chiquitos. In general, these areas are dominated by grasses andsedges, with patches of dense shrub with heights ranging from 1 to 3 meters and smallisolated trees. Scattered palms are in evidence in the eastern wet portion of this forestedSavannah area.

In Brazil, the majority of the area crossed by the pipeline route has already been impacted byhuman activities. Much of the area is characterized by pasture, agriculture and cultivated forest.Only small areas of primary vegetation remain. The main vegetation types identified in the area ofinfluence are represented as the following Ecological Zones: Pantanal, Cerrado, Seasonal Forest,Atlantic Forest, Araucaria Forest, and Campo Limpo. Each one of these types is directlyinfluenced by its physical and/or socioeconomic condition.

Pantanal Complex - The Pantanal is a complex mosaic of landscapes characterized by atleast six vegetation types, including Cerrado, Grassy Timbered Cerrado, Cerrado Park,Cerradao, Semideciduous Seasonal Forest, and Deciduous Seasonal Forest. In spite ofbeing decharacterized by human intervention, the Cerrado still maintains its dense arborealcharacter, constituted of elements of low and medium height, with about 50% of thespecies comprised of trees and thomy shrubs. The Grassy Timbered Cerrado ischaracterized by periodic floodings with a predominantly creeping vegetation, mixed withrare shrubs. The Cerrado Park is characterized small trees sparsely interjected over acontinuous mat vegetation and tufts of arboreal Cerrado vegetation. The Cerradaoformation has an average height of about 10 meters, occurring predominantly in isolatedareas of the Pantanal Matogrossense plains. The upper canopy of the deciduous seasonalforest has an average height of about 20 meters, and is found in the area between theParaguay and Miranda rivers.

Cerrado - The Cerrado is characterized by the following vegetation types: Cerradao,Cerrado Gratnineo-Lenhoso or Campo Cerrado and Campo, the latter being the result ofintervention by human activity in the area. The Campo Cerrado in this formation isextremely degraded, as a result of the burning for creation of pastures.

Seasonal Forest - This type of forest usually occurs in regions under the influence of twodistinct seasons, a rainy season and a dry season, causing partial deciduality of its arborealspecies, primarily the ones which occupy the upper canopy of the forest. This vegetationtype is found only in scattered areas of the State of Sao Paulo and small areas of RioGrande do Sul, although in the latter area it has been largely replaced by agriculture andpastures.

Atlantic Forest - The Atlantic Forest is a dense pluvial tropical forest located along theBrazilian coast line near the Parana State border and parts of the State of Sao Paulo. Itsdense vegetation with an upper layer of trees approximately 25 meters in height ischaracteristic of wet tropical areas, which do not have a biologically dry period.

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Araucaria Forest - The Araucaria Forest occupies areas of high altitude, primarily in theSerra do Mar slopes. Its main characteristic is the large occurrence of Parana pine, whichis the dominant species of the upper canopy.

Campo Limpo - Within the study area, the Campo Limpo formation occurs almostexclusively in the State of Rio Grande do Sul. It is characterized by a variety of grassspecies growing in shallow soil layers.

Fauna

The composition and diversity of fauna present in the study area varies according to the life zoneand level of disturbance of the natural habitat. The temperate dry forest area of the Chaco regionhas one of the highest mammalian species diversities on the continent. The majority of themammals present in this area have extensive distributions in this part of the continent; however,this area also represents the southern limit of dispersion of some of the large Amazonian mammalslike the capybara, jaguar, puma, and some primate species. The Pantanal Complex has a greatbiodiversity system, with great areas of flooded vegetation, which are habitat for some of Brazil'srichest fauna. However, the process of environmental modification that the area has experiencedhas significantly reduced the populations of some species. The extensive use of land in Brazil forranching and agriculture has contributed to the declining populations in much of the study area.

The avifauna exhibits Amazonian influences from the north and Andean-Patagonian influencesfrom the south and southwest. In the western portion of the Bolivian study area the mostconspicuous bird species include parrots, toucans and wading birds. In the dry and humid forestareas the typical species include the various pigeons, Toco toucan, cardinal, Greater Rhea, andvultures. In the Pantanal and the Bafnados de Izozog area and in Isla Verde, large concentrationsof ibis, storks and herons are present. Within the study area are also a great number of migratorybirds.

The herpetofauna are also rich, with the occurrence of diverse species of amphibians and reptiles,and a great number of turtles. The Pantanal area also harbors several caiman species and lizards.

The many rivers in the Project area of influence harbor a high fish species diversity, beingsurpassed in the neotropics only by the total existing in the Amazonian basin.

Species of Concern

The most pursued and threatened mammalian species include large mammals such as deer, wildpigs, and large cats which are hunted for their meat and skin. The felines are huntedindiscriminately because they are considered a threat to cattle which occupy a broad area of thewoodland. Among the species which require protection are Tayassu tajacu (Collared Peccary),T. albirostris (White-lipped Peccary), Catagonus wagneri (Chacoan Peccary), Alouatta caraya(Black Howler Monkey), Mazama Americana (Agouti), Tapirus terrestris (Brazilian Tapir),Dawypus novemcinctus (Nine-banded Armadillo), Priodontes maximus, Tolypeutes tricinctus,Panthera onca (Jaguar), Felis concolor (Puma or Cougar), Blastocerus dichotomus (Marsh

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Deer), Hydrochaeris (Capybara), Chrysocyon brachiurus (Maned Wolf), and Ozotocerusbezoarticus (Pampas Deer). The Chacoan Peccary, blind armadillo, and the Chaco race of theGuanaco (Lama Guanico) are endemic to the Chaco and are not adequately protected in any otherconservation area.

There are also a great number of avifaunal species which are threatened with extinction or thathave a declining population, including Amazonetta brasiliensis (Brazilian Duck), Anodorhychushyacinthinus (Hyacinth Macaw), Amazona xanthops, Columbina cyanopis, Alecturus risona,Ara ararauna, Culcivora caudacuta, Nothura minor, and Falco deiroleucus (Bat Falcon), amongothers. A great number of migratory birds, like the macaricos and the swallow are also in theprocess of reducing their populations.

The reptile species which is most threatened due to intense hunting is the caiman. In Bolivia, theCaiman yacare is intensively pursued, although there are laws to protect these reptiles. In Brazilthe Eunectes notatus, Dracaena notatus and a great number of turtles are also endangered.

Threatened plant species in the Chaco area include Bulnesia sarmientoi and several species oforchids. There are also many ecologically critical vegetation species found in Brazil, such asAspidosperma, Bromeria, Cereus, Mimosa, Curatella americana, and Agonandra brasiliensis.

Protected Areas and Areas of Environmental Sensitivity

In Bolivia the most ecologically sensitive area impacted by the project is the Gran Chaco NationalPark and Integrated Management Area, instituted in 1995 to protect the largest tract ofsubtropical dry forest in the Americas. The other protected area in Bolivia potentially impactedby the project is the Historical National Park of Santa Cruz La Vieja. National parks in Boliviaare areas of ecological or historical significance which are set aside and protected, to allow naturalevolution and development of existing ecosystems with minimal human intervention. IntegratedManagement Areas are areas which have a management plan for the controlled use anddevelopment of renewable natural resources. The management plan is designed to maintain abalanced interface between man and the ecological environment. The Gran Chaco and theadjacent Banlados de Izozog are rich in biodiversity and high in floral endemism. The Chaco is thelargest protected area in South America and contains one of the highest mammalian speciesdiversities on the continent.

In Brazil there are three primary areas of environmental sensitivity - the Pantanal Complex, MataAtlantica, and Aparados da Serra. A 70 km stretch of the pipeline from the Verde River to apoint just south of Miranda in the state of Mato Grosso do Sul will traverse the Pantanal, whichis the world's largest fresh water swamp. The Pantanal is a unique ecosystem which is habitat formany of the world's threatened and endangered species. The Mata Atlantica is an ecologicallysensitive forest which has been officially designated as a protected area. The cutting ofvegetation in this area is forbidden by federal decree, unless specifically approved by IBAMA.The pipeline will cross 70-100 km of Mata Atlantica in the state of Santa Catarina, which totalsapproximately 62 hectares of forest. The Mata Atlantica is notable because of its diversified faunaand flora, primarily smaller mammalian species and avifauna. The forest area is somewhat

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fragmented, however, due to farming, ranching and silviculture. The Aparados da Serra which islocated on the boundary of the states of Santa Catarina and Rio Grande do Sul is a legallyprotected area. The area is particularly sensitive to erosion and is characterized by patches ofMata Atlantica, steep topography and associated talus deposits. There is significant rainfallassociated with this topographic variation which accelerates the erosion process.

The following Legally Protected areas are located close to the Project Influence Area in Brazil:

* Pantanal Arenoso Biological Reserve;* Pantanal Matogrossense Environmental Protection Area;* Corumbatai Environmental Protection Area;* Ibitinga Environmental Protection Area;* Ipanema National Forest;* Aparados da Serra National Park;* Serra Geral National Park;- Mata Atlantica Biosphere Reserve; and3 Permanent Preservation Areas (riparian woods, marshes, areas of steep slopes)

4.3 Socioeconomic Environment

Land Use

Most of the study area in Bolivia is under natural vegetation cover. Low precipitation andrelatively poor soils limit the capacity of the land to sustain intensive cattle ranching oragricultural activities. Human concentrations are scattered. The most prevalent land use type islowland deciduous forest, which has been developed only to a small extent by the loggingindustry, apparently due to the lack of moisture, which limits the development of commerciallyvaluable timber resources. The second most prevalent land use type is the lowland pasture and/orshrubland, which is used for low density grazing and limited agriculture, and found primarily inthe central portion of the study area. The floodplains of the Parapeti River in the west and theOtuquis River in the east which are characterized by abundant surface water, as well as shallowgroundwater, support limited agricultural development, primarily rice. The most significant areasof cultivation occur in the western portion of the study area, mainly to the west of the RioGrande. Principal crops grown in this area include soybeans, sunflowers, barley, and corn.

In Brazil the predominant land use in the study area is pasture, which occupies approximately60% of the total area. Natural vegetation cover occupies 15%, and agricultures occupies lessthan 10%. The distribution of these land uses varies among the states.

Two thirds of the land in the state of Mato Grosso do Sul is utilized for ranching, due to thenative grasses which constitute the basic feed support for cattle. A small amount of the land isused for crops, principally soybean, rice and wheat. In Sao Paulo, the primary land use isagriculture, principally sugar cane. Remnants of the Mata Atlantica (Atlantic Forest) are alsofound within this state, near the Parana border. The forest in this area has been greatly altered by

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agricultural and ranching activities. In Parana, 40% of the land is agricultural, and 20% is usedfor cattle grazing. Natural forests and vegetation occupy approximately 15% of the area, and 8%of the land is used for commercial tree farms. In Santa Catarina, the primary land use isagriculture, with a large number of annual crops such as banana, rice, pineapple, sugar cane,tobacco, and manioc. The principal land use in Rio Grande do Sul is ranching (65%), followed bynatural forests (22%). Annual crops occupy a small percentage of the study area.

Population and indigenous peoples

The sparsely populated study area in Bolivia is concentrated in six urban settlements, with acombined population of less than 50,000 inhabitants - Pail6n, San Josd de Chiquitos, Robore, ElCarmen, Puerto Suarez, and Puerto Quijarro. There are three indigenous groups located withinthe study area: the Ayoreos, Chiquitanos, and the Izozefno Guaranis. The Ayoreos have a semi-nomadic culture and inhabit the areas located along the Santa Cruz-Puerto Suarez railroad. TheChiquitanos reside primarily in areas located in the vicinity of San Jose de Chiquitos. TheIzozenios live along the Parapeti River in the area of the Bafnados de Izozog. The twenty-twocommunities in Izozeino Guarani group, with a total of 7500 people, are well organized andconstitute the Capitania del Altoy Bajo Izozog (CABI).

In Brazil, the population in the indirect influence area of the pipeline is approximately sevenmillion, with over 90% being concentrated in urban areas. The demographic density isapproximately 50 inhabitants per square kilometer. There are four indigenous groups in thepipeline area, three located in the states of Mato Grosso do Sul and one in Santa Catarina. Theindigenous lands of Mato Grosso do Sul are a territory of the Terena Indians, with a population ofapproximately 3500. These indigenous people have had many years of contact with other groupsof Brazilian society and have integrated into the regional life as agricultural and urban workers.The Guarani Nandeva Indians in the state of Santa Catarina have historically lived a semi-nomadiclife, existing upon hunting, fishing and subsistence agriculture. This social organization ischanging, and the few remaining Indians are concentrated in one family unit living in the area ofPalhoca. It is not anticipated that there will be any resettlement either in the Bolivian or Braziliansector due to the pipeline project.

Economy

The Bolivian macroeconomy faced a deep crisis in the mid-80's. Inflation rose to 24,000 percentin 1985. However, since 1985, Bolivia's economy has stabilized, and the country has maintainedthe lowest comparable inflation rate in South America.

The main sources of income for the population in the Bolivian study area are agriculture,ranching, various government institutions, and trade. The area around Pail6n has fairly fertile soil,and the majority of the population is employed by large scale agroindustrial farms. In San Jose deChiquitos and Robor6, the majority of the urban population is employed by the government, therailroad, or various commercial establishments. Ranching also contributes to these localeconomies. El Carmen has a 60% unemployment rate. Employment is available primarily

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through the logging concessions in the area and cattle ranching. Due to their proximity to theBrazilian border, the economies of Puerto Quijarro and Puerto Suarez are based almostexclusively on activities involving border trade.

Brazil also faced a severe economic crisis during the 1980s, but since July, 1994 the economy hasstabilized. In the Brazilian study area there is great economic diversity, with some municipalitiesbeing typically agricultural or pasture land and others very industrialized. In Mato Grosso do Sulranching is the predominant economic activity, followed by annual crops like soybeans and wheat.Border trade also contributes to the local economy in Corumba. Sao Paulo is the mostindustrialized state in Brazil, with a concentration of industrial activity in the Arauquaria/Paulinia/Campinas area. Production of sugar cane and citrus crops are also important sources ofrevenue in this state. The economies of Parana, Santa Catarina and Rio Grande do Sul areprimarily based upon industry, services, and agriculture.

Education

Basic education in the Bolivian study area region consists of a limited number of pre-schools,primary schools, and high schools. The Mennonite colonies, primarily in the western portion ofthe study area, have implemented their own educational systems based mainly on their culturaland religious beliefs. Because the area is rural, there are a limited number of technical schools, anddue to the lack of universities, the majority of the population does not have access to highereducation.

In Brazil the educational infrastructure is reasonably proficient because the pipeline route crossessome of the most developed states in Brazil. There are many universities, concentrated in thelarger cities. The better universities are owned by the state, although there are many privateinstitutions. There are fewer schools in the rural areas which are typically owned by the State,and they have a larger student-teacher ratio. The best primary and secondary schools are typicallyprivately owned.

Health and Safety

The medical facilities in the villages in Bolivia are comprised of small, minimally-equippedhospitals and first aid posts. The medical work force is limited, with often only one physician andone or two nurses, supported by several midwives located throughout the region. The mostcommon diseases are dysentery, malaria, lung infections, parasites, bronchopneumonia, measles,and tuberculosis. There is a high rate of infant mortality as a result of poor living conditions,deficient health care and education services, and diseases such as dysentery and malaria.

Medical facilities in most of the project area in Brazil are fairly well equipped, and the medicalstaff is generally well trained. The most common diseases are hepatitis, dengue fever and parasiticdiseases. In Mato Grosso do Sul there is also an incidence of malaria, yellow fever and rabies.

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Cultural and Archeological Resources

The "Ethnic, Territorial, and Archeological Map of Bolivia" does not indicate any cultural orarcheological resources in the study area. However, literature research has identified a limitednumber of sites in the general area, none of which are in the immediate vicinity of the pipelineroute. The most important historical sites in the region are the Jesuits Cathedral and the SantaCruz la Vieja National Historic Park, both of which are located in San Jose de Chiquitos.

In Brazil, much of the project area of influence has a high archeological potential due to itshistorical occupation by indigenous people. There are 615 known archaeological sites in themunicipalities located within the five states traversed by the pipeline, most of which are outsidethe direct influence area of the pipeline. In Mato Grosso do Sul, there is a predominance ofearthen archaeological sites. In Sao Paulo, most of the sites are stone, while in Parana 96% of thearchaeological sites are ceramic. In the State of Santa Catarina and -Rio Grande do Sul, there is apredominance of sambaquis and ceramic sites. The most significant buildings of historical interestare generally located in the main towns. The majority of these churches, homes, monuments andsquares are protected on a state and municipal level.

5.0 Analysis of Alternatives

Various siting and construction alternatives have been evaluated for both the Bolivian andBrazilian sectors of the project. The final route was determined to best balance overall impacts tothe human, biological, and physical environment while achieving its overall gas transportationpurpose.

Bolivia

Two alternate routes for the Bolivian sector were evaluated by CUMAT in a study performed in1990. The first alternative was a route running parallel to an existing railroad between Pail6n andPuerto Suarez. Under this alternative, the pipeline would run adjacent to or through thepopulated centers of Pail6n, San Jose de Chiquitos, Robore, El Carmen, and Puerto Suirez. Thesecond alternative followed a relatively straight route from the Rio Grande Gas Plant to PuertoSuarez, across the Bolivian Chaco region. The second alternative was preferred from anenvironmental perspective, mainly because it traverses relatively homogeneous terrain and avoidsareas of slope instability along the southern foothills of the Sierras Chiqutanas. This alternative isshorter in distance and impacts less area of undisturbed forest and marshland. During theEnvironmental Impact Study performed in 1996 this route was further evaluated and modified tominimie potential environmental impacts, especially in areas of high environmental sensitivitysuch as the Cafion de la Victoria.

Brazil

Numerous alternatives have been considered in finalizing the pipeline route in Brazil. In definingthe route, the goal has been to minimize potential environmental impacts by avoiding steep slopes,

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areas of primary and secondary vegetation, protected areas, and urban areas. A notable exampleof how alternative routing was selected to minimize environmental impacts is in the Pantanal. Theoriginal route was 40 km North of BR-262, in a sensitive area of the Pantanal. The route wasmoved South into a previously impacted area parallel to the highway in order to minimnizeenvironmental impacts. In the State of Santa Catarina, the original route passed within 50 metersof mines in coal exploitation area. The route was diverted to avoid these mining areas. Satelliteimagery and aerial photography have been carefully evaluated to fine-tune the route and avoidfragmentation of forested areas and other areas of primary vegetation.

No Project

The "no project" alternative was also evaluated. If the project is not implemented, potentialadverse impacts on the human, biological and physical environments as a result of the proposedproject would not occur. However, there would be no potential positive impacts realized as aresult of project implementation such as improved air quality due to use of clean burning naturalgas in Brazil, increased employment opportunities, improved area infrastructure, and especiallythe generation of public revenues that can be used for health and education in Bolivia.

6.0 Environmental Impacts and Mitigation Measures

Impacts in the Bolivian sector were analyzed using a combination of matrices, modeling, and mapoverlays using Geographic Information System (GIS). An impact identification matrix was usedto determine associations between the project activities and the environmental parameters, basedon predicted modifications to the existing environmental conditions as a result of construction andoperation of the project. For each possible combination of activity and environmental parameter,an assessment was made as to whether the baseline condition of a given environmental parameteris likely to be modified by the project activity. The GIS-based map overlays were used in thequantification of the impacts on individual environmental parameters such as soils and vegetation.

6.1 Physical Environment

Air Quality and Noise

Impacts to air quality during the construction phase will be temporary and localized. An air screenmr.odel of the four proposed compressor stations in Bolivia was run using the SCREEN3 simulatorprogram. The model predicted the project in-stack emissions rates for PM1o, S02, and No, will bewell below the World Bank Emission Guidelines for gas turbine sources and Bolivian air emissionstandards. No exceedance of the World Bank Guidelines for ambient air quality were predictedfor any of the pollutants modeled. However, the model did predict a minor exceedance of the

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Bolivian 1-hour and 24-hour national ambient air quality standards for No. Identical equipmentwill be used for the compressor stations in Brazil.

To prevent or minimize potential air quality impacts, the following measures will be applied.Where available, water will be used to wet construction areas for dust control. All engines will beproperly maintained to minimize emissions of contaminants. Detail design will considermodifications to stack height and other parameters related to the operation of the compressorstations to ensure compliance with applicable regulations.

The noise from camps and construction activities along the pipeline alignment and the compressorstation sites could affect wildlife and human settlements. This impact will be minimal andtemporary. Compressor stations have been sited to avoid heavily populated and sensitive wildlifeareas, which will minimize noise impacts during operations. Workers will be exposed to noisegenerated by compressor station equipment which will be mitigated by utilizing hearing protectiondevices.

Due to the substitution of clean-burning natural gas in Brazil other less attractive fossil fuels suchas medium and heavy fuel oils with some sulfur content, there will be a reduction in the levels ofatmospheric pollution, particularly in the metropolitan and industrial areas. Air pollution levels inmost urban areas were predicted for project and non-project conditions. Unlike oil and coal,natural gas contains little sulfur, which produces sulfur dioxide emissions upon combustion.Nitrogen oxides and carbon dioxide emissions and particulates emitted from the burning of naturalgas are also lower compared to coal and oil. The increased availability of natural gas in Brazil willresult in an improvement in air quality through replacement of alternative fuels which are morepolluting sources of energy.

Geology, Geomorphology and Soils

The prmary impact of the project on soils is an increase in erosion potential in areas where soilbecomes exposed by vegetation removal and areas where soils are physically disturbed bytrenching, spoil piling, and backfiuling. Because the majority of the pipeline in Bolivia willtraverse relatively flat areas with natural vegetation cover and low precipitation, it is anticipatedthat the potential for erosion will be low. The erosion potential is somewhat higher in some areasof Brazil, due to topographical features. Highly limited areas, from a construction point of view,such as hill slopes greater than 30 degrees, and terrains subject to erosion will be avoided wherepossible. To control erosion, appropriate erosion prevention and control techniques will beemployed during construction, as described in the Environmental Construction Plan developed forthis project.

Some areas will be replanted with natural vegetation to inhibit erosion. However, due to thelimited rainfall in much of the Bolivian project area, the recovery of native vegetation andrestabilization of disturbed areas will be a slow process. Vegetation recovery will be rapid in

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areas of higher precipitation. In some areas, the adjacent vegetation will serve as a barrieragainst wind and as a source of seeds for natural revegetation to occur. Overall, the erosionpotential is considered minimal as the right-of-way will disturb only a very narrow strip of soil.

Cambrian outcrops in the Puerto Suarez area, mountainous areas principally in the State ofParana, and the rocky plateau in the Aparados da Serra may necessitate blasting, but this shouldnot have a significant effect on the geomorphology with the implementation of managed blastingprocedures. Soil compaction will be minimized through application of soil restoration techniquesduring final grading. Due to low levels of seismic activity and the absence of known, active faultsin the study area, the potential for damage to project facilities resulting from a seismic event isnegligible.

The final alignment of the pipeline route in Brazil was delineated to avoid numerous mining sites.In cooperation with the National Department of Mineral Production (DNPM), attempts will bemade to place restrictions on mining licenses granted in the future to avoid interference with thepipeline. Project sponsors will work with IBAMA and the DNPM to develop a MineralsInvestigation Program to precisely identify the location of valuable mineral deposits.

Hydrology and Water Resources

For each significant river crossing, detailed studies of its hydrological conditions have beenconducted to determine the best crossing method. To minimize sedimentation in water bodies anddisturbance to wetland areas, controlled procedures for wetland and water body crossings will beimplemented. Most of the river and stream crossings will be constructed using open-cut methodswhich could suspend sediment in the streams. However, many of the rivers to be crossed areshallow and carry heavy sediment loads, and the additional load is expected to be temporary andlocalized. Clearing of vegetation, trenching and storage of topsoil in the study area may alsoresult in increased soil erosion and sediment load carried by surface runoff from the disturbedareas. The Paraguay and Itajai-Acu rivers have very active beds and will be crossed by directionaldrilling which will eliminate the potential for sedimentation.

During the peak construction period, more than 1,600 persons will be on the project in Bolivia invarious locations. Potable water for these workers will be withdrawn from wells at multiplelocations installed at depths ranging from lOOm to 200 m. The groundwater resources of theseaquifers are recharged mainly by infiltration of rainwater, and the expected annual recharge isrelatively high. Therefore, impacts from groundwater withdrawal to meet the domestic waterrequirements of the project are considered less than significant. Aquifer mixing will be preventedby properly casing the wells. -In Brazil it will not be necessary to drill water wells for potablewater.

The majority of the water used for hydrotesting the pipeline is expected to be withdrawn fromsurface waters. To mitigate impacts to aquatic life, volumes of water for hydrotesting will belimited The pipeline will be tested in 20-30 km segments, requiring withdrawal of approximately15,000 m3 per test segment. Thus, the impact of withdrawals from surface waters is consideredless than significant.

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Groundwater and surface water quality will be protected through the implementation ofappropriate spill prevention and control measures. Potential impacts will be avoided or minimizedby applying proper techniques to manage and dispose of hazardous materials. Domestic andsanitary wastewater generated at work camps and pipe storage yards will be treated prior todisposal. Extended aeration package plants or conventional septic system drains will beconstructed to provide treatment. Impacts are not expected to be significant due to the shortconstruction period and relatively small volume of discharge anticipated.

6.2 Biological Environment

Flora

Throughout most of the proposed pipeline corridor in Bolivia, a five meter wide strip ofvegetation was cleared in 1993 in preparation for route survey and project implementation.Additional impacts will result from expansion of the cleared area to a width of 30 meters forpipeline construction. In most areas of the pipeline corridor, native herbaceous and shrubbyspecies are expected to revegetate naturally following completion of pipeline construction. Dueto the nature of the soils and dry climatic conditions, revegetation of the pipeline corridor in theChaco may require more time than the remainder of the corridor. The Aeolic Plain will bereplanted to expedite revegetation in this area. There will be a permanent loss of forested canopyin the 17-meter wide permanent corridor, but the canopy will return to the portion of the right-of-way which is not required for maintenance of the pipeline.

In Brazil 85% of the area cirossed by the gas pipeline has been previously impacted by humanactivity. Remnants of original vegetation affected by the project are found in only 15% of thearea, and only 7% of these areas will not readily regenerate. Where appropriate, areas will bereplanted with native species collected from surrounding areas. This will be done in the PantanalMatogrossence in areas of Chaquena vegetation, in the Araucarias Plateau and the Aluvial PionerFormation. Workers involved in the project will be instructed about the importance of preservingnatural vegetation, and construction activities will be monitored to ensure this is done.

Fauna

Potential impacts affecting animal populations include the following:

* Permanent loss or fragmentation of wildlife habitat.* Disturbance to important habitat elements such as breeding, foraging, and cover areas.* Displacement of individual animals during construction or maintenance.* Temporary disruption of movement patterns of animals across the right-of-way.* Direct loss of wildlife from construction activities or increased hunting pressure

The most substantial wildlife impact associated with the project will be the conversion of habitatin the permanent maintenance corridor. However, along portions of the right-of-way which werepreviously cleared for route survey, additional impacts will be minimal, due to the fact that

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impacts to faunal species have already occurred. Clearing of vegetative cover in the right-of-waywill affect the nesting and foraging habitat for some wildlife species, but this impact will beminfimized by restricting the permanent right-of-way strip to a narrow corridor.

Additional impacts on wildlife include disturbance, displacement, and mortality duringconstruction. These impacts will be minimized by training the work force regarding protection ofnatural resources, including wildlife. Construction activities will be carried out as quickly aspossible to diminish exposure time. The construction area will be monitored, and animals whichmay fall into the pipeline trench will be rescued.

Aquatic species in the area of the Pantanal, floodplains and major river systems are expected to beadversely impacted by high turbidity generated by construction activities. However, impacts areexpected to be short-term. Fish species and mobile reptilian and mammalian species will likelymove out of the area temporarily, but should return following completion of constructionactivities. Non-mobile species including benthic invertebrates and any bivalves will be eliminatedin the construction corridor, but are expected to recolonize impacted areas quickly fromsurrounding areas.

To minimize loss of wildlife during construction, hunting and fishing by construction crews will bestrictly forbidden. Intruders will be prohibited from entering wildlife areas during construction.Although the pipeline corridor will open access to previously undeveloped areas which mightincrease hunting activities, this wi1l be controlled in the operations phase through the use of signs,fences and barricades.

Species of Concern

Impacts to terrestrial and wetland/aquatic plant and animal species identified as species of specialconcern are expected to be minimal and temporary. Temporary displacement of some speciesfrom the construction area will occur, and for some species movement across the right-of-waywill be hampered during construction activities. After completion of construction, however, theright-of-way will be allowed to naturally revegetate as much as possible, and affected species ofspecial concern are expected to return. To mitigate impacts to the wildlife populations, huntingwill be strictly prohibited for anyone associated with pipeline construction and maintenanceoperations. Impacts to the population of protected floral species are expected to be insignificant.

Protected Areas and Areas of Environmental Sensitivity

Project activities will be conducted in the vicinity of two protected areas in Bolivia. theIntegrated Management Area of the Gran Chaco National Park and the Historical National ParkSanta Cruz La Vieja Direct impacts in the Gran Chaco will be limited to clearing of the right-of-way. Secondary impacts may include the risk of colonization of areas in and around the park dueto the establishment and maintenance of the right-of-way; however, this potential is deemed low.Indirectly, the possibility of increased hunting pressure within the park boundaries exists, andspecific measures will be implemented to prevent it.

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The access road from San Jose de Chiquitos to the right-of-way traverses the Santa Cruz La Viejapark. The park will be affected by road improvement work and increased traffic in the area. Tomitigate any potential adverse impacts, the area will be closely monitored, and access to the parkwill be controlled. The work force will be educated in the significance of the park to Bolivia'snational heritage and the necessity to protect this historic site.

The project sponsors propose to make a contribution to Bolivia's National Endowment Fund asan offset mitigation for direct and potential indirect impacts of the project. Revenues from thecontribution will be earmarked for the management of parks in the Department of Santa Cruzfunded through this program, primarily the Gran Chaco National Park. Administration of thefunds will be managed by Bolivia's National Secretary of Natural Resources and the Environment.In addition, one of the camps will be strategically placed in order to be used as a control facilityby the park administration after construction is finished.

To develop a plan to minimize potential environmental impacts in the Pantanal, extensiveenvironmental studies have been completed. The route was finalized in this area based upontechnical analysis and environmental considerations. For the most part, the pipeline will runparallel to an existing highway. Seasonal considerations and implementation of specializedenvironmental construction techniques and will further mitigate any adverse impacts.

The Mata Atlantica is a fragmented region in which areas of high ecological significance areinterspersed with areas of low sensitivity. The route through this area was carefully selected toavoid environmentally significant areas to the extent possible, and additional impacts are expectedto be minimal. Where environmentally sensitive areas cannot be avoided, they will becompensated through an ecological compensation program.

After a comprehensive evaluation, it was recommended that potential impacts of soil erosion inthe Aparados da Serra be mitigated by utilization of specialized construction techniques.

6.3 Impacts on the Socioeconomic Environment

Land Use

Some changes in land use are expected to occur as a result of project implementation. However,the Project Sponsors plan to restore land as much as possible to its pre-project condition.Conversion of land from existing uses such as farming and grazing has the greatest potential tocreate adverse social and economic impacts to rural households. Temporary conversion of land tosupport pipeline and facility construction may result in the loss of one to two years' use for cropsand grazing. Landowners will be compensated for their losses. Little of the land along thepipeline route, storage yard or camp locations is currently under human use, so this impact isexpected to be minimal. Project facilities have been sited to avoid areas of socioeconomic valueas much as possible.

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The project will create an increase in vehicular traffic, primarily during the construction phase.This impact will be mitigated by upgrading the access roads to work sites, camps and storageareas. Signs will be posted on access roads, and communities will be informed about trafficconditions.

The possibility exists for indirect land use impacts due to utilization of portions of the right-of-way as a trail or road, which may promote illegal trade, increase mobilization and colonizationpressure. However, the project does not intend that the right-of-way be used as an access roadand will provide measures to prevent such use. Signs, barriers and gates will be installed, and thearea will be monitored on a regular basis. Furthermore, the project will contribute to the in-situprotection of parks and reserves.

Population

Perhaps the most sensitive social issue related to the project is the a small and temporary increasein population during the construction phase due to the influx of workers. Impacts to the localpopulations will be minimized by siting camps away from smaller towns and utilizing local laboras much as possible. While workers will be housed in camps along the right-of-way, it is expectedthat they will visit the main population centers in search of relaxation and entertainment duringwork breaks. Environmental and social behaviour codes of conduct will be enforced in all camps.One of the primary areas expected to be impacted is El Carmen in Bolivia, where an 800-personcamp will be located. The presence of the working crew will be continuous, adding to thedemand for services in this town. El Carmen should experience an overall positive impact fromthe improvement of the water and electrical supply to support camp activities.

The project will increase the risk of accidents to the population due to the transportation anddistribution of gas. This risk will primarily affect the population living in the immediate vicinity ofthe pipeline. The pipeline will include design factors to mitigate safety risk. Risk Managementand Emergency Response plans will be developed and implemented to respond to unexpectedevents.

Indigenous peoples

The project could potentially impact the indigenous people in Bolivia by opening up previouslyinaccessible areas of forest, which would reduce the forest areas available for indigenous use.However, since the right-of-way was partially cleared in 1993, no evidence of colonization hasbeen detected. Therefore, this impact is considered insignificant.

Impacts to indigenous groups have been further mitigated by the establishment of the Gran ChacoNational Park, which gives legal protection to the core territory of these groups. Through acontribution to Bolivia's National Endowment Fund, interest earnings will be designated tobenefit the management of the Gran Chaco National Park by subsidizing park rangers and theconstruction of ranger stations.

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An indigenous peoples development plan (IPDP) was developed for the Bolivian segment. Thisplan includes programs such as land titling, water supply, health, and education. Perhaps the mostimportant component is support to land titling activities. This plan is being negotiated with theindigenous communities. On the Brazilian side, an IPDP is being developed for the Terena andGuarani Nandeva groups.

Community Relations

The project will maintain a Community Relations program to promote good relations with thecommunities in the influence area of the project, as well as providing environmental education andinformation. Preference will be given to local hiring. Impacts on local populations are consideredto be minimal and temporary. No displacement of households is anticipated for the project.

Economy

The project will provide substantial direct financial revenues to Bolivia and Brazil through the saleand purchase of natural gas. Additional revenues will be generated through taxes on local goodsand services. This economic impact will benefit both countries on a national, regional andmunicipal level throughout the life of the project.

The project will employ several thousand Bolivian and Brazilian nationals during peakconstruction of the pipeline, some of whom will be retained as operations and maintenancepersonnel. This increased employment will improve the local economy, primarily on a short-termbasis during construction.

Urban areas will experience some increase in the demand for goods and services from pipelineconstruction and operations personnel, which will be a positive impact of the project. Thepotential exists for inflationary prices, which would have a negative impact on local residents, butthis potential is not considered to be significant.

Health and Safety

Medical facilities in the urban areas will be upgraded to provide adequate medical care forpersonnel involved in the pipeline construction. This will have a positive impact on the availablehealth care for local populations. With the temporary influx of people during construction, theremay be an increase in contagious diseases, particularly sexually transmitted diseases. This adverseimpact will be mitigated through education programs, initial and periodic health examinations andprophylactic health care. The increased risk of parasitic diseases such as malaria will be mitigatedby chemoprophylaxis programs.

A Construction Safety Plan has been prepared to provide explicit instructions for accidentprevention, occupational health, and construction safety procedures. The manual will apply to allcontractor and subcontractor personnel as well as project personnel.

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Archaeology

No potentially significant impacts to cultural, archeological, or historical resources have beenidentified in the area of direct influence of the gas pipeline. However, an Accidental DiscoveryPlan has been developed to provide guidance in the event such resources are encountered duringconstruction. An archeologist will be present during construction in areas with a high potentialfor archeological or cultural resources. Any artifacts discovered will be reported and/or salvagedin accordance with applicable governmental requirements and the Project Archeological Plan.

Upstream and Cumulative Impacts

A Strategic Environmental Assessment (SEA) was carried out per request of the lendinginstitutions. Perhaps the most sensitive upstream impact of the project is related to increasedexploration and exploitation of new gas developments in Bolivia. In order to fill the capacity ofthe pipeline (30 million m3/day) it will be necessary to develop new reserves in addition to theproven reserves of 18 million. The most promising areas are located in highly sensitive regions(Yungas and Chaco) including vulnerable ecosystems and indigenous peoples (more than 19groups). Seismic studies, exploratory wells, new pipelines, access roads, and the influx ofworkers, will pose serious risks on natural systems and indigenous groups. Existing institutionalcapacity to manage this type of situations is still weak in Bolivia. Although technological andmanagement strategies exist to minimize environmental and social impacts from gas and oilexploration in sensitive areas, the "fast track" exploration could result in serious environmentaland social degradation in those areas. An environmental management plan for the most sensitiveareas will be prepared during project implementation with terms of reference approved by thelending institutions. Regulations for oil and gas activities in indigenous territories have alreadybeen prepared under a World Bank Technical Assistance Project.

The SEA also concluded that the synergy of the gas pipeline with other macro-projects in theregion is relatively low therefore cumulative impacts will not be significant. For instance, theexploitation of iron and manganese in Bolivia and Brazil has a strong linkage with the Hidroviaproject but a weak one with the gas pipeline. Expansion of soybean agriculture in Bolivia presentsa strong synergy with the paving of the Santa Cruz - Puerto Suarez road and the Hidrovia but notwith the gas pipeline.

7.0 Public Consultation Program

In accordance with Bolivian and Brazilian regulations, public consultation programs wereconducted during the preparation of the Environmental Impact Studies for the Bolivia-Brazil GasPipeline project in each country. In addition, project sponsors have been involved in numerousinformal sessions to discuss project issues with the people.

In Bolivia project sponsors held a series of public meetings and visitations with governmentauthorities, non-governmental organizations, organizations of indigenous peoples, and affectedcommunities. Sponsor representatives participated in the program, which was attended byapproximately 850-900 people. The meetings in six affected municipalities followed an interactive

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approach to identify and discuss environmental issues associated with the project. Thisconsultation assisted with identification of possible project impacts, reconciliation of opposingviews about the project, discussion of licensing requirements, and promotion of understanding ofthe nature and extent of any social or environmental impacts. The indigenous peoplesdevelopment plan was subject of intensive consultation with indigenous organizations.

The primary concerns of the Bolivian people were employment and basic needs such as water andelectricity. These concerns are being taken into account in project planning. Preference will begiven to utilizing local labor in the project. To the extent possible, water wells drilled for theproject will be left for use of the people, and consideration is being given to donating electricalgenerators to some of the communities upon completion of construction.

In Brazil, numerous meetings have been held with municipal, state and federal government bodies,the scientific community and the concerned population to discuss the project. Interviews havebeen conducted with community leaders, and extensive research has been done in museums,universities, and various institutions. Videos have been presented, brochures have beendistributed, and presentations made in an attempt to inform the population about the project andresolve any concerns.

As prescribed in Brazilian regulations, a Summary of the Environmental Impact Assessment(RIMA) must be available for public review for at least forty-five days. For the Brazilian sectorof the Bolivia-Brazil Gas Pipeline Project, this announcement of the availability of the RIMA waspublished in the official State journal and in the major regional and local newspapers in eachaffected State. Public audiences were held in each State to provide local citizens an opportunityto evaluate the project's environmental aspects and resolve public concerns.

8.0 Environmental Management

A comprehensive Environmental Management Plan (EMP) has been developed, to serve as amaster planning and management tool for the project. The plan establishes guidelines andprocedures to manage the environmental aspects of the project. Included in the plan areenvironmental construction procedures, spill prevention and control, waste and hazardousmaterials management, air quality protection and noise control, vegetation and wildlife protection,and cultural resources management. Community relations, training, inspection, monitoring,impact mitigation are also addressed. Ecological and socioeconomic compensation programs aredescribed in great detail. Indigenous peoples development plans are an integral component of themanagement plan.

To implement the Plan, an environmental organization and budget has been established within theProject Management organization. This organization includes: (i) an environmental consultantfirm will supervise environmental compliance during construction as well as manage theimplementation of all ecological and socio-economic compensation programs and indigenouspeoples development plans; and (ii) an independent environmental auditor will audit works andenvironmental supervision and management and will report directly to the World Bank and theIDB. Terms of reference for both activities were approved by the lending institutions. The

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environmental auditor will prepare audit reports every two months which will be sent to thelending institutions, NGOs and community organizations. NGO representatives will be entitled toparticipate of audit visits and periodic workshops to discuss audit reports will be held in selectedcities and towns along the pipeline.

Environmental training will be provided to all employees prior to commencement of work. Newworkers brought to the project after the initiation of project activities will receive training as soonas practicable following their arrival.

During construction, monitoring will be part of the inspection program. Environmentalmonitoring may include, but not be limited to erosion control, water quality, protected wildlifespecies, cultural resources, social problems, water resources, vegetation, and protected areas.

As part of the management of the project, the sponsors will maintain a community relationsprogram aimed at promoting good relations with the communities in the area of influence of theproject, as well as providing environmental education and increasing awareness about the projectand the environment.

The Environmental Construction Plan outlines basic environmental construction procedures thatwill be used to construct the pipeline and describes impact minimization techniques that will beemployed during and after construction. These procedures are designed to protect theenvironment and to minimize potential effects of the pipeline construction. The Plan includesstandard construction procedures and specialized techniques designed for use only as requiredunder specific circumstances.

Environmental impacts of the project will be further mitigated through following proceduresestablished in plans for "Spill Prevention and Control" and "Waste and Hazardous MaterialsManagement". Specific procedures will be established to minimize direct and indirect impacts tovegetation and wildlife. A plan has also been developed to provide guidance in the event of anaccidental discovery of cultural resources or human remains.

9.0 Conclusions

The majority of the pipeline route in Bolivia is in an area of low environmental sensitivity, and theprobability of significant adverse environmental impacts is expected to be minimal. In Brazil 85%of the area of influence has already been impacted by human activity. Additional impacts of theproject are expected to be minimal, and most negative impacts will be mitigated.

* The most significant impacts identified will occur during the construction stage, most of thembeing temporary and reversible.

* Throughout most of the study area, the physical and biological environment appears to beresilient to the type and magnitude of impacts anticipated from this project. The primarydirect impact in most of the route will result from clearing the right-of-way. In Bolivia.

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* The most environmentally sensitive areas within the project study area are 1) the Gran ChacoPark in Bolivia, due to its protected status, large biological resources, indigenous populations,and biogeographic status, 2) the Pantanal Complex in Brazil, due to its species diversity, 3)the Atlantic Forest in Brazil, due to its primary vegetation and protected status, and 4) theAparados da Serra in Brazil, due to its high erosion potential. Measures will be taken tomitigate or compensate for any adverse impacts to these areas.

* The population in the study area of the Bolivian sector is small, and throughout much of thearea land use is sparse, partly due to limited land use capability associated with poor soilquality, low precipitation, and a lack of readily available surface and groundwater. Native,undisturbed vegetation is prevalent throughout much of the study area. Socioeconomicimpacts of the project are not expected to be significant.

* The proposed pipeline alignment was selected to avoid areas of slope instability, populatedareas, and environmentally sensitive or protected areas. The route was determined to bestbalance the overall impacts to the human, biological, and physical environment while achievingthe project's main purpose, which is to transport natural gas from production fields in Boliviato markets in Brazil through an environmentally acceptable and economically viabletransportation system. As a result of the Environmental Assessments, the route was furtherrefined to avoid areas of potential environmental sensitivity.

* The principal positive impacts anticipated in the project area of influence are 1) animprovement in air quality in Brazil's industrial and metropolitan areas, 2) an increase inrevenues for Bolivia from the sale of gas to Brazil, 3) redistribution of tax revenues back intothe area of influence of the project, 4) a temporary increase in employment within the studyarea, 5) an increase in the demand for goods and services in the study area, and 6) an increasein funds allocated for management of protected park areas.

* The principal negative impacts anticipated in the project area of influence are 1) the removalof vegetation and wildlife habitat along the right-of-way, 2) an increase in the potential forerosion, sedimentation, and hydrology disruption due to project construction activities, 3) thepotential for increased hunting pressure on species of special concern, 4) the potential forpromoting colonization of undisturbed areas, and 5) the potential disruption of the hydrologicpatterns in the rivers and Bafiados.

* Perhaps the most sensitive upstream impact of the project is the increased gas exploration andexploitation in sensitive areas in Bolivia. Environmental management plans for these areas willbe designed during project implementation. Further institutional strengthening inenvironmental management and enforcement will be necessary.

* Cumulative impacts will be relatively insignificant. The project does not present stronglinkages with other regional development projects.

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* During the detail design phase of the project, procedures and design parameters will be refinedto respond fully to concerns identified in the Environmental Impact Assessments. Projectsponsors will continue participation in public consultation to evaluate public concerns as theyrelate to the final design and execution of the project.

* An Environmental Management Plan and various environmental programs and I.P.D. planswill be implemented to provide appropriate mitigation of unavoidable impacts and lower thesignificance of negative impacts to acceptable levels.

The project is environmentally achievable, as its negative impacts can be satisfactorily mitigated,in order to reach a balance between economic growth and ecological preservation, in accordancewith the goals of sustainable development. However, there will be a need for continuedmonitoring throughout the project life to ensure these objectives are maintained.

10.0 Bibliography

Dames Moore. 1996. Environmental Impact Study for Bolivia-Brazil Gas Pipeline Project(Bolivian Sector).

Dames & Moore. 1997. Indigenous Peoples Development Plan - Bolivian Sector

Dames & Moore. 1997. Environmental Management Plan - Bolivian Sector

Centro de Investigaciones y Estudio de la Capacidad de Uso Mayor de la Tierra (CUMAT).1990. Environmental Impact Assessment for the Construction of the Santa Cruz-PuertoSuarez Gas Pipeline and Puerto Suarez Steam-Electric Power Plant.

PETROBRAS. 1996. Environmental Impact Study - Bolivia-Brazil Gas Pipeline (BrazilianSector).

ENGEVIX. 1995. Environmental Assessment Summary - Bolivia-Brazil Gas Pipeline (BrazilianSection).

ENGEVIX. 1995. Environmental Impact Studies - Bolivia-Brazil Gas Pipeline. Curitiba-Florian6polis-Porto Alegre. Volumes 1-4

ENGEVIX. 1995. Bolivia-Brazil Gas Pipeline Curitiba-Florian6polis-Porto Alegre.Environmental Impact Studies Photographic Report.

ENGEVIX. 1994. Environmental Impact Studies - Gas Pipeline Bolivia-Brazil. Corumba-Curitiba Section. Volumes 1-4.

ENGEVIX. 1995. Environmental Technical Specifications - Construction, Assembling andCommissioning Phases of the Pipeline.

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ENGEVIX. 1994. Environmental Impact Report. Corumba-Curitiba Section.

ENGEVIX. 1993. Bolivia-Brazil Gas Pipeline Corumba-Curitiba. Environmental Impact StudiesPhotographic Report.

ENGEVIX. 1993. Assessment Diagnosis of Bolivia-Brazil Gas Pipeline Impact on theArcheological Patrimony in the State of Mato Grosso do Sul. Corumba - TerenosSection. Annex Report 1.

ENGEVIX. 1994. Evaluation Report and Diagnosis of the Archeological Heritage in AreasAffected by the Bolivia-Brazil Gas Pipeline Construction. Terenos - Tres LagoasSection. Annex Report 2.

ENGEVIX. Additional Information to Governmental and Non-Governmental OrganizationsAssessment - SEMA - MS. EIA/RIMA. Annex Report 3.

ENGEVIX. 1994. Bolivia-Brazil Gas Pipeline - Mato Grosso do Sul Section. EnvironmentalProgrammes Details. Annex Report 4.

ENGEVIX. 1994. EIS/EIR Complements Related to Technical Report. CPLA/DAIA NR. -098/94 - SMA/SP. Annex Report 5.

ENGEVIX. 1994. Assessment of Gas Pipeline Basic Route Outline in Curitiba MetropolitanArea. Annex Report 6.

ENGEVIX. 1994. EIA/RIMA Complements Related to Technical Report CPLA/DAIA Number208/94 - SMA - SP. Annex Report 7.

ENGEVIX. 1994. EIA/RIMA Complements Related to Technical Report CPLA/DAIA Number208/94 - SMA - SP. Volumes 1 & 2. Annex Report 8

ENGEVIX. 1994 EIA/RITMA Complementary Material Requested by SMA-SP. Volume 1/2.Annex Report 9.

ENGEVIX. 1994. EIA/RIMA Complementary Material Requested by SMA-SP. Volume 2/2.Annex Report 10.

ENGEVIX. 1995. Revision of the Final Complementary Material for the EIA/RIMA inResponse to the Technical Judgment Document CPLA/DAIA No. 037/95. Annex Report11.

Prime Engineering. 1997. Strategic Environmental Assessment of the Bolivia- Brazil gasPipeline.

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Primne Engineering. 1997. Environmental Management Plan - Brazil Sector.

Almeida, J. F. R. and Arze, C. A.. 1995. Bolivia-Brazil Gas Pipeline Project - An EnvironmentalEconomic Evaluation.

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