asian development bank · gail – gas authority of india limited hazop – hazardous operation hdd...

ASIAN DEVELOPMENT BANK PCR:IND 28033

PROJECT COMPLETION REPORT

ON THE

LPG PIPELINE PROJECT (Loan 1591-IND)

IN

INDIA

September 2003

CURRENCY EQUIVALENTS

Currency Unit – Indian rupee/s (Re/Rs)

At Appraisal (22 September 1997)

At Project Completion (1 March 2001)

Re1.00 = $0.028 $0.022 $1.00 = Rs36.14 Rs45.61

ABBREVIATIONS

ADB – Asian Development Bank APPS – application software EIL – Engineers India Limited EIRR – economic internal rate of return FIRR – financial internal rate of return GAIL – Gas Authority of India Limited HAZOP – hazardous operation HDD – horizontal directional drilling IDC – interest during construction LA – Loan Agreement LNG – liquefied natural gas LPG – liquefied petroleum gas RPL – Reliance Petroleum Limited SCADA – supervisory control and data acquisition

WEIGHTS AND MEASURES

bm3 (billion cubic meter) – 1,000,000,000 m3

bars (pressure unit) – 1.019 kg/cm2 cm (centimeter) – 10 millimeters hp (horsepower) – 746 watts kg (kilogram) – 1,000 grams km (kilometer) – 1,000 meters MMCM (million metric cubic meters) – unit of gas volume MMTPA (million metric tons per annum) – unit of mass of LPG MMSCMD (million standard cubic meters per day) – unit of gas volume per day t (ton [metric]) – 1,000 kilograms

NOTES (i) The fiscal year (FY) of the Government and Gas Authority of India Limited ends on 31

March. FY before a calendar year denotes the year in which the fiscal year ends. For example, FY2003 begins on 1 April 2002 and ends on 31 March 2003.

(ii) In this report, “$” refers to US dollars.

CONTENTS Page

BASIC DATA iii MAP vii I. PROJECT DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 2 A. Relevance of Design and Formulation 2

B. Project Outputs 3 C. Project Costs 4 D. Disbursements 4

E. Project Schedule 5 F. Implementation Arrangements 6 G. Conditions and Covenants 7 H. Related Technical Assistance 7 I. Consultant Recruitment and Procurement 7

J. Performance of Consultants, Contractors, and Suppliers 8 K. Performance of the Borrower and Executing Agency 8 L. Performance of the Asian Development Bank 9 III. EVALUATION OF PERFORMANCE 9 A. Relevance 9 B. Efficacy in Achievement of Purpose 10

C. Efficiency in Achievement of Outputs and Purpose 10 D. Preliminary Assessment of Sustainability 10 E. Environmental, Sociocultural, and Other Impacts 11

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 12

A. Overall Assessment 12 B. Lessons Learned 13 C. Recommendations 13

APPENDIXES 1. Chronology of Main Events in Project Implementation 15 2. Cost Breakdown by Project Components 17 3. Project Costs and Summary of Contracts 18 4. Annual Average Exchange Rates 19 5. Project Financing Plan 20 6. Projected and Actual Disbursements of Loan Proceeds 21 7. Implementation Schedule 22 8. Organization Chart and Project Implementation Structure 23 9. Status of Compliance with Major Loan Covenants 24 10. Summary of Environmental Impact Assessment 29 11. Major Assumptions Related to Economic and Financial Evaluation 31 12. Economic and Financial Evaluation 33 13. Training 35 14. Policy Issues Related to Pricing in the Gas Sector 36

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CONTENTS

Page SUPPLEMENTARY APPENDIXES (available upon request) A. Balance Sheets 39 B. Income Statements 40 C. Sources and Uses of Funds 41

BASIC DATA A. Loan Identification

1. Country India 2. Loan Number 1591-IND 3. Loan Title LPG Pipeline Project 4. Borrower Gas Authority of India Limited 5. Executing Agency Gas Authority of India Limited 6. Amount of Loan (net after cancellation) $98.19 million First Cancellation $13.50 million 31 May 1999 Second Cancellation $15.50 million 12 October 1999 Third Cancellation $11.50 million 21 September 2000 Fourth Cancellation $11.31 million 1 March 2002 7. Project Completion Report Number PCR:IND 764

B. Loan Data 1. Appraisal

- Date Started 22 September 1997 - Date Completed 3 October 1997

2. Loan Negotiations

- Date Started 12 November 1997 - Date Completed 14 November 1997

3. Date of Board Approval 16 December 1997 4. Date of Loan Agreement 11 December 1998 5. Date of Loan Effectiveness

- In Loan Agreement 11 March 1999 - Actual 4 May 1999 - Number of Extensions 1

6. Closing Date

- In Loan Agreement 30 November 2001 - Actual 1 March 2002

7. Terms of Loan - Interest Rate 6 months variable ordinary capital resources (OCR) rate - Maturity 15 years - Grace Period 4 years

8. Terms of Relending - Interest Rate Not less than OCR rate - Maturity (number of years) 15 years - Grace Period (number of years) 4 years

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9. Disbursements

a. Dates

Initial Disbursement Final Disbursement Time Interval

27 May 1999

1 March 2002 33 months

Effective Date Original Closing Date Time Interval

4 May 1999 3 November 2001 31 months

b. Amount ($ million)

Category

Original

Allocation

Last Revised

Allocationa

Net Amount

Disbursed

Undis- bursed Balance

1. Civil Works and Construction

53.00 48.60 43.23 5.37

2. Goods and Equipment 56.00 46.16 44.83 1.33 3. Interest and

Commitment Charges 23.00 8.89 8.89 0.00

4. Trainingb 0.00 1.96 1.24 0.72 5. Unallocated 18.00 3.89 0.00 3.89

Total 150.00 109.50 98.19 11.31 a Last revised allocation completed on 31 August 2001. b Training component was included later, at the request of the Gas Authority of India Limited,

to use the loan savings. Source: Controller’s Department, Asian Development Bank, Manila.

C. Project Data

1. Project Cost ($ million)

Cost Appraisal Estimate Actual

Foreign Exchange Cost 208.80 129.00 Local Currency Cost 155.60 119.98

Total 364.40 248.98 Source: Asian Development Bank estimates. 2. Financing Plan ($ million)

Appraisal Estimate Actual Item Foreign Local Total Foreign Local Total

Implementation Costs ADB 127.00 0.00 127.00 93.39 0.00 93.39 International Banks 44.80 0.00 44.80 0.00 0.00 0.00 Local Banks 0.00 8.80 8.80 30.81 38.43 69.24 GAIL Internal Resources 0.00 144.25 144.25 0.00 76.60 76.60

IDC Costs ADB 23.00 0.00 23.00 4.80 0.00 4.80 International Banks 14.00 0.00 14.00 0.00 0.00 0.00 Local Banks 0.00 0.00 0.00 0.00 0.00 0.00 GAIL Internal Resources 0.00 2.55 2.55 0.00 4.95 4.95

Total 208.80 155.60 364.40 129.00 119.98 248.98 ADB = Asian Development Bank, GAIL = Gas Authority of India Limited, IDC = interest during construction. Source: Asian Development Bank estimates.

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3. Cost Breakdown by Project Components ($ million)

Appraisal Estimate Actual Item Foreign Local Total Foreign Local Total A. Base Cost

1. Line Pipe 48.60 0.00 48.60 30.70 19.25 49.952. Pipe Coating 24.30 0.00 24.30 10.50 2.01 12.513. Line Fittings 0.00 4.80 4.80 0.00 1.24 1.244. Valves 3.80 0.00 3.80 4.70 3.32 8.025. Pumps 0.00 0.00 0.00 8.20 1.13 9.336. Right of Use

Compensation 0.00 3.80 3.80 0.00 1.70 1.70

7. Pipe Laying 47.40 5.30 52.70 41.10 15.76 56.868. River Crossings (HDD) 0.00 1.20 1.20 0.00 0.31 0.319. Booster, Dispatch, and

Tap-Off Stations 3.50 12.80 3.50 0.00 11.67 11.67

10. SCADA and Telecommunications

systems

12.00 15.70 27.70 12.00 11.51 23.51

11. Cathodic Protection System

3.50 0.00 3.50 4.20 0.41 4.61

12. Power Supply 0.00 6.30 6.30 12.80 1.67 14.4713. Construction Camps

and/or Townships 0.00 5.50 5.50 0.00 2.01 2.01

14. Commissioning 0.00 0.10 0.10 0.00 0.00 0.0015. Surveys 0.00 1.90 1.90 0.00 1.16 1.1616. Engineering 0.00 12.70 12.70 0.00 9.80 9.8017. Consulting and Training 2.00 0.00 2.00 0.00 0.68 0.6818. Project Management 0.00 6.30 6.30 0.00 13.54 13.5419. Ocean Freight 7.10 0.00 7.10 0.00 0.00 1.7220. Customs Duty 0.00 29.60 29.60 0.00 15.61 15.6121. Port and Domestic

Transport 0.00 7.80 7.80 0.00 0.00 0.00

22. Excise Duty and Central Sales Tax

0.00 5.60 5.60 0.00 0.00 0.00

23. Insurance 0.00 1.30 1.30 0.00 0.20 0.2024. Others 0.00 0.00 0.00 0.00 0.32 0.32

Subtotal (A) 152.20 120.70 272.90 124.20 115.03 239.23 B. Contingencies 1. Physical Contingencies 15.22 12.07 27.29 0.00 0.00 0.002. Price Contingencies 9.38 20.28 29.67 0.00 0.00 0.00

Subtotal (B) 24.60 32.35 56.96 0.00 0.00 0.00 C. Interest During

Construction 32.00 2.55 34.54 4.80 4.95 9.75

Subtotal (C) 32.00 2.55 34.54 4.80 4.95 9.75

Total 208.80 155.60 364.40 129.00 119.98 248.98HDD = horizontal directional drilling, SCADA = supervisory control and data acquisition. Source: Asian Development Bank estimates.

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4. Project Schedule

Appraisal Estimate Actual

Item Start End Start End Surveys Jan 1996 Sep 1998 Jan 1996 Jul 1998 Right of Way and Land Acquisition Apr 1997 Oct 1997 Apr 1997 May 2000 Engineering

Feasibility Study Jan 1996 Jan 1997 Jan 1996 Sep 1996 Design Freeze Feb 1997 Oct 1997 Feb 1997 Dec 1997 Process Design Nov 1997 Mar 1998 Nov 1997 Jan 1998 Detail Engineering Apr 1998 Sep 1998 Mar 1998 Apr 2000 HAZOP Apr 1998 Jan 2001 Feb 1998 Mar 2001

Procurement Line Pipe Feb 1998 Apr 2000 Dec 1997 Dec 1999 Station Valves Mar 1998 Dec 1998 Oct 1998 Oct 2000 Pumps and Drivers Sep 1998 Jun 1999 Oct 1998 Jul 2000 Appurtenances Apr 1998 Mar 2000 Apr 1998 Sep 2000 Optical Fiber Cable Apr 1998 Mar 2000 Mar 1998 Jul 2000

Construction Pipe Coating Mar 1998 Sep 2000 Jan 1998 Jun 2000 Pipe Laying Jul 1998 Mar 2001 Jun 1998 Feb 2001 Terminal and Pump Stations Dec 1998 Feb 2001 Dec 1998 Jan 2001 Telecommunications Mar 1999 Feb 2001 Mar 1999 Mar 2001 SCADA Feb 1999 Jan 01 Feb 1999 Nov 2003a

Commissioning Feb 2001 Apr 2001 Oct 2000 Jan 2001 HAZOP = hazardous operations, SCADA = supervisory control and data acquisition a Expected date of completion. Source: Gas Authority of India Limited.

5. Project Performance Report Ratings

Ratings

Implementation Period Development

Objectives Implementation

Progress

(i) From 1 Mar 1999 To 31 Dec 1999 S S (ii) From 1 Jan 2000 To 31 Dec 2001 HS S

HS = highly satisfactory, S = satisfactory.

Source: Project Performance Reports of the Asian Development Bank. C. Data on Asian Development Bank Missions

Name of Mission

Date

No. of Persons

No. of Person-

Days

Specialization of Membersa

Fact-Finding 24 Feb–7 Mar 1997 5 15 a, b, g Special Contact 3–5 Jul 1997 5 15 a, b, g Appraisal 22 Sep–4 Oct 1997 4 52 a, c, d, g Contact 16–20 Nov 1998 3 15 a, b, c Inception 23 Feb–1 Mar 1999 3 15 a, h Review 1 19–25 Oct 1999 1 7 a Review 2 21–25 Feb 2000 2 10 a, e Review 3 4–8 Sep 2000 2 10 a, e Project Completion Review Mission 2b

27–30 May 2003 4 16 a, b, d, e

a a = engineer, b = financial analyst, c = counsel, d = economist, e = procurement and/or consultant specialist, f = control officer, g = programs officer, and h = loan administration staff. b This report was prepared by Mission Head V. Rao Karbar, project implementation officer (Energy), India Resident Mission (INRM); V. Ravindranath (consultant); and R. Kapoor, assistant project analyst, INRM. Source: Back-to-Office-Reports of the Asian Development Bank.

I. PROJECT DESCRIPTION

1. The objectives of the Project were to (i) improve the availability of liquefied petroleum gas (LPG) by addressing infrastructure constraints, (ii) minimize the transportation cost of LPG, (iii) improve the environment by reducing energy consumption and exhaust emission, and (iv) enable private sector importers and traders of LPG to access infrastructure that was historically captive for public sector companies. The Project envisaged achieving these objectives by laying a 1,171 kilometer (km) pipeline system from Jamnagar in Gujarat to Loni, which is near Delhi, and implementing reforms in the Indian gas sector. The pipeline was envisaged to transport indigenously produced LPG and that imported through Kandla port.

2. The Project comprised the (i) design and construction of a trunk line from Samakhiali to Loni that is 1,015 km in length, with a diameter of 12 and 16 inches, and a spur line from Jamnagar to Samakhiali that is 156 km in length, with a diameter of 14 inches; (ii) construction of pumping facilities at Jamnagar and three main line booster pump stations; (iii) installation of supervisory control and data acquisition (SCADA) and telecommunications systems; and (iv) provision of training for Gas Authority of India Limited (GAIL) employees (on the operation and safety aspects of LPG pipeline systems).

3. The Project was designed to transport 1.7 million metric tons per annum (MMTPA) of LPG from the LPG rich western region to the LPG deficient northern region of India. Along the pipeline route, LPG is tapped for delivery to bottling plants at Ajmer, Jaipur, Piyala, Madanpur-Khadar, and Loni, for easy and convenient delivery in India’s northern states.

4. The hydrocarbon sector plays a vital role in the economic growth of India. The mix of commercial energy comprises coal (50%), hydrocarbons (42%), hydropower (7%), and nuclear power (1%). The share of hydrocarbons has increased from 27% at appraisal to 42% today, and is expected to further increase to 45% by 2010. Currently, gas meets 8% of India’s total primary energy demand, and is expected to meet 20% of this demand by 2010. For cooking, LPG and kerosene have been the main commercial fuels. LPG has been primarily used in urban areas, while noncommercial fuels, such as wood, dung, and crop residues, are widely used in rural areas. This pattern of commercial and noncommercial fuel use by households, particularly in northern India, can be attributed to the lack of adequate LPG supplies and an unreliable supply chain. Further, the refineries, the main source for indigenous LPG, are concentrated in India’s western region, and the limited number of transport facilities between the western region and northern region has contributed to the poor penetration of LPG in the north. The use of noncommercial fuels and commercial fuel kerosene for cooking, particularly by low-income households in urban areas and a majority of rural households, also causes environmental pollution and health problems.

5. GAIL, with the support of the Government, initiated laying the LPG pipeline between India’s western and northern regions to (i) arrest environmental pollution, (ii) provide easy access to and improve the reliability and availability of the LPG supply, and (iii) meet the increasing demand for LPG. The Asian Development Bank (ADB) earlier played a major role in (i) enhancing the institutional capacity of Indian hydrocarbon public sector enterprises (PSEs), (ii) introducing competition, (iii) initiating divestment of government equity in PSEs, (iv) deregulating product prices, and (v) initiating steps toward the establishment of a regulatory framework. To further the reform process, promote the use of commercial fuels, and provide the infrastructure for meeting increasing demand for LPG in the north, ADB agreed to finance the Project. At appraisal, in 1997, the Indian gas sector was at critical juncture in reforms, and there was a need to move toward establishing a market-driven and commercially oriented gas sector.

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ADB’s rationale in financing the Project complemented the reform process by (i) establishing the principle of open access pipelines in India, (ii) unbundling gas transmission from trading, and (iii) developing between GAIL and pipeline users commercial contracts that can serve as a model for similar future projects.

6. A $150 million ADB loan was approved in December 1997. Under the financing plan, ADB was to finance $150 million (41%) of the total cost of the Project, and the balance was to be financed by GAIL ($146.6 million), international banks ($58.8 million), and local banks ($8.8 million). The main components financed by ADB were (i) line pipes; (ii) line pipe coatings; (iii) optical fiber cables; (iv) sectionalizing main line and conduit gate valves; (v) laying and installation of line pipes and associated systems; and (vi) training, which was included during the implementation stage, at GAIL’s request.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

7. The main events in project implementation are given chronologically in Appendix 1.

A. Relevance of Design and Formulation

8. The hydrocarbon sector in India is critical to infrastructure development. An efficient hydrocarbon sector was expected to play a major role in the success of India’s overall economic development and the overall reform program initiated in India in early 1990s. At appraisal, ADB’s country operational strategy for India was to support efforts of the Government designed to achieve higher sustainable economic growth, promote employment, and reduce poverty. To achieve the intended economic growth, ADB’s focus was primarily on (i) improving the supply-side efficiency of the economy, especially by reducing bottlenecks in the hydrocarbon sector; and (ii) placing greater emphasis on improving policy, institutional, and regulatory frameworks, to enhance the efficiency of public sector operations and encourage private investment. Thus, the Project was designed to efficiently transport LPG from the LPG rich western region to the LPG deficient northern region of India, by laying an LPG pipeline between Jamnagar and Loni. The Project was highly relevant at the time of appraisal and remains relevant today, since the demand for LPG in the northern region is projected to grow to 2.6 MMTPA by 2006/07 and 3.5 MMTPA by 2011/12.

9. Despite considerable LPG use in urban areas, demand remained unserved in the lower income groups in urban areas, due to their relatively poor access to LPG. In addition to unmet demand in urban areas, use of LPG in rural areas, particularly in northern India, was insignificant due to availability and supply constraints. In view of this, ADB formulated the Project to promote LPG use in rural areas and increase the access of low-income groups in urban areas to LPG. The Project was also designed to improve the environment by replacing the existing LPG road and rail transport mode with a pipeline transport mode and substituting, in rural households, LPG for noncommercial and polluting fuels, such as wood, dung cake, and crop residues. The Government has also been actively promoting the use of LPG in rural areas, through its ninth and tenth plans (1997/98 to 2006/07). In 1997, only 27% of rural households were using LPG, and the Government planned to increase the level of LPG use by 1% each year to reach 10% of rural households by 2006/07. This was to result in a total LPG coverage of 37% of all Indian households. As a part of the Project, tapping points were to exist along the route of the pipeline, to encourage the use of LPG in rural areas.

10. In India, the gas and oil pipelines all belong to the public sector. This has led to a virtual monopoly that to some extent reduces the benefits brought about by deregulation. It is important

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that the private and public sector have access to pipelines. At appraisal, ADB’s strategy was to have an open access pipeline (the first in India), to ensure wider coverage of actual users in the public and private sectors. The resulting reliability of assured supply of LPG to dealers (traders) has led to lower inventory costs at dealer points. At the same time, the market expanded (use in rural areas that hitherto did not use LPG increased), which in turn increased the social values and standard of living of rural people in general. As a result, traders are pleased with increased revenue and contribute to restructuring efforts in rural India that are designed to promote the use of LPG.

11. The Project’s components were implemented without any major deviation from the design adopted at appraisal. The actual level of performance achieved by GAIL demonstrates the appropriateness of the design rationale and the contracts entered into with private sector importers and traders of LPG when creating the first open access pipeline in India. The policy of providing open access to an LPG pipeline is timely and will be a model in furthering the private-public partnership when developing the Indian hydrocarbon sector. There was no project preparatory technical assistance program for this Project.

B. Project Outputs

12. The Project comprised (i) constructing a 1,015 km trunk line, with a diameter of 12 and 16 inches, from Samakhiali to Loni; (ii) constructing a 156 km spur line, with a 14-inch diameter, from Jamnagar to Samakhiali; (iii) constructing pumping facilities at dispatch points and three main line pump stations; (iv) installing SCADA and telecommunications systems; and (v) conducting training for GAIL staff. As envisaged during appraisal, all components except the SCADA system have been installed and commissioned within the scheduled completion period of 42 months. A brief review of the status of the completion of project components follows.

1. Pipeline from Jamnagar to Loni

13. The Jamnagar to Loni pipeline comprised the following major components: (i) detailed engineering and design; (ii) pipes (12-, 14-, and 16-inch), valves, optical fiber cables, and other associated items; (iii) laying of coated line pipes and constructing booster stations; and (iv) other civil works. The pipeline was commissioned on 31 January 2001, 3 months ahead of schedule. The pipeline throughput from the commissioning date has been the same as that envisaged at appraisal (1.7 MMTPA).

2. Pumps at LPG Input Station and Booster Pumps

14. The installation of pumps and booster pumps comprised the following major components: (i) installation of main line pumps (478.5 kilowatts [kW], with a 201 cubic meter [m3] per hour capacity) and booster pumps (194 kW, with a 258.5 m3 per hour capacity) at the Jamnagar LPG input station; and (ii) installation of three main line pumps, one at the Samakhiali station (758 kW, with a 323 m3 per hour capacity), one at the Abu Road station (836 kW, with a 323 m3 per hour capacity), and one at the Ajmer station (270 kW, with a 270 m3 per hour capacity). The booster pumps were designed based on the requirement of maintaining the necessary threshold pressure of 20 bars in the pipeline. The pumps were commissioned on 25 January 2001, within the scheduled time allotted for the completion of the Project. With the approval of ADB, the location of one of the main line pump stations was changed from Palanpur to Abu Road during the detailed design stage.

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3. Supervisory Control and Data Acquisition and Telecommunications Systems

15. This component comprised the installation of SCADA and telecommunications systems. These are required for remote monitoring and computerized control of the performance of the pipeline. Major parts of the SCADA system were completed in January 2003, and the entire telecommunications system was completed in March 2001. The dynamic leak detection feature and application software (APPS) module, which are part of the SCADA system, have not been commissioned, due to a substantial delay in the vendor’s deploying specialists. GAIL has indicated that the remaining parts of the SCADA system have been installed and site acceptance tests are underway. After the site acceptance tests are successfully completed, it is expected that all the features of SCADA system would be operationalized by November 2003. Without the leak detection feature, GAIL staff cannot instantly detect LPG leaks remotely. However, under the present arrangement, the operations staff can detect LPG leaks by analyzing the pressure profile of the LPG along the pipeline. The data collected is available to staff on-line at master control stations, which ensures the safe operation of the pipeline. The APPS module was envisaged to optimally set the operational parameters of pumps and other equipment, based on system input and output requirements, and obtain the optimum operational efficiencies. Although not commissioning the APPS module has had no effect on the operation of the pipeline, using the APPS module’s on-line capabilities would reduce the operating costs of the system.

C. Project Costs

16. At appraisal, the total cost of the Project was estimated at $364.4 million equivalent, comprising $208.8 million (57%) in foreign currency and $155.6 million (43%) in local currency. The ADB loan at appraisal was valued at $150 million, out of which only $98.19 million was used. Cost savings of $115.42 million equivalent (33%) were composed of $79.80 million in foreign currency and $35.62 million equivalent in local currency. Appendix 2 compares estimated and actual project costs. The Project’s costs and a summary of contracts are in Appendix 3. Appendix 4 provides the average exchange rates used when converting local currency to dollar equivalents.

17. The savings in project cost are mostly in the foreign currency component of the total project cost (38.3%), when compared to the local currency component (22.9%). The foreign exchange cost savings are attributed to (i) a substantial fall in the international price of steel (estimated at $600 per ton [t], the actual price was $420 per t), leading to lower procurement prices for the pipeline; (ii) a general recession in the market; and (iii) savings in interest during construction, because the debt (loan) component of the Project was reduced (the loan in foreign currency was $98.10 million, compared with $155.6 million at appraisal). The savings in local currency are attributed to (i) non levy of customs duties, which was envisaged at appraisal, because GAIL obtained exemption from the Government as a special case; (ii) savings in telecommunications and SCADA procurement; and (iii) savings related to engineering services.

D. Disbursements

18. ADB approved a $150 million loan from its ordinary capital resources on 16 December 1997. Disbursements totaled $98.19 million out of the original loan amount of $150 million. $51.81 million was canceled in four stages as loan savings. Initial disbursements under the loan started on 27 May 1999, and the final disbursement was on 1 March 2002 (33 months later).

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The pattern of actual disbursements closely followed the annual disbursement projections. The actual and projected disbursements are given in Appendix 6.

E. Project Schedule

19. The planned project implementation steps are compared with the actual sequence of events in Appendix 7. The Project was scheduled to start in November 1997, with a commissioning date of April 2001. All project components were completed by January 2001, except for the SCADA system, which was partly commissioned in January 2003 and is expected to be fully commissioned and operationalized by November 2003.

1. Pipeline from Jamnagar to Loni

20. The implementation schedule for the pipeline comprised engineering, procurement, and construction (including civil) activities.

21. The design process was scheduled to begin in November 1997 and be completed by March 1998. The actual work was completed in January 1998, 2 months ahead of schedule. The detail engineering was to begin in April 1998 and be completed by September 1998. The actual engineering was completed only in April 2000, with a delay of 18 months. The delay was due to changes and/or modifications in drawings at the time of execution. The procurement of long lead time items, not affected by these delays, was ordered at the same time. Thus, there was no impact on the completion date of the Project.

22. The procurement of pipes was to begin in February 1998 and be completed by April 2000. Actual procurement was completed 2 months ahead of schedule. However, there were delays (6–15 months) in the procurement of valves and fittings. There was, however, no impact on the Project’s schedule, as GAIL revised the procurement schedules of items that were to be used in other projects.

23. The construction activities comprised the coating of pipes, pipe laying, and civil works for the terminal and pump stations. The coating and pipe laying activities were scheduled to be completed simultaneously, with a head start of 4 months given to coating activities. The pipe laying, scheduled for completion by March 2001, was completed in January 2001 (2 months ahead of schedule). Construction of terminal and pump station buildings began in December 1998 and was to be completed by February 2001. The buildings were completed 1 month ahead of schedule, in January 2001.

2. Installation of Pumps

24. Three main line pumps and three booster pumps are at the LPG input station at Jamnagar. The engineering for these items began with that for the pipeline. Procurement for these items was to commence in September 1998 and end by June 1999. Actual procurement commenced 1 month later, in October 1998, and was completed in July 2000, after a delay of 13 months. The delay in delivering the pumps is attributed to a backlog of earlier orders to the supplier. The late delivery of the pumps did not affect the commissioning of the Project, as these were required at the sites only 2 months prior to the commissioning dates. Since the pumps were received by July 2000, and the scheduled commissioning date was April 2001, the Project’s completion target was not affected. The construction of the terminal pump stations was scheduled to begin in December 1998 and be completed in February 2001. The stations were completed 1 month ahead of schedule, in January 2001.

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3. Installation of Supervisory Control and Data Acquisition and Telecommunications Systems

25. The engineering for the two systems, the SCADA and telecommunication systems, began with that for the pipelines. The procurement of optical fiber cables was scheduled to start in April 1998 and be completed by March 2000. Actual procurement began in March 1998 and was completed in July 2000, with a delay of 3 months. The SCADA system was scheduled to begin in February 1999 and be completed in January 2001. Although the work started according to schedule, the SCADA was commissioned in January 2003 without its dynamic leak detection system and APPS module. With APPS specialists currently at the site, the system is likely to be completed by the end of November 2003. The telecommunications system was installed in March 2001, which was 1 month past the scheduled date of February 2001.

F. Implementation Arrangements

26. The implementation arrangements were the same as envisaged at appraisal, and ADB found the implementation arrangements to be satisfactory. A project implementation office, headed by a project manager, who was assisted by qualified technical and administrative staff, was set up at Noida. The Project was periodically monitored by GAIL’s top management, through monthly review meetings at the site and New Delhi. The implementation arrangements were considered adequate by ADB, as overall coordination existed and a proper management system was in place. The Project’s implementation structure is provided in Appendix 8.

27. An Indian firm was appointed consultant for the Project and provided consultation, design, engineering, procurement, expediting, quality assurance and/or quality control, construction, and construction management services. The consulting firm had also set up a central coordination site office at Jaipur, which was headed by a resident construction manager, who was assisted by a group of engineers specializing in construction, construction management, quality assurance, and quality checks. This office also acted as the nodal point for all the spreads for technical assistance, workforce deployment, execution, project planning, and project monitoring.

28. The total 1,171 km of pipeline, as envisaged during project appraisal, was to be laid from Jamanagar (Gujarat) to Loni (Uttar Pradesh). Keeping in view the length of the pipeline, the terrain through which it had to be laid, and the implementation schedule, GAIL divided the total length of pipeline into five. Each section was headed by a person who reported directly to the general manager (Pipelines), GAIL, Jaipur. The sections are

(i) from Jamnagar to Bhimasar, with a pipeline length of 207.5 km and an office at Jamnagar;

(ii) from Bhimasar to Abu Road, with a pipeline length of 231 km and an office at Palanpur;

(iii) from Abu Road to Kantaliya, with a pipeline length of 184.1 km and an office at Palanpur;

(iv) from Kantaliya to Jaipur, with a pipeline length of 254 km and an office at Jaipur; and

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(v) from Jaipur to Loni (Uttar Pradesh), with a pipeline length of 294 km and an office at Noida.

29. The pumps at the input and other stations have been installed. Intermediate pumping and/or booster stations are required to maintain the requisite pressure in the pipeline system, pumping the LPG downstream, and meeting the pressure profile at off-take points. The work was carried out on a contract basis, supervised by the consultant.

30. The engineering for the SCADA and telecommunications systems began with that for the pipelines. The procurement of optical fiber cables was scheduled to begin in April 1998 and be completed by March 2000. The actual procurement began in March 1998 and was completed in July 2000, with a delay of 4 months. The SCADA system was scheduled to be completed in January 2001. Due to delays caused by the contractor, the system is now expected to be operationalized with all features by the end of November 2003. The telecommunications system was installed in March 2001.

G. Conditions and Covenants

31. The effective date for the Loan Agreement was specified as 90 days after the date of the agreement. The additional conditions to be complied with before the loan became effective were as follows: (i) the capacity of the pipeline had to be established; (ii) GAIL was to have executed binding contracts for at least 90% of the pipeline’s capacity; (iii) consultants were to be appointed to undertake a hazardous operations (HAZOP) analysis; and (iv) the Government was to confirm that no legislative approvals, consents, or permits would be required for public or private sector entities to have pipeline access. In addition, before the loan could become effective, (i) GAIL had to obtain the Government’s approval as the Guarantor, (ii) all corporate and government approvals had to be obtained, (iii) the status of Navaratna1 had to be granted to GAIL, and (iv) valid LPG transmission contracts had to be finalized.

32. The conditions were fulfilled by GAIL. The status of compliance with key loan covenants and conditions is shown in Appendix 9. No covenants were modified, suspended, or waived during implementation. All covenants were satisfied, except for those relating to divestment of government equity in GAIL below 70% and the establishment of a gas regulatory authority. The Government has cited the prevailing difficult market conditions as the reason for its inability to off-load its holdings in the market, and the Government is setting up a gas regulatory authority, which is expected to be in place by the end of 2003. A brief note on the policy issues in the gas sector appears in Appendix 14.

H. Related Technical Assistance

33. No technical assistance is related to this Project.

I. Consultant Recruitment and Procurement

1. Consultants

34. As decided at appraisal, GAIL, from its own resources, appointed an experienced Indian engineering firm to be the main consultant. The scope of work entrusted to the consultant included (i) preparing a feasibility study; (ii) preparing the basic design of pipeline, terminal 1 Navaratna status allows a company to incur capital expenditures of up to Rs3 billion, and enter into joint ventures

with private companies involving an investment of up to Rs1 billion, without prior government approval.

8

facilities, and pump stations; (iii) creating the detailed design of and engineering for these facilities; (iv) preparing bid documents; (v) procuring materials and equipment, which included performance monitoring, expediting and inspection services at vendors’ shops; (vi) supervising construction and providing quality assurance activities; (vii) providing project management services, including monitoring and progress reporting; and (viii) providing commissioning and start up assistance.

35. GAIL also conducted a HAZOP study, through an internationally qualified British consulting firm. Another firm was appointed to conduct a third party inspection of the pipeline. The selection of these two firms was carried out in accordance with ADB’s Guidelines on the use of Consultants.

2. Procurement

36. The procurement packages funded by ADB covered (i) line pipes, (ii) pipeline construction, (iii) block and/or sectionalizing valves, and (iv) coating and transportation. ADB agreed to advance procurement actions for these items, and GAIL carried out procurement for ADB-financed contracts in accordance with ADB’s Guidelines for Procurement. GAIL acquired its previous procurement experience through ADB’s Gas Rehabilitation and Expansion Project,2 and due to the support of an experienced consultant, no major problems were encountered in contract packaging, preparation of bid documents, or bid evaluation. The procurement of line pipes, which accounts for 62% of procurement by value, was carried out on time. However, there were some delays in the procurement of valves and pumps. The delays were attributed to the poor performance of vendors. The supply of valves was delayed, but this, had no impact on the Project’s schedule, as GAIL diverted some of these items from other projects. The delivery of the pumps was not critical for commissioning.

J. Performance of Consultants, Contractors, and Suppliers

37. GAIL reported that the consultants performed the assigned tasks professionally and in accordance with the terms of reference. Apart from the tasks mentioned in para. 35, the main consultant was also asked to carry out an environmental impact assessment study. A summary of the findings is given in Appendix 14.

38. The main pipeline laying contractors were able to lay the pipeline ahead of schedule and helped get the line charged with LPG before schedule.

39. The suppliers of line pipe supplied the pipes ahead of schedule. GAIL reported that the performance of these suppliers was satisfactory.

K. Performance of the Borrower and Executive Agency

40. GAIL was both the Borrower and Executing Agency. Its performance was satisfactory. The Project was completed successfully and ahead of schedule (3 months). The additional revenue earned, due to early completion, was $2.6 million. The amount of LPG transported during this period was 100,000 tons.

41. The Project was funded by the second ADB loan given to GAIL. Both loans were used according to schedule, and no loan extensions were asked. Moreover, GAIL ensured that 229

2 ADB. 1993. Technical Assistance to India for the Gas Rehabilitation and Expansion Project. Manila

9

technical staff members were trained in India and overseas. Appendix 13 provides a summary of training programs attended by GAIL staff.

L. Performance of the Asian Development Bank

42. ADB closely and regularly monitored project progress, through review measures, and provided useful advice in several areas, including procurement, project management, and staff planning.

43. ADB’s India Resident Mission (INRM) also closely monitored project administration. ADB, GAIL, and the Indian consultant held several tripartite meetings that improved GAIL’s performance. Various timely corrective measures were suggested and implemented as a result of those reviews. Thus, ADB’s overall performance was satisfactory.

III. EVALUATION OF PERFORMANCE

A. Relevance

44. At appraisal and completion, the Project was rated highly relevant to the Government’s and ADB’s hydrocarbon sector strategy for the country (paras. 8 to 10). The Project’s primary objective at appraisal was to mitigate the LPG shortage in northern India through the efficient transportation of surplus LPG from the western region of India, promotion of LPG use in rural areas and among low-income groups, and the provision of pipeline access to the private sector.

45. The demand for LPG is expected to rise to 2.6 MMTPA in 2007 and 3.5 MMTPA by 2012. The pipeline capacity of 1.7 MMTPA has been contracted to the public sector (1.49 MMTPA) and the private sector (0.21 MMTPA), and the average quantities drawn in 2001 were 90.15%, with take or pay provisions. Thus, the objective of meeting the demand in the northern region has been greatly addressed as a result of this project.

46. The number of LPG road tankers needed was drastically reduced after the installation of the pipeline. In the past, 270 LPG tankers were required to transport an average of 5,000 tons of LPG per day. The road tankers that are now free, as a result of the pipeline, are being redeployed to carry LPG to remote areas. This is resulting in LPG becoming available to segments of the population that were earlier dependent on wood and cow dung for fuel. The Project’s objective of reducing LPG transportation costs is being achieved, as the cost is now 50% lower than by road and 30% lower than by rail.

47. The amount of pollutants released into the environment has also been reduced. The amounts of suspended particle matter (6,253 tons per annum [tpa]), carbon monoxide (1,034 tpa), unburned hydrocarbons (10,340 tpa), and sulfur oxide and nitrogen dioxide (3,693 tpa) are expected to drop considerably.

48. The Project is relevant and important in providing pipeline access to the private sector. Two private companies, Energy Infrastructure (India) Limited, New Delhi, and Dharamsi Morarji Chemical Company Limited, Mumbai, have entered into 15-year contracts with GAIL. The parties will be drawing LPG from the pipeline at Patli in Rajasthan and Loni in Uttar Pradesh, respectively. The Project was instrumental in developing commercial contracts between GAIL and the private sector, which in turn will facilitate open access to the pipeline for the private sector. The successful execution of contracts and implementation will serve as a model for similar future projects and can provide financial gain to private operators.

10

B. Efficacy in Achievement of Purpose

49. The Project achieved its immediate objectives of transporting 1.7 MMTPA of surplus LPG from India’s western region to its LPG deficient northern region, reducing pollution, and providing open access to the pipeline. The system was designed to transport 1.7 MMTPA of LPG. Against this capacity, during FY2002/03, GAIL transported 1.53 MMTPA of LPG, using 90% of the total capacity in the second year of operation. Due to GAIL’s effective and efficient operation of the LPG system, there have not been any disruptions in operation. The Project also achieved its long-term objective of contributing to ADB’s strategy of supporting efforts designed to achieve higher sustainable economic growth. Since the early 1990s, the Government’s emphasis has been on policy changes that will affect the institutional and regulatory framework and enhance the efficiency of public sector operations and encourage private investment. The Project was also formulated to achieve ADB’s objective of supporting projects with environmental benefits.

C. Efficiency in Achievement of Outputs and Purpose

50. The Project has been operating continuously from the date of commissioning. The pipeline was designed to handle 1.7 MMTPA of LPG, and the actual output has been 1.49 MMTPA, on an average. The pipeline will meet its design capacity once the balance quantity of 0.21 MMTPA is supplied by scheduled suppliers.

51. The Project’s financial internal rate of return (FIRR) was determined to be 15.22%, after tax, which is well above GAIL’s weighted average cost of capital (WACC) of 10.80%, in real terms. The economic internal rate of return (EIRR) was estimated at 31.48%. The financial and economic analyses were made using the domestic price numeraire. Major assumptions used in the financial evaluation, economic evaluation, and detailed calculations of FIRR and EIRR are in appendixes 11 and 12. Balance sheets, income statements, and sources and uses of GAIL’s funds can be found in the supplementary appendixes.

D. Preliminary Assessment of Sustainability

52. Technically, the design of the Project is robust and sound, given the technical parameters and long-term sustainability of the pipeline. The design capacity can be achieved. This capacity is proposed to be further increased to 2.5 MMTPA by 2006/07, to meet the growing demand for LPG in the northern region. After increasing the capacity of the system, the cost of transportation is expected to lower further. According to government forecasts, the LPG shortages and constraints in the LPG supply chain will continue. As a result, there will be adequate demand for LPG. Therefore, the Project can largely fill the deficit in LPG gas supply in the northern region of the country. On the operations side, GAIL is well equipped with a skilled and competent staff that can operate and maintain project installations effectively and efficiently. Further, as the FIRR exceeds the WACC of GAIL, the returns from the Project will contribute to the overall financial health of GAIL. Therefore, no problems are foreseen with the long-term sustainability of the Project. The Project is also expected to trigger an increase in private sector activity in LPG supply, which was hitherto an exclusive domain of the public sector. The contracts drawn up by GAIL with the public and private sectors are for 15 years, with provisions that the contract amount will be paid for even if LPG is not taken.

53. The Loan Agreement, under Schedule 6, required GAIL to prepare a HAZOP analysis of the pipeline’s operability and safety features. The analysis was to be carried out by international consultants during three stages of the Project: (i) on completion of the conceptual design of the

11

Project’s facilities, (ii) on completion of the detailed design for the Project’s facilities, and (iii) on completion but prior to the commissioning of the Project’s facilities. The HAZOP consultants were to submit to ADB a report on the results of its analysis at each stage. GAIL will then modify the Project’s facilities as recommended by the HAZOP consultants, to enhance the design or safety features of the Project’s facilities.

54. GAIL conducted the HAZOP study through an internationally qualified firm. The study was carried out in two stages, one in August and September 1998 and the other in March 2001, after the pipeline was commissioned. As a result of this study, GAIL executed an action plan that included producing a safety procedures manual at each installation. Some parts of the action plan are described in paras. 55, 56, and 57.

55. The sectionalizing valve stations along the Jamnagar–Loni pipeline have been provided with adequate safety features. Every station has a security guard and dedicated telephone, and thermoelectric generators (TEG) supply emergency power. The main valves of all stations and the TEGs can be operated and controlled from the master control rooms, at Jamnagar and Loni. Each sectionalizing valve station has its own smoke detection and fire fighting systems, such as carbon dioxide flooding systems and portable fire extinguishing appliances. Vaporizers are provided between pressure reduction stations and the TEGs, to avoid liquid LPG going into the TEGs.

56. On-site and off-site emergency plans that are well documented and cover all contingencies are at each intermediate pumping stations (IPS). Drills at all IPSs are carried out each quarter. Representatives of the safety and production departments prepare jointly a final audit report examining on-site awareness of and responses to these drills, and this audit report is continuously reviewed. The last drill was held on 26 March 2003.

57. The overriding consensus of the HAZOP consultant was that the pipeline was well designed. The design incorporated many safety features that were generally conservative, in principle, and this enabled the pipeline to be operated in a safe and efficient manner. Various markers and warning signs were provided, in accordance with American Petroleum Institute standards and specifications. GAIL has obtained ISO 9001 (quality management), ISO 14001 (environment management), and ISO 18001 (occupational health and safety) certification for its pipeline system. The safety measures implemented by GAIL are adequate to ensure the safe operation of the Project during its lifetime.

E. Environmental, Sociocultural, and Other Impacts 58. The impact of the pipeline on the environment was assessed in two parts—impact during construction and/or operations and impact on a long-term basis.

59. The land along the right of way was cleared of vegetation and debris in a strip 10 meters wide on side of the right of way’s center line. The strip was reduced to 5.5 meters near the 0.5 km stretch of mangrove on the Hazira-Patan route. The pipeline was buried at least 1 meter underground. The main impact on the environment during pipeline, booster station, and terminal construction was caused by the movement of mechanical equipment during the excavation and pipe laying phases, which generated pollutants like dust, suspended particle matter, carbon monoxide, and nitrogen dioxide from fuel use. However, these pollutants were temporary in nature and restricted to the construction area.

12

60. The entire pipeline was coated with three layers of polyethylene before being laid, to prevent corrosion and/or rusting of the underground steel pipes and contamination of subsoil. The impact on bodies of water during construction was very minor. Most of the water bodies that were crossed by the pipeline route are small to medium in size. One major river (Yamuna) was crossed, under the riverbed, using horizontal directional drilling. This method did not disturb the banks or the riverbed, and no sediment was washed away by the river. The path selected keeps the pipeline away, to the extent possible, from presently developed areas, future growth areas, and intermediate population clusters.

61. The pipeline does not pass through any wildlife sanctuaries or national parks. The degraded forests affected are mostly treeless grassland, which could more appropriately be classified as scrubland. The pipeline traverses an area where grazing animals are found, such as goats, sheep, camels, and horses.

62. The LPG pipeline offers an environmentally friendly mode of transportation that entails less energy consumption and exhaust emissions than other modes. The transportation of LPG through the pipeline system helps reduce air pollutants, including carbon monoxide, suspended particulate matter, unburned hydrocarbons, and sulfur and nitrogen oxides. Noise pollution is also reduced, as the pipeline makes it unnecessary to deploy a fleet of 270 trucks per day, each producing 90 decibels of noise.

63. The social impact of the Project was directly visible in many ways. The infrastructure in the form of a pipeline fostered the installation of LPG bottling plants at various points that have created direct employment opportunities. The pipeline also provided employment during the construction phase and subsequently during regular operations.

64. GAIL has taken up community development programs on an ambitious scale in all the areas surrounding the pipeline. The various pumping stations have been identified as centers for effecting those programs. The programs involve (i) providing scholarships to needy and economically deprived students; (ii) constructing roads and hospitals and supplying medicine; (iii) distributing crop seeds and hand pumps to farmers; and (iv) carrying out drought relief measures, such as providing drinking water. GAIL has so far spent Rs4.3 million on these programs.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

65. Project formulation and design were consistent with ADB’s strategy for the hydrocarbon sector in India. The performance of consultants and contractors was generally satisfactory. The Project was completed ahead of the appraisal schedule and without cost overruns. The Project’s components have achieved the desired level of performance within a few months of commissioning. In addition, the Project successfully contributed to the reduction of pollutants in the environment, resulting from a significant reduction in the number of LPG road tankers needed. The Project’s main objectives of reducing the imbalance in demand between the western and northern regions of the country and allowing the private sector to have access to the pipeline (for the first time in India) have been satisfactorily achieved. The benefits

13

generated by the Project are visible. The FIRR and EIRR of the Project confirm the findings. Overall, the Project is rated as highly successful.3

B. Lessons Learned

66. A project of this magnitude requires a high level of preparedness and planning on the part of the executing agency. The fact that the Project was completed 3 months ahead of schedule testifies to the fact that GAIL is fully capable of executing such infrastructure projects, given regular monitoring and review by ADB. This is the second ADB-financed project in the gas sector. Both have been completed on time and have realized their objectives.

67. The delayed completion of the SCADA system is attributed to the late deployment of specialists to the site by the supplier. In the earlier ADB-funded project (the Gas Rehabilitation and Expansion Project), the installation of a SCADA system was similarly delayed. In future projects, GAIL will need to place greater emphasis on this safety-related issue.

68. The procurement work was generally well executed. However, there were delays in the delivery of valves and fittings (6 to 15 months) and pumps (12 months). The delays were caused by vendor backlogs. This issue should be resolved by the executing agency in the future.

69. ADB followed closely all activities, through headquarters and INRM review missions. These proved valuable in expediting project schedules and monitoring major milestones.

C. Recommendations

1. Project Related

a. Future Monitoring

70. The dynamic leak detection system and APPS module of the SCADA system are in the final stages of commissioning. ADB’s INRM needs to monitor the commissioning of these and evaluate their operational benefits in achieving optimal performance of the LPG pipeline.

71. The pipeline was designed to handle 1.7 MMTPA of LPG. The quantity contracted so far is 1.49 MMTPA. As for the balance of 0.21 MMTPA, the two private parties involved have yet to commence shipping. GAIL should inform ADB as soon as both start using the pipeline.

b. Covenants

72. Most of the covenants were complied with, except for those pertaining to the establishment of a regulatory authority and the dilution of equity in GAIL. The recent steps being taken by the Government may ensure that the regulator will be in place by December 2003. On the equity issue, there is a need to take up further this issue with GAIL, as part of future monitoring. Indian Oil Corporation, a stakeholder having an equity stake of 4.8%, is actively considering a public offering, subject to government approval. The INRM is of the view that, given the present improved equity market conditions and divestment policy of the Government,

3 This report is part of a sample of about 50% of all project completion reports prepared this year that have been

independently reviewed by the Operations Evaluation Department. The review has validated the methodology used and the rating given.

14

the covenant related to the dilution of equity in GAIL will be complied with sooner rather than later.

c. Further Action or Follow-up

73. The Project does not require any specific follow-up action by ADB, except monitoring to ensure that the issues in paras. 70 and 71 have been resolved.

d. Additional Assistance

74. GAIL has drawn up a program to implement clean fuel projects in selected cities in India, to improve the environment by substituting compressed natural gas for polluting diesel. A similar project, implemented by GAIL, is operating in India’s capital city and the quality of the city’s environment has improved considerably due to a huge reduction in pollutants.

e. Timing of Project Performance Audit Report

75. A project performance audit report (PPAR) is recommended toward the end of 2005, to enable the PPAR Mission to evaluate the benefits of the APPS module in optimizing the operation of the LPG pipeline system, since, with the commissioning of APPS system, pipeline parameters can be set at the optimum level to obtain the optimum efficiencies of pumps and other installations.

2. General

76. The overall demand-supply scenario for gas in India indicates substantial deficits. India still needs to import gas, given likely outcome of exploration efforts. Gas imports are restricted to liquefied natural gas and those received via pipelines. Many liquefied natural gas projects are already at various stages of completion. The most economic way to transport gas would be through pipelines.

77. A number of possible routes can be established for transporting gas through pipelines. From western India, Turkmenistan has evinced keen interest in exporting gas through a pipeline to India. A joint working group has been set up to go further into the details. Similarly, Iran offers significant potential for transporting gas to India. The Government of India is keen on an offshore pipeline to bring Iranian gas to the west coast of India.

78. On the eastern side, a few oil companies, such as Cairn Energy, Shell, and Unocal, are proposing to transport gas from the Sangu gas field in Bangladesh to India. Whether or not these proposals are accepted will depend on the Government of Bangladesh’s stand on gas exports to India.

79. These developments would be consistent with ADB’s long-term strategy for India. ADB has supported efforts to achieve higher sustainable growth to promote employment and reduce poverty. Efficient development of the hydrocarbon sector, in general, and the gas sector, in particular, is important to the success of India’s self-sufficiency in the hydrocarbon sector. The Government has generally implemented the gas sector reforms agreed upon with ADB, and ADB expects to continue its involvement in the sector.

Appendix 1 15

CHRONOLOGY OF MAIN EVENTS IN PROJECT IMPLEMENTATION Date Event 1995 16 Feb Country program concept clearance was obtained. 1997 24 Feb–7 Mar Fact-finding mission activities were carried out. 3–5 Jul Special contact mission activities were carried out. 24 Sep–4 Oct Appraisal activities were carried out. 3 Nov Staff review committee meeting was held. 12–14 Nov Loan negotiations were held. 16 Dec Board approved the Project.

1998 10 Feb Preliminary hazardous operation (HAZOP) study was conducted. 16–20 Nov Contact mission activities were carried out. 11 Dec Loan Agreement was signed.

1999 29 Jan Contract worth $27,265,660 was awarded for the supply of line pipes. Contract worth $62,600 was awarded for the supply of line pipes. Contract worth $235,100 was awarded for the supply of line pipes. Contract worth $2,693,300 was awarded for the supply of line pipes. Contract worth $14,572 was awarded for the supply of line pipes. 23 Feb–1Mar Inception Mission activities were carried out. 1 Apr Contract worth $11,074,870 was awarded for the coating and

transportation of line pipes. 4 May Loan was declared effective. 19 May First disbursement under the Project was made. 28 May Contract worth £4,344,646 was awarded for the installation of main line

pumps. 28 May Contract worth £920,145 was awarded for the installation of main line

pumps. 29 Jun Contracts worth $2,443,726 and Rs17,949,131 were awarded,

respectively, for the installation of the supervisory control and data acquisition (SCADA) system and application software (APPS).

31 May Loan balance was reduced to $136.5 million, after $13.5 million of the total amount was cancelled.

3 Jul First lot (326 km) of line pipes from Hyundai arrived at Kandla port. 8 Jul Contract worth $248,621 was awarded for the supply of sectionalizing

valves. 26 Jul Coating of line pipes commenced. 10 Aug Contract worth $8,294,114 was awarded for the provision of the

telecommunications system. 12 Oct Loan balance was reduced to $121 million, after $15.5 million of the total

amount was cancelled. Rs = Indian rupees, $ = US dollars, £ = pounds sterling.

Continued on next page

16 Appendix 1 Table…Continued Date

Event

2000 19–25 Oct

First Review Mission met with Gas Authority of India Limited (GAIL) officials to discuss project implementation matters.

3 Jan Last lot (124 km) of pipes was received at the coating yard. 21–25 Feb Second Review Mission met with GAIL and Government officials to

discuss project implementation, consulting work, procurement status, physical progress, and compliance with loan covenants.

3 Apr Horizontal directional drilling was completed. 1 May Three main line pumps were received at the site. 15 May Five booster pumps were received at the site. 5 Jun Booster pumps were erected. 15 Aug Gas-in was completed at Reliance Petroleum Limited (RPL) terminal. 4–8 Sep Third Review Mission met with GAIL and Government officials to discuss

project implementation, consulting work, procurement status, physical progress, technical assistance status, and compliance with loan covenants.

21 Sep Loan balance was reduced to $109.5 million, after $11.5 million of the total amount was cancelled.

15 Oct Gas-in dispatch terminal was completed. 19 Oct Gas-in from RPL to Samaikiali was completed. 15 Nov Gas-in to Abu Road pumping station was completed. 24 Nov Gas-in to Ajmer pumping station was completed. 2–5 Nov Booster pumps at Ajmer pumping station were commissioned. 28 Nov Liquefied petroleum gas (LPG) was sent to Bharat Petrochemicals Limited

at Ajmer. 10 Dec LPG was sent to Indian Oil Corporation at Sanganer. 21 Dec

LPG was received by Bharat Petrochemicals Limited.

2001 19 Jan Booster pumps at Samaikiali were commissioned. 25 Jan Booster pumps at Abu Road were commissioned. 31 Jan

LPG pipeline was commissioned.

2002 1 Mar Loan balance was reduced to $98.19 million, after $11.31 million of the

total amount was cancelled. 1 Mar Final disbursement under the Project was made. 2003 27 –31 May Project Completion Review Mission activities were carried out.

Appendix 2 17

COST BREAKDOWN BY PROJECT COMPONENTS ($ million)

Appraisal Estimate Actual Item Foreign Local Total Foreign Local Total A. Base Cost

1. Line Pipe 48.60 0.00 48.60 30.70 19.25 49.952. Pipe Coating 24.30 0.00 24.30 10.50 2.01 12.513. Line Fittings 0.00 4.80 4.80 0.00 1.24 1.244. Valves 3.80 0.00 3.80 4.70 3.32 8.025. Pumps 0.00 0.00 0.00 8.20 1.13 9.336. Right of Use

Compensation 0.00 3.80 3.80 0.00 1.70 1.70

7. Pipe Laying 47.40 5.30 52.70 41.10 15.76 56.868. River Crossings (HDD) 0.00 1.20 1.20 0.00 0.31 0.31

9. Booster, Dispatch, and Tap-Off Stations

3.50 12.80 3.50 0.00 11.67 11.67

10. SCADA and Telecommunications

Systems

12.00 15.70 27.70 12.00 11.51 23.51

11. Cathodic Protection System

3.50 0.00 3.50 4.20 0.41 4.61

12. Power Supply 0.00 6.30 6.30 12.80 1.67 14.4713. Construction Camps

and/or Townships 0.00 5.50 5.50 0.00 2.01 2.01

14. Commissioning 0.00 0.10 0.10 0.00 0.00 0.0015. Surveys 0.00 1.90 1.90 0.00 1.16 1.1616. Engineering 0.00 12.70 12.70 0.00 9.80 9.8017. Consulting and Training 2.00 0.00 2.00 0.00 0.68 0.6818. Project Management 0.00 6.30 6.30 0.00 13.54 13.5419. Ocean Freight 7.10 0.00 7.10 0.00 0.00 1.7220. Customs Duty 0.00 29.60 29.60 0.00 15.61 15.6121. Port and Domestic

Transport 0.00 7.80 7.80 0.00 0.00 0.00

22. Excise Duty and Central Sales Tax

0.00 5.60 5.60 0.00 0.00 0.00

23. Insurance 0.00 1.30 1.30 0.00 0.20 0.2024. Others 0.00 0.00 0.00 0.00 0.32 0.32

Subtotal (A) 152.20 120.70 272.90 124.20 115.03 239.23 B. Contingencies 1. Physical Contingencies 15.22 12.07 27.29 0.00 0.00 0.002. Price Contingencies 9.38 20.28 29.67 0.00 0.00 0.00

Subtotal (B) 24.60 32.35 56.96 0.00 0.00 0.00 C. Interest During

Construction 32.00 2.55 34.54 4.80 4.95 9.75

Subtotal (C) 32.00 2.55 34.54 4.80 4.95 9.75

Total 208.80 155.60 364.40 129.00 119.98 248.98HDD = horizontal directional drilling, SCADA = supervisory control and data acquisition. Source: Asian Development Bank estimates.

PCSS Category Category Description Contract AmountNo. No. Amount ($) Disbursed ($)

0001 02 Supply of Line Pipes 27,264,530 27,264,530 0002 02 Supply of Line Pipes 62,600 62,600 0003 02 Supply of Line Pipes 224,051 224,051 0004 02 Supply of Line Pipes 2,686,160 2,686,160 0005 02 Coating and Transportation of Coated Pipes 10,456,684 10,456,684 0006 02 Supply of Optical Fiber Cable Package 1,397,230 1,397,230 0007 02 Supply of Main Line and Sectionalizing Conduit Gate Valves 223,759 223,759 0008 02 Supply of Main Line and Sectionalizing through Conduit Gate Valves 2,515,909 2,515,909 0009 01 Laying and Installation of Pipelines and Associated Systems 17,432,562 17,432,562 0010 01 Laying and Installation of Pipelines and Commissioning 25,794,941 25,794,941

No. = number, PCSS = Procurement Contract Summary SheetSource: Asian Development Bank's Loan Financial Information System.

PROJECT COSTS AND SUMMARY OF CONTRACTS 18 Appendix 3

Appendix 4 19

ANNUAL AVERAGE EXCHANGE RATES

Fiscal Year Indian Rupees

(Rs) per $

1999 42.07

2000 43.33

2001 45.61

Source: Reserve Bank of India.

PROJECT FINANCING PLAN ($ million)

Appraisal Estimate Actual Item Foreign Local Total Foreign Local TotalA. Implementation Costs

1. Asian Development Bank 127.00 0.00 127.00 93.39 0.00 93.39 2. International Banks 44.80 0.00 44.80 0.00 0.00 0.00 3. Local Banks 0.00 8.80 8.80 30.81 38.43 69.24 4. GAIL Internal Resources 0.00 144.25 144.25 0.00 76.60 76.60

B. Interest During Construction Costs

1. Asian Development Bank 2. International Banks 3.Local Banks 4.GAIL Internal Resources

23.00 14.00

0.00 0.00

0.00 0.00 0.00 2.55

23.00 14.00 0.00 2.55

4.800.000.000.00

0.00 0.00

0.004.95

4.80 0.000.00

4.95

Total 208.80 155.60 364.85 129.00 119.98 248.98

20 Appendix 5

GAIL = Gas Authority of India Limited. Source: Asian Development Bank estimates.

Appendix 6 21

For the Year Cumulative For the Year Cumulative

0.00 3.000 36.770 36.770 36.000 39.000 44.420 81.190 17.200 56.200 16.380 97.570

- 56.200 0.620 98.190

a Projections are those made in the annual Loan Financial Information System (LFIS). Source: LFIS of Asian Development Bank.

200020012002

PROJECTED AND ACTUAL DISBURSEMENTS OF LOAN PROCEEDS

CalendarYear

1999

Projected a Actual

($ million)

ActivityJ F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N DActivities prior to 1997 are not shown

Surveys

Design Freeze

Process Design

Detail Engineering

HAZOP

Line Pipe

Station Valves

Pumps and Drivers

Appurtenances

Optical Fiber Cable

Pipe Coating

Pipe laying

Terminal/Pump Stations

Telecommunication

SCADA

Commissioning

HAZOP = hazardous operations, ROW = right of way, SCADA = supervisory control and data acquisition.J = January, F = February, M = March, A = April, M = May, J = June, J = July, A = August, S = September, O = October, N = November, D = December.Note: The letters representing the months of each year are placed in order January to Decemb

Appraisal EstimateActual

Source: Gas Authority of India Limited

2001

PROJECT IMPLEMENTATION SCHEDULE

1999 20001998

Construction

1997

ROW and Land Acquisition

Engineering

Procurement

22 Appendix 7

Appendix 8 23

ORGANIZATION CHART AND PROJECT IMPLEMENTATION STRUCTURE

Chairman and Managing Director

OIC AjmerOIC Abu Road

OIC Samakhiali

OIC RPL/EOL

Spread 5 In-charge

Spread 4 In-charge

Spread 3 In-charge

Spread 2 In-charge

Spread 1 In-charge

Dy. General Manager (Finance)

General Manager (Pipeline)

Dy. General Manager (LPG

Pipeline)

Executive Director (Projects)

Director (Projects)

Dy. = Deputy, EOL = Essar Oil Limited, OIC = officer-in-charge, RPL = Reliance Petroleum Limited. Source: Gas Authority of India Limited.

24 Appendix 9

STATUS OF COMPLIANCE WITH MAJOR LOAN COVENANTS

Covenant Reference in Loan Documents

Status of Compliance

1.

The Borrower shall provide to the Asian Development Bank (ADB) copies of all government agencies’ reports on the Project’s performance related to the mitigating measures outlined in the Environment Impact Assessment (EIA), including reports submitted by the Borrower to the State Pollution Control Board and the Ministry of Forest and Environment.

Loan Agreement (LA), Sch. 6, para. 24

Complied with.

2. Annually, the Borrower’s environment and safety unit will collate the environmental monitoring results and provide the same to ADB, together with copies of environmental and safety licenses, clearances, and permits, and identify any special environmental concerns.

LA, Sch. 6, para. 25

Complied with.

3.

The Borrower, together with the Indian consultant, shall conduct dynamic and hydraulic simulations, to gain an understanding of the system’s behavior under a variety of flow conditions and assist in establishing the system’s capacity. The result of such analysis shall be compared with the contractual liquefied petroleum gas (LPG) supply and delivery obligations in the LPG transmission contracts. A report on the findings of the analysis and comparison shall be provided to ADB by the end of February 1998.


Complied with.

4.

The Borrower, together with international consultants, shall prepare a hazardous operation (HAZOP) analysis of the pipeline system’s operability and safety features. The analysis shall be carried out during the following three stages of the Project: (i) upon completion of the conceptual design for the Project’s facilities, (ii) upon completion of the detailed design for the Project’s facilities, and (iii) upon completion of construction but prior to commissioning of the Project’s facilities. The HAZOP consultant shall submit to ADB a report on the result of the analysis at each stage.


Complied with.

5.

The Borrower shall, by the end of April 1998, provide ADB, for its review and approval, an inspection plan setting out details of the scope of work and assignment of responsibilities for the inspection, with respect to the acceptance of work executed under the Project. Third party consultants shall be retained to act as independent inspection contractors and carry out such work.


Complied with.


Appendix 9 25 Table…Continued

Covenant Reference in Loan Documents


6.

The Borrower shall provide ADB with its annual investment plan and its proposed mode of financing, starting from fiscal year 1997/98 and for each of the following 5 years.

LA, Sch. 6, para. 5(ii) and para. 5(iv)

Complied with.

7.

The Borrower shall maintain at all times a debt service ratio of no less than 1.5:1.

LA, Sch. 6, para. 5(iii)

Complied with.

8.

The Borrower shall finance at least 30% of its capital expenditures from funds generated from internal sources.

LA, Sch. 6, para. 5(v)

Complied with.

9. Commercial financing shall be arranged in sufficient time to meet the financing requirements of the Project. If the commercial financing has not been arranged by 15 October 1998, the Borrower shall make funds immediately available to the Project that are equal to the amount of commercial financing not obtained. If commercial financing is subsequently obtained, the Borrower’s obligation to make the funds available shall be reduced to the extent of such commercial financing.

LA, Sch. 6, para. 6 Complied with.

10.

The tariff to be charged for the transmission of LPG shall be set so as to generate sufficient revenues from the Project, on a stand-alone basis, for (i) a minimum debt service coverage ratio of 1.25 and (ii) a minimum post tax internal rate of return of 13.5 %. The tariff will also, at all times, take into account foreign exchange movements.


Complied with.

11.

The Borrower shall furnish ADB quarterly reports on the execution of the Project and the operation and management of the Project’s facilities.

LA, Sec. 4.06(b)

Complied with.

12.

Promptly after physical completion of the Project, no later than 3 months thereafter, the Borrower shall prepare and furnish to ADB a report on the execution and initial operation of the Project, including its costs; the performance of the Borrower regarding its obligations under the LA; and the accomplishment of the purposes of the loan.

LA, Sec. 4.06(c)

Complied with.


26 Appendix 9 Table…Continued

Covenant Reference in

Loan Documents


13. The Borrower shall (i) have its accounts and financial statements (balance sheet, statement of income and expenses, and related statements) audited annually, in accordance with appropriate auditing standards consistently applied by independent, professional auditors whose qualifications, experience, and terms of reference are acceptable to ADB; (ii) furnish ADB, as soon as available but, in any event, no later than 6 months after the end of each related fiscal year, unaudited copies of such accounts and financial statements and furnish ADB, no later than 9 months after the end of each related fiscal year, certified copies of such audited accounts and financial statements and the report of the auditors relating thereto (including the auditors’ opinion on the use of the loan proceeds and compliance with the covenants of the LA), all in the English language; and (iii) furnish ADB such further information concerning such accounts and financial statements, and the audit thereof, as ADB shall from time to time reasonably request.

LA, Sec. 4.07(a)

Complied with.

14.

The Borrower shall enable ADB, upon ADB’s request, to discuss the Borrower’s financial statements and its financial affairs from time to time with the Borrower’s auditors and shall authorize and require any representative of such auditors to participate in any such discussions requested by ADB, provided that any such discussions shall be conducted only in the presence of an authorized officer of the Borrower, unless the Borrower shall otherwise agree.

LA, Sec. 4.07(b)

Complied with.

15.

Sec. 2.07 of the Gas Rehabilitation and Expansion Project (GREP) guarantee agreement, dated 17 May 1994, between ADB and the Borrower is hereby amended to the extent that the Government shall use its best efforts to reduce its equity ownership in the Borrower to no more than 70% by 31 Dec 1999 or as soon as market conditions permit.

Guarantee Agreement (GA), Sec. 2.12

Partially complied with. The Government has taken measures to divest its holding in Gas Authority of India Limited (GAIL) by 30%. The actual divestment by the Government in GAIL is 32.648%. However, out of this, the divestment in favor of public sector enterprises is to the extent of 10.918% (Oil and Natural Gas Commission–4.829%, Indian Oil Corporation –4.829% and Life Insurance Company–1.26%) and the actual divestment to the private corporate sector and financial institutions is 21.73%. GAIL stated that, in view of the difficult capital market conditions prevailing for the


Appendix 9 27 Table…Continued


Loan Documents


last few years, the Government has

been unable to off-load its holdings in the market.

16.

The Borrower shall ensure that at least one-third of the Board of Directors of the Borrower are nongovernment representatives representing a cross section of disciplines relevant to the operation of a private sector LPG and gas company and that such directors shall be appointed to the Board within 4 months of the loan’s effective date.

LA, Sch. 6, para. 9

Complied with.

17.

The Guarantor shall from time to time take such action as may be necessary or appropriate on its part to assist the Borrower in obtaining all land, rights of way, easements, licenses, permits, consents, approvals, or other clearances required, both at the state and central level, for the expeditious execution of the Project.

GA, Sec. 2.06 and 2.07d

Complied with

18.

The Guarantor shall ensure that Cabinet approval of the establishment of an independent gas regulatory authority, which shall operate as an autonomous body in a fair, open, and transparent manner, has been issued by 30 June 1999. The Guarantor represents and warrants that, at such time as an LPG, gas, or other applicable regulatory authority is established, due consideration shall be given in formulating and enacting the required legislation, regulations, orders, or directives, to the extent possible, to maintain the tariff and other terms and conditions set forth in the LPG transmission contracts, in order to preserve the commercial viability of the Project, as appraised by ADB, and the economic and financial viability of the LPG transmission contracts for the Borrower and pipeline users.

GA, Sec. 2.08 and 2.09

Not complied with. Under the New Exploration and Licensing Policy issued by the Government, the gas companies are free to determine their marketing strategies, including pricing. In addition, the Government is bringing a new enactment for a gas regulatory authority for regulating the transmission and distribution of gas, including fixing the price of gas and downstream products. The establishment of a gas regulatory authority by the Government is at an advanced stage, and an authority is expected to be in place by the end of 2003.

19.

The Borrower shall take out and maintain with responsible insurers, or make other arrangements satisfactory to ADB, insurance against such risks and in such amounts as shall be consistent with sound LPG, gas industry, and commercial practice.

LA, Sec. 4.04(a)

Complied with.


28 Appendix 9 Table…Continued


Loan Documents


20.

The Borrower and ADB shall have agreed upon the deemed capacity of the pipeline after completion of dynamic hydraulic simulations to establish the system’s economic capacity.

LA, Sec. 6.01(a)

Complied with.

21.

The Borrower shall have entered into legally binding LPG transmission contracts with respect to at least 90% of the pipeline’s capacity, and the Borrower and pipeline users shall have obtained all necessary and advisable corporate and governmental approvals, consents, or other clearances for such LPG transmission contracts

LA, Sec. 6.01(b).

Complied with.

22.

The Borrower shall have appointed international consultants to undertake the HAZOP analysis, with the appointment, terms and conditions of the appointment, and terms of reference acceptable to ADB.

LA, Sec. 6.01(c)

Complied with.

23.

The Borrower shall have obtained the Guarantor's approval for the borrowing of the loan and for the undertaking of the Project as may be required by the memorandum and articles or the laws of the Guarantor.

LA, Sec. 6.02(a)

Complied with.

24.

The Borrower shall have obtained all corporate and government, whether central or state level, approvals; consents; or other clearances required or advisable for the construction of the pipeline and carrying out the Project, or if such governmental approvals, consents, or other clearances have not yet been obtained, the opinion shall identify the approvals, consents, or other clearances so required.

LA, Sec. 6.02(b)

Complied with.

25.

The Borrower shall have been granted by the Guarantor a status equivalent to that of a Navratna and no further action is required to confirm such status.

LA, Sec. 6.02(c)

Complied with.

26.

The LPG transmission contracts shall have been duly executed and delivered by the parties thereto and constitute the parties' valid, legal, binding, and enforceable obligations.

LA, Sec. 6.02(d)

Complied with.

Appendix 10 29

SUMMARY ENVIRONMENTAL IMPACT ASSESSMENT A. Introduction 1. The Environmental Impact Assessment (EIA) study of the Liquefied Petroleum Gas (LPG) Pipeline Project in India was carried out by the Indian consultant for the Project sponsor, Gas Authority of India Ltd (GAIL). The EIA was submitted to the Ministry of Environment and Forests (MOEF) and taken up by its Appraisal Committee. The LPG pipeline from Jamnagar to Loni replaced erstwhile transportation by rail and road in this sector. The pipeline consists of 1,171 km of 12-inch, 14-inch, and 16-inch pipeline; five dispatch terminals; nine tap-off points; three intermediate booster stations; and other infrastructure. B. Description of the Project 2. The land along the right of way (ROW) was cleared of vegetation and debris in a strip 10 meters wide on both sides of the center line of the ROW, which was reduced to 5.5 meters near a 0.5 km stretch of mangrove swamp on the Hazira-Patan route. The pipeline was buried at least 1 meter underground. The land on the ROW may not be used for planting trees or building homes or any permanent structures. However, the land can be used for growing wheat, vegetables, oil crops, and other plants. Pipeline construction across small rivers was done by the open-cut method, and markers are placed at each stream or river crossing and turning point. C. Description of the Environment 3. The pipeline begins in Jamnagar and continues through the salt pans of Gujarat; deserts and wastelands of Gujarat and Rajasthan; farmlands in Gujarat, Rajasthan, Haryana, and Uttar Pradesh; and along the irrigation canals in Uttar Pradesh and Rajasthan. The area is generally thinly populated. Methane and nonmethane hydrocarbon (HC) values were measured at different locations along the pipeline route. The average methane concentration ranged from between 1.18 and 2.42 parts per million (ppm) and nonmethane HC between 0.09 and 2.36 ppm, which can be attributed to vehicular emissions from highways. The water quality was analyzed for physical, chemical, and biological parameters. The pH (negative logarithm of the hydrogen ion molar concentration) of the water samples was recorded between 7.6 and 8.27, showing the alkaline nature of the water. The dissolved oxygen content was 5.68–6.68 milligrams per liter. Seawater was free from odor, and its pH was in the alkaline range. Groundwater samples were free from odor, and their pH ranged between 7.37 and 8.42. Soil samples were collected from agricultural as well as barren lands, to assess existing soil quality. The bulk density of soils ranged from 1.33 to 1.47 grams per cubic centimeter. 4. The pipeline does not pass through any wildlife sanctuaries or national parks. In agricultural areas, the main crops are maize, groundnut, cotton, paddy, wheat, etc. The trees are generally small species whose root systems cannot affect irrigation canal embankments. The pipeline traverses an area where grazing animals are found, such as goats, sheep, camels, and horses.

30 Appendix 10 5. The pipeline route was selected to bypass densely populated areas, villages, and important historical sites. However, there was some impact on the influx of migrant workers, food supply, necessities, and employment during construction. Impacts will continue during operation and maintenance. D. Environmental Impact and Mitigation Measures 6. The main negative impact of the Project occurred only during construction. After rehabilitation of the pipeline ROW, the residual impact of the Project was limited to the small areas occupied by the markers. The pollutants released by mechanical equipment during construction were produced for 3–5 days and restricted to construction sites. As the pipeline laying operation was carried out in remote and sparsely populated areas, the noise was not a problem. Most of the water bodies, through which pipeline crossed, are seasonal streams, and the pipeline was laid by the open-cut method. The land required during pipeline construction was predominantly agricultural, and proper compensation was paid to landowners for the acquisition of the ROW and loss of crops. 7. The pipeline’s ROW was cleared of shrubs, undergrowth, and trees. Under the compensatory reforestation rules of MOEF, GAIL planted two trees for every tree cut. Villagers living along the pipeline route were given jobs during the laying of the pipeline, subject to job availability and the skills possessed by villagers. Basic facilities and medical facilities were provided to the nonlocal workforce. E. Operational Phase 8. Risk analysis for the most credible accidents was carried out, and it was found that the impact area would be confined to less than 200 meters from the pipeline. If LPG is released from a pressurized pipeline, a substantial fraction of it flashes to vapor almost instantaneously. The pipeline’s design, construction, and operation were carried out as per national and international standards. To meet emergencies, proper warning systems for identifying hazardous situations were developed. For efficient and satisfactory functioning of the pipeline system, from the safety and economic points of view, the pipeline was protected against corrosion and other potential dangers. Descaling of the pipeline was carried out regularly, according to Oil Industry Safety Directorate norms. 9. The transport of LPG in a pipeline requires lower fuel per ton per kilometer than transport by road. In the service area, LPG will displace kerosene and solid fuels. LPG has a higher combustion efficiency than kerosene and other liquid or solid fuels. The compressors and pumps will generate noise in the range of 90–100 decibels, even with silencers attached. A supervisory control and data acquisition system will be used to ensure the protection of the pipeline’s integrity. The ROW will be maintained and inspected regularly, to ensure clear visibility and easy access to valve locations.

Appendix 11 31

MAJOR ASSUMPTIONS RELATED TO ECONOMIC AND FINANCIAL EVALUATION A. General Methodology 1. Financial evaluation of the Project was carried out on an incremental and after-tax basis. All prices are in constant March 2003 terms. The Project commenced operations in January 2001, and it is assumed that the Project will have an operating life of 30 years. No salvage value is expected at the end of this period. The Project is expected to generate economic benefits through reductions in the cost of transporting liquefied petroleum gas (LPG) between domestic refineries and bottling plants in the northern region. The economic capital cost of the Project is based on the financial capital costs and excludes duties, taxes, and other financial changes. The local currency costs are adjusted by using a standard conversion factor of 0.8. Pipeline operating costs, in economic terms, were estimated using the price for diesel, the standard conversion factor, and the shadow wage rate and shadow prices for both electricity and water. As a result, the economic cost per ton-kilometer of LPG haulage works out to be Rs1.88. B. Costs 2. The Project’s actual capital costs amount to $248.98 million, and the component of ADB’s loan equals $98.19 million. While the fixed costs are estimated at Rs44.59 million per annum, the variable costs (which will vary from year to year) for 2003/04 are estimated to be Rs22.71 million. C. Revenues 3. LPG transportation charges are recognized as sales revenues at a level tariff of Rs1.27 per ton-kilometer, with effect from 2000/01 and an annual escalation of 2%. Sales volume is considered to be 88% of the pipeline’s total capacity during FY2003 and is expected to reach 100% by the FY2007, with an almost constant increase. D. Income Tax 4. Even though carry forward losses exist (which are allowable up to a maximum of 8 years), a minimum alternate tax rate of 12.9% on book net profit is applicable under Indian law, whenever book net income is positive. Otherwise, the income tax rate of 35% is applicable. E. Internal Rates of Return 5. On the basis of a comparison of economic costs and benefits over a 30-year project lifetime, the Project has an economic internal rate of return (EIRR) of 31.48%. No account was taken in this analysis of the additional investments in road or rail capacity that the Project renders unnecessary, which represent benefits to the Project that are not quantified. Similarly, no account was taken of the savings in road maintenance expenditure and operating costs of all road vehicles that result from slower pavement deterioration than would have occurred if LPG were transported by road. The Project is also expected to achieve a healthy financial internal rate of return (FIRR) of 15.22%, after taxes (17.63% before taxes, at the present tax rate of 35%).

32 Appendix 11 F. Environmental Benefits 6. The Project is expected to generate additional economic benefits over and above the direct transport cost savings. Transporting a given volume of LPG through the pipeline requires the use of substantially less hydrocarbon fuel than transporting the same volume by road. In addition, the volume of noxious emissions and particulate matter that can be inhaled, resulting from burning hydrocarbon fuels, will be less if the Project is pursued than if it were not. On the basis of available estimates of diesel fuel consumption in road transport and the diesel fuel requirements for operating the pipeline, hydrocarbon fuel usage with the pipeline will be around 10% of the level that will be required to transport the same volume of LPG by road. The environmental benefits are not considered in calculating EIRR, due to a lack of required data. 7. The EIRR and FIRR are given in Appendix 12.

Unit priceMMTPA MMT-km Rs/T-km

1998 0 0 0 0 0 0 0 0 0 0 0 01999 0 0 0 0 0 0 0 0 0 (4,633) (4,633) (4,633) 2000 0.10 99 1.27 125 0.30 2.50 3 122 0 114 (5,026) (4,912) (4,912) 2001 1.30 1,372 1.30 1,777 181 307 488 1,289 0 1,244 (457) 787 787 2002 1.00 1,094 1.32 1,446 130 186 316 1,130 0 1,130 0 1,130 1,130 2003 1.50 1,601 1.35 2,158 227 446 673 1,485 0 1,485 0 1,485 1,485 2004 1.52 1,780 1.37 2,447 227 446 673 1,774 0 1,774 0 1,774 1,774 2005 1.58 1,850 1.40 2,594 227 446 673 1,921 0 1,921 0 1,921 1,921 2006 1.64 1,920 1.43 2,747 227 446 673 2,074 0 2,074 0 2,074 2,074 2007 1.70 1,991 1.46 2,904 227 446 673 2,231 0 2,231 0 2,231 2,231 2008 1.70 1,991 1.49 2,962 227 446 673 2,289 801 1,488 0 1,488 2,289 2009 1.70 1,991 1.52 3,021 227 446 673 2,348 822 1,526 0 1,526 2,348 2010 1.70 1,991 1.55 3,082 227 446 673 2,409 843 1,566 0 1,566 2,409 2011 1.70 1,991 1.58 3,143 227 446 673 2,470 865 1,606 0 1,606 2,470 2012 1.70 1,991 1.61 3,206 227 446 673 2,533 887 1,647 0 1,647 2,533 2013 1.70 1,991 1.64 3,270 227 446 673 2,597 909 1,688 0 1,688 2,597 2014 1.70 1,991 1.68 3,336 227 446 673 2,663 932 1,731 0 1,731 2,663 2015 1.70 1,991 1.71 3,403 227 446 673 2,730 955 1,774 0 1,774 2,730 2016 1.70 1,991 1.74 3,471 227 446 673 2,798 979 1,818 0 1,818 2,798 2017 1.70 1,991 1.78 3,540 227 446 673 2,867 1,003 1,864 0 1,864 2,867 2018 1.70 1,991 1.81 3,611 227 446 673 2,938 1,028 1,910 1,910 2,938 2019 1.70 1,991 1.85 3,683 227 446 673 3,010 1,054 1,957 1,957 3,010 2020 1.70 1,991 1.89 3,757 227 446 673 3,084 1,079 2,004 2,004 3,084 2021 1.70 1,991 1.92 3,832 227 446 673 3,159 1,106 2,053 2,053 3,159 2022 1.70 1,991 1.96 3,909 227 446 673 3,236 1,132 2,103 2,103 3,236 2023 1.70 1,991 2.00 3,987 227 446 673 3,314 1,160 2,154 2,154 3,314 2024 1.70 1,991 2.04 4,066 227 446 673 3,393 1,188 2,206 2,206 3,393 2025 1.70 1,991 2.08 4,148 227 446 673 3,475 1,216 2,259 2,259 3,475 2026 1.70 1,991 2.13 4,231 227 446 673 3,558 1,245 2,313 2,313 3,558 2027 1.70 1,991 2.17 4,315 227 446 673 3,642 1,275 2,368 2,368 3,642 2028 1.70 1,991 2.21 4,402 227 446 673 3,729 1,305 2,424 2,424 3,729 2029 1.70 1,991 2.26 4,490 227 446 673 3,817 1,336 2,481 2,481 3,817 2030 1.70 1,991 2.30 4,579 227 446 673 3,906 1,367 2,539 2,539 3,906 2031 1.70 1,991 2.35 4,671 227 446 673 3,998 1,399 2,599 2,599 3,998

Financial Internal Rate of Return 15.22%Financial Internal Rate of Return 17.63%

MMT-km = million metric tons per kilometer, MMTPA = million metric tons per annum, Rs/t-km = rupees per ton kilometer.

ECONOMIC AND FINANCIAL ANALYSIS

(All figures are in 2003 prices and Rs million, unless otherwise stated)

Sales Revenue Incremental Operating Cost Net Cash Flow

Table A12.1: Financial Internal Rate of Return

After Tax Before Tax

Fiscal Year

Total Cost

Cash Inflow

before tax

Income Tax

Cash Inflow After Tax

Incremental Sales Total Revenue

Variable Cost

Source: Gas Authority of India Limited.

After TaxBefore Tax

Capital Investment

Fixed Cost

Appendix 12 33

Operating

1998 0 0 0 0 0 0 0 0 01999 3706.4 0 0 0 0 0 0 0 0 (3,706) 2000 4020.8 0.10 99 203 0 2 2 201 201 (3,820) 2001 365.6 1.30 1,372 2,830 144 246 390 2,440 2,440 2,074 2002 1.00 1,094 2,258 104 149 253 2,005 2,005 2,005 2003 1.50 1,601 3,304 182 357 538 2,766 2,766 2,766 2004 1.52 1,780 3,673 182 357 538 3,134 3,134 3,134 2005 1.58 1,850 3,817 182 357 538 3,279 3,279 3,279 2006 1.64 1,920 3,962 182 357 538 3,424 3,424 3,424 2007 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569 2008 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569 2009 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569 2010 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569 2011 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569 2012 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569 2013 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569 2014 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569 2015 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569 2016 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569 2017 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569 2018 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569 2019 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569 2020 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569 2021 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569 2022 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569 2023 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569 2024 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569 2025 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569 2026 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569 2027 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569 2028 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569 2029 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569 2030 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569 2031 1.70 1,991 4,107 182 357 538 3,569 3,569 3,569

31.48%MMT-km = million metric ton per kilometer, MMTPA = million metric tons per annum.

Fixed Cost

ECONOMIC AND FINANCIAL ANALYSIS

Total Cost Cost Savings

Total Benefits

Net Cash Flow

Table A12.2: Economic Internal Rate of Return

Economic Internal Rate of Return

Source: Gas Authority of India Limited.

(All figures are in 2003 prices and Rs million, unless otherwise stated)

Fiscal Year

Capital Investment

PipelineThroughput

MMTPA MMT-Km

Road Cost Variable Cost

34 Appendix 12

Appendix 13 35

SUMMARY OF TRAINING COURSES Course Code Course Level Manpower Person-days LPG P/L-Tr-01 Operation and maintenance of cross-

country liquefied petroleum gas pipeline

J to M 20 200

LPG P/L-Tr-02 Operation and maintenance of booster stations

J to M 20 200

LPG P/L-Tr-03 Operation and maintenance of supervisory control and data acquisition and application software systems

J to S 33 345

LPG P/L-Tr-04 Concept technology, installation, and operation and maintenance of various telecommunications systems

J to S 22 590

LPG P/L-Tr-05 Operation and maintenance of instrumentation systems and flow measurements

J to M 10 75

LPG P/L-Tr-06 Emergency Response and Disaster Management

J to S 19 171

LPG P/L-Tr-07 Exposure to similar operating pipelines in the world

M and above 20 200

LPG P/L-Tr-08 Training of technicians in the operator grade

O to J 20 200

LPG P/L-Tr-09 Procurement and financial issues in Asian Development Bank-funded projects

J to M 6 60

LPG P/L-Tr-11 Exposure to the end users for similar pipelines

J and above 10 100

LPG P/L-Tr-12 Safety management in operation, maintenance, repair, fire fighting, fire prevention, and fire protection

J to M 11 110

LPG P/L-Tr-13 Hazardous operations analysis J to M 11 165 LPG P/L-Tr-14 Training for trainers J to M 5 75 LPG P/L-Tr-15 Total quality management M and above 4 60 LPG P/L-Tr-16 Inspection of the pipeline system,

components, and specifications J to M 5 75

LPG P/L-Tr-17 Legal and regulatory issues in the power and energy sector.

J to M 3 30

Development of a high-pressure liquid hydrocarbon handling training facility

J and above 10 100

Total 229 1581 J = deputy manager level, M = deputy general manager level, O = operator level, S = level above M. Source: Gas Authority of India Limited.

36 Appendix 14

POLICY ISSUES RELATED TO PRICING IN THE GAS SECTOR

A. Background 1. In India, the demand for natural gas has grown exponentially over the last 15 years, and the supply has been linked to domestic availability. Against an availability of around 67 million standard cubic meters per day (MMSCMD), the demand is likely to rise to about 120 MMSCMD by 2020. Until about a year ago, the Government planned to meet the growing demand through importing natural gas via pipelines (the potential suppliers being Bangladesh, Iran, and Myanmar) and/or importing liquefied natural gas (LNG). Accordingly, restrictions on imports of gas were removed and import duties slashed. However, with the discovery of a large amount of natural gas, made by Reliance Petroleum Limited (RPL) in the KG basin (currently anticipated by RPL to consist of roughly 14 trillion cubic feet of in-place gas reserves) and prospects of further discoveries in the eastern and western offshore areas of India, the Government and the private sector will have to again evaluate plans for imports of natural gas, particularly of LNG. A clearer picture is likely to emerge in 1 or 2 years. 2. The most critical issue regarding the future demand of natural gas is the commodity’s price. Fed on a diet of subsidized gas prices, the Indian consumer is yet to be faced with the prospect of paying realistic prices. About 80% of the gas consumed in India is consumed by the power and fertilizer sectors. Prices for these two commodities are subsidized, and political exigencies make it difficult for the Government to reduce or remove the subsidies in these sectors. This makes it difficult for the Government to free natural gas from the Administered Pricing Mechanism, although several high-level committees set up by the Government have strongly advocated freeing the sector from pricing controls. The recent recommendation of the Group of Ministers for an increase of Rs350 per metric cubic meter (MCM), approved by the Cabinet, may improve the bottom line of Oil and Natural Gas Corporation (ONGC). However, the increased gas price is still not remunerative to ONGC, especially because ONGC is making huge investments in activities designed to produce oil discoveries in deep waters, which were outlined in the Tenth 5-Year Plan. 3. Natural gas can be imported either through terrestrial or subsea pipelines or in the form of LNG, where gas is transferred in a liquefied form, transported, and subsequently regasified for distribution. India is considering various proposals for importing gas through pipelines. Many LNG projects have been announced in the recent past, and some of the projects are in the advanced stages of completion. The potential demand for imported gas is estimated at 56 MMSCMD by FY2007, which is expected to be met by LNG imports of around 15 million tons (equivalent to 56.7 MMSCMD). LNG pricing is expected to be a crucial factor, as the main gas consumers are power and fertilizer units. With such a consumer profile in India, LNG prices are likely to be benchmarked against other fuels, such as coal (in the case of power generation), and the substitution price (in the case of the fertilizer industry).

Appendix 14 37 B. Current Scenario 4. The price of natural gas in India is currently based on a pooling concept, with the pooled or consumer price fixed by the Government. The consumer price of natural gas is currently subsidized, with the subsidy being borne entirely by the nationalized companies receiving suboptimal prices for their production of natural gas. The private sector joint ventures, on the contrary, receive international prices for the natural gas they produce. Based on Expert Committee recommendations, the Government has partly dismantled the Administered Price Mechanism for the calculation of consumer prices, and a new pricing mechanism was put into effect from 1 October 1997 to 31 March 2000, according to which the consumer price of gas at landfall points was linked to the price of a basket of low sulfur heavy stock fuel oils. A discount of Rs300 per MCM will also be available for existing consumers in the northeast, on a case by case basis. 5. The 1997 gas pricing order stipulates that the consumer price for natural gas (the consumer price) is a floating price linked to an international basket of fuel oils (the international reference price) that is determined and fixed quarterly by GAIL, based on the methodology laid down by the Government. This consumer price was 55%, 65%, and 75% of the international reference price in the fiscal years that ended on 31 March 1998, 1999, and 2000, respectively. The consumer price is, however, subject to both a ceiling price of Rs2,850 per MCM and a floor price of Rs2,150 per MCM and is linked to calorific value of 10,000 kilocalories per kilogram. For gas having a lower or higher calorific content, the consumer price will increase or decrease proportionately. This pricing, which was valid up to 31 March 2000, has been continued. 6. As far as LPG is concerned, its price is subsidized to the extent of 30% of the cost of production. This subsidy is met from the Oil Pool Account of the Government, contributed by the National Oil Companies by way of cross-subsidization. The retail selling price of packed LPG in India is lower than that in countries like Bangladesh, Nepal, Pakistan, and Sri Lanka. C. Future Scenario 7. The Government has yet to decide the price of natural gas, which was due on 1 April 2002. The National Oil Companies have indicated that the present prices are not remunerative and do not encourage investment, unless producer prices are increased substantially, which would include the correction of an anomaly in the purchase of gas from joint ventures that is indirectly deducted from ONGC’s due. The Group of Ministers has recommended an increase of Rs350 per MCM in the price of gas (a 12% increase) and suggested that the Tariff Committee submit its gas price and transport tariff report within 6 months. The recommendation and suggestion await the Cabinet’s approval. 8. Private sector joint ventures, on the contrary, receive international prices for the natural gas they produce. With production of such joint ventures likely to increase in the medium term, continuing a pooled pricing mechanism will further increase under recoveries by the National Oil Companies, unless consumer prices rise significantly. Overall there appears to be a strong case for a gas price increase.

38 Appendix 14 9. The LPG subsidy was Rs672.4 million (corresponding to Rs150.55 for each 14.2-kilogram cylinder) in FY2001 and has increased every year, due to increases in the cost of production and increases in LPG connections. Since the oil pool account has been dismantled, as a result of the Administered Price Mechanism, the direct burden is on the Government’s exchequer. Prices of LPG will rise once these subsidies are withdrawn. 10. The Government introduced the Petroleum Regulatory Board Bill 2002 in May 2002 for the approval of Parliament. The bill aims to establish a petroleum regulatory board that will regulate the refining, processing, storage, transportation, distribution, marketing, and sale of petroleum products, excluding the production of crude oil and natural gas, to protect the interests of consumers and entities engaged in specified activities relating to petroleum and petroleum products, ensure uninterrupted and adequate supply of petroleum and petroleum products in all parts of the country, promote competitive markets, and undertake other related or incidental matters. The bill was referred to a standing committee that submitted its recommendations and comments on the draft bill. These recommendations and comments are currently being processed by the Ministry of Petroleum and Natural Gas and will later be considered by the Parliament.