Document of The World Bank FOR OFFICIAL USE ONLY

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT Energy & Mining Development Sector Unit East Asia and Pacific Region INDONESIA GAS UTILIZATION PROJECT (Loan No ID) June 15, 1999 Report No: This document has a restricted distribution and may be used by the recipients only in the performance of their official duties. Its contents may not be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (as of March 31, 1999) Currency Unit - Indonesian Rupiah (Rp) US$1.0 = Rp 10,400 WEIGHTS AND MEASURES 1 kilometer (km) = miles (mi) I ton 1000 kilograms (kg) 1 standard cubic foot (CF) = cubic meter 1 British Thermal Unit (BTU) = kilicalories MCF = thousand standard cubic feet MMCF = million standard cubic feet M[MCFD = million standard cubic feet per day TCF - trillion standard cubic feet Borrower's Fiscal Year April 1- March 31 ABBREVIATIONS AND ACRONYMS MM - Million ERR - Economic Rate of Return FIRR - Financial Internal Rate of Return GOI - Govermment of Indonesia MIGAS - Directorate of Oil and Natural Gas LEMIGAS - Research and Development Center for Oil and Gas Technology TEKNOGAS - Gas Technology Development Unit PGN - PT..Perusahaan Gas Negara (Persero) (Sitate Gas Corporation) PERTAMINA- National Oil and Gas Company UKDFID - United Kingdom's Department for International Development Regional Vice President Country Director Sector Manager Task Manager Jean-Michel Severino Mark Baird Yoshihiko Sumi Salahuddin Khwaja

3 IMPLEMENTATION COMPLETION REPORT PREFACE... INDONESIA GAS UTILIZATION PROJECT (Loan No IND) Table of Contents EVALUATION SUMMARY... FOR OFFICIAL USE ONLY Page No. iii PART I - PROJECT IMPLEMENTATION ASSESSMENT A. Statement/Evaluation of Objectives... 1 B. Achievement of Objectives... 4 C. Major Factors Affecting the Project... 6 D. Project Sustainability... 8 E. Bank Performance... 9 F. Borrower Performance G. Assessment of Outcome H. Future Operation Key Lessons Learned PART I - STATISTICAL TABLES Table 1: Summary of Assessment.15 Table 2: Related Bank Loans/Credits.16 Table 3: Project Timetable.16 Table 4: Loan Disbursements.17 Table 5: Key Indicators for Project Implementation.17 Table 6: Key Indicators for Project Operation.17 Table 7: Studies included in the Project.18 Table 8A: Project Costs Table 8B: Project Financing Table 9A: Economic Rate of Return Table 9B: Financial Rate of Return Table 9C: PGN Financial Summary ( ) Table 9D: PGN's Fiscal Impact Table 10: Status of Legal Covenants Table 11: Compliance with Operational.Manual Statements Table 12: Bank Resources: Staff Inputs Table 13: Bank Resources: Missions APPENDICES A. Mission's Aide Memoire B. Borrower's Contribution MAP IBRD This document has a restricte distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

4 IMPLEMENTATION COMPLETION REPORT INDONESIA GAS UTILIZATION PROJECT (Loan No lND) PREFACE This is the Implementation Completion Report (ICR) for the Gas Utilization Project in Indonesia, for which Loan No IND, in the amount of US$86.0 million equivalent was approved on May 31, The loan was substantially closed on 31St December 1998, two years and three months behind the scheduled closing date of 3 0 th September 1996, except for Category 2 (b) of Schedule 1 of the Loan Agreement which was closed on 31 st March 1999 to enable the completion of equipment contracts which had been delayed due to monetary crisis in the country. Cofinancing for the Project was provided by the Department for International Development (DFID) of the UK government. This ICR was prepared by S. Khwaja, Consultant Gas Specialist, EASEG and S. Shum, Senior Financial Analyst, EASEG, and reviewed by M. Farhandi, Principal Energy Specialist, EASEG. Preparation of this ICR was begun during the Bank's final supervision mission in November, It is based on material in the Project file, findings of the ICR mission in March, 1999 and updated project information provided by the Borrower. The Borrower also contributed to the preparation of ICR by preparing own project completion report (attached as Appendix B), and commenting on the draft ICR.

5 IMPLEMENTATION COMPLETION REPORT INDONESIA GAS UTILIZATION PROJECT [LN IND] EVALUATION SUMM\VARY Introduction. i. GOI's strategy of developing large-scale domestic markets for natural gas, as a substitute for oil, particularly for power generation, industrial and commercial use was formulated with the help of four Bank studies. These were: i) Energy Assessment Report of 1981, which flagged the potential of Indonesia's alternative energy sources to economically substitute oil in domestic consumption in order to maintain potential exports; ii) Gas Utilization Study of 1984, which supported expanded use of natural gas in domestic consumption in a long-term perspective; iii) Gas Distribution Study of 1985, which confirmed the potential for expanded gas distribution to small and medium industries, commercial entities and households in urban areas; and iv) LPG Feasibility Study of 1985, which confirmed the economic viability of LPG distribution more widely for household use. Later, in 1987, Bank's Energy Options Review reiterated the important role of natural gas as a substitute for petroleum products to meet the growing fuel requirements of the power, industrial and commercial sectors. ii. In 1986, Bank helped GOI design a project, called Gas Distribution Project, to support this strategy through rehabilitation and expansion of gas distribution systems and development of gas markets in the cities of Jakarta, Bogor (West Java) and Medan (North Sumatra), institution building of the involved utility (PGN), and an energy pricing study. The agreement for a Bank loan (Loan No IND) for the project was signed in June The project was completed and the loan closed in July This was Bank's first lending operation in Indonesia's gas sub-sector. It was rated, by the Operations Evaluation Department, as one of the seven best designed and implemented projects Bank wide. iii. In 1990, to accelerate the utilization of natural gas in domestic energy consumption and encouraged by the success of the ongoing Gas Distribution Project, GOI sought Bank support for a similar project, called Gas Utilization Project, covering rehabilitation and expansion of gas distribution systems and development of gas markets in Surabaya and twelve other towns in East Java and further development in Medan in North Sumatra, along with institutional strengthening of the gas utility (PGN), the Directorate General of Oil and Gas (MIGAS), and the Research and Development Center for Oil and Gas Technology (LEMIGAS). The agreement for a Bank loan (Loan No IND) for the Project was signed on July 6, The Project was substantially completed and the loan was closed on December 31, 1998 except for Category 2 (b) of Schedule I of the Loan Agreement covering the establishment of Gas Technology Development Unit (TEKNOGAS) in LEMIGAS. This category was closed on March 31, 1999 to enable the completion of equipment contracts which had been delayed due to theasian financial crisis. Project Objectives. iv. The primary objective of the Project was to support GOI's initiative of diversifying domestic energy consumption away from heavy reliance on petroleum products by substituting petroleum product fuels in

6 - i'{ - power generation, industrial and commercial sectors with natural gas. It was to be pursued through: a) the provision of an assured supply of natural gas, at competitive prices, to power plants, manufacturing industries and commercial entities in Surabaya and twelve other towns in its vicinity in East Java and in Medan in North Sumatra.; b) integration of gas utilization plans and operations to achieve economies of scale in the development and operation of gas supply infrastructure; and c) institution building, technology transfer and marketing studies to accelerate safe and efficient utilization of natural gas and to help define its long-term development plans. Specific objectives to be achieved under the Project were: * to promote the use of natural gas as fuel for power generation, manufacturing industries and commercial entities by constructing new gas transmission and distribution facilities in project areas; * to develop Indonesian expertise in long-term planning of gas utilization, optimization of gas supply systems and management of expanding operations; * to develop and establish cost effective standards and codes of practices, appropriate to Indonesian environment, and to promote establishment of a regulatory system for safe and efficient utilization of natural gas; * to enhance the safety and efficiency of PGN's operations in Surabaya through the rehabilitation and replacement of its out-dated pipeline networks; and * to reduce environmental pollution by promoting the use of gas which is a cleaner fuel than the other fossil fuels it would replace. Implementation Experience and Results. v. Until July 1997, project implementation had been highly satisfactory. All targets were either achieved or surpassed. In East Java, where 90% of the investment was undertaken, potential demand for natural gas was in the order of 300 MMCFD, compared with 100 MMCFD envisaged at project fornulation. PGN's efficiency improvement programn had been implemented two years ahead of schedule. PGN achieved a rate of return (ROR) on revalued net fixed assets in operation in excess of 20% from FY 92 to FY 96, compared with a minimum of 10% covenanted under the loan. Gas losses had been maintained at below 2% and despite an expanding construction program the staff employed (1,208) was well below the agreed ceiling (1,44C0). Project implementation was delayed by 2 years and six months on account of a 9 month delay in twinning arrangement, a 2 years delay in supply of gas to East Java and a 6 months delay in supply of equipment (for TEKNOGAS) on account of the financial crisis. vi. With the onset of the financial crisis (July 1997), profitability of PGN's gas marketing operations were severely eroded as about 65% of its gas purchases were paid for in US dollars while all of its gas sales were denominated in Rupiah. PGN's ROR fell below the covenanted rate to 1.0% for FY 97 and -12% for FY 98, if adjusted for foreign exchange loss related to gas purchase. As part of the remedial measures, PGN raised its gas sale price. However, the domestic price of diesel (its main competitor) was maintained at precrisis level through C;OI subsidy. The price of gas is now about 40% higher than the price of diesel. Due to reduced economic activity and price disparity with diesel, PGN's sales declined in 1998 but have now stabilized, most likely due to limited availabilily of diesel. In 1998 gas sold and transported by PGN substituted about 15 million barrels of petroleum product fuels with an export value of about US$230 million (compared with 4 million barrels in 1990), of which about 6 million barrels were substituted in project areas. Given a level playing field (i.e., elimination of subsidy on diesel), PGN could have substituted about US$300 million worth of petroleum product fuels in 1998.

7 - v - vii. GOi's pricing policy that allows for a level playing field through the elimination of subsidy for diesel is essential for the achievement of targeted gas substitution for diesel. However, for the near term, consideration for the socio-economic impact of raising domestic diesel price may well inhibit its implementation. In this context, GOI is considering the reduction of government take in the production sharing contracts for gas production as a temporary measure to allow for the reduction of end-user price of gas without a corresponding reduction in PGN's gas profit margin. GOI has indicated its intention to gradually eliminate diesel subsidy over the medium term. Summary of Findings, Future Operations, and Key Lessons Learned. viii. Despite the set back in the development of gas markets in Surabaya and its environs (East Java) and in Medan (North Sumatra) on account of financial crisis, the Project substantially achieved its main objectives of accelerating economic gas utilization in domestic energy consumption and institutional strengthening of the involved agencies i.e., PGN, LEMIGAS & MIGAS. ix. The economic objectives have been substantially achieved, with the economic rate of return (ERR) for the overall project currently estimated at about 29%, even though it is lower than the appraisal estimate of 59%, mainly due to lower international oil prices than earlier anticipated. The financial objectives have also been substantially achieved; the financial rates of return (FRRs) for the Surabaya and Medan conmponents are currently estimated at about 16% and 26%, respectively, which is the same as the appraisal estimate for Surabaya and significantly higher than that for Medan (14%) mainly due to higher than anticipated profit margins. Further, as noted above, PGN's ROR consistently outperformed the minimum covenanted rate prior to the financial crisis. The company's net fiscal contributions to GOI (Rp 260 billion) also surpassed the appraisal estimate (Rp 186 billion) during the period x. The Project demonstrated that large markets for natural gas can be economically developed in parallel with the upgrading of Indonesian expertise to plan and manage this process. PGN has emerged as an efficient gas utility with sufficient expertise to spearhead the development. GOI's expertise in longtern planning of gas sector development has been enhanced. Also, a regulatory framework has been instituted to enhance safety in gas utilization. Thus, the stage has been set to accelerate substitution of exportable (or imported) petroleum product fuels in domestic consumption with non-exportable natural gas. Since the financial crisis, such substitution should be a high priority as it would help accelerate industrial production by eliminating fuel scarcity, in addition to improving the country's balance of payments and reducing GOI's fiscal burden for subsidy on petroleum product fuels. xi. PGN will continue expanding gas markets in East Java and North Sumatra and transporting gas for PLN in North Sumatra and for Caltex at Duri form the fields in South Sumatra, these operations would not require any major investments over the next ten years as the requisite infrastructure expansions have recently been completed. Beyond these, PGN is seeking support from the Bank, ADB and OECF and private sector participation for the expansion of distribution networks for gas market development in West Java, building of a transmission pipeline for transporting gas from South Sumatra fields to the markets in West Java, and for building a pipeline for export of gas from Sumatra fields to Singapore. xii. The key lessons learned were: a) the importance of providing a broad based package of technical assistance through long-term collaboration (twinning) with an experienced operating entity for institution building in parallel with project implementation; b) gas supplies must be assured before commitment with customers is firmed up as slippage would expose the seller to undue risks and erode its credibility; c) gas marketing should lead investment in infrastructure, the alternative would weaken the seller's bargaining position vis-a-vis buyers; d) integrated gas supply and reticulation system maximizes economic gains; d) outsourcing project implementation activities minimizes employee establishment costs; e) an appropriate

8 - vi - legal and regulatory framework should be in place to ensure compliance with the agreements and efficient development of the sector; and f) early and adequate attention is needed in the establishment and maintenance of project accounts.

9 IMPLEMENTATION COMPLETION REPORT INDONESIA GAS UTILIZATION PROJECT [LN IND] PART 1 - Project Implementation Assessment A. Statement/Evaluation of Objectives 1. The primary objective of the Project was: 2. To support GOI's initiative of diversifying domestic energy consumption away from heavy reliance on petroleum products by substituting petroleum product fuels in power generation, industrial and commercial sectors with natural gas. 3. It was to be pursued through: a) the provision of an assured supply of natural gas, at competitive prices, to power plants, manufacturing industries and commercial entities in Surabaya and twelve other towns in its vicinity in East Java and in Medan in North Sumatra; b) integration of gas utilization plans and operations to achieve economies of scale in the development and operation of gas supply infrastructure; and c) institution building, technology transfer and, marketing studies to accelerate safe and efficient utilization of natural gas and to help define its long-term development plans. 4. Surabaya and its environs in East Java and Medan in North Sumatra were selected as project areas due to existence of a market that could be encouraged to shift from petroleum product fuels to natural gas and the accessibility of sufficient reserves. By integrating the gas utilization plans of the power sector with those of industrial and commercial users in the design of common delivery systems, the project would be able to achieve economies of scale in the establishment of gas transmission and distribution systems. This was important as gas sales to industry were to be market driven with prices to consumers competing with the domestic price of petroleum product fuels. Prices for purchase and sale of gas were to be determined through negotiations between the parties involved in contrast with the practice under the first project where prices were set by GOI. Strengthening of expertise within the gas sector in gas market development; design, planning, construction and operation of transportation systems; gas utility management; as well as in long-term planning, formulation of cost effective standards and codes of practices, and establishment of an appropriate regulatory framework for safe utilization of gas would accelerate and sustain the development of the sector on an economically rational basis. 5. The objective was pertinent to Indonesia's development strategy as it focused on substitution of exportable petroleum product fuels with non-exportable natural gas which would improve the country's balance of payments. It was achievable as PGN, which had the overall responsibility for gas market development, integration of utilization plans and building of requisite infrastructure, had considerably enhanced its capabilities under the ongoing first project and its further institutional strengthening was arranged through the already proven method of twinning with British Gas. Institutional strengthening of other key agencies in the sector, MIGAS

10 -2- and LEMIGAS, was arranged through technical collaboration agreements witb a reputable organization namely, the Institute of Gas Technology (IGT) of Illinois, USA. Main risks associated with achieving this objective were: a) Pertamina might not be able to supply gas in time and in sufficient quantities; b) devaluation of Rupiah might make price of gas unattractive to consumers; and c) PGN's twinning arrangement with British Gas, a key factor in 1 project implementation, might be delayed. 6. Specific objectives to be achieved under the Project were: 7. To promote the use of natural gas as fuel for power generation, manufacturing industries and commercial entities by constructing new gas transmission and distribution facilities in project areas. This was to be achieved by PGN through cost effective and timely construction of gas supply and reticulation iacilities. Having the benefit of experience in West Java under the first project and with additional expertise from the twinning arrangement under this Project, PGN could optimally design and efficiently phase the building of transmission pipelines, distribution mains and reticulation networks that. would minimize idle investment and enable competitive pricing. However, the risk that some of the potential consumers may alter their plans near the final stage of developmnent, and thus full benefit of investrmd!a may be delayed, was still there. 8. To develop Indonesian expertise in long-term planning of gas utilization, optimization of gas supply systems and management of expanding operations. Expansion of natural gas utilization in domestic energy consumption would be linked with demand and resource development, involving major investments in the forn of discrete but inter-linked projects. Building of Indonesian expertise would be necessary to ensure efficient planning and phasing of these investments, implementation of projects and management of follow-up operations. This would be brought about through: on-the-job training of PGN's staff during the course of project implementation witlh assistance from the twinning partner and discrete courses; upgrading the expertise of key staff of MIGAS through courses at professional institutes and study visits; and developing a support capability in LEMIGAS involving the establishment of a Gas Technology Development Unit (TEKNOGAS), for which a scoping study had already been conducted by IGT under funding from the Trade and Development Administration of USA. In case of PGN, the twinning arrangement designed for and successfully being implemented under the first project was extended to cover this Project albeit with the provision for development of additional expertise in these areas. Expertise upgrading of MIGAS and developmtient of capability in LEMIGAS were to be achieved under the aforementioned technical collaboration agreements with IGT. While PGN's institutional strengthening was well assured under the already proven arrangement of twinning with British Gas, in the establishment of TEKNOGAS there was a risk that its professional staff, still to be recruited, may not be of the expected quality and that the experts of IGT may not interact well with TE]KNOGAS staff. 9. To develop and establish Cost effecl.ive standards and codes of practice, appropriate to Indonesian environment, and to promote the establishment of a regulatory svstem for safe and efficient transportation and utilization of natural gas. Prominent world. standards and codes of practice were already being followed in the design, construction and operation of gas transportation, reticulation and utilization systems. There was, however, a need to review the standards and codes to ascertain if these were most appropriate in the prevailing zon.ditions in Indonesia. Such review(s) were to be conducted by MIGAS, with the support o, LEMIGAS and active participation of operating agencies in the sector i.e., Pertamina and PG1r. Establishment of

11 - 3 - regulatory system involved upgrading the expertise of MIGAS and LEMIGAS in the review, approval, promulgation- and enforcement of standards and codes of practices. Such expertise upgrading was to be achieved under the aforementioned technical collaboration agreements with IGT. 10. To enhance the safety and efficiency of PGN's operations in Surabaya through the rehabilitation and replacement of its out-dated pipeline networks. Prior to the Project, PGN was operating a manufactured gas reticulation network in down-town Surabaya serving household consumers. Due to impurities in the gas, the system was corroded, prone to leakage and required frequent repairs. During loan negotiations it was agreed that apart from the rehabilitation and replacement of the system, the old gas manufacturing plant in Surabaya, as well as similar plants in three other towns (Bandung, Semarang and Ujung Pandang) out-side the project areas, would be closed and the affected consumers would be supplied with natural gas in Surabaya and with LPG in the other towns. A dated action plan, as part of PGN overall efficiency improvement program, was agreed to be implemented. With the skills upgrading already received under the first and ongoing project and further assistance under this Project, PGN could achieve this objective. 11. To reduce environmental pollution by promoting the use of gas which is a cleaner fuel than the other fossil fuels it would replace. This would be an important outcome of efficient implementation of the project. 12. The primary and specific objectives remained unchanged during the implementation of the Project. However, at the outset PGN's twinning arrangement with British Gas was delayed by nine months and, subsequently gas supply by Pertamina was delayed by two years, which resulted in a cumulative delay of two years and three months in loan closing. Also, since the financial crisis (commencing July 1997) the price of diesel has been heavily subsidized. Consequently, gas sale price is about one and a half times the price of diesel, its main competitor, which has retarded gas market development. 13. Project components designed to achieve the Project objectives. A. Provision of natural gas supply system in Surabaya and its surrounding areas: i) Laying of about 80 km of high pressure transmission pipelines, about 190 km of medium pressure steel pipelines and about 165 km of medium pressure polyethylene pipelines. ii) Construction of gas metering, pressure regulating and odorization stations with associated instrumentation downstream of the city gate stations at about five locations, and about four pressure reducing stations on pipeline networks. iii) Construction of service lines, pressure regulation and flow metering stations at about 375 medium size industries, 150 commercial enterprises and the paper mill at Leces. B. Expansion of natural gas supply systemfor Medan: i) Construction of about 24 km of high pressure transmission pipeline with associated cathodic protection, pressure/flow monitoring facilities and three pressure reducing stations. and ii) Construction of service lines and pressure regulating and flow metering stations for PLN power station at Belawan.

12 -4 - C. Technical Assistance: i) Enhancenment of PGN's skills in markcet development; planning, design, construction and operation of natural gas compression, transmission and distribution systems; project management; procurement; financial management; cost control; long-term planning; and efficient implementation of the Project, including provision of related goods. ii) Strengthening of LEMIGAS through, inter alia, the establishment of a Gas Techmlogy Development Unit and provision of related goods. iii) Upgrading skills in MIGAS to facilitatte the coordination of development plans in the gas sector andl to institute a regulatory system for safe utilization of natural gas. D. Studies The carrying out of feasibility studies for, inter alia, natural gas marketing in Palembang (South Sumatra), Jambi (Central Sumatra), Batam Island (Riau), and Balikpapan. B. Achievement of Objectives 14. To support GOI's initiative of diversifying domestic energy consumption away from heavy reliance on petroleum product by substituting petroleum product fuels in power generation, industrial and commercial sectors with natural gas. 15. It was substantially achieved despite the setback on account of financial crisis, particularly due to subsidy on diesel since the commencement of the crisis. 16. By 1997 a demand for natural gas of the order of 300 MMCFD had been generated in East Java, compared with 100 MMCFD projected at project formulation, all the gas available under purchase contracts with Pertamina was being sold and gas transported (for power generation by PLN in North Sumatra) was 160% of the projections. 17. PGN's institutional strengthening as well as success at marketing gas for co-generation of power in East Java also contributed to the acceleration of gas market development in West Java, generating a demand of the order of 500 MMCFD. 18. In 1998, PGN substituted about 15 mnillion barrels of petroleum product fuels with an export value of about US$230 million in North Sumatra, West Java and East Java (compared with 4 million barrels in 1990), of which about 6 million barrels were substituted in project areas. 19. With the advent of financial crisis (July 1997), gas sales shrunk due to reduced economic activity and due to escalation of gas price following Rupiah depreciation while the price of diesel, the main competitor of gas, remained at pre-crisis level with the support of heavy government subsidy. PGN's gas sales in 1998 were t]hus about 70% of the level achieved in Transportation of gas to PLN's power stations in North Sumatra, however, increased by about 10%, most likely to maximize power generation from non-exportable gas. Given a level playing field (i.e., elimination of subsidy on diesel) and taking into account the available gas supplies, in 1998 PGN could have substituted petroleum product fuels worth about US$300 million (export value) in North Sumatra, West Java and East Java.

13 To promote the use of natural gas as fuel for power generation, manufacturing industries and commercial entities by constructing new gas transmission and distribution facilities in project areas. This was achieved. Through well designed and well timed construction of its gas transmission and distribution facilities, and consequently competitive pricing, PGN was able to generate a high potential demand (about 300MMCFD as against 100 MMCFD stipulated at project formulation) in East Java prior to monetary crisis. The system design also enabled PGN to supply gas for co-generation of power, which is the most economical use of gas. Before financial crisis co-generation accounted for about 40% of the gas sales in East Java (and for about 30% of gas sales in West Java, triggered by the success in East Java). Similarly in North Sumatra, additional gas supply from PGN's Wampu-Paya Pasir transmission pipeline enabled PLN to expand gas based power generation at its stations near Medan. 21. To develop Indonesian expertise in long-term planning of gas utilization, optimization of gas supply systems and management of expanding operations. It was substantially achieved. In parallel with the implementation of the Project, and without any increase in its staff establishment, PGN successfully undertook: a) planning, implementation and operation of Grissik-Duri Gas Transmission Project (estimated cost US$400 million) for supply of 300 MMCFD gas to substitute crude in steam generation at Duri; b) planning and design of South Sumatra-West Java Gas Transmission Project (estimated cost US$350 million) for supply of 250 MMCFD gas to West Java gas market; c) planning and design of West Java Gas Development Project (estimated cost US$150 million) for accelerating the substitution of petroleum product fuels in West Java; and d) several gas marketing and development planning studies for Java, Sumatra and Sulawesi. 22. To develop cost effective standards and codes of practice, appropriate to Indonesian environment, and to promote the establishment of a regulatory system for safe and efficient transportation and utilization of natural gas. This was achieved. After a detailed review Indonesian standards were formulated in line with prominent world standards and were promulgated under a Decree of August Subsequently, safety distances of gas pipelines from the property line were reviewed and the related standards reformulated and promulgated under a Decree of April Lastly, the codes of practice for safe operation of distribution systems were formulated and promulgated under a Decree of June Expertise of MIGAS was upgraded in the institution of regulatory system for safe utilization of natural gas. 23. To enhance the safety and efficiency of PGN's operations in Surabaya through the rehabilitation and replacement of its out-dated pipeline networks. It was achieved along with the agreed efficiency improvement program for PGN (Annex 6.05 of the Staff Appraial Report of the Project), which was implemented ahead of schedule. 24. To reduce environmental pollution by promoting the use of gas which is a cleaner fuel than other fossil fuels it would replace. Promotion substantially achieved, given a competitive price (in this case removal of subsidy form diesel) gas is the preferred fuel. 25. Economic Objectives. From the country's viewpoint, the economic benefits of the project are derived from the substitution of imported liquid fuels, most notably diesel. The appraisal estimate for the overall project economic rate of return (ERR) was 59% (in real terms), with the Surabaya and Medan components estimated at 51% and 154%, respectively. Further, the results of sensitivity analysis indicated that if all the economic benefits were to be based on fuel oil (with lower economic value than diesel), the ERR for the overall project was estimated at

14 - 6-38%. Based on the latest operational plan and the actual/latest estimates of project costs and benefits, the economic objectives have been substantially achieved, even though the re-estimated ERRs are lower than the appraisal estimate, mainly due to lower economic benefits of gas substitution for liquid fuels as a result of significantly lower international oil prices than earlier anticipated (US$18/bbl). The ERR has been re-estimated at about 29% (in real terms) for the overall project, and the ERRs of the Surabaya and Medan components re-estimated at 22% and 48%, respectively (Table 9A).The results of sensitivity analysis indicated that the overall project ERR would be reduced to only 8% in the event all the future economic benefits are to be derived solely from fuel oil substitution. 26. Financial Objectives. From PGN's view point, the financial viability of the project is critically dependent on the adequacy of the gas sales volume and profit margin. The financial objectives have been substantially achieved; the FRRs for the Surabaya and Medan components are currently estimated at 16% and 26%, respectively. The current estimate of FRR for the Medan component is significantly higher than the appraisal estimate mainly because of higher profit margins than earlier envisaged. Separately, the FRR for the Surabaya component is the same as the appraisal estimate based on the assumption that the recent trend of lower profit margins would be reversed to higher gas profit margin ($1.4/MMBTU) than the appraisal estimate ($1.14/MMBTU). In the event the future profit margin for the Surabaya component is reduced to the appraisal assumption, the FRR. would be reduced to about 13%. 27. Separately, with respect to the financial performance of PGN, the financial covenant provided for minimum targets of rate of return (ROR) on revalued net fixed assets in operation of not less than 4% in FY91, 5% in FYs 92-93, 8% in FY94 and 10% thereafter. During the period , PGN consistently outperformed the above minimum financial targets, with ROR increasing steadily from about 18% in 1991 to about 27% in However, mainly due to the Asian financial crisis and the consequent sharp devaluation of the Rupiah, the ROR was only 1% and a negative 12% in 1997 and 1998, respectively, if its operating costs were adjusted to reflect the foreign exchemge loss related to the gas purchase. The significant reduction in ROR in 1998 was, in part, attributable to the commissioning of the Grissik-Duri gas transmission pipeline in October, which resulted in a sharp increase in the rate base but with only three months of operational revenues. 28. PGN's net fiscal contribution to GOI has been substantial. In line with the appraisal estimate, PGN's net fiscal impact started to become positive in During the period , its net fiscal impact amounted to Rp 251 billion (Table 9D), which is significantly higher than the appraisal estimate of Rp 186 billion. However, the nominal value of fiscal impact may not be fully comparable due to the significant differences between the assumptions at the time of project appraisal and the actual foreign exchange rates and inflation rates. C. Major Factors Affecting the Project Factors not generally subject to government control 29. Asian financial crisis of 1997 was a factor not subject to control by GOI. Consequent massive decline in the value of Rupiah and slowdown of the economic activity retarded gas market development.

15 The border price of diesel would have a significant impact on the economic benefits of the project as well as the maximum levels of end-user gas pricing based on imported diesel parity. Factors generally subject to government control 31. During project implementation period, GOI reduced the subsidy on diesel, the main competitor of natural gas, from about 40% in 1990 to about 15% in pre-crisis 1997 which enabled gas to compete. Since the monetary crisis, the consumer price of diesel has been heavily subsidized by the government. Consequently, the consumer price of gas, which takes into account the depreciation of Rupiah, is now about 40% higher than the price of diesel, its main competitor. The government subsidy on diesel is, thus, an obstacle to the primary aim of the Project. GOI is aware of this issue and its intention is to gradually eliminate the diesel subsidy over the medium term. 32. Integration of gas utilization plans of PLN, Petrokimia and PGN in East Java resulted in design optimization of Pertamina's Kangean-East Java gas transmission system for the delivery of off-shore Kangean gas to East Java. This enabled PGN to negotiate a competitive price for purchase of gas and secure multiple off-takes from the on-shore portion of the pipeline which reduced PGN's infrastructure investment 33. PGN's management structure was enlarged from four to five directors and its functions were regrouped to facilitate the management of increased corporate and development activities. 34. In 1994, PGN was authorized to undertake gas transmission in addition to gas marketing and distribution and subsequently, in 1996, it was converted into a Persero to enable it to accept private sector participation in its expansion projects. 35. Government regulation prohibited dollar denominated pricing of gas sale to PGN's consumers. Since at the commencement of monetary crisis about 65% of the gas purchased by PGN was dollar denominated while all of its gas sales were in Rupiah, rapid depreciation in the Rupiah's value severely eroded the viability of PGN's gas marketing operations. Consequently, PGN's return on revalued net fixed assets in operation, which was over 20% from 1992 to 1996, reduced to 1.0% for 1997 and is estimated -12.0% for Pertamina gave the responsibility of building its offshore Kangean-Surabaya high pressure gas pipeline to an entrepreneur who had no experience in the field which led to a delay of two years (from March 1992 to March 1994) in the supply of gas to the Project. 37. Lack of adequate legal and regulatory framework to enforce supply contracts contributed to aforementioned delay. Factors generally subject to implementing agency control 38. PGN enlarged and reorganized its Surabaya branch, responsible for the implementation of a major part of the Project, to include full-fledged planning, construction and operations divisions. 39. In gas marketing, instead of piecemeal development of separate distribution systems, PGN incorporated the gas requirements of all the consumers in Surabaya and in twelve other

16 - 8 - towns in its vicinity into a single plan and developed an integrated high and medium pressure gas transportation and reticulation system that could efficiently balance the demand and supply of consumers in different locations, minimizing investment and operating cost and enabling competitive pricing. 40. PGN renegotiated its gas sale contracts passing on the Rupiah devaluation risk to the consumers once iehe regulation prohibiting dollar denominated gas pricing was held in abeyance. PGN curtailed its investment in infrastructure by US$7.5 million and had the loan reduced by this amount followingr the slow down of economic activity on account of financial crisis 41. PGN escalated its gas sale price between September 1997 and July 1998 to minimize the impact of Rupiah depreciation on its margin. 42. PGN completed the efficiency imprcvement program, agreed at loan negotiations, about two years ahead of schedule. Implementation delays 43. The infrastructure development under the Project was delayed due to: a) a nine month delay in the commencement of technical assistance provided through a twinning arrangement with British Gas under UKDFID funding which delayed initial planning; and b) a two year delay in gas supply to East Java by Pertamina which caused PGN to delay firming its commitment with customers (as slippage would erode credibility),and consequently procurement processing to avoid idle investment. These delays necessitated the first extension of the closing date from September 30, 1996 to March 31, Subsequently, although the project implementation was on schedule, a second extension of the closing date to December 31, 1998 was agreed to allow more time to some high yield prospective customers to firm up their development plans. A third extension of the closing date but confined to Category 2 (b) of Schedule 1 of the Loan Agreement was agreed to enable completion of equipment contracts for the establishment of TEKNOGAS, which had been delayed due to financial crisis in the country, while all other categories closed on December 31, D. Project Sustainability 44. The economic and financial sustainability of the project is critically dependent on: (a) the competitiveness of gas prices vis-a-vis the domestic prices of diesel in order to achieve an adequate volume of gas sales to substitute for imported diesel consumption; (b) the future prices of imported diesel would have a significant impact on the economic benefits of the project as well as the maximum levels of end-user gas pricing based on imported diesel parity; and (c) an adequate supply of gas at reasonable termns. Insofar as the financial sustainability of both the project and PGN is concerned, an adequate gas profit margin is also a critical factor. 45. As noted above, GOI's pricing policy that allows for a level playing field through the elimination of su'bsidy for diesel is essential for the achievement of targeted gas substitution for diesel. However, for the near term, consideration for the socio-economic impact of raising domestic diesel price may well inhibit its implementation. In this context, GOI is considering the reduction of government take in the production sharing contracts for gas production as a temporary measure to allow for the reduction of end-user price of gas without a corresponding

17 - 9 - reduction in PGN's gas profit margin. GOI has indicated its intention to gradually eliminate diesel subsidy over the medium term. 46. According to PGN's surveys, gas requirements of the industries in the project areas of East Java and North Sumatra are currently estimated, on fuel substitution basis, at about 140 MMCFD and 25 MMCFD respectively and the gas reserves in the vicinity can easily sustain such offtakes. PGN's current sales in East Java and North Sumatra amount to 39 MMCFD and 9 MMCFD respectively. There is, thus, ample scope for growth given level play field with competing fuels (viz elimination of GOI subsidy for diesel) and economic recovery over the medium and longer term. 47. With the institutional development under the Project, PGN now has a core staff of 311 professionals and 350 technicians (compared with 190 professionals and 260 technicians at the close of Gas Distribution Project in 1994). It has also acquired a capability to train about 20 professionals a year. Its enhanced skills have been demonstrated, over a six year period, in the efficient management of two expansion projects undertaken simultaneously (Gas Distribution and Gas Utilization projects followed by Gas Utilization and Grissik-Duri Gas Transmission projects) along with distribution operations and planning of further expansion projects. It should, therefore, have no difficulty in managing gas marketing business in the Project areas. 48. PGN, however, needs to strengthen its senior management following the commissioning (September 1998) of its Grissik-Duri gas transmission system. Currently, the responsibility of the operation of this system is held by the Director of distribution systems operation. Considering the size and complexity of transmission and distribution operations, a full time director should be made responsible for each of the two operations. Thus, PGN's Board of Directors should be enlarged to include a Director responsible for the operation of gas transmission system, so that the current Director of operations may be fully devoted to the operation of distribution systems. Operational Plan 49. PGN's operational plan for the Project areas covers the period of Projections of gas sales assume price parity with diesel and economic recovery over the medium and longer term. The transportation and reticulation systems built under the Project are well planned and built, and are capable of supporting the projected rate of growth over the next 8 to 1O years with out any significant investments. There are ample reserves in the vicinity of Project areas and adequate supplies have secured to meet the expected sales growth. E. Bank Performance 50. In general, the Bank's performance was satisfactory in all of the project phases. The Project was clearly identified, well focused and simple in design. Consequently, the pre-appraisal mission was able to complete the appraisal of the project. Potential risks to the Project were flagged during identification and pre-appraisal missions, and steps to mitigate the risks were taken in Project design and during implementation. 51. As the Gas Distribution Project (Bank's first lending operation in the sector) was in an early stage of implementation, the feasibility of natural gas as an efficient substitute for petroleum product fuels in industrial consumption and the viability of natural gas marketing for such purposes was still to be demonstrated. It was, therefore, premature to include the

18 - 10- preparatory work- for enabling private sector participation in sector development in the scope of this Project. The Project design, as for the Gas Distribution Project, was narrowly focussed on "grass roots" development of gas market in parallel with the upgrading of Indonesian expertise to manage the process. 52. Supervision missions closely monitored the implementation and assisted the implementing agencies in evaluations and in devising corrective measures. However, PGN's oversight in adequate maintenance of separate project accounts (see below) could have been avoided, or at least diagnosed earlier than the ICR mission, if earlier Bank missions had provided PGN with sufficient guidance on sound accounting practices for project accounts. 53. Given cogent reasons, the Bank was flexible in extending the loan closing date three times and agreed to the cancellation of funds no longer required. F. Borrower Performance 54. GOI, as ]3orrower, fulfilled all commitments made during negotiations and covenanted in the loan agreement and was supportive in project implementation. It ensured that necessary counterpart funds were available to the implementing agencies (PGN and LEMIGAS) to carry out the Project and pay scales of the staff of these agencies were maintained at a level as remunerative as that offered by similar public corporations. While inordinate delay in the supply of gas to the Project was not prevented, integration of gas utilization plans of PLN, Petrokimia and PGN in East Java enabled PGN to negotiate a competitive price for purchase of gas. In the aftermath of the financial crisis GOI assisted PGN, through a soft loan, in reducing the adverse impact of Rupiah devaluation, however, the durable measure of restoring competition between gas and diesel (its main competitor), disrupted since the financial crisis due to GOI's subsidy on diesel, has still to be taken. 55. PGN's performance, as the major Beneficiary, has been very satisfactory. Till the onset of monetary crisis, it fulfilled or exceeded all performance covenants and targets under the project notably, it achieved a rate of return on revalued net fixed assets in operation in excess of 20% for five straight years compared with 1.0% covenanted, gas losses were maintained below 2%, a potential demand of the order of MMCFD was generated in East Java compared with 100 MMCFD stipulated at project formulation, and despite an expanding work program the staff employed (1208) remained well below the agreed ceiling (1440). Since then, while there has been a sharp drop in its ROR for reasons beyond its control, it has survived the crisis through good management of its gas contracts, capital. and operating expenses and cash flow. 56. During the project implementation period, PGN's audit reports had consistently included an unqualified opinion from the State auditor (Financial and Development Supervisory Board). However, its audit reports did not provide supplementary information that clearly and separately show the expenditures and financing of the project, although annual audit reports on the Special Accounts have been provided to the Bank. In hindsight, it would have been helpful if PGN had established and maintained separate project accounts in accordance with sound accounting practices. 57. LEMIGAS faced some problems in the first year of the establishment of TEKNOGAS as not many individuals with requisite backgrounds were available since the industry was at an early

19 stage of development and also because the management of TEKNOGAS was not sensitive to the training needs of the staff. LEMIGAS responded by amending the skills development program, as advised by IGT, and changed the management of TEKNOGAS. Thereafter the progress has been satisfactory. G. Assessment of Outcome 58. The Project has demonstrated that large markets for natural gas can be economically developed in parallel with the upgrading of Indonesian expertise to plan and manage this process. PGN has emerged as an efficient gas utility with sufficient expertise to spearhead the development. GOI's expertise in long-term planning of gas sector development has been enhanced. Also, a regulatory framework has been instituted to enhance safety in gas utilization. Thus the stage has been set to accelerate substitution of exportable (or imported) petroleum product fuels in domestic consumption with non-exportable natural gas. Since the financial crisis, such substitution should be a high priority as, apart from improving the country's balance of payments and reducing GOI's burden of subsidy on petroleum product fuels, it would help accelerate industrial production by eliminating fuel scarcity. 59. Before the crisis, a Bank sponsored study revealed a high level of interest by prominent international gas utilities in forming joint-ventures with PGN or taking an equity position in the company. It may still be possible to attract private investment if competition between gas and competing petroleum product fuels is restored and an adequate legal and regulatory framework is in place. 60. While TEKNOGAS is still at an early stage of development, it has already demonstrated its ability to serve some of the needs of the industry on self financing basis, total payments on this account exceed one million US dollars equivalent. 61. PGN's future operations include: H. Future Operations a) expansion of gas markets in East Java and North Sumatra and transportation of gas, for PLN within North Sumatra and for Caltex at Duri from Asamera fields in South Sumatra; these operations would not require any major investments over the next ten years as the related infrastructure expansion projects have recently been completed; and b) expansion of existing infrastructure for gas market development in West Java and building of new infrastructure for transportation of gas from South Sumatra to West Java and from South Sumatra to Singapore via Batam Island; these developments are proposed to be undertaken through the following projects; i) West Java Gas Distribution Project, planned with Bank assistance, to provide additional supply mains and distribution networks for gas market development in West Java at an estimated cost of US$120 million, ii) South Sumatra-West Java Gas Transmission Project, also planned with Bank assistance, to provide a gas transportation system from Pertamina operated gas fields in South Sumatra to the markets in West Java at an estimated cost of US$350 million, and

20 iii) Grissik-Singapore Gas Transmission Project, to provide a gas transpcrtation system from Asamera operated gas fields in South Sumatra to Singapore at an estimated cost of US$260 million. 62. To finance these investments, PGN has planned to seek support of OECF, ADB and the Bank as well as private sector participation through joint ventures and strategic partnerships. I. Key Lessons Learned 63. As the objectives of the Project were similar to the objectives of the first project (Gas Distribution Project) and the implementation periods overlapped, important lessons drawn from its implementation experience, with some exceptions, are essentially the same as those under the first project. These are summarized as follows. 64. Twinning Arrangement: Long-term technical collaboration (twinning) of PGN with an experienced operating entity was very successful in the institutional development and technology transfer as it provided a broad based package of technical assistance in key operating areas and integrated know-hlow transfer and staff training on site in the course of project implementation. 65. Gas Supplies must be Assured before Commitment with Customers is Firmed up: PGN closely followed the progress of Pertamina's arrangements for gas supply to East Java and withheld firming up its commitment with customers till the gas supply was assured as slippage, after the commitment, would erode its credibility and impede market development. 66. Gas Marketing should lead Investment in Infrastructure: In line with the delay in Pertamina's supp]ly of gas to East Java and consequent delay in firming up commitment with customers, PGN postponed the building of its distribution infrastructure and thus minimized idle investment, the alitemative would have reduced its bargaining position vis-a-vis customers and cut its profits. PGN, however, deviated from this practice in the case of paper mill at Leces and built the pipeline to Leces with insufficient customer commitment (e.g., customers plans for gas utilization had not been firmed up) since then, due to financial crisis in the country, the customer has indefinitely postponed conversion to gas supply. 67. Integrated Gas Supply and Reticulation System Maximizes Economic Gains: Instead of piecemeal development of separate distribution systems, PGN incorporated the gas requirements of atll the prospective consumers in Surabaya and in twelve other towns in the vicinity into a single plan and developed an integrated high and medium pressure gas transportation and reticulation system, efficiently balancing the demand and supply, minimizing investment and opierating cost. 68. Outsourcing Project Implementation Activities: to the extent possible, enables implementation of expansion projects at the desired pace as well as minimizes employee establishment costs since most of project activities are temporary in nature. Traditionally PGN outsourced only the construction services. In the implementation of the Project detailed engineering, site supervision, inspection andl testing were also outsourced (contracted out to private firms). This enabled PGN to maintain jits employee establishment at the pre-project level.

21 Appropriate Legal and Regulatory Framework: should be in place to ensure compliance with the agreements and efficient development of the gas chain from production to utilization. PGN's contracted gas supply for East Java component of the Project was delayed by two years and there was little recourse to redress it. 70. Project Accounts. Consistent with good practices for quality at entry, during project preparation, Bank staff should provide adequate guidance to the beneficiary regarding the establishment and maintenance of separate project accounts in accordance with sound accounting practices.

22

23 IMPLEMENTATION COMPLETION REPORT INDONESIA GAS UTILIZATION PROJECT (Loan No IND) PART II: Statistical Tables Table 1: Summary of Assessment A. Achievement of objectives Substantial Partial Negligible Not applicable Macroeconomic policies E E 0 0 Sector policies E E E 0 Financial objectives Institutional development 0 0 E E Physical objectives 0 El E El Poverty reduction l El El Gender concerns El E El ED Other social objectives E El El D Environmental objectives 0 E E E Public sector management 0 E E E Private sector development E El E 0l B. Project sustainability Likely Unlikely Uncertain E E E1 C. Bank performance Highly satisfactory Satisfactory Deficient Identification 0 El E Preparation assistance 0 E E Appraisal 0 E E Supervision E 0 E D. Borrower performance Higly satisfactory Satisfactory Deficient Preparation 0 El El Implementation E E Covenant compliance El 0 E Operation t E El E. Assessment of outcome Highly satisfactory Satisfactory Deficient El El

24 - 16- Table 2: Related Bank Loans Credits Loan/Credit Title Purpose Year of Status Approval Preceding Operations: 1. Gas Distribution Project To facilitate substitution of 1986 Closed on July 31, 1994 (Ln.2690-IND) petroleum product fuels with natural gas in domestic energy consumption Following Operations: None Table 3: Project Timetable Steps in Project Cycle Date Planned Date Actual/Latest Estimate Identification 4/30/88 4/30/88 Preparation / Preappraisal 1 1/1/88 11/25/88 Appraisala 10/1/89 5/31/89 Negotiations 1 1/1/89 3/1/90 Board Presentation 2/1/90 5/31/90 Signing 7/6/90 7/6/90 Effectiveness 10/6/90 3/12/91 Project completion 9/30/96 12/31/98 Loan closing 9/30/96 12/31/98 and 3/31/99 only for category 2(b) of Schedule 1 a. Preappraisal mission was converted to appraisal mission

25 -17- Table 4: Loan/Credit Disbursement: Cumulative Estimated and Actual (US $ million) FYa Appraisal Estimate Actual Actual as % of estimated Date of final disbursement: a. Fiscal year ending June 30 Table 5: Key Indicators for Project Implementation Implementation Period SAR Estimate Actual Construction of Infrastructure in Medan July 90 - Dec. 92 March 91 - March 93 (North Sumatra) April 97 - October 97a Construction of Infrastructure in Surabaya Sept March 96 Sept March 98 b and its environs (East Java) Closure of obsolete gas manufacturing Jan Dec. 94 Jan Dec. 92 plants replacement by LPG or natural gas a. For new market b. Construction postponed due to a 2 year delay in gas supply from PERTAMINA. Table 6: Key Indicators for Project Operation After Project Completion SAR Estimate Actual PGN's gas losses < 2% v PGN's rate of return on revalued net fixed asset in operation > 10% -12,8%b PGN's staff establishment < Project areas pipeline network (Kin): Surabaya & environs c Medan Project areas gas sales (MMCFD): 43 38c Surabaya & environs Medan Project areas gas carriage (MMCFD): PLN power station (Medan) a. < 2% since 1992 b. > 20% for FY's 92-96, reduced to 3.5% for FY97 due to financial crisis commencing July c. Network construction curtailed as demand reduced due to financial crisis. Consequently, a total of US 7.5 million of loan amount cancelled which would have otherwise enabled construction of additional 40 km of network and additional sale of about 20 MMCFD in Surabaya area.

26 - 18- Table 7: Studiies Included in Project Study Purpose as definied at Status Impact of Study appraisal/rederifned 1. Gas Supply/Demand Not identified in SAR, Completed Initiated planning Analysis - West Java purpose was to accelerate expansion of West gas utilization in WVest Java gas market Java 2. West Java Gas Not identified in SAR Completed Helped plan West Development Planning purpose was to accelerate Java Gas Distribution Study gas utilization in West Project Java 3. Environmental Not identified in SAR Completed Helped prepare South Impact Assessment of purpose was to support Sumatra-West Java South Sumatra-West acceleration of gas Gas Transmission & Java gas Transmission utilization in West Java West Java Gas Pipeline & West Java Distribution projects Gas Distribution Projects 4. Corporate Not identified in SAR, Completed In support of PGN's Restructuring of PGN purpose was to accelerate privatization planning gas utilization through private sector participation 5. Gas market studies Assessment of polential Completed Gas distribution in covering Jambi, gas market Palembang Palembang, Batam commenced in 1996 Island & Balikpapan and being planned for Batam Island

27 - 19- Table 8A: Project Cost Appraisal Estimate Actual / Latest Estimate (US $ million) (US $ million) Item Local Foreign Total Local Foreign Total Cost Cost Cost Cost A. Expansion of Natural Gas Transmission and Distribution System for: Surabaya and its environs: - Pipelines Regulator Stations Meter Station & Station Lines Subtotal Medan: - Pipelines Meter Station & Station Lines Subtotal Base Cost (A) Taxes & Duties Physical & Price contingencies TOTAL A B. Technical Assistance PGN: - Training Equip. (computer& software) Subtotal LEMIGAS (Gas Tech. Development Center) - Consultancies Training Equipment Subtotal MIGAS - Training Base Cost (B) Taxes & Duties Physical & Price contingencies TOTAL B C. Studies Base Cost (C) Taxes & Duties Physical & Price contingencies TOTAL C TOTAL PROJECT COST (A+B+C) Capitalized Interest during Construction TOTAL FUNDING REQUIRED

28 Table 8B: Project Financing Appraisal Estimate Actual / Latest Estimate _(US $ million) (US $ million) Source Local Foreign Total Local Foreign Total Cost Cost Cost Cost IBRD Bilateral Assistance PGN Internal Cash generation GOI Equity Contribution Commercial Loans Consumers TOTAL

29 Table 9A: Economic Rate of Retum - Surabaya Component (in Thousands USS: Constant $ for Appraisal; Nominal S for Actual) Project Investment Conversion Operating Total Gas Sales (in mmcfd) Gas Sales Margin Net Benefit Year Foreign Local Total Costs Costs Costs Industry Others Total industry lothers Total App Actual App Act App Act App Act A App Act App Act App Act App Act App Act App ARt App Act App Act Const $ Nom $ Const $ t (220) (204) , ,280 21,176 1, ,176 1,280. (21.176) (1,280) (1,137) ,824 3, ,150 21,264 5,128 3, ,264 5,128.. (24,264) (5,128) (4,569) ,884 4,782 1,056 2,110 10,940 8,892 3, ,810 14,286 9, ,110 1, ,673 1,363 (4,613) (8,339) (7,173) , ,670 7,356 15,324 1, ,623 17, ,264 9, ,514 9,464 20,891 (8,110) (6,447) , , , ,700 5,208 19, ,506 12, ,756 12, (7,077) (5.885) ,295 4,630-13,925 1, ,992 1,818 16, ,792 15,022 18,250 55,042 15,022 53,224 (1,895) (1.660) , ,894 1,022 1,940 1,022 12, ,100 4,034 18,260 69,360 4,034 68,328 (8.800) (8,024) ,095 4,302 1,095 5, ,210 1,588 18,250 74,460 1,588 73,365 (3.504) (3,154) ,168 5,573 1,168 5, ,320 14, ,570 14, ,968 7, ,226 5,840 1,226 6, ,408 19,693 18,250 83,658 19,693 82,432 13,503 11, ,270 7,210 1,270 7, ,474 27,015 16,250 86,724 27,015 65,454 19,645 16, , ,314 7, ,540 30,849 18,250 89,790 30,849 88,476 23,017 18, ,380 8,302 1,380 8, ,540 37,352 18,250 89,790 37,352 88,410 28,700 22,743 r ,449 8,853 1,449 9, ,540 43,137 18,250 89,790 43,137 88, ,521 9,581 1,521 9, OS 71,540 48,134 18, ,269 38, ,597 9,950 1,597 10, ,540 51,461 18, ,461 88,193 41,161 30, ,677 10,400 1,677 10, ,540 54,602 18,250 89,790 54,602 88,113 43, ,76f 10,400 1,761 10, ,540 56,164 18,250 89,790 56,164 88,029 45,414 31, ,849 10,400 1,849 10, , ,250 89,790 58,507 87,941 47,757 32, ,941 10,400 1,941 10, ,540 60,850 18,250 89, ,849 50,100 33,432 ERR :1% 23% 22% Note actuatlestimate gas profit margins include 5% thermnal efficiency gains for industrial uses as assumed in appraisal estimate

30 Table 9A: Economic Rate of Return -- Medan Component (in Thousands US$: Constant $ for Appraisal; Nominal S for Actual) Project. Investment Operating Total Gas Sales (in mmcfd) Gas Sales Margin Net Benefits Year Foreign Local Total Costs Costs PLN Industry Total PLN Industry Total Appraisal Actual App Act App Act App Act App Act App Act App Act App Act App Act App Act App Act App Act Constant $ Nomninal $ Constant $ ,155 1,155 1,155 (1,155) (1,070) ,872 2,661 1,034 5,872 3, ,872 3, (5,872) (2,891) (2,568) , ,511-7,665 1,011 9,176 1,011 9,074 (71) (63) , ,665 1,113 9,176 1,582 9,074 1,492 1, ,511 2,381 7,665 1,605 9,176 3,986 9,074 3,634 2, ,511 2,662 7,665 1,950 9,176 4,612 9,074 4,321 3, , , , ,511 2,418 7,665 2,822 9,178 5,240 9,074 2,398 2, , ,665 2,467 9,176 3,176 9,074 2,228 2, , ,665 3,305 9,176 4,195 9,074 3,345 3, , ,665 7,181 9,176 8,101 9,074 7,131 6, , , ,665 10,636 9,176 11,556 9,074 10,286 8, , , , ,665 13,021 9,176 13,941 9,074 12,491 10, , , , ,665 15,543 9,176 16,463 9,074 14,833 12, '102 1, , , ,665 18,202 9,176 19,122 9,074 17,312 13, , , , ,665 20,998 9,176 21,918 9,074 19,918 15, , , , ,665 25,745 9,176 26,665 9,074 24,305 18, , , , ,665 27,194 9,176 28,114 9,074 25,654 18, , , , ,665 28,498 9,176 29,418 9,074 26,848 19, , , , ,665 29,993 9,176 30,913 9,074 28,233 19,794 t's , , , ,665 31,700 9,176 32,620 9,074 29,820 20, , , , ,665 32,254 9,176 33,174 9,074 30,374 20,269 ERR 155%1 50% 48% Note actual/estimate gas profit margins include 5% thermal efficiency gains for industrial uses as assumed in appraisal estimate

31 Table 9A: Economic Rate of Rrtrun: Combined Medan & Surabaya Components (In Thousands US$: Constant S for Appraisal; Nominal $ for Actual) Project nvetment. C._. Conversion Operating Total Gas Sales Margin _ Net enefit Year Foreign Locel Total Costs Coas _ Costs PLN Industry Otherm Total App Actual App Act App Act App Act App Act App Act App Act App Act App Act App Act App Act Constant $ Nominal S Constnt ,375-1,375 (1.375) (1.274) , , , ,048 5, (27.048) (4.171) (3.706) , ,142 21,264 6,120 3, ,366 6, ,665 1,011-9,176 1,011 (15,190) (5199) (4,633) ,500 4, , , , ,792 1, ,775 2, ,849 2,945 4,461 (6,847) (5.889) ,300 13,654 1,056 1, ,496 1, ,430 9,725 17,926 1,511 2,381 19,929 11, ,690 13, (4,476) (3,558) ,360 12, , ,915 1, ,970 5,310 19,865 1,511 2,662 31,171 14,467 18,250 50,932 17,129 45,622 (2,756) (2,292) ,867-4, , ,759 1,511 2,418 44,457 17, , , ,572 1,124 2, ,782 1, , ,250 78, ,402 (6,572) (5,992) ,230. 1,230, 1,197 4,712 1,197 5,942 1, , ,250 83, (159) (143) ,270 6,263 1,270 6,593 1, ,985 21,772 18,250 88, ,476 16,099 14, , ,328 7,460 1, ,073 30,329 18,250 92,834 31, , ,372 8,360 1,372 8,820 1, ,139 40,036 18,250 95, ,416 8,812 1,416 9,462 1, ,205 46, , ,850 30,743 I ,482 9,812 1,482 10,462 1, ,205 55,554 18,250 98, ,484 46,012 36,461 U ,551 10,553 1, , ,205 64,135 18,250 98, , ,623 11,641 1,623 12,291 1, ,205 73,879 18,250 98, ,508 47, ,699 12, , ,205 78, ,966 79,575 97,267 66, ,779 12,670 1,779 13,320 1, ,205 83,100 18, ,020 97,187 70, ,863 12,780 1,863 13,430 1, ,205 86,157 18,250 98,968 87,077 97, , ,951 12,900 1,951 13,550 1, ,205 90,207 18,250 98,966 91,127 97,015 77,577 53, ,043 12, , ,205 93,104 18,250 98,966 94,024 96, NtRR :9% 30% 29% Note actual/estimate gas profit margins Include 5% thermnal efficiency gains tor industrial uses as assumed in appraisal estimate

32 Table 9A; ECONOMIC ANALYSIS - ASSUMPTIONS FOR PETROLEUM PRODUCTS SUBSTITUTION BY PROJECT COMPONENT (in US $ Thousand) SU RABAYA Y.., Fuel Subtituted i 1 i i I LPG LPG IDO IDO HSD HSD FO FO Kerosene Kerosene Total Total Cost of Total Sales. Volume * Fuel Price Gas Gas Purchase Margin MMCF MMBBL MMCF MMBBL MMCF MMBBL MMCF MMBBL MMCF MMBBL MMCF US $ US $ US $ US $ ,011 3, ,184 1, , , ,837 26, ,927 9, , , , ,019 38, ,962 12, , , , ,910 47, ,206 15, , , , ,764 33, ,731 4, , , , ,210 38, ,173 1, , , , ,265 62, ,092 14, , , , ,360 70, ,458 19, , , , , ,835 89, ,284 27, i,i , , , ,930 95, , , , , , , , , ,744 37, , , , , , , ,475 43, t , , , , , , ,782 48, , , , , , , ,936 51, , , , , , , ,878 54, , , , , , , ,878 56, , , , , , , ,878 58, , , , , , , ,878, 60,850.21

33 Table 9A: ECONOMICANALYSIS-ASSUMPTIONS FOR PETROLEUM PRODUCTS SUBSTITUTION BY PROJECT COMPONENT (in US $ Thousand) ME DAN Year _ Fuel Subtituted Total Total Cost of Total Sales LPG LPG IDO IDO HSD HSD FO FO Kerosene Kerosene Volume Fuel Gas Gas Margin MMCF MMBBL. MMCF MMBBL MMCF MMBBL MMCF MMBBL MMCF MMBBL MMCF Price Purchase 1991 O O , , , , , , ,042 1, ,015 3, ,299 1, ,130 3, , ,142 2, , , ,825 3, , A2, ,920 8, , , ,015 12, ,369 10, , ,745 14, ,618 13, , , ,475 17, ,867 15, , , ,205 20, ,116 18,202 U , , ,935 23, ,365 20, , , ,395 28, ,863 25, , , ,760 30, ,987 27, , , ,125 31, ,112 28, , , ,490 33, ,236 29, , , ,855 35, ,361 31, , , ,855 35, ,361 32,254

34 Table 9A: Economic Analysis Assumptions ActuallProjected International Oil Price Movements 1989=100 Crude Oil Prices Year Deflator (US$) Prices Current Prices.Annual% Cumulative, ($Ibbl) Annual % ($1bbl) lannual % % % % % % % % % % 1993 (0.3) 112.2% % % % % % % % % 1996 (4.4) 120.3% % % 1997 (5.1) 114.1% % % 1998 (3.9) 109.7% 1: % % % 1: % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % Sources: Global Commodity Markets, The World Bank, January 1999 Note: S98 crude oil prices are based on actual average spot prices of Brent, Dubai and West Texas Intermediate (equally weighted); future oil prices are the projections included in the latest issue of the "Global Commodity Markets"

35 Table 9B: Financial IRR - Surabaya Component (In Current Million US$) FY Investment Operating Cost Income Tax Net Gas Revenues Net Cashflow Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Nominal Deflator Constant Nominal Deflator Constant $ Index $ $ Index $ (0.22) (0.22) (26.2) 1.06 (24.7) (1.28) (1.23) (26.5) 1.12 (23.6) (5.13) (4.93) (9.6) 1.19 (8.1) (6.64) (6.16) (9.49) (8.77) (9.04) (8.74) (2.2) (19.06) (19.42) s (10.43) (11.06) FRR 23% 16% 17% 16%

36 Table 9B: Financial IRR - Medan Component (In Current Million US$) FY Investment Operating Cost Income Tax Net Gas Revenues Net Cashflow Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Nominal Deflator Constant Nominal Deflator Constant $ Index $ $ Index $ (1.15) (1.1) (7.0) 1.06 (6.6) (2.82) (2.7) (0.12) (0.1) a A (1.25) (1.3) , FRR 21% 14% 26.1% 25.6%

37 Table 9C: PGN Financial Summary ( ) (In Billion Rp) Appraisakl Actual Appraisal Actual Appraisal Actual Appraisal Actual AppraIsall Actual Appraisal Actual Appraisal ACtUal Actual Income Statement It.mit Gas Sales Volume (mmscfd) ISO 153 Sales Volume (mmbtu) sag ea ,140 1,178 1, ,581 Average Gas Pucoe ($lmcf) $ 3.15 $ 3.42 $ 3.30 $ 3.94 $ 3.40 $ 3.82 $ 3.37 $ 3.56 $ 3.32 $ 3.65 $ 3.31 $ 3.50 $ 3.27 $ 3.45 $ 2.14 Average Gas Margin ($/mcf) $ 1.23 $ 1.72 $ 1.63 $ $ 2.25 $ 1.37 $ 1.88 $ 1.32 $ 1.67 $ 1.31 $ 1.40 $ 1.47 $ 0.59 S 0.59 Gas Sales Revenues ,266 Total Revenues Operating Income e Net Income Cash Flow Statement Items intemnal Cash Generation so so '136 Long TermnBorrowings Equity InvestmentslGovt contribution (22) Capital Expentdiures Is ,399 Changes In Working Capital 7 (7) (0) (7) (19) 3 (6) (9) 49 Total Debt SerAlce DPS Contdibutions (dividends) Balance Sheet Items Current Assets Current Liablifties Net Fixed Assets In OperatIon ,972 Long Term Debt ,871 Equity Ratios Gross Margin on Gas Sales 40% 52% 37% 55% 41% 60% 40% 53%/ 39%/ 47% 39% 41% 38% 18% 31% Operating Ratio 89% 68% 85% 62% 82% 60% 84%A 65% 79% 70% 78% 75% 76% 96% 82% Net Margin 8% 24%A 8% 24% 9% 25% 8% 20% 9% 21% 11% 18% 12% 2% 12% ROR on Net Operationat Fixed Assets (a) At Historicat Cost 8% 31% 13% 38% 13% 42% 9% 40% 15% 49% 18% 89% 24% 10% 15% (b) On Revatued Basis 5% 18% 9%/ 22% 10% 25% 7% 23% 11% 25% 13% 27% 16% I1%6-12% Debt Service Coverage Current RatIo , LT Debt/Total Capitat 42% 29% 58% 23% 65% 26% 68% 29% 65% 30% 64% 45% 59% 67% 81% Accounts Receivabte (days) Macroeconomic Statistics Averape Exchange Rate (p.a.) , ,030 1,758 2,667 1,750 2,180 1, ,78o l0.600 LocalInfinton Rates 6% 9.4% 6%A 7.6% 6% 9.2% 6% 856% 6%1 9.4% 6% 7% % 12.7% 80.0%1

38 Table 9D: PGN's FISCAL IMPACT (FYs Net Fiscal Benefits of PGN's Operations) In Rp.Millions PGN Payments to GOI GOI for PGN FY Ending Custom Income Debt DPS Total PGN DIP Debt Total GOI Payments Net Fiscal Impact Duties Tax Service Payment Payments to GOI Contribution Service for PGN Actual Appraisal , , ,775 2,143 (855) (348) ,598 3,613 3,662 9,873 10,694 42,832 53,526 (43,653) (19,331) ,492 10,762 5,000 49,254 7,284 9,445 16,729 32,525 17, ,085 11,592 15,460 62,137 9,326 9,856 19,182 42,955 21,965 o ,601 13,572 21,088 73,261 10,058 11,033 21,091 52,170 17, ,370 15,025 24,406 77,801 13,008 14,451 27,459 50,342 32, ,973 26,834 24,801 94,608 18,017 22,091 40,108 54,500 40, ,193 40,934 23, ,725 21,522 24,446 45,968 62,757 75,214 Total 0 236, , , ,947 90, , , , ,876

39 Table 10: Status of Legal Covenants Section Description of Covenants Covenant Present Comments Type Status Loan Agreement Section 3.01 (A) The borrower to cause PGN to perform 4,10 C In compliance in accordance with the provisions of the PA, and to provide the funds, facilities, services and other resources, necessary or appropriate to enable PGN to carry out the project. Section 3.02 (A) The borrower shall sign a subsidiary 10 C In compliance. Loan Agreement with PGN Section 3.05 The borrower shall cause PGN to 05 C In compliance. maintain a salary structure at a level as remunerative as that of other similar public corporations (Perums) Section 4.01 (A) The borrower shall maintain or cause to 1 C In compliance. be maintained records and accounts adequate to reflect in accordance with sound accounting practices the operations, resources and expenditures in respect of parts C (II), C (III) and D of the project. Section 4.01 (B) The borrower shall have the records and I C In compliance, accounts referred to above, including except for audit of those for the Special Account, audited by studies on independent auditors acceptable to the environmental Bank, and furnish this audit to the Bank impact assessment not later than nine months after the end and corporate of each fiscal year. restructuring Project Agreement Section 2.03 (B) PGN shall take all necessary steps to 5 C In compliance. secure permits for rights of way/way leave for the pipelines to be built under Parts A & B of the project at least 6 months prior to the estimated start of the related construction Section 2.06 (A) PGN shall prepare a rolling five-year 5 C In compliance. plan of gas requirements by the end of FY and discuss the plan with GOI, gas supplier and the Bank within 3 months Section 2.06 (B) By Jan. I of each calendar year, PGN 5 C In compliance. shall prepare an investment program and furnish it for Bank's comments Section 2.07 PGN shall prepare and furnish for 5 C In compliance. Bank's review/comment a detailed training program with respect to Part C (I) of the project Section 2.08 (A) PGN shall adopt and thereafter 5 C In compliance. implement an efficiency improvement program for PGN's activities, satisfactory to the Bank.

40 Section 4.01 (A) PGN shall maintain records and accounts I C In compliance. adequate to reflect in accordance with sound and consistently maintained accounting practices its operations and financial condition. Section 4.01 (B) PGN shall have its accounts and I C In compliance. financial statements balance sheets, statements of income and expenses for each fiscal year audited in accordance with appropriate auditing princi]ples by independent auditors acceptable to the Bank and furnish this audit to the Bank not later than nine months after the end of each fiscal year. Section 4.02 (A) PGN shall take all measures required to 2 C In compliance except realize annual rate of return on revalued for FYs 97 & 98 due net fixed assets in operation of riot less to Asian Financial than 4% in fiscal years , 8% in crisis. fiscal year 1994; and 10% in fiscal year 1995 and thereafter Covenant Type I Accounts/audit 2 Financial performance/generate revenue from beneficiaries 3 Flow and utilization of Project funds 4 Counterpart funding 5 Management aspects of the Project or of its executing agency 6 Environmental covenants 7 Involuntary resettlement 8 Indigenous people 9 Monitoring, review and reporting 10 Implementation 11 Sectoral or cross-sectoral budgetary or other resource allocation 12 Sectoral or cross-sectoral regulatory/institutional action 13 Other Present Status C Complied with CD Compliance after Delay NC Not Complied with CP Complied Partially NYD Not Yet Due SOON Compliance Expected in Reasonably Short Time

41 Table 11: Compliance with Operational Manual Statements The project did not experience any lack of compliance with Bank Operational Statements Table 12: Bank Resources: Staff Inputs Stage of project cycle Planned Actual Weeks US$ Weeks US$ Preparation n.a. n.a Appraisal n.a. n.a Negotiation n.a. n.a Supervision 52.5 n.a ICR Total

42 Table 13: Banlk Resources: Missions Stage of Month! No. of Days in Spec. staff Implemen- Dev.- Types Project Cycle Year Persons field represented tation Impact of problems status Through appraisal Nov Gas Specialist May Gas Specialist Fin. Analyst Board Approval Nov Gas Specialist through Effectiveness Feb Energy Spec. Supervision I May Gas Specialist I I market identification, system design Supervision II Oct Gas Specialist 1 1 market develop., skills Energy Econ. upgrading Supervision III June Gas Specialist I I financial, marketing, Fin. Analyst institutional Supervision IV Feb Gas Specialist 2 1 implemen. and procur., planning, financial, gas supply delay Supervision V May Gas Specialist I 1 market development Fin. Analyst Supervision VI Oct Gas Spec. S HS procurement, customer Fin. Analyst attachment Supervision VII Nov/Dec Gas Specialist S HS system optimization, 95 Economist accelerated implemen. reorganization of field operations Supervision VIII June Gas Specialist S HS procurement processing Economist Supervision IX Nov Gas Specialist S HS procurement processing Economist Supervision X July Gas Specialist S HS market develop., Fin. Analyst accelerated implement. Supervision XI Feb Gas Specialist S S erosion of profitability of gas marketing due to fin. crisis in the country Supervision XII Nov./Dec 2 8 Gas Specialist S S erosion of profitability of 98 Fin. Analyst gas marketing due to fin. crisis in the country Completion Mar Gas Specialist --- Fin. Analyst Notes: Implementation Status and Development Impact: I= Satisfactory, 2= Unsatisfactory, HS = Highly Satisfactory, S = Satisfactory

43 Appendix A AIDE MEMOIRE A World Bank mission comprising Mr. S. Khwaja and Ms. S. Shum visited Indonesia March 17- April 1, 1999 for the preparation of Implementation Completion Report (ICR) of the Gas Utilization Project (Loan No IND). The mission held discussions with the officials of State Ministry of State Owned Enterprises, MIGAS, PGN and LEMIGAS. The mission would like to thank the Government of Indonesia (GOI) and its agencies for the cooperation and courtesies received. A list of key people met is given in Annex 1. The project objectives, design and implementation were reviewed, with special attention to gas market development; procurement of goods and services; infrastructure design, construction and costs; project returns; PGN's financial performance; and institutional strengthening ofpgn, LEMIGAS & MIGAS. GOI and its agencies were apprised of the preliminary findings of this review, which are summarized as follows. Achievement of Objectives Despite the setback in the development of gas markets in Surabaya and Medan on account of the Asian financial crisis, the project substantially achieved its main objectives of accelerating gas utilization in domestic energy consumption and institutional strengthening of the involved agencies i.e., PGN, LEMIGAS & MIGAS. Project Implementation Overall, the project has been satisfactorily implemented within the budget. The implementation was delayed by two and a half years due to a 9 month delay in twinning arrangement, a two year delay in gas supply to East Java and a 6 months delay in the procurement of equipment (for TEKNOGAS) on account of the financial crisis. An amount of US$7.5 million was canceled from the original Bank loan of US$86 million as PGN curtailed infrastructure development in East Java following the crisis. The project was substantially completed and the loan was closed on December 31, 1998 except for Category 2 (b) of Schedule 1 of the Loan Agreement covering the establishment of Gas Technology Development Unit (TEKNOGAS) in LEMIGAS. This category was closed on March 31, 1999 to enable the completion of contracts for the procurement of the aforementioned equipment. Project Returns A copy of a plan agreed with PGN for the operations of the assets created under the project is attached as Annex 2. Based on this operational plan and the actual/latest estimates of project costs and benefits, the project returns have been re-estimated and summarized below. However, these estimates are only preliminary at this stage; PGN is currently in the process of refining the projected gas sales data which would be sent to the Bank by April 13, (a) Economic Rate of Return (ERR). From the country's viewpoint, the benefits of the project are derived from the substitution of imported liquid fuels. The project remains economically attractive, with an overall ERR currently estimated at about 39% (in real terms), even though this is lower than the appraisal estimate of 59%, mainly due to lower economic benefits of gas substitution for liquid fuels as a result of significantly lower international oil prices than earlier anticipated.

44 Appendix A (b) Financial Rate of Return (FRR). From PGN's view point, the financial viability of the project is critically dependent on the adequacy of the gas sales volume and profit margin. The FRR for both the Surabaya and Medan components is currently estimated at 16%. The current estimate of FRR' for the Medan component is the slightly higher than the appraisal estimate mainly because the latest estimate of gas sales volume is higher than that of the appraisal assumption. Separately, the FRR for the Surabaya component is the same as the appraisal estimate based on the assumption that the recent trend of lower profit margins would be reversed to higher gas profit margin ($1.4/MMBTU) than the appraisal estimate ($1.14/MMBTU). In the event the future profit margin for the Surabaya component is reduced to the appraisal assumption, the FRR would be reduced to about 13%. Institutional Development With the institutional strengthening received under the project, PGN now has a core staff of 311 professionals and 350 technicians (compared with 190 professionals and 260 technicians at the close of the last project in 1994). It has also acquired the ability to train about 20 professional a year. Its enhanced skills have been demonstrated in the implementation of two expansion projects (Gas Utilization Project and Grissik-Duri Gas Transmission Project) undertaken along with the ongoing distribution operations and planning of further expansion projects (South Sumatra-West Java Gas Transmission Project and West Java Gas Distribution Project). A gas technology development unit (TEKNOGAS) has been established in LEMIGAS with 37 professionals. While it is still at an early stage of development, it has already demonstrated its ability to serve some of the needs of the industry on self financing basis. Expertise of key staff of MIGAS has been upgraded. Gas Marketing Gas Price. Before the financial crisis, about 65% of gas purchased by PGN (i.e., all gas purchased from Pertamina's production sharing contractors) was paid for in US dollars while all of its gas sales were Rupiah denominated as GOI regulations would not allow a dollar denominated sale price. Consequently with the onset of the crisis (July 1997) the viability of its gas marketing operations started eroding. Therefore the cap on its sale price was removed, and it was allowed to negotiate price escalation and denomination of all or part of the price in US dollars. Under the current price, effective since July 1998, the foreign exchange risk in PGN's gas purchase has been partly passed onto the consumer. Gas Sales. PGN's gas sales have been adversely affected by the slow down of economic activities and also due to heavy subsidy on diesel, the main competitor of natural gas. The price of gas is about 40% higher than the price of diesel. PGN's overall sales in 1998 (153 MMCFD) were well below the 1997 level (180 MMCF]D) while the gas carriage (80 MMCFD) for PLN power station at Belawan, North Sumatra, was a little more than the 1997 level (76 MMCFD) as PLN continued to maximise the use of natural gas for power generation. In the project areas, compared with the projections in the Staff Appraisal Report (SAR), the sales were about 60% of the target and gas carriage was 170% of the target. The decline in PGN's overall gas sales, experienced since March 1998, stopped as of September 1998, most likely due to limited availability of petroleum product fuels. Pricing Policy. Subsidy on diesel is a major impediment to the penetration of gas in domestic energy consumption. In 1998, about 50 million barrels of petroleum product fuels (most notably diesel) were imported which, at US$14 / bbl border price, were worth US$700 million

45 Appendix A and GOI subsidy amounted to US$150 million. Substitution of these fuels with non-exportable natural gas will improve the balance of payment, reduce the burden of subsidy and support economic recovery. Gas sold and transported by PGN in 1998 substituted petroleum product fuels with an export value of about US$230 million. Given a level playing field (i.e., eliminating subsidy on diesel) and taking into account the available gas supply, PGN could have substituted liquid fuels with an export value of about US$300 million in Gas Supply. To realize the full potential of the economic benefits of gas in domestic energy consumption, supply constraints, notably investments and price, need to be addressed through competition in gas production. Given economic recovery and adequate investment in field development and transportation facilities, non-exportable natural gas could substitute about 900 million barrels of liquid fuels in domestic consumption over a ten-year period. PGN's Finances Past Finances. During the period , PGN's finances were robust. Its rates of return on revalued net fixed assets in operation (18% - 27%) were well above the covenanted minimum of 10%. PGN's net fiscal contributions to the Government totaled some Rp 301 billion during the period However, as indicated in the Table Al below, the key indicators of PGN's recent financial health have been weakened considerably mainly as a result of the financial crisis. (a) Profitability. In sharp contrast to the pre-crisis period, PGN's profitability has been eroded considerably in the post-crisis period, as indicated by a decrease in gas profit margin from $1.36/MMBTU to about $0.6/MMBTU in Indeed, its ROR was only 1% in 1997, if adjusted for the foreign exchange loss (Rp 99 billion) related to gas purchased in end 1997 but paid in US dollars in Further, the ROR in 1998 was a negative 12%, if foreign exchange loss related to gas purchase (Rp 61 billion) had been included as part of the gas purchase cost instead of non-operating expense. The significant reduction in ROR in 1998 was, in part, attributable to the commissioning of the Grissik-Duri gas transmission pipeline in October, which resulted in a sharp increase in the rate base but with only three months of operational revenues. (b) Liquidity and Solvency. The erosion of profitability, coupled with an increasing debt service burden, contributed to the weakening of PGN's liquidity position in 1998, as indicated by a reduction of the current ratio (to I time), although the debt service coverage ratio remained satisfactory at about 2.4 times. In addition, the quality of its accounts receivable has also deteriorated in the wake of economic recession. During the period , its average collection period increased from 43 days to 55 days, and bad debt provision increased from 1% to 6%. (c) Capital Structure. In recent years, PGN's long-term debt/total capitalization has increased significantly, reaching a high level of 81% by This could be attributed to a number of factors, including (a) implementation of capital-intensive projects largely financed by foreign debt; sharp devaluation of the Rupiah has further increased the valuation of foreign debt in rupiah equivalent terms; and (b) non-implementation of earlier initiatives for partial privatization.

46 Appendix A I'able Al Gas Sales Volume (MMSCFD) Average Gas Price (US$/MMBTU) $3.5 $3.45 $2.14 Gas Profit Margin (US$/MMBTU equivalent) (a) Audit report data $1.36 $1.10 $0.69 (b) Adjusted for FX loss in gas purchase $1.36 $0.59 $0.59 (in Rp EBillions) Gas Sales Revenues ,266 Net Income Net Fixed Assets ,972 Long Term Debt ,871 Equity Ratios Rate of Return (revalued net fixed assels) (a) Audit report data 27% 20% -9% (b) Adjusted for FX loss in gas purchlase 27% 1% -12% Debt Service Coverage Ratio (times) Current Ratio (times) Accounts Receivable (days) Bad Debt Provision (% A/R) 1% 3% 6% L/T Debt/Total Capitalization (%) 45% 67% 81% Macroeconomic Parameters Average FX Rate (Rp/US$) 2,362 2,827 10,600 Domestic Inflation rate (%) 6.7% 12.7% 80% Future Finances. In part due to the recent appreciation of the Rupiah, as well as the operation of the recently commissioned Grissik-Duri gas transmission pipeline at its full capacity, PGN's 1999 budget has projected a significant improvement in financial performance. Based on an assumed gas profit margin of about $1IMMBTU, its net income is projected at Rp 368 billion. Notwithstanding the projected improvements in PGN's finances in 1999, the company is faced with consicderable challenges and uncertainties in its future financial outlook. In particular, its financial sustainability is critically dependent on a number of factors, including: (a) Competitiveness of gas price and adequacy of gas sales volume -- As noted above, GOI's pricing policy that allows for a level playing field through the elimination of subsidy for diesel is essential for the achievement of targeted gas substitution for diesel. However, for the near term, consideration for the socio-economic impact of raising domestic diesel price may well inhibit its implementation. In this context, it is understood thatgoi is considering the reduction of government take in the production sharing contracts for gas production as a temporary measure to allow for the reduction of end-user price of gas without a corresponding reduction in PGN's gas profit margin. It is further understood that diesel subsidy is envisaged to be eliminated gradually over the medium tern. (b) Adequacy of gas supply at reasonable terms - Some of PGN's gas supply contracts are expiring in 2001 and the company is in the process of negotiating new supply contracts. In this connection, the mission noted that international oil price movements have been characterized by volatility (Annex 3). Thus, it is common international practice for the buyers and sellers of gas to

47 Appendix A share both the upside and downside risks through such provisions as gas price adjustments based on indices for oil prices and inflation rates. Indeed, precedents have already been set for selected gas purchase contracts in Indonesia. (c) Adequacy of gas profit margin - Notwithstanding PGN's efforts to control its costs, the results of the company's preliminary financial forecast indicated that the gas profit margin would need to be maintained at about $11MMBTU in order for the company to achieve the agreed minimum targeted financial performance targets, including rate of return on revalued net fixed assets of no less than 10% and debt service coverage ratio of no less than 1.3 times. (d) Appropriate Capital Structure - The current capital gearing ratio ofpgn is above the benchmark for prudent financial management. To mitigate the financial risks faced by PGN, it was agreed that it would take all measures to gradually reduce its debt/total capitalization ratio from the current level of 81% to about 60% over the long term. Potential measures would include the implementation of earlier initiatives for privatization (includingipo, strategic partner etc). It is understood that PGN has already carried out substantial preparatory work, including the separation of accounts for the transmission and distribution operations as well as various studies on corporate restructuring and privatization carried out with the assistance of consultants. However, considerable more work would need to be done after the passage of the enabling legislation that would allow for the implementation of the privatization program. Accounts and Audits During the project implementation period, PGN's audit reports had consistently included an unqualified opinion from the State auditor (Financial and Development Supervisory Board). However, its audit reports did not provide supplementary information that clearly and separately show the expenditures and financing of the project, although annual audited reports on the Special Accounts had been provided to the Bank by the Ministry of Finance. On hindsight, it would have been helpful if PGN had established and maintained separate project accounts in accordance with sound accounting practices; the apparent inadequacy in the maintenance of separate project accounts had hampered the efficiency and effectiveness in the compilation of actual project cost and financing data. Subsequent to the ICR mission, PGN clarified with the Ministry of Finance that import duties and taxes (except for a small amount for value added tax) had been exempted under the project; the actual project cost and financing data were finalized on this basis. Next Steps The mission's draft of the Implementation Completion Report is expected to be sent to GOI, PGN, LEMIGAS and UKODA (co-financier for the Project) for review by mid April 1999, with a view to receiving their comments by May 10, Jakarta April 1, 1999

48 Appendix A Annex 1 LIST OF KEY PEOPLE MET State Ministry of State Owned Enterprises Mr. Bacelius Ruru Mr. Harry Susetyc Mr.. Hebron Sinaga Assistant to Minister Director for Mining Assistant to the Deputy MIGAS Ir. Soepraptono S,uleiman Dr. Wiranto Wiromartono Director General Secretary PGN Drs. A. Qoyum Ir. Rohali Sani Drs. W.M.P. Simandjuntak Ir. Nursubagio Prijono President Director Director of Development Director of Finance Director of Operations LEMIGAS Dr. Maizar Rahman Dr. E. Legowo Dr. E. Soedarmo Director Head, TEKNOGAS Head (Designate), TEKNOGAS

49 GAS UTILIZATION PROJECT: Operational Plan Appendix A Annex 2 In East Java, the high and medium pressure gas transportation and reticulation system covering Surabaya and twelve other towns in the vicinity has the capacity to distribute about 150 MMCFD without major investments. Prior to the monitary crisis, PGN's surveys indicated a demand of about 300 MMCFD on the basis of prevailing requirements of the existing industries as well as the requirements under their expansion plans. Since the crisis, PGN has reviewed the demand and now its estimate is based only on the substitution of petroleum product fuels currently in use in the existing industries. Such demand is estimated at 140 MMCFD. Currently PGN is selling about 40 MMCFD. On the basis of gas supplies available (from ARCO and LAPINDO gas fields), PGN plans to increase its sales to about 115 MMCFD by the year This is subject to satisfactory remedial measures taken by GOI to restore competition between gas and diesel (its main competitor) which has been eliminated since the crisis due to GOI's price subsidy on diesel. The projctions of gas sales, essential investments for customer attachment and expected sale price are given in the Attachment 1. In North Sumatra, the high and medium pressure transportation and reticulation system covers the industrial areas of Medan and PLN's power stations in the vicinity. The high pressure transportation system is capable of supplying 120 MMCFD to PLN power stations. The reticulation networks can sustain sales of the order of 40 MMCFD. Current gas sales are around 9 MMCFD while the supplies are limited to 12 MMCFD. Additional supplies of 12 MMCFD are expected from the year Taking into account the demand of existing industries on fuel replacement basis, the availability of gas supplies and subject to restoration of competition with diesel, PGN expects to increase it gas sales to about 35 MMCFD by the year The gas transportation for PLN, based PLN's generation plans, would remain at 70 MMCFD. The projections of gas sales and transportation, essential investments for customer attachment and expected sale price are given in the Attachment 1.

50 Gas Utilization Project (Loan 3209-IND) Operational Plan x East Java Cumulative Number of Industrial Customers C Cumulative Number of Commercial Customers I Average Day Sale (mmscefd) Annual Investment (million US$) Average Purchase Price (USD/MMBTU) Average Sale Price (USD/MMBTU) North Sumatra Cumulative Number of Industrial Customers Cumulative Number of Commercial Customers Average Day Saie (mmscfd) Average Day Transportation (mnmsefd) t") Annual Investment (million US$) Average Purchase Price (USD/MMBTU) Average Sale Price (USD/MMBTU) Average Transportation Price (USD/MMBTU) Total Cumulative Number of Industrial Customers Cumulative Number of Commercial Customers Average Day Sale (mmscfd) Annual Investment (million US$) Cumulativelnvestment(millionUS$) Note: Exchange rate in 1998 = Rp. 10,000/USD in 1999 = Rp. 8,000/USD and escalated by 5% thereafter

51 Appendix A Annex 3 Actual/Projected Intemational Oil Price Movements 1989=100 Crude Oil Prices Year Deflator (US$) 1990 Prices Current Prices _Annual % Cumulative ($/bbl) Annual % ($/bbl) Annual % % % % % % % % % % 1993 (0.3) 112.2% % % % % % % % % 1996 (4.4) 120.3% % % 1997 (5.1) 114.1% % % 1998 (3.9) 109.7% % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % Sources: Global Commodity Markets, The World Bank, January 1999 Note: crude oil prices are based on actual average spot prices of Brent, Dubai and West Texas Intermediate (equally weighted); future oil prices are the projections included in the latest issue of the "Global Commodity Markets"

52

53 -45 - Appendix B PT. PERUSAHAAN GAS NEGARA (PERSERO) 31. K.H. Zainul Arifin No. 20, Jakarta Implementation Completion Report Gas Utilization Project WN'orld Bank Loan 3209-IND March 29, 1999

54 Appendix B PT. Perusahaan Gas Negara (Persero) GAS UTILIZATION PROJECT IMPLEMENTATION COMPLETION REPORT WORLD BANK LOAN 3209-IND 1. Introduction Although use of indigenous natural gas. as fuel and feed stock. started in Indonesia in 1960s it was confined to some major industries directly supplied by Pertamina and to some small industries. commercials and householcdsupplied by PGN. In 1986 GOI decided to promote domestic use of natural gas to save oil for export. A project called Gas Distribution Project was launched with World Bansk suppo:-t (Loan 2690-IND). and w-itlh PGN as the implementillg agency, to develop the gas market in Jakarta and Bogor in West Java and in Medan in North Sumatera Encouraged by the success in market dev-elopment wnhile the project was still under implementation. GOI launched a second project called Gas Utilization Project again wvith Bank support (Loan 3209-liND) and inith PGN as the implementing agency for development of gas market in East Java and further development in Nledan. North Sumatra. The first project was very successfully completed in The second project has recently completed (December 31,1998) and is the subject of this completion report. The purpose of this report is to revicw the implementation of the Gas Utilization project, particularly in respect of market development and the associated skills upgrading and institutional development. 2. Project Objectives and Description The primary objective of the project was to support GOI's program of diversifying domestic energy use by substituting petroleumn product fuels in power generation. industrial and commercial sectors with natural gas. This objective was to be pursued through: a) the provision of an assured supply of natural gas. at competitive prices, to power plants. manufacturing industr;c-.. anid commercial entities in Surabava and telve other to\ns n its vicinit- in East Jai a and n Mcdan in Northi Sumatra: b) the integration of gas utilization plans and operations to achlcx cconomies of scale in the devclopnicnt and operation of gas supply infrastrmcture: and c) Institution building. technology transfer and, marketing studies to accelerate safe and efficien-. Atilization of natural gas and to help dcfine its long-temi dcx elopmcnt plans. Specifically, the project consisted of follow\ing four components: I) Provision of natural gas supply, system in Surabaya and its environs involving: a) about 80 klm of high prcssure pipclincs. 190 knm of mcdium pressure steel pipclines and 165 km of medium pressure polyeth\clene pipciincs: b) fixe gas offtake metering, pressure regulation and odorization stations with associated instrumentation and four pressure reducing stations: and c) service lines, metcring and regulating stations for 375 medium size industries and 150 comnmercial enterprises and the paper nill at Leces. rcpornai d-,c

55 Appendix B II) Expansion of natural gas suppli system in Medan involving: a) about 24 km of high pressure pipeline wvith associated cathodic protection, pressure/flo monitoring facilities and three pressure reducing stations; and b) service line and pressure regulating and flow metering stations for two PLN power stations at Belawvan. 111) Technical assistance involving: a) enhancement of PGN's skills and efficient implementation of its cxpansion project; b) establishment of a Gas Technology Development Unit in LENIIGAS: and c) upgrading skills in MIGAS to facilitate the coordination of development plans in gas scctor and to institute a regulatory system for safe utilization of natural gas. IV) Feasibility studies for natural gas marketing in Palembang (South Sumatra), Jambi (Central Sumatra), Batam Island (Riau). and Balikpapan (Kalimantan). Of the total cost of USD 118 mnillion. USD 86 million wvas financed from the World Bank loan (Ln 3209-IND). USD 5 million out of a grant from the United Kingdom Overseas Development Administration (ODA) and the remainder by GOI contribution and PGN's internal cash generation. The ODA financing covered the technical collaboration (twinning) of PGN wvith British Gas. The project objectives and components Nvere clearly defined and achievable. Competitive pricing to be achieved through contract negotiations for purchase and sale of gas, in contrast with prices fixed by GOI under the first project. was a new concept for PGN and there wva some uncertainty about its success given a verv small gas market and its early stage of development. The need for reviewing and modi&'ing (if necessary) the interantional standards and procedures to enhance the safety of gas transmission / distribution operations in the Indonesian environment was felt under the then ongoing Gas Distribution Project, hence it was provided for in this project through support to NI1GAS and LEMIGAS. 3. Project Design NIIGAS w-as to oversee the overall implementation of the project. wvith direct responsibility for its skills upgrading. gas transmission / distribution safetv enhancement and studies. PGN was to responsible for all gas market and infrastructure development and its institutional development. LEMIGAS Nvas to be responsible for the establishment of Gas Technology Unit (TEKNOGAS). The project dcsigned to enable PGN to achieve gas market and infrastructure development. over a six-year period. in parallel with its institutional development and skills upgrading. PGN's board of directors Nxas to be expanded and reorganized to enable efficient management of (a) project implementation along wvith (b) the implementation of the ongoing Gas Distribution Project and (c) the operation of the distribution system already in existence. An additional director a cas to be appointed to be responsible for human resource development, personnel managemnt. legal and general affairs, relieving Director Finance of these responsibilities. Thus a full time director for finance, corporate planning. bugeting and cost control was provided. Also. the branch in Surabava. the main project area. wxas to be upgraded and given more autonomy. All gas market and infrastructure planning. conceptual design and costing was to be done inhouse by PGN. while all detail design and construction was to be contracted out reperta doc 2

56 Appendix B In view of the success of PGN's institutional development and skills upgrading through twinning with British Gas under the Gas Distribution Project, it was decided to extend this arrangement to cover this project. Although originally not included in the project design. during implementation it Nas felt necessary to crcate a full-fledged division. under Director Development, dedicatcd to procurement processing and a standing tender evaluation comrnittee to expedite procureeniit. 4. Achievement of Objectives Diversification of domestic energy consumption away from petroleum products vas wvell achieved: against the overall company target of 153 mmcfd for actual sale of 178 mmcfd was achiieved. In the same year. gas sold and transported by PGN substituted petroleum product fuels with an export value of about USD 300 million. The sales, however, declined from July 1997 due to monctarv crisis in the countrv. Negotiated gas purchase and sale pricing and efficient distribution operations provided and assured, supply of gas at competitive prices Nwhich encouraged expanded and more efficient use of gas. Before the monetary crisis, about 40% of the gas sold in East Java was utilized in cogeneration and a demand of about 350 mmcfd (as against 100 mmcfd stipulated at project design) from a large variety of consumers had been generated. Also, the success of cogeneration in East Java prompted the consumers in West Java to persue such usage and by 1997 about 30% of the gas sold in West Java Nvere used for co-generation. Bv, including all the industries in the major industrial areas of East Java, covering twvelve towns besides Surabava. PGN wvas able to achieve economies of scale in the provision and operation of gas transport and marketing infrastructure. This contributed significantly to the enhancement of PGNM's rate of return (ROR) on revalued net fixed assets in operation w hich was consistently above 20% from 1992 to 1996 as against a maximum of 10% covenanted under the Loan. (ROR f'ell to 3.5% in 1997 and -12%2Xo in 1998 due to monetary crisis). Enhancement of environmental protection and safety of PGN's operations was achieved through: a) closure (two vears ahead. of schedule set under the project set under the project) of old and inefficient gas manufacturing plants (producing corrosive gas) at Bandung. Scmarang, Surabava and Ujung Pandang and substitution of this gas supply with natural gas (in Surabava) and LPG (in other towns): b) efficient maintenance and operation of the system. minimizing escapingz gas. %hereby gas losses Nere reduced to 2' o by lq92. thrce years ahead of targct set ullder the project- and have been maintained below 2'o since then.: and c) revicxw and appropriate modification, in line with lndonesian cnvironment, of standards and procedures relating to gas distribution operations. and promulgation of such standards and procedures. Of a total staff of 1206, PGN has core group of 318 professionals with expertise in gas markcting and customer conversion: gas transmission and distribution infrastructure planning. design and costing: distribution systems operation and maintenance: construction of distribution infrastructure: procurement processing: contract management: quality control: project planning and managcncmnt: finance. cost accounting. budgeting. and corporate planning: and human resource dc\clopment. The expcrtise upgrading has been achiccd through discrcte courses (list of training placcs filled in Attachment---) and through on-the-job training. PGN now has the capability to provide in-house training to about 20 professionals per ' ear. repona I doc 3

57 - - Appendix B With the institutional development received under the project PGN has, %%hilc implementing this project: a) planned and managed the implementation of Asamera-Duri gas transmission project (estimated cost USD 400 million): b) planned and conceptually designed and costed the proposed South Sumatra-West Java gas transmission project (estimated cost USD 350 million): c) planned. designed and costed WNest Java gas distribution project; d) conducted in-house studies of West Java gas market. W est gas distribution planning. Palembang gas market. Jambi gas market. Batam and Balikpapan gas market development: e) supenrised South Sumatra gas reserve certification study: and f) supervised environmental impact study of the development of. South Sumatra gas fields. South Sumatra-West java gas transmission pipeline and West Java gas distribution infrastructure. It has recently engaged in the preliminary planning and negotiations of export to Singapore. Prior to monetary crisis. tak-ing note of its successful development, more than twenty international companies expressed interest in joint ventures vith PGN. Financial Aspects - Impact of MIonetary Crisis Since the monetarv crisis broke out in July PGN has been facing erosion of its profitability because of its exposure to currency exchange risk. since mostly (65%) of gas purchases were payable in US Dollars but all of its gas sales were in denominated in Rupiah. In responding to the impact of this adverse economic situation, mitigation measures taken included a cost cutting program to keep the operating and investment cost to minimum, deferring gas purchase payment to Pertamina (purchases from PSCs continued to be paid for at market exchange rate). raising gas sale price and, a soft loan of Rupiah 75 billion from GOI. The amount of loan was based on PGN's ability to pay for gas purchases from Pertamina at the exchange rate of Rp 5000 per US Dollar as against the prevailing market rate of Rp 7500 per US Dollar. it enabled PGN to clear the above mentioned deferred payments by October The price was raised in five steps between November 1997 and July In the agreements with the consumers implementing the last price raise PGN passed on the currency exchange risk in its gas purchases to the consumers by denominating this element of the price in US Dollars wvhile the distribution operating cost remained Rupiah denominated. T}le sale price gas is now about eno and half time the price of dicscl. its main competitor. as the price of diesel, has been rnaint-ined at prc-crisis level through heavy GOI subsidy. This is a handicap in the achievement of the r-.nar\- objectiv c of the projcct. Before the crisis GOI retulations prohibited gas sale pricing in currencies other Rupiah. the currency- exchanle rate \xas controlled bv GOI and the prices of petroleum product fuels wvere raised by- GOI wxith slippage in the value of Rupiah. The monctary crisis Nvas not anticipated even by the international lenders. thereforc PGN did not hedge against currency exchanuc risk NNhich " ould added to the costs repota I d.x 4

58 Appendix B PGN's financial ratios before and since the crisis are given below R OR 17.8 %.21.8 % 24.7 'o 22.4 % 25.2 o 26.6 'o 16.7 % Current Ratio (times) Debt to Equity Ratio (tim es) _ Market I)evelopment SURABAYA Mlarket dcvelopment activities in green field gas distribution project are normally sequenced as folloxxs: a) market identification and evaluation; b) sezmentation and prioritization of distribution areas on the basis of rate of return (ROR) estimates: c) customer cost/benefit analysis and commitment i.e. entering into gas supply contract, ordering of conversion equipment and installation of internal gas piping; d) planning. procurement and installation of distribution facilities; and e) customer conversion and commencement of gas supply. This approach is necessary to avoid idle investment in distribution facilities. As the customer commitment leads the planning and installation of gas distribution infrastructure. the establishment of the distribution's credibility with regards to availability and security of gas supply is essential. The delay in gas supply to East Java Nvas therefore a major impediment to the implementation of the Surabaya component. There NNas little scope for PGN to recover much or this lost time by re-phasing the aforementioned activities as * it is not possible to fully speci3" and size thc distribution systems until most of the custon,mer off takes have been identified: * it makes good commercial sense for PGN to phase investment in line with the level of market commitment: and * it would sacrifice negotiating strength with potential customers. The mitigation measures adopted thercfore included: a) obtaining flexibilitv form PERTAP41NA in gas purchase --ramp up": b) intensification of markct development activities: c) reorganization of procurement and construction acti\ ities in line with (b) above: d) installation of temporary metering,/regulating facilities till the regular equipment has been procured: repona I d.

59 Appendix B e) introduction of "measurable contracts"' as against lump sum"' contract to provide greater flcxibilitv in construction management: and f) greater autonomy in project implementation to the regional management. Despite the two delay in gas availability form PERTANIINA. PGN managed to achieve a relatively high build up in sales since the commencement of gas supplies in By end June 1997 a demand of the order of MMCFD had been generated. Gas sales in Surabava were averaging around 44 MMSCFD compared with 56 MINSCFD (36 MMSCFD general industry. 20 NMMSCFD Paper Leces) in SAR to a total of 89 general industrial customers. Although Leces Paper. a large consumer, was still not connected the annual contract quantitv for supplies from ARBNI could be achieved by about November. From July 1997, with the onset of monetary crisis the sales started shrinking due to its main competitor. The price of diesel has been maintained at pre-crisis level by GOI subsidy Nvhile the price of gas escalated to make up for Rupiah depreciation. Since July the price of gas is about one and a half time the price of diesel. However. by November 1998 the decline in gas sale bottomed out. possibly due to scarcity of diesel as GOI could subsidize limited imports of petroleum product fuels. Sales in East Java arc currently about 39 MMCFD. Given sale price parity with diesel. PGN's projections. based on most recent survey, indicate gradual gro\\th of sale reaching maximum take of 96 NIMSCFD under purchase contract in about 7 years s-ithin about 7 years. rather than the 14 N'ear specified in the original contract schedule. Accelerating the sale build up, in pre-crisis times. has been largely on account of concentrating marketing efforts in areas of high potential demand (particularli in the Waru, Drivorejo and Rungkut areas). and also in capturing medium sized industrial combined heat and power loads, ranging up 10 MMSCFD. This is still seen as a key growvth area for the future. The projected sales plan included attachment of of 25 NIMSCFD demand from the Paper Mill at Leces +vhich could not be done as the consumer got into financial difficulties. The pipeline has, however, been built and commissioned up to Pasaruan. Planied vs. actual sales in Surabava are as follows. All sales finures are in MMCFD. YEAR SARPLAN ACTUAL SALES General Paper Total General Paper Total i Industrv Leces Industrv Leces ( 7.4 o I 1, 0 22 'IS (I l "l o 1997! { 0l 41 19it98 I21rs, '() { 70l 41j MEDAN Attachmen3t kives a comparison of actual xersus the plan in the Staff Appraisal Report. The SAR targeted ani increase in sales to industrial. coninmercial and household customers in Mledan from 5 of 12 mmscfd. and an increase in transportation of Pertamina gas to PLN's Belawan power stations from 30 to 48 nmmscfd. Gas sales to industry in Medan peaked in 1992 at about 10 nnmscfd. hosnever since that time a number of large consumers have closed down as their reporta] doc 6

60 Appendix B _ 52_ outdated plants were not competitive or switched over to cheap fuel oil form Singapore. T.his has led to a reduction in sales to about 7 mmscfd. Market surve-s identified potential for gas fuel in Tanjung Morawa. with 35 industries wvith a total demand of about 10 MMCFD and a supply main has been laid to this localitv. PLN's requirement for gas rransportation has now- escalated to over 100 mmscfd. as a result of changes to its generation strategv and increased power demand in the Medan area. The necessary modifications to the distribution network have been implemented. These modifications will enable PGN to react to increases in demand by the PLN power stations. A suitablv sized mater/regulating unit has been installed at the PLN BelawN-an complex. Sales and PLN Transportation in Medan. Planned VS Actual. (mmcfd) YEAR SAR PLAN Total ACTUAL Total PLN General PLN General Transport Industry Transport Industry [ ( l r i_ Distribution System Design and Development East Java * Natural gas is supplied from five off take stations into the PGN system Nia PERTAMINA offshore/onshore transmission pipeline from Kangean field approximately 350 km to the east of Surabava. Kangean field and pipeline also supplies gas to tw-o major industrial customer. PLN Gresik and Petrokimia Gresik. - *This configuration is designed to maximize the use of PERTAMNINA line, by installing a number of off take station instead of laying trunk lines parallel to PERTAMFNA line. The system is designed \ith inter links between each off tak-e station to provide security of supply in the ecvent of a station failure of planned shutdown for station maintcnance or modificatioln ctc. * High pressure system includes: * high pressure stcel pipelincs of i ar\ ing sizes from 4" to 16' API5L Grade B to API5L X46: * five offtake regulating stations capable of operating at a maximum inlet pressure of 70 Bar and supplying a total of 400 M11MCFD at a minimum inlet pressure of 20 Bar. twin stream activc/monitor/slam configuration and complete with an odorisation unit. ThCse stations are located at Porong. Warum Gunung Sari. Tandes and Gresik: * four ofifake orifice metering stations to be operated by Pertamina and operating at a maximum inlet pressure of 70 Bar complete with chromatograph. RTU. flow computer and micro\ave link- to the Pcrtamina/'Arco onshore receiving facility (ORF) Porong: 7

61 Appendix B * SCADA with RTU's at five regulating sites relaying information to the master SCADA at PGN Gembong via designated telephone lines: * pig trap installations at Waru. Mojokerto, Porong and Probolinggo to facilitate the intemal inspection of the pipeline wvith an on-line intelligent pig, All pipeline bends vere a minimum of 3D configuration and tees greater than 50% of the main pipeline diameter were fitted with pig bars to allow uninterrupted access of an on-line inspection vehicle; and * customer meter/regulating stations, twvin stream,. ith active/monitor/slam configuration fitted with a turbine meter and by-pass in sizes from 30 SCMH to SCMH. * Medium pressure distribution network comprised: * Construction of PE pipe SDR1 I vanring in size from 63mmn to 180nmm, suppliying five discrete low pressure netvorks designed to operate between mbar to supply domestic and small commercial consumers. * Construction of a medium pressure ring main within the Surabaya city area with I 80mm PE pipe SDR I I operating between 2-4 Bar to supply commercial consumers. * Provision of district pressure regulating stations, monitor/active/slam configuration for each discrete network. The majority of PGN's customers are generally located adjacent to main highw-ays. and therefore the pipeline routes for the most part followved the verge of these main highways. To increase the level of safety over and above the requirement of B3 1.8, the pipeline stress wvas therefore limnited to a maximum of 30% SMYS for a maximum design operating pressure of 40 Bar, although it was envisaged that the normal maximum operating pressure would be around 25 Bar or less. In addition pipe wall thickness for the largest diarneter pipeline of 16" NB w -as increased to 12.7 mnm vall thickness. vhilst all pipelines wvere to be buried to a minimum depth of cover of 1.5 meters thereby minimizing the possibility of third party interference. Detailed routing and preparation of alignment drawvings were prepared by an Engineering Design Contractor (EDC) and commenced in The EDC was responsible also for obtaining the relevant information from third parties concerning the location of other utilitics alonz the rou.. of the pipcline. Permits in principlc from local authorities. such as the Public Works. Toll road owners. rail%%a!s. irrigation and in some instances from pn%atc landon\ners %%ere also obtained. During this period also. PGN engaged the services of a Quantity Sur% c\ ina Contractor to assist PGN in the preparation of detailed design specifications and Bills of Quantities for the construction phases of the project. Specifications for all materials. equipment and specialist designs such as cathodic protection and SCADA %\ere prepared by PGN and assisted by in-house consultants from British Gas. rnpoeril do 8

62 Appendix B Cathodic Protection designs included for both sacrificial anode and impressed current svstems depending on location and soil resistivity surve% s. Generally however, pipelines located in the city area and pipeline branches were designed as sacrificial anode systems. Specifications and designs for the off take metering stations were prepared by PGN and assisted by specialist consultants. An environmental impact assessrnent (EIA) ".AIDAL" report was prepared for the "hole project and approved by the Ministry for Mines and Energy in North Sumatra Reinforcinm PGN's operation in Medan the system would include: --l6 x 24 km pipeline to the newly constructed PLN's gas fired 2 x 260 MW combined cycle gas turbine power plant and PERTAMINIA's pipeline from Pangkalan Brandan to Wamnpu alongt widh metering and regulation station to supply over 100 MMCFD gas: and --pipeline netwnork to Tanjung Moraw\a Industrial Area and along the road to Binjai. Procurement Procurement division w-as established to implement the international procurement process. This division was managed by experienced personnel wvho have a direct involvement in intemational bidding. The division handled the all itendering process, tendering in most cases wvere wvell performed by complying with "milestone"' target dates and completing the process in accordance w ith the previouslh agreed, scheduled. It im1plemented the tendering using the World Bank guidelines for procurement processing including time scales for preparation and drawing up appropriate technical specification for materials and construction wsorks by using recognized international standards. evaluation of tenders on pre-selected administrative., technical and financial criteria. The success in improving the cfficiency of procurement process had been achieved. i.e for steel linac pipe procurement. the tendcr proccss took 28 weeks starting from tender document preparation until notification of awnard: procurement of sorks for steel pipe. thc tender process took 32 \xecks starting from tcndcr document preparation until the notification of a\ard. compared \N ith 527 weeks before the establishment of the division. CATEGORIES PACKAGES VALUE (US S) 1. WORKS GOODS CONSUJLTANCIES TRAiIN ING 15:I TOTAL VALLUE _ repora I doc 9

63 Appendix B Impact of Monetary Crisis As a result of monetarv crisis in Indonesia. all of the contractor / suppliers suffered lack of liquidity because of high interest rate of Bank Loan and the increases of prices. Therefore the Government decreed the Guidance for Escalation of Unit Price and Contract Value (Bappcnas Finance Department Decree No. SE-100/A/21/ SE-2916/D.VI/06/98 dated June ). The formula used to calculate the price escalation as follow Hn =Ho(a+b.Bn/Bo+c.CniCo+d.Dn/Do+. Where Hn = Actual unit price goods/services Ho = Bid unit price for goods/services (28 days before bid closing date) a = Fix coefficient representing profit and overhead ( a = 0, 15) b.c-d = coefficient representing labor, component, tools, etc Bn, Cn, Dn = Actual price of major component Bo, Co. Do = Bid price indices of major component (28 days before bid closing date) In the above fomiula, applicable price indices from Central Bureau of Statistic Nvere to be used. or if not available, indices from related department or Associated Indices approved by related department. Also, Major Component Coefficient of Contract performned by Public Work Department / related department were to be used. The price escalation / adjustment formula was only applicable for: a. Contract supply for equipment and services in Rupiah portion for multi years and single Xyear on current project funded by overseas loan b. Multi vears contract with attached prices adjustment if contractor require. T1here wvere 4 contracts wvhich fulfilled the requirement of the above price escalation formula. consisting of I procurement of good (Off Take Metering Stations) and 3 procurement of w orks (Tandes-Gresik Project. PE/I and PE/I1). The total compensation value as a result of price escalation was around Rp Skill Upgrading PGNI in now capable of planning. designing. operating and maintaininge gas distribution net-works. it has the capability of planning and development gas transmission projcct i.e. Asamera-Duri-Batam and South Sumatra-West Java. it has sound financial management skills and a wide range of marketing and utilization skills. During the two bank funded project PGN has development the following core skills in gas marketing. distribution system planning. design. construction. operations and maintenance (O+M) and gas utilization/customer conversion. This level of skills development is sufficient to manage PGN's expansion plans at existing levels. The core skills developed are: ntpcrt.! doc l ()

64 Appendix B -56 Market Development * Medium sized industrial consumer market identification and sector evaluation * Dem,land forecasting * Market segmentation and prioritisation Customer cost/benefit analx sis Distribution System Planning. Dcsign and Construction * Estirmation of peak/average loads and degree of demand diversitv * Development of design criteria * Analsis. simulation and optimization of small to medium sized distribution network; * Conceptual design and spccification of pressurc/flow control and gas measurement systems * Adoption of 'best practice' standards * Cost estimate and analvsis * Project programming and procurement processing * Construction supervision and quality control * Shake down and conurissioning of facilities Distribution System Operations and Maintenance * FlowN and pressure control of medium sized networks and supply mains * Operation of corrosion svstem ( Calibration of pressure for monitoring netw ork condition. third party intervention. gas balances and gas loss Gas Utilization and Customer Conversion Conceptual design and specification of small off take gas burners and control equipment for medium sized industries * Design of internal gas piping for consumers prernises * Estimation of conversion cost * Design and fabrication of simple bumers. jets and nozzles Procurement * The capabilitx to draw up appropriate technical specification for materials procurement and the tendering of construction -orks * The capability to dran\ up tender and contract documents, using recognized international standards X\hcrc appropriate. c. FIDIC * The implementation and manacement of Banrk and GOI approved tcndering procedurcs. and the tend.rin- of goods and scrx iccs under international competitive bidding procedures * The capability to c aluatc complex. high value tenders on preselectcd administrativc. technical and financial critcria Informaltion Technology and System * Thic procurement. distribution and implementation of proprictary soft\\are systems and packages use support and mainmenance procedures * A software specification and evaluation capability, tailored to the needs of the business (for example. PGN has specified and procured a geographical information sy stcm, capabl. of integrating its mark-eting database and customer accounting records ith a network analysis facilitv to cnable more sophisticated netwsork planning and system design) * Th.c capability to specify and procure hard -are. and to integrate it with existing equipment ppoa ri d 1

65 Appendix B * The capability to design, implement and manage a small scale local area network ad ie associated data management and distribution control systems * The specification, procurement and management of communications systsems --c equipmenthroughout the organisation, e.g. PABX, pagers, radiotelephone. etc Financial * The development and implementation of financial and management accounting prcced and associated management information systems..the development and implementation of appropriate budgetary and financia c:r zn systems and procedures The streamnlining and tightening of customers accounting and billing procedures * The introduction of formal capital expenditure appraisal and approval procez: improved financial modelling and forecasting skills * Improved intemal audit systems and procedures The development of skills has been demonstrated in the planning of the \W-s: :-1-- Distribution Expansion project wvhere PGN have produced detailed planning stu.ies _c implementation planning guidelines of high quality. In summary PGN now has a trained core of staff that includes around 311 pro ss;.- (sales executives, engineers, accountants, procurement specialists and economistl s r around350 technicians. In country training comprising on-the-job training and courses ws supplemented with overseas training including Masters Degree courses in the UIK aixi -- practical training in the UK, Japan, Australia and the USA. In addition to training of itsz -- employees PGN has also implemented training of customers and contractors in equipnr conversion and installation of utilisation equipment and in new construction techniques polyethylene pipelines. Implementation Delays and Closing Date Extensions Infrastructure development under the project has been delayed due to: (a) a 9 month * in the commencement of TA provided through a twinning arrangement with British Gas x-= delayed the initial planning and (b) a 2-year delay in gas supplv to East Java by Pert=z wvhich caused PGN to delay finming up customer commnitment (as slippage Nvould ere credibility) and consequently procurement processing to avoid idle investment in distnbr.b r facilities. In October PGN undertook an accelerated implementation program a.it -a substantially complete the project by the loan closing date of September 30, It a-s -cr successful in this cffort as it could sustain the burden of planning its large transmission pfcr e-: in addition to accelerated implementation of this project. The revised scaled di--- implementation program has included strengthening the implementation establishmelt =.c authority of the Branch in Surabaya, where over 90 % of the remaining works of the proje: z to be executed, formation of separate stand alone tender evaluation comnittee for d}co development and transmission projects and reallocation of responsibilities arnong the dir.-zzrin the hcad office. The loan closing date has been extended by 18 months (as a gaints and 9 months lost) to March 31, The implementation is generally progressing as plaze except wvhere interfacing wnith PERTAMINA is involved. Specifically the procurerr.. -r offitake metering stations and SCADA facilities (valued around $ 5.0 million) has been &ik, on this account and consequently the closing date has been extended again until Dece-mel% An extension of 27 months as against 33 month lost. rtpom l.doc 12

66 Appendix B Sustainability According to the market studies conducted bv MIGAS and PGN's survevs, prior to monetary crisis, the prevailing potential demand. much of vhich was unmet due lack of infrastnicture, from general industrial consumers, was of the order of 600 mmcfd and 350 mmcfd in West Java and East Java rnspectively. Taking into account the fuel requirements of general industry in the urban areas of Sumatra. Java. Sulawesi and East Kalimantan, total demand could reach around 1200 mmcfd b)y year 2000 and at a 7% growvth rate wvould increase to about 2500 mmcfd by the year The general industry was expected to provide the biggest demand growth (apart from power generation), steady (minimum swing) consumption and a large customer base therebi minimizing the risk for gas distribution operations. Given economic recovery, this would still be the most likely scenario. PGN has very good experience in sale of gas to this category of consumers and there are sufficient proven and potential reserves (12 TCF) of non-exportable gas to support such demand over a 15 year period and given competition in production more reserves could be proved in this category. PGN has developed into an efficient gas company with a good track track record in the development of gas markets and required infrastructure minimizing idle investment. Provided competition between gas and diesel (its main competitor) is restored, the project objective of accelarating the utilization of non-exportable natural gas in domestic energy consumption is fully sustainable. In fact it has a lead role in the economic revival. iepoat.l dcc 13

67 Appendix B PT. PERUSAHAAN GAS NEGARA (PERSERO) ACADEMIC QUALIFICATION OF STAFF EMPLOYED QUALIFICATION PGN Regular Staff Outsourced Master Degree Bachelor Degree year Diploma year Diploma year Diploma Senior High School Junior High School Elementry Elementry (not graduate) Total Core Professional Group PGN Regular Staff Outsourced Total

68 Appendix PT. PERUSAHAAN GAS NEGARA (PERSERO) FORMAL TRAINING PLACES FILLED NO SUBJECT NUMBER OF TRAINEES I Technical Distribution and Transmission Systems (Planning, Design, Construction, C) & M, Instnrmentation, Metering & Specialised Courses on Long Term Planning Gas Utilization) Finance 263 (Financial Management, Accounting, - investment Planning) Ill Specialist Function/Management (Market Development, Demand Forecasting, Procurement Legal, Admin, Personnel Management) IV General Management (Utility Management, Corporate Planning, Human Resource Development, Project Management) Grand Total 4.511

69 PT Pcersahaani Gas Negara (l'ersero) PGN'S Staff Atteniding Overseas & Local Master Degree Name I'osition Plrograum Institution A. (Oierscas I. Drs. Y. Sasongko Y.P Head of Treasury Sub Division Business Administration Univ of Birmingham, UK 2. Ivan Irawan. SH Head of Legal and Public Relation Sub Division liter'l European Trade Law Univ. of Leicester 8. Ir. Agus Dhiharjo Head of Business Development and Information Sub Ccntre Gas Engineering & Management Univ. of Salford 4. Ir. Bambang Banvudoyo Head of Planning Division Gas Engineering & Management Univ. of Salford 5. Ir. Melanton Ganap Head of Marketing Sub Division Gas Engineering & Management Univ. of Salford 6. Ir. Arsyad Rangkuti Head of Business Development and Inforrnation Centre Gas Engineering & Management Univ. of Salford 7. Ir. Triyono Heriyanto Head of Contruction Sub Division Gas Engineering & Management Univ. of Salford 8. Ir. Iwan Heryawan Project Manager of Trans Central Sumatera Gas Engineering & Management Univ. of Salford 7. Jr. M. Napitupulu Logistic Manager of Trans Indonesia Project Gas Engineering & Management Univ. of Salford S. Ir. Daniel H. Hutauruk Head of Contruction Section ( Jakarta Branch) Gas Engineering & Management Univ. of Salford 0 9. Ir. Tagor Samosir Staf of Distribution Division Gas Engineering & Management Univ. of Salford 10. Ir. Komaruddin Engineering Manager of Central Sumatera Construction Management Univ. of Birmingham 11. R. Arman W. Head of Planning Sub Divison Construction Management Univ. of Strathcyde 12. Ir. Jobi Triananda Contruction Manager of Central Sumatera Mechanical Engineering Univ. of Strathcyde 13. Ir. Djoko Saputro Assistant to Business Development and Information Centre Electrical Power Engineering Univ. of. Manchester 14. Drs. Mangatas Panjaitan Head of Accounting Sub Division Corporate Finance Univ of Salford 15. Ir. Budiarto Head of Logistic Sub Divison Purchasing &- Logistic MNanagement Univ. of Salford 16. Ir. Ismet S.A. Pane Head Section of Planning Division Purchasing & Logistic Management Univ. of Salford 17. Dra. Del Castriza Head of Accounting Sub Division Accounting Univ. of Birmingham 18. Drs. M. Zulfikri Staf of Human Resources Division Media Technology for Tootl Univ. Now Castle, ULl 19. Heri Yusuf, SH Head of Legal and Public Relation Sub Divison Post Graduatc in Law Universitv of Widener 20. Ir. Busrani Head of Fire and Safety Sub Division Energy Planning & Energy Policy Univ. of Technology, Svdney M w

70 PT Perusabaan Gas Negarn (Persero) PGN'S Staff Attending -Overscas & Local Master D)egree Nar _ Pos ion Pbrogram Instituttion B. Local 1. Dra. Siti Nurlhafiui Hacd Section of Budget Division Acoounting Managemcnt Universitas Indonesia 2. Ir Uji Subroto Head of Operation Service ( Surabaya Branchi ) Maiketing Managemcnt Universitas Airlangga 3. Drs. Rosichin Head of Human Resources Sub Division Financial Management Sckolah 'ritggi Manajemen Labora 4. Drs. Irwan Tascha Head of Treasury Division Financial Mauagenient Universitas Trisakti 5. Drs. Agus Suryono Head of Human Resources Sub Division Human Resources Management Sekolah Tinggi Manajemen Labora 6. Ir. Herman Usman Head of Operation Service (Jakarta Branch) Business Administration Institut Manajemen Mitra Indonesia 7. Drs. Timbul Pramono Head of Finance & Accounting Section (Jakarta Branch) Administration & Business Policy Universitas Indonesia/ LAN 8. Drs. Sutikno Head of Budget Division Administration & Business Policy Universitas Indonesia/ LAN 9. Ir. AMR Abas Project Coordinator Administration & Business Policy Universitas Indonesia/ LAN 10. Ir. M.A.R. Zarnzani Head Section of Distribution Division Administration & Business Policy Universitas Indonesia/ LAN 11. Ir. Sulistyo Elly Assistant Manager of Trans Indonesia Project Administration & Business Policy Universitas Indonesia/ LAN 12. Drs. Arief Djunaedi Expert on Privatization Administration & Business Policy Universitas Indonesia/ LAN 13. Dra. Endang Nadina Head Section of Intemal Supervision Centre Communication Management Universitas Indonesia 14. Ir. Syafrudin Lubis Head Section of Planning Division Industrial Safety Universitas Indonesia 15. Ir. Joki Eko Juswanto Head of Distribution Sub Division Administration Universitas Indonesia/ LAN 16. Ir. Bahri Sinulingga Head of Planning Section (Jakarta Branch). Administration Universitas lndonesia/ LAN I-,. x

71 Appendix B ICR SUMMARY SLIDES LOAN IBRD 32094IND ESTABLISHMENT OF TEKNOGAS _ GAS TECHNOLOGY DEVELOPMENT UNIT RESEARCH AND DEVELOPMENT CENTER FOR OIL AND GAS TECHNOLOGY "LEMIGAS" _JAKARTA

72 Appendix B I ISUBJECTS l BACKGROUND 0 PROJECT OBJECTIVE AND DESCRIPTION! PROJECT DESIGN! IMPLEMENTATION C)F OBJECTIVES '0 ACHIEVEMENT OF TEKNOGAS j 0 SUSTAINABILITY 0 FUTURE OPERATION OF GTDU _ICR. 320WND GTrU - -LEMIGAS ] _. BACKGROUND. _I El GOI is developing alternativenergy sources 0 Natural gas and LPG are significant sources of energy for domestic use 0 GOI has recognized ithe need for a gas technology center 0 LEMIGAS establish GTDU (TeknoGas) under IGT supervision through Technical Assistance Contract and funded by The World Bank Loan IBRD 3209-IND I ICR GTDU - LEMIGAS' _.~~~~~~~~~~~~~~~~~~~~~~~

73 Appendix B nlproject D OBJECTIVES ANDi IDESCRIPTION A The primary project objective was establishment of GTDU' (TeknoGas) within LEMIGAS for the development of in-house expertise: * R &D and compilation of standard and code * Studies and research in gas transmission, distribution and utilization i * Analysis of fuel and material for efficient gas utilization * Human resource development a Dissemination of technical information ICR ND GT. LBAIGASI D PROJECT DESIGN Project activities was comprised of three prmary components: O Procurement of Good for laboratory equipment 0 Professional Development Program (PDP), consist of: Overseas training, Local Training, Master Degree Prdgram I Institutional Development Program (IDP) Designed based on implementation of 18 Activity function grouped into 4 cluster (Planning, Information and support services, Distributionlutilization, Technical Services) ICR HO GTDU - LEMIGAS' 2

74 Appendix B - 66 _ ' IMPLEMENTATION PROCUREMENT OF LABORATORY EQUIPMENT 0 Procurement of laboratory equipment, consist of: * Data and Informnation Support * Analyfical, Testing and Laboratory equipment * Mini Gas Demonstration System * Supportng Laboratory Equipment 0 Procured through ICB in accordance with the Bank Guidelines 0 Laboratory equipment and supporting materials procured has been received and substantially commissioned and final disbursement currently in progress _IECR -3209IND GTDUl -LEMIGAS_ ] IMPLEMENTATION l PROFESSIONAL DEVEILOPMENT PROGRAM El 3186 training days for 37 TeknoGastaff have been completed in IGT Chicago during tree years project period 0 Seven TeknoGastaff have been graduated forrn Master Degree Program in UK as scheduled 0 41 training day for 25 TeknoGastaff have been completed for local training bases on special needed I[CR - IND GTDU- 'LEMIGAS' 3

75 Appendix B H IMPLEMENTATION Li x INSTITUTIONAL DEVELOPMENT PROGRAM 21 Implemented based on 18 AIF grouped into 4 clusters! 11 Project Models was carried out, 5 of them was succeedsli (Project 1, 4, 7, 9 and 10) 0 TeknoGas have participated in various gas activities and institutional relationship with other organization 0 TeknoGas was established within LEMIGAS and positioned to; sustain itself as an acfive participation in gas expansion activities in Indonesia ICR IND GTDU - 'LEMIGAS' IMPLEMENTATION FINANCIAL ASPECTS [ATECRY jaor REALIZATION COMM ALANCE BED I.Equipment 7j ,770 2,754t77 2ICOISuHIFSt I901."sIWSS I i, TraiininAcademic ' l ZA4 S.fl4.X _ 0cR.3-N D GTMU. LEMI-GAS" _ 4

76 Appendix B ACHIEVEMENTS OF TEKNOGAS R0 TeknoGastaff have been professionally supporting the gas industry through externally funded project, total value of the assignments completed is now over US S one million equivalent. El Research and development activites have been conducted, the result being scientific papers relatng to gas technology and have been published. Some studies have also been used as input for the GOI El Recognizing its performance, GOI is processing the incorporation of TEKNOGAS as R & D Gas Technology Division within LEMIGAS, under GOI regulation and as a dmision within LEMIGAS. ICR-3200-ND GTDU * LEMIGAS J SUSTAINABILITY O TEKNOGAS now has: * 37 staff trained in various gas technology subjects * 7 staff l'aster Degree holders * Facilitated with library, training material, software and laboratory equipment O Teknogas will be able to professionally support safe and effective use of nataural gas in Indonesia t ICR-32094ND GTDU - "LEMIGAS' I S

77 - 69- Appendix B ] t FUTURE OPERATIONS 1. Providing Training for PGN * Subjects: Developing an In-Country Training Program for Mid. Echelon and In-Country On-The-Job Training for Non- Echelon PGN Distfibution Staff Developing Specialized Technical Area for PGN Professional Distribution Staff O Cooperation with IGT as a Local Partner IC-R -3209INDOIUEN ' 1 FUTURE OPERATIONS 2. Implementation of SOP for Gas Distribution 3. Preparation ofsopfor: - Planning * Reporting * Measuring of Gas * Logistic 4. Evaluation of Cathodic Protection System of Gas Distribution System 5- Preparation of Business Promotions Brochures for PGN 6. Gas Distribution Network Analysis ICR.32og440 0 G1OU _ 6

78 Appendix B []* FUTURE OPERATIONS 7. Geographic Information System of Gas Distribution Networks 8. Preparation of PGN Corporate History 9. Preparatfon of Gas Industry Personnel Cerification Requirements 10. Preparation of Gas Indusfry Contractor Certification Requirements I1. Gas Master Plan for Indonesia I R4320S6MD GlDU. LEKIGAS' I I FUTURE OPERATIONS 12. Development of Capabilities of Critical Industry Services: - High Consunption Consumer Culpoit - Environmental Proteclion in Gas Tansportation and Utilzation - Pmrotion bf Environnental Benefits and Safety in Gas Utilization - The Development of Marginal and Isolated Gas Source Utilization - Develpment of Data Base for Gas Transporation and Utilization (HycauIic Modeling, GeogrWNhic; Information System, Customer Inforrnation System) - Economic Analis of Gas Produclion, Transportion, Utilization Infra Strcture (Cost and BenefitAnalysis) - Investigation of Gas Transportation and Slorage Techndogies - Devebpment of Public Awareness of Safe and Effects Gas Utilization. cr.ce.2nd G1WD -LEMIAS I 7

79 Appendix B HIIFUTURE OPERATIONSI TRAININO FOR INDUSTRY: *-*Gas firing equipment '-'Corosion Control %*Energy Management and Conservation %-Emergency Response Planning of Gas Customers '-*SCADA system I ICR-3206ND GTDU.-LEIIGSI

80 GAS UTILIZATION PROJECT, ) b-d.,j., MED;, 4 H A.- 2"'Th. _~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.... NE 19